REYES Bar Reviewer on Taxation I (v.3)

PM REYES BAR REVIEWER ON TAXATION I(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) This is the first installment of my two-part reviewer on taxation. This covers two topics: (1) General Principles of Taxation; and (2) Income Tax. It is a consolidated and updated version of my reviewers in Tax 1 and Taxation Law Review. This reviewer is based on notes from Atty. Montero and Assoc. Dean Gruba and the books and reviewers of Atty. Mamalateo and Atty. Domondon. I also added some stuff from Atty. Mickey Ingles’ reviewer and Justice Dimaampao. References have also been made to the 2013 Bedan Red Book and the 2012 UP Tax Reviewer. Further, I added the recent and relevant revenue regulations and other BIR issuances (especially those issued in 2012) and the latest SC and CTA jurisprudence (as of January 31, 2013). Most of the digests were sourced from Du Baladad and Associates (BDB Law) and from Baniqued & Baniqued. The reviewer will make reference to codal provisions. Thus, I recommend that you read this with a copy of the NIRC and other Laws Codal (2012 edition) by Atty. Sacadalan-Casasola Possessors may reproduce and distribute my reviewer provided my name remains clearly associated with my work and no alterations in the form and content of my reviewer are made. If you find this reviewer useful, please share it to others. May this reviewer prove useful to you. If it does, please share it to others. Happy studying! --------------------------------------------------------------------------- It is the power by which the sovereign raises revenue to defray the expenses of government. It is a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burden. --------------------------------------------------------------B. Nature of Taxation --------------------------------------------------------------Q: What is the nature of the power of taxation? The nature of the power of taxation is two-fold. It is both an inherent power and a legislative power. 1. An inherent power The power of taxation is inherent in the State, being an attribute of sovereignty. The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it M ACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY VS. M ARCOS [261 SCRA 667]. This is so because the very existence of the State is dependent on taxes. 2. Legislative in character The power of taxation is essentially a legislative function. Taxation is an attribute of sovereignty. It is the strongest of all powers of the government. There is a presumption in favor of legislative determination. Public policy decrees that since upon the prompt collection of revenue depends the very existence of government itself, whatever determination shall be arrived at by the legislature should not be interfered with, unless there be a clear violation of some constitutional inhibition. [SARASOLA VS. TRINIDAD [40 PHIL. 252] It is a legislative power because it involves the promulgation of rules. The Constitution has allocated to the legislative department the enactment of law TABLE OF CONTENTS --------------------------------------------------------------------------- I. General Principles of Taxation .................... 1 II. NIRC A. Income Tax .............................................. 45 ---------------------------------------------------------I. GENERAL PRINCIPLES OF TAXATION -----------------------------------------------------------------------------------------------------------------------A. Definition and Concept of Taxation --------------------------------------------------------------Q: Define taxation Taxation is the inherent power of the sovereign exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. It is the mode of raising revenue for public purposes. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 1 of 158 Last Updated: 30 July 2013(v3) PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) Q: May the legislature enact a law to raise revenues even in the absence of a constitutional provision granting the said body the power to tax? Yes. The power to tax can be exercised by the government even if the Constitution is entirely silent on the subject. There is no need for a constitutional grant for the State to exercise this power. The power to tax is inherent in the State, being an attribute of sovereignty. This is so because the State can neither exist nor endure without taxes. It must be noted that Constitutional provisions relating to the power of taxation do not operate as grants of power to the Government, but instead merely constitute as limitations upon a power which would otherwise be practically without limit Q: Why is the power to tax considered inherent in sovereignty? It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power, no sovereign State can exist nor endure. The power to tax proceeds upon the theory that the existence of a government is a necessity. No sovereign State can continue to exist without the means to pay its expenses, and, for those means, it has the right to compel all citizens and properly within its limits to contribute; hence, the emergence of the power to tax. --------------------------------------------------------------D. Power of Taxation compared with other powers --------------------------------------------------------------Q: Differentiate the power of taxation from police power and the power of eminent domain. See table below. TAXATION EMINENT DOMAIN May be exercised by (1) government or political subdivisions OR (2) granted to public utilities The property is taken for public use and must be compensated POLICE POWER Only by government or its political subdivisions Authorit y who exercise s the power Only by the government or its political subdivisions Purpose The property is taken for the support of the government --------------------------------------------------------------C. Characteristics of Taxation --------------------------------------------------------------Note: This should properly refer to Characteristics or Elements of a Tax, not Characteristics of Taxation. In the event the question is asked, answer as if the question refers to characteristics of a tax. See Chapter 1, K. Characteristic of Tax. With reservations, however, as to the source, the 2013 Beda tax reviewer enumerates as characteristic of taxation the following: (1) Comprehensive (2) Unlimited (3) Plenary and (4) Supreme. It is submitted that the proper answer would make reference to the inherent limitations to the power of taxation. Atty. Domondon states that the inherent limitations on the power of taxation is also known as the elements, tenets or characteristics of taxation. The use of the property is regulated for promoting the general welfare and is not compensable Operates on a community or class of individuals Persons affected Operates on a community or class of individuals Operates on an individual as owner of a particular property There is a transfer of the right to property Effect The money contributed becomes part of the public funds There is no transfer of title. At most, there is restraint on the injurious use of property The person affected receives Benefits received It is assumed that the He receives the market value of the PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 2 of 158 Last Updated: 30 July 2013(v3) PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) individual receives the equivalent of the tax in the form of protection and benefits he receives from the government Amount of impositi on Generally, there is no limit on the amount of tax that may be imposed property taken from him indirect benefits as may arise from the maintenance of a healthy economic standard of society 1. Revenue purposes: The basic purpose of taxation is to raise revenues. 2. Sumptuary or regulatory purpose: The secondary purpose of taxation is to promote the general welfare and to protect the health, safety or morals of inhabitants Q: What are non-revenue (or sumptuary) objectives of taxation? 1. Taxation can strengthen anemic enterprises; 2. Taxes may be increased in period of prosperity to curb spending power and halt inflation and lowered in periods of slump to expand business and ward off depression 3. Taxes on imports may be increased to protect local industries 4. Taxes on imported goods may be used as a bargaining tool by a country by setting trarrif rates first at a relatively high level before trade negotiations 5. Taxes can discourage certain business (e.g. tobacco and alcohol) 6. Taxes can also minimize inequity Some cases illustrating the non-revenue or sumptuary objectives of taxation: In PHILIPPINE COCONUT PRODUCERS FEDERATION VS. PCGG [178 SCRA 236], the Supreme Court held that the coconut industry is one of the major industries supporting the national economy. It is therefore, the State’s concern to make it a strong and secure source not only of the livelihood of a significant segment of the population but also of export earnings the sustained growth of which is one of the imperatives of economic stability. In PHILIPPINE HEALTH CARE PROVIDERS VS. CIR [554 SCRA 411], the Supreme Court, on the issue of whether Health maintenance organizations (HMOs) were exempt from Documentary Stamp Tax (DST), held that it is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise. HMOs, just like any concern organized No amount imposed but rather the owner is paid the market value of property taken Amount imposed should not be more than sufficient to cover license and necessary expenses Relatively free from constitutional limitations; it is superior to the impairment of contract provision Relation ship to Constitu tion Subject to certain constitutiona l limitations; including the impairment of obligation of contracts Inferior to the impairment of obligations of contracts prohibition; government cannot expropriate property which under a contract it had previously bound itself to purchase --------------------------------------------------------------D. Purposes of taxation 1. Revenue-raising 2. Non-revenue/special or regulatory --------------------------------------------------------------Q: What are the purposes of taxation?1 _________________________________________ 1 Atty. Mamalateo enumerated six purposes or objectives of taxation, namely: (1) Revenue; (2) Regulatory; (3) Promotion of General Welfare; (4) Reduction of social inequity; (5) Encourage economic growth by granting incentives and exemptions; and (6) protectionism. Note: It is submitted that items (3) to (6) can be considered subsumed under the regulatory purpose. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 3 of 158 Last Updated: 30 July 2013(v3) Jurisprudence provides that such exactions are considered regulatory fees in light of their purpose. in determining whether the levy for the Philippine Sugar Institute Fund is a fee or a tax. Montero’s lecture. the Supreme Court held that the levy of 30% tax on videogram operators was imposed primarily to answer the need for regulating the video industry. The proper term. HMOs should not be arbitrarily and unjustly included in the DST coverage. as used by the Supreme Court in numerous decisions should be “regulatory fee” or “fee”. in determining whether the taxes collected for the Oil Price Stabilization Fund are taxes or regulatory fees. they were exacted not under the power of taxation. Q: May a tax be validly imposed in the exercise of police power and not of the power to tax? Yes. but if the regulation is the primary purpose. The distinction made by the Supreme Court in PROGRESSIVE DEVELOPMENT CORPORATION V. This is inaccurate and adds to confusion. The designation Note: The criteria is based on Atty. Q: When an exaction is imposed to discourage certain businesses. Some cases: In OSMENA V. the Supreme Court held that such levy was not so much Page 4 of 158 Last Updated: 30 July 2013(v3) Q: How do you determine if an imposition is a tax or a (regulatory) fee? In determining whether an imposition is a tax or a regulatory fee. they were referred to as “license fees. The power of taxation may be used as an implement of police power of the State with the end in view of regulating a particular activity. Q: When an exaction is imposed to provide means for the rehabilitation and stabilization of a threatened industry. one must inquire into the following: 1. The main objective was not revenue but to stabilize the price of oil and petroleum products. . This is particularly useful in analyzing whether an imposition is a tax or a fee. the Supreme Court held that the municipal license fees for the privilege to engage in the business of selling liquor or alcoholic beverages were imposed for regulatory purposes as such products are potentially harmful to public health and morals. The Court stated that: If the generating of revenue is the primary purpose and regulation is merely incidental. The amount of the exaction 3. the Supreme Court stated that while the funds were referred to as taxes. 2013) for a lawful economic activity have a right to maintain a legitimate business. QUEZON CITY [172 SCRA 629] is particularly instructive. is the exaction a tax? No. CITY OF M ANILA [8 SCRA 367]. Note: Some authors and jurisprudence still refer to the imposition levied for the purpose of regulation as a tax. the fact that incidentally revenue is also obtained does not make the imposition a tax Thus. In earlier cases.” It is submitted that the use of the term “tax” should only be used to refer to an imposition for the purposes of revenue while the term “fee” is used for an imposition for purposes of regulation. In REPUBLIC V.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. but in the exercise of the police power of the State. Hence. it is a regulatory fee. The purpose of the imposition 2. The purpose of the imposition Q: How do you distinguish a tax from a regulatory fee in terms of its purpose? PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . a (regulatory) fee is imposed for purposes of regulation (in exercise of police power) while a tax is imposed for revenue generation purpose (the power of taxation). It is also important for purposes of tax exemptions. ORBOS [220 SCRA 703]. VIDEOGRAM REGULATORY BOARD [151 SCRA 208]. In COMPANIA GENERAL DE TABACOS DE FILIPINAS V. the distinction between a “tax” and a “fee” is relevant as certain inherent and constitutional limitations apply only to one and no to the other. BACOLOD-MURCIA MILLING [17 SCRA 632]. As you will see later. the imposition is a tax. particularly rampant film piracy and flagrant violation of intellectual property rights. In TIO VS. is the exaction a tax? No. In PLANTERS PRODUCT V. 2013) an exercise of the power of taxation but an exercise of the police power to aid and support the sugar industry. a private company. Some cases: In VILLEGAS V. Q: Should margin fees be considered a tax or a fee? Margin fees are regulatory fees. In GEROCHI V. BCDA [SEPTEMBER 15. Hence. the greater the extent and frequency of supervision and inspection required to ensure safety. the same must be no more than sufficient to cover the actual cost of inspection or examination. 2007]. As held in CHEVRON PHILIPPINES V. 2010]. is it a fee or a tax? The exaction should be considered a tax. the Supreme Court held in the negative and stated that the universal charge is a regulatory fee levied to ensure the viability of the country’s electric power industry Q: When the exaction is imposed to make a private company viable. The amount of the exaction Q: How do you distinguish a tax from a regulatory fee in terms of the amount of the exaction? If the amount levied is too high and/or if the amount levied is not related to costs of regulation. Q: Are royalty fees (on a per liter basis) imposed on the movement of petroleum fuel to and from special economic zones a tax or a fee? The royalty fees imposed on the movement of petroleum fuel are regulatory fees. The Supreme Court held that the margin fees cannot be deducted as they are not taxes. Q: Should universal charges (for electricity end-users) be considered a tax or a fee? Universal charges are regulatory fees. in determining whether the exaction of P50. security and order within the zone. the Supreme Court held that the amount was too excessive and that there was no logic or justification in the exaction from aliens who have been cleared for employment. they cannot be considered as a deductible business expense. FERTIPHIL CORPORATION [548 SCRA 485]. In PLANTERS PRODUCT V.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. the exaction should be considered a tax as it is levied for revenue purposes. In ESSO STANDARD EASTERN V. Hence. the company sought to deduct the margin fees it paid from its gross income. viable. In AMERICAN M AIL LINE V. in determining whether the Universal Charge imposed on electricity end-users by distributors is a tax. FERTIPHIL CORPORATION [548 SCRA 485]. the Supreme Court stated that for fees to be regulatory in nature. the Supreme Court held that the amount collected from the imposition on the domestic sales of fertilizer grades was too excessive to serve a mere regulatory purpose.00 from aliens securing an employment permit (from the Mayor of Manila) is a fee or a tax. JULY 17. It is applied to strengthen the country’s international reserves and is not imposed for revenue purposes. Margin fees are imposed to curb excessive demand upon the international reserves in order to stabilize the currency. The Court opined that it was obvious that the purpose of the exaction is to raise money under the guise of regulation. DOE [G. 159796. HIU CHIONG TSAI PAO HO [86 SCRA 270]. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 5 of 158 Last Updated: 30 July 2013(v3) . The Supreme Court held that the levy was invalid for not serving a public purpose as the ultimate beneficiary was a private company. the primary purpose was for revenue generation. NO. CIR [175 SCRA 149]. an Letter of Instruction was issue imposing a capital recovery component on the domestic sales of all fertilizer grades and such exaction shall be collected until adequate capital was raised to make Planters Product. CITY OF BASILAN [2 SCRA 309]. as they are not taxes.R. the royalty fees were exacted on a per liter basis because the higher the volume of fuel entering the special economic zone. Note: This case reversed the doctrine previously held in REPUBLIC V. In PAL V. the rule should be plain and simple: If the imposition is for revenue purposes. AUF failed to demonstrate that the building fees were arbitrarily determined or unrelated to the activity being regulated.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. JUNE 27. This view finds support in the case of PCGG V. in determining whether the motor vehicle registration fees (MVRF) were taxes or fees. Q: Can an imposition which. the Supreme Court stated that the taxation power can be used as an implement for the Page 6 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . An exaction can be considered both a tax and a regulatory fee through a combined exercise of police power and the power of taxation. In CIR VS.” Thus. In GEROCHI V. PATSTONE [42 PHIL 818]. 2013) ANGELES UNIVERSITY V. In this case. COJUANGCO [G. 2001] where the Supreme Court held that the coco levy funds were raised through the State’s police and taxing powers. CIR [22 SCRA 13]. A charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of the police power. their nature has become that of taxes notwithstanding the fact onefifth or less of the amount collected is set aside for operating expenses of the agency administering the program. was regulatory in nature be considered a “tax” because of the substantial increase in the amount collected? Yes. it is a fee and it is in the exercise of police power. the registration of vehicles because a convenient way of raising revenues. The City Treasurer assessed AUF a Building Permit Assessment. a nonstock. In Victorias Milling Co. the Supreme Court held that while the MVRFs were originally intended for regulation. CENTRAL LUZON DRUG CORPORATION [456 SCRA 413]. as motor vehicles became absolute necessities and vehicular traffic exploded in number. The Designation Q: Does designation matter in determining whether an exaction is a fee or a tax? No. 147062-64. AMERICAN M AIL LINE V. The City argues that they are not exempt (because it is a regulatory fee). (2) The fact that revenue is incidentally raised does not make the imposition a tax. simply because they are levied for different purposes. non-profit educational institution. The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes ( G. Note: It is submitted that the purpose of the exaction is the primary factor to consider.R. AUF argues that it is exempt from the payment of the building permit fees (because it is a tax). DECEMBER 14. the fact that the revenue is incidentally raised does not make the imposition a tax. NO. While it is conceded that the revenue from the building fees is generated for the benefit of LGUs.R.A. 189999. FIRST VIEW: No. DOCTRINE: (1) A charge which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of the police power. DOE [527 SCRA 696]. EDU [164 SCRA 320]. CUUNJIENG V. if it is for regulatory purposes. the Supreme Court stated that the designation given by the authorities does not decide whether the imposition is properly a tax or a fee. CITY OF BASILAN [2 SCRA 309]) SECOND VIEW: Yes. CITY OF ANGELES [G. FACTS: Angeles University Foundation (AUF). vs. Q: Can an exaction be considered both a tax and a regulatory fee? There two views. PHILIPPINE RABBIT BUS LINES [32 SCRA 211] to Q: May the power of taxation be used as an implement of the power of eminent domain? Yes. Note: It is submitted that the first view is the more acceptable view as it is consistent with the distinctions made between a “tax” and a “fee. Neither has AUF adduced evidence to show that the rates of building permit fees imposed and collected by the respondents were unreasonable or in excess of the cost of regulation and inspection. HELD: The building permit fees are regulatory fees. the Supreme Court stated the conservative and pivotal distinction between the power of taxation and police power rests in the purpose for which the charge is made. it is a tax and it is in the exercise of the power to tax. Thus. at first. the effect that motor vehicle registrations fees are regulatory fees. 2012]. filed with the City of Angeles a building permit for the construction of the building of the AUF Medical Center. The theory of taxation explains why there is a need to impose taxes while the basis or rationale for taxation explains the reason why a State may impose taxes. 2013) exercise of the power of eminent domain. 2011]. However. the rule of taxation should be uniform and equitable. The Court stated that fiscal adequacy requires that the sources of revenue must be adequate to meet government expenditures. Necessity Theory 3. Theoretical Justice --------------------------------------------------------------Q: What the basic principles of a sound tax system? The basic principles are the following: 1. One of the justifications was based on fiscal adequacy. the non-observance thereof will not render a tax imposition invalid except to the extent that specific constitutional or statutory limitations are impaired. it is submitted that such would not be constitutionally infirm. Fiscal Adequacy 2. SECRETARY OF FINANCE [249 SCRA 628] which held that the system of taxation need not be always progressive. It noted that the tax credit granted to private establishments giving senior citizen discounts can be deemed as their just compensation for private property taken by the State for public use. address and TIN of the toll way user must be indicated in the VAT receipt or invoice. OF FINANCE [JULY 19. Domondon. asserted that the substantiation requirements for claiming the input VAT were impractical and incapable of implementation as in order to claim input VAT. The basis of this view can be found in the case of TOLENTINO VS. I submit that it would amount to a violation of the Constitution. SEC. the petitioner PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 7 of 158 Last Updated: 30 July 2013(v3) . One of the grounds raised in assailing the validity of the imposition of VAT on the collection of toll way operators was that it violated the principle of administrative feasibility. Lifeblood Theory 2. via an Executive Order. Dimaampao is of the view that if the tax law runs contrary to the principle of theoretical justice. It is submitted that this should be qualified. ONGPIN [186 SCRA 331] . Theoretical Justice – a good tax system must be based on the taxpayer’s ability to pay 3. Fiscal Adequacy – The source of government revenue must be sufficient to meet governmental expenditures and other public needs 2. The Supreme Court held that such was valid. This was settled in the case of DIAZ V. Note: J. the rounding off of the toll rate and putting the excess collection in an escrow is illegal while the giving of the change to meet the exact toll rate would be a logistical nightmare. To continue collecting at valuations arrived at several years ago is not in consonance with a sound tax system. the theory of taxation and the basis or rationale for taxation are two different concepts. --------------------------------------------------------------G. Principles of a sound tax system 1. as to a violation of the principle of theoretical justice on the basis of equity. The theory of taxation refers to the lifeblood theory (and the necessity theory which is but an extension of the lifeblood theory). Jurisdiction over subject and objects --------------------------------------------------------------Note: As explained by Atty. of the property values for purposes of real property taxes. In addition. at issue was the validity of the increase. As to a violation of the principle of theoretical justice on the basis of uniformity. the name. The basis or rationale of taxation refers to (1) the symbiotic relationship and (2) jurisdiction by the state over persons and property within its territory. --------------------------------------------------------------F. Particularly. Benefits-Protection Theory (Symbiotic relationship) 4. The Supreme Court held that while administrative feasibility is a canon of a sound tax system. Note: The basic principles of a sound tax system are also known as the Canons of Taxation. Theory and Basis of Taxation 1. In CHAVEZ V. Administrative feasibility – taxes should be capable of being effectively enforced. Q: Will a violation of the abovementioned principles render a tax law unconstitutional? It depends. such violation will render the law unconstitutional considering that under the Constitution. specifically the equal protection clause.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Administrative Feasibility 3. if not totally evade. CIR [13 SCRA 775]. The lifeblood theory can be manifested in the following cases: 1. ORO M AURA SHIPPING LINES [593 SCRA 14]. validity of a tax cannot be assailed until after the taxpayer has paid the tax under protest. By questioning a tax’s legality without first paying it.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. OF FINANCE VS. CIR vs. CIR v. Lifeblood Theory --------------------------------------------------------------Q: What is the lifeblood theory? As stated in the case of CIR vs. the existence of government is a necessity. the Supreme Court held that the Government cannot be estopped from collecting taxes by the mistake. Cebu Portland [156 SCRA 535] In PHILIPPINE GUARANTY V. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation. we reiterate the legal principle that estoppel generally finds no application against the State when it acts to rectify mistakes. negligence. the Supreme Court opined that assuming further that MARINA merely committed a mistake in approving the vessel’s proposed cost and that the Collector of the Port of Manila similarly erred. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. The Supreme Court held that this argument loses sight of the urgency of the need to collect taxes as the lifeblood of the government. and for those means. Neglect or omission of government officials entrusted to collect taxes should not be allowed to bring harm or detriment to the people. NIRC] 2. in collusion with BIR officials. The prohibition against set-off of taxes [see Section 204(C). can unduly delay. If the payment of taxes could be postponed by simply questioning heir validity. this being the government’s primary source of revenue. In SEC. which is the promotion of the common good. or omission of its agents. Algue [158 SCRA 9] The lifeblood theory states that an assessment of a tax is enforceable despite it being contested because of the urgency to collect taxes. the Supreme Court stated that the requirement that the withholding agent should withhold the tax before addressing a query to the Commissioner of Internal Revenue is not without meaning for it is in keeping with the general operation of our tax laws: payment precedes defense. In CIR v. 2013) --------------------------------------------------------------1. Upon taxation depends the Government’s ability to serve the people for whose benefit the taxes are collected. the government has the right to compel all its citizens and property within its limits to contribute in the form of taxes. CA [457 SCRA 32]. the machinery of the state would grind to a halt and all government functions would be paralyzed. CTA [234 SCRA 348]. Presumption of correctness of assessments Illustrative cases: In CIR v. irregularities. Likewise. the payment of such tax. The prohibition against the issuance of an injunction to restrain the collection of taxes 3. or illegal acts of its officials and agents irrespective of rank. The rule holds true even if the rectification prejudices parties who had meanwhile received benefits. errors. a taxpayer. Cebu Portland [156 SCRA 535]. the Supreme Court held that government cannot and must not be stopped in matters involving taxes as “they are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. Algue [158 SCRA 9]. In PHILIPPINE NATIONAL OIL COMPANY VS. Q: What is the exception to the prohibition on the issuance of an injunction to restrain the collection of taxes? An injunction may be issued to restrain the collection of taxes “when in the opinion of the Court the collection may jeopardize the interest of the Page 8 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . On the other hand. the taxpayer argued that that the deficiency assessment cannot be enforced because it is still being contested. it cannot exist nor endure without the means to pay its expenses. may be achieved. The basis or rationale of taxation is also used to explain why taxation is basically territorial in character because it is only within the territorial boundaries of the taxing authority where tax laws may be enforced. This is so because it is only within the confines of its territory that a country. RA 1125. 1961] that nowhere does the law vest in the CTA original jurisdiction to issue writs of prohibition or injunction independently of. Jurisdiction is a reason why citizens must provide support to the state so the latter could continue to give protection. Taxes being the chief source of revenue for the government to keep it running. 2013) Government and/or the taxpayer. It is the country. taxation is a necessary burden to preserve the States sovereignty and a means to give the citizenry an army to resist aggression.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. ALGUE [158 SCRA 9]. is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. is merely ancillary to and in furtherance of its appellate jurisdiction. L12518. state or sovereign that gives protection that has the right to demand the payment of taxes with which to finance activities so it could continue to give protection. every person who is able must contribute his share in the running of the government and the latter.C. It can only issue such a writ of injunction in its appellate jurisdiction. as amended by RA 9282). for its part.” (See Section 11. must be paid immediately and without delay. lest the tax collector kill the "hen that lays the golden egg". The Supreme Court held in CIR vs. in order to maintain the general public's trust and confidence in Page 9 of 158 Last Updated: 30 July 2013(v3) --------------------------------------------------------------3. that the CTA cannot issue a writ of injunction to restrain the collection of taxes in the exercise of its original jurisdiction. No. an appealed case. Yuseco [G. It must be exercised fairly. and those which come within the State’s territory and facilities and protection which a government is supposed to provide Q: Discuss the meaning and implications of the following statement: the power to tax involves the power to destroy. Note: It must be noted. J. it could suspend the collection and require the taxpayer to deposit the amount claimed or to file a bond. state or sovereign may give protection. Hence. Necessity Theory --------------------------------------------------------------Q: What is the necessity theory? As stated in the case of PHILIPPINE GUARANTY V. the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property. a corps of civil servants to serve. support between the State and its inhabitants. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power --------------------------------------------------------------4. Jurisdiction over subjects and objects --------------------------------------------------------------Q: Explain the jurisdiction of the State over persons and property within its territory as a basis or rationale of taxation. the basis of taxation is found in the reciprocal duties of protection and PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . CIR [13 SCRA 775]. public improvements for the enjoyment of the citizenry. a navy to defend its shores from invasion. except if the CTA opines that collection would jeopardize the interest of the Government and/or taxpayer. In return for his contribution. October 28. however. The writ of prohibition or injunction that it may issue to suspend the collection of taxes. Benefits-Protection theory (Symbiotic relationship) --------------------------------------------------------------Q: What is the benefits-protection theory? According to this principle. And. the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court. equally and uniformly. and apart from. the Supreme Court stated that taxes are what we pay for civilized society.R. --------------------------------------------------------------2. In CIR VS. despite the natural reluctance to surrender part of one’s hard-earned income. A taxpayer who feels aggrieved by a decision of a revenue officer and appeals to the CTA must pay the tax assessed. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. Taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for support of the government. While. Imprescriptibility --------------------------------------------------------------Q: Are taxes imprescriptible? As a general rule. 18649.” Reconcile the apparently inconsistent statements. FEBRUARY 27. In particular. --------------------------------------------------------------H. Second. B. may PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . taxes must only be imposed prospectively. the Supreme Court held in LORENZO VS. the law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens. Imprescriptibility 3. And such Revenue laws are not to be classed penal laws.F. the imposition of a valid tax could not be judicially restrained merely because it would prejudice the taxpayer’s property. CIR V. CTA [23 SCRA 276]. NO. Double Taxation 4. 353] that inheritance taxation is governed by the statute in force at the time of the death of the decedent. not to determine the latter's real liability. but to take advantage of every opportunity to molest peaceful. Compromise 8. the general rule under the Civil Code that laws shall have prospective application applies to tax laws. Construction and Interpretation ----------------------------------------------------------------------------------------------------------------------------1. investigation or assessment. GOODRICH PHILS [FEBRUARY 24. so even if favorable. taxes are imprescriptible. The two statements can be reconciled on three levels. as an exception. in resolving the issue of whether a statute favorable to a taxpayer-heir can be given retroactive effect. should not be given retroactive effect. TOKYO SHIPPING [244 SCRA 332] be imposed retroactively if the law expressly provides and if it will not amount to a denial of due process. taxes. Prospectivity of tax laws 2. Tax Amnesty 9. COLLECTOR [G.” On the other hand. Hence. Holmes view refers to an invalid tax. law-abiding citizens. In CIR V. ALMANZOR [196 SCRA 322]. 1965]. Exemption from Taxation 6. Marshall’s view refers to a valid tax while J. First.R. J. ROXAS VS. POSADAS [64 PHIL. ABLAZA [108 PHIL 1105. to the Government because tax officers would be obliged to act promptly in the making of assessment. REYES V. 1999]. Page 10 of 158 Last Updated: 30 July 2013(v3) Q: Can tax statutes be applied retroactively? Yes. Third. and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers. Q: What is the rationale behind providing for a statute of limitations in the collection of taxes? As held in the case of REPUBLIC VS. as a general rule. as an exception. the tax law may provide otherwise.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. unless the language of the statute clearly demands or expresses that it shall have a retroactive effect which is not the case. --------------------------------------------------------------2. However. Escape from Taxation 5. Justice Holmes stated later that “the power to tax is not the power to destroy while the court sits. the NIRC and LGC provides for prescriptive periods for assessment and collection of taxes. 2013) the Government this power must be used justly and not treacherously. Q: Justice Marshall said that “the power to tax involves the power to destroy. Prospectivity of tax laws --------------------------------------------------------------Q: Are tax statutes prospective in its application? Yes. an illegal tax could be judicially declared invalid and should not work to prejudice a taxpayer’s property. As held in CEBU PORTLAND V. Compensation and Set-off 7. the Supreme Court noted that our tax laws provides for a statute of limitations in the collection of taxes for the purpose of safeguarding taxpayers from any unreasonable examination. Doctrines in Taxation 1. The FWT is an income tax subject to Page 11 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . although both taxes are national in scope because they are imposed by the same taxing authority -. Double taxation is indirect where some elements of direct double taxation are absent. the same may be suspended for equity and special circumstances. First. 6.” Q: What are the two types of double taxation? Double taxation may be direct (strict sense) or indirect (broad sense). It has also been defined as taxing the same person twice by the same jurisdiction over the same thing. these two taxes are of different kinds or characters. 2013) Q: How should said statute of limitations in taxation be construed? The law on prescription being a remedial measure should be liberally construed in order to afford protection.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Third. October 25. At the same time. PHILIPPINE NATIONAL BANK [G. OF TANAUAN [69 SCRA 460] --------------------------------------------------------------3. Q: Is double taxation prohibited under the Constitution? It depends. the taxing periods they affect are different. Second. 2005]. On the other hand. This means that the same property is taxed twice when it should be taxed only once and that both taxes are imposed on the same subject matter for the same purpose. Is the imposition of the FWT and GRT a form of double taxation? No. Thus. MUN. in the case of CIR VS. In the strict sense. However. The FWT is deducted and withheld as soon as the income is earned. 5. the taxes herein are imposed on two different subject matters. In the broad sense. Double Taxation a) Strict sense b) Broad sense c) Constitutionality of double taxation d) Modes of eliminating double taxation --------------------------------------------------------------Q: What is double taxation? Double taxation is defined as taxing the same property twice when it should be taxed but once. if double taxation amounts to a direct double taxation. double taxation means direct double taxation. Q: Bank A’s gross receipts from passive income is subject to 20% final withholding tax. the Court held that even if the 2-year prescriptive period for a claim for tax refund has already lapsed. 4. No.R. the total gross receipt of Bank A is subject to 5% gross receipts tax (GRT). the exceptions to the law on prescription should be strictly construed. then it becomes legally objectionable for being oppressive and inequitable.the national government under the Tax Code -. On the other hand. It is sometimes known as “duplicate taxation. and is paid after every calendar quarter in which it is earned. double taxation means indirect double taxation. the GRT is neither deducted nor withheld. 2. On the same subject matter For the same purpose By the same taxing authority Within the same jurisdiction During the same taxing period The taxes must be of the same kind or character PEPSI-COLA BOTTLING COMPANY V. The subject matter of the FWT is the passive income generated in the form of interest on deposits and yield on deposit substitutes. It applies to all cases in which there are two or more pecuniary impositions. by the same taxing authority within the same jurisdiction during the same taxing period and covering the same kind of tax. 161997.and operate within the same Philippine jurisdiction for the same purpose of raising revenues. It violates the equal protection and uniformity clauses of the Constitution. while the subject matter of the GRT is the privilege of engaging in the business of banking. but is paid only after every taxable quarter in which it is earned. 3. The Constitution does not prohibit the imposition of double taxation in the broad sense. Q: What are the elements of (direct) double taxation? There is direct double taxation if the two taxes are imposed: 1. Is there double taxation? No. in the former. the other is a tax. Hence. The MNC argues that it was already being taxed for the manufacture of copra so there was double taxation. Is there double taxation? Yes. MUNICIPALITY OF T ANUAN [69 SCRA 460]. while the payment of 1% for the same violation is a tax for the generation of income which is the primary purpose for this instance. while the GRT is a percentage tax not subject to withholding. Is there double taxation given that buildings pay real estate taxes and also income taxes besides the tenement tax imposed by the ordinance? No. The payment of 1/10 of 1% for incurring reserve deficiencies is clearly a penalty as the primary purpose is regulation. the taxing authority is the national government while in the latter. In PROCTER & GAMBLE V. Is there double taxation? No.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. The Page 12 of 158 Last Updated: 30 July 2013(v3) . One is a penalty. it must be noted. Supreme Court ruled that there was no double taxation in the said case because the second ordinance repealed the first ordinance. and they must be the same kind or character of tax. both taxes must be imposed on the same property or subject-matter. CHINA BANKING CORP VS.” It has been shown that a real estate tax and the tenement tax imposed by the ordinance. the taxing authority is the local government. (see CIR VS. Q: A city passed two ordinances. All the elements of double taxation are present. A tax on products is different from a tax on the privilege of storing copra in a bodega situated within the territorial jurisdiction of the municipality. Q: A City passed an ordinance imposing license tax on persons engaged in the business of operating tenement houses. are not of the same kind or character. MUNICIPALITY OF JAGNA [94 SCRA 894]. although imposed by the same taxing authority. The same tax may be imposed by the national government as well as by the local government. (REPUBLIC BANK VS. by the same State. during the same taxing period. The first levies and collects from soft drinks producers a tax for every bottle corked while the second levies and collects on soft drinks produced and manufactured within its territorial jurisdiction. However. that while the factual milieu provided is similar to the case of PEPSI COLA V. Government. Under the General Banking Law. for the same purpose. In order to constitute double taxation in the objectionable or prohibited sense the same property must be taxed twice when it should be taxed but once. In COMPANIA GENERAL DE TABACOS V. calling or activity by both the State and a political subdivision thereof. while it is true that they are taxable as real estate dealers (income tax) and still taxable under the ordinance. the Supreme Court stated that there is double taxation when the same person is taxed twice by the same jurisdiction for the same thing. the Supreme Court held that both a license fee and a tax may be imposed on the same business and occupation and such as not a violation of the rule against double taxation. Decide. Otherwise. A multinational company doing business in the Philippines stored copra in its warehouse located in the municipality and was thus assessed the storage fee. There is nothing inherently obnoxious in the exaction of license fees or taxes with respect to the same occupation. there would have been double taxation. The first ordinance imposed a tax on the privilege of selling liquor while the second ordinance imposed a tax on the sales of liquor. CA [403 SCRA 634]) Q: Under the Tax Code. the argument against double taxation may not be invoked. SOLIDBANK CORP [416 SCRA 436]. There is no double taxation. within the same jurisdiction or taxing district. CITY OF M ANILA [8 SCRA 367]. 2013) withholding. or taxing authority. Bank A is subject to 1% reserve deficiency tax if it incurs reserve deficiencies. CITY OF ILOILO [26 SCRA 578]) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: A municipality enacted two ordinances. Furthermore. Bank A must 1/10 of 1% for incurring reserve deficiencies. (VILLANUEVA V. CTA [213 SCRA 266]) Q: A municipality imposed a storage fee for the storage of copra within its jurisdiction. there is no double taxation. Furthermore. The Code specifically provides for the collection and manner of payment of the said inspection fees. Is there double taxation? No. Q: Company A. Escape from Taxation a) Shifting of tax burden b) Tax Avoidance c) Tax Evasion ----------------------------------------------------------------------------------------------------------------------------a) Shifting of tax burden --------------------------------------------------------------Q: What is meant by “shifting the tax burden”? Shifting of tax burden is the process by which the burden of a tax is transferred from the statutory taxpayer or the one whom the tax was assessed or imposed to another without violating the law. The local government unit may levy a tax on quarry resources extracted from public lands but not from private lands. The national government argues that it may not do so as such articles are already taxed by the NIRC. by express provision in the Local Government Code. Decide. firm. and 4. Is A correct? No. they being one of the miscellaneous taxes provided for under the Tax Code. However. Impact of taxation (liability) is the point on which a tax is originally imposed while incidence of taxation (burden) is that point on which the tax burden finally rests or settles down. The first is a license fee for the privilege of engaging in the sale of liquor in the exercise of police power while the other is imposed for revenue purposes based on the sales made. CA [299 PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: What is the meaning of impact and incidence of taxation? Impact of taxation and incidence of taxation are two different concepts. the local government unit cannot impose taxes on quarry resources as they are already taxed under the NIRC. Tobacco inspection fees are levied and collected for purposes of regulation and control. it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation. Q: A local government unit wishes to levy excise taxes on quarry resources found within its jurisdiction. Allowance of tax credit for foreign taxes paid 3. Page 13 of 158 Last Updated: 30 July 2013(v3) . It has been expressly affirmed by the Supreme Court that such an argument against double taxation may not be invoked where one tax is imposed by the state and the other is imposed by the city. calling or activity by both the state and the political subdivisions thereof. entity or corporation doing business in the City. In PROVINCE OF BULACAN V. Allowing reciprocal exemption either by law or by treaty 2. Thus. 2013) impositions are of a different character. CTA [134 SCRA 36]) SCRA 442]. is subject to the payment of tobacco inspection fees aside from other taxes it pays to the national government. Q: What are the modes of elimination double taxation? The usual methods of avoiding the occurrence of double taxation are: 1. Tobacco inspection fees are of a different kind and character from other taxes imposed. DE LEON [25 SCRA 938]) --------------------------------------------------------------4. the Supreme Court stated that the NIRC levies a tax on all quarry resources whether extracted from public or private land. A contends that the ordinance constitutes double taxation as he already pays taxes imposed by the national government. (CITY OF BAGUIO VS. the LGU may levy on quarry resources extracted from public land. Allowance of deduction for foreign taxes paid. engaged in the manufacture of tobacco. Reduction of the Philippine tax rate Q: A city ordinance imposed a license fee on any person.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. (LA SUERTE VS. Tobacco Inspection fees are undoubtedly National Internal Revenue taxes. 183553. In CIR v. in the first instance. 2012] DOCTRINE: The claimant for the refund of excise taxes related to exported products shall be the same person who paid the taxes. from. one person in the expectation and intention that he can shift the burden to someone else. 2010]) As held in the case of EXXONMOBIL V. CONTEX CORPORATION VS. In the refund of indirect taxes. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 14 of 158 Last Updated: 30 July 2013(v3) . CIR [G. shifts the burden. HELD: The Court ruled that “the right to claim a refund or be credited with the excise taxes belongs to its supplier. CIR [G.R. PLDT [478 SCRA 61] Q: What taxes can be shifted? Only indirect taxes may be shifted.When the burden of the tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer. CIR [433 SCRA 577] The liability for the payment of the indirect tax lies only with the seller of the goods or services. NO. Q: How do you determine if a tax is direct or indirect? Direct taxes are taxes wherein the impact or liability for the payment of the tax as well as the incidence or burden of the tax falls on the same person. Q: In the refund of indirect taxes. Forward shifting . to the purchaser as part of the price of goods sold or rendered. 3 As an example.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 3. the statutory taxpayer is the proper party who can claim the refund ( SILKAIR VS. or are paid by. Petitioner then filed applications for tax refund/ issuance of tax credit certificates corresponding to the excise taxes which its supplier paid but passed on to it as part of the purchase price of the subject raw alcohol invoking Section130(D) of the Tax Code. purchased raw alcohol from its supplier for use in the manufacture of its beverage and liquor products. it is intended or desired. who is the proper party to claim the said refund? _________________________________________ 2 As an example. Backward shifting – When the burden of the tax is transferred from the consumer or purchaser through the factors of distribution 2 to the factors of production. the purchaser may shift the tax to the producer by purchasing only when the price is reduced. NOVEMBER 12. it is the manufacturer of the goods who is entitled to claim any refund thereof. In indirect taxes.” Any excise tax paid thereon shall be credited or refunded” requires that the claimant be the same person who paid the excise tax. JANUARY 19. On the other hand. in effect. DIAGEO PHILIPPINES V. PLDT [478 SCRA 61]). he. 2013) Q: Enumerate the ways of shifting the tax burden and define each. among others. the producer/manufacturer may pass the tax burden to the retailer/seller of the goods who in turn will pass the tax burden to the purchaser. in the case of indirect taxes. should pay them while indirect taxes are those that are demanded. Subsequently. not the liability to pay it. CIR v. 1. when the seller passes on the tax to his buyer. petitioner exported its locally manufactured liquor products and received the corresponding foreign currency proceeds of such export sales. FACTS: Diageo Philippines. NO. 2. not in the buyer thereof. the Supreme Court distinguished direct taxes from indirect taxes by stating that direct taxes are those that are extracted from the very person who. The purchase price for the raw alcohol included. Onward shifting – When the tax is shifted two or more times either forward 3 or backward. Indirect taxes paid by the manufacturers or producers of the goods cannot be refunded to the purchasers of the goods because the purchasers are not the taxpayers. CIR [FEBRUARY 25. indirect tax are taxes wherein the impact or the tax liability for the payment of the tax falls on one person but the incidence or burden thereof can be shifted or passed to another. 180909.R. the excise taxes paid by the supplier. 2011]. Inc. The supplier imported the raw alcohol and paid the related excise taxes thereon before the same were sold to the petitioner. CIR [G. as a tax-exempt entity. The CA affirmed the denial and ruled that petitioner is not the proper party to seek for the refund of the excise taxes paid. 2012] DOCTRINE: Oil companies are not exempt from the payment of excise tax on petroleum products manufactured and sold by them to international carriers. 1998 to December 31. CIR v. In M ACEDA V. the CTA En Banc upheld the ruling Q: Can the seller claim an exemption on indirect taxes if it sold products to buyers who. is actually passed on to the end consumer as part of the transfer value or selling price of the goods. The seller cannot claim an exemption or a refund on the indirect taxes it paid for those goods sold or services rendered to an entity exempt from indirect taxes. 188497. NO. PILIPINAS SHELL [G. The Supreme Court ruled in the affirmative. ultimately bears the tax burden. 166482. bartered or exchanged. Philippine Acetylene claimed an exception on the indirect taxes it paid for the oxygen and acetylene gases it sold to NPC. The CTA denied the petition and ruled that while petitioner’s country indeed exempts from excise taxes petroleum products sold to international carriers.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. as the purchaser and end-consumer. APRIL 25. where the CTA also granted the taxpayer’s claim for refund on the basis of excise tax exemption for petroleum products sold to international carriers of foreign registry for their use or consumption outside the Philippines. which it alleged to have been erroneously paid based on Section 135(a) and (b) of the Tax Code of 1997. but this does not transform its status into a statutory taxpayer. It filed petitions for review since no action was taken by the BIR on its claims. under the law. HELD: The Supreme Court held that excise taxes. 2012] DOCTRINE: The proper party to question or seek a refund of an indirect tax is the statutory taxpayer. exempted from absorbing the burden of indirect taxation and it is the seller then that shall shoulder this burden. the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. the buyer is PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 15 of 158 Last Updated: 30 July 2013(v3) .R. While the tax is directly levied upon the manufacturer/importer upon removal of the taxable goods from its place of production or from the customs custody. or seek a refund of an indirect tax is the statutory taxpayer. the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another . petitioner elevated the case to the CA. 1998. M ACARAIG [197 SCRA 771]. The Supreme Court ruled that NPC is a tax-exempt entity and the said tax is due from the manufacturer. On appeal. petitioner filed a Petition for Review with the Court of Tax Appeals. it must be held exempted from absorbing the economic burden of taxation. JANUARY 25. CIR [20 SCRA 1056]. cannot be made liable for the indirect taxes. which apply to articles manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported into the Philippines. The CTA’s First Division ruled that the taxpayer is entitled to the refund of excise taxes in the reduced amount. at issue was whether Gotamco & Sons should pay the contractor’s tax (an indirect tax) on gross receipts it realized from the construction of the WHO building in Manila. The Court opined that WHO. by the oil companies. As NPC is exempt from direct and indirect taxation. the Supreme Court ruled that the tax burden may not be shifted to the NPC. FACTS: The taxpayer filed with the Large Taxpayers Audit & Investigation Division II of the (BIR) the several formal claims for refund or tax credit for various years. a tax-exempt entity. is basically an indirect tax. sold. Thus. Petitioner. Upon the denial of the motion of reconsideration. the tax. The proper party to question. petitioner nevertheless failed to comply with the second requirement under Section 135 (a) of the 1997 Tax Code as it failed to prove that the jet fuel delivered by Petron came from the latter’s bonded storage tank . in reality. are tax-exempt entities? No. FACTS: Petitioner filed an administrative claim for refund on the excise taxes paid on the purchase of jet fuel from its supplier oil company for the period of July 1. the oil companies could have shift the burden to NPC. Had not NPC been exempt from indirect taxes. Due to inaction by respondent Commissioner. The tax exemption of the buyer cannot be the basis of a claim for tax exemption of the manufacturer (PHILIPPINE ACETYLENE V. GOTAMCO [148 SCRA 36]. CIR [20 SCRA 1056]) In PHILIPPINE ACETYLENE V. 2013) SILKAIR V.R. It relied on a previous ruling rendered by the CTA En Banc in a previous case involving the same taxpayer. In CIR V. the oil companies must absorb all or part of the economic burden of the taxes. As a tax-exempt entity. 135 of the 1997 NIRC did not exempt the oil companies from the payment of excise tax on petroleum products manufactured and sold by them to international carriers. The Supreme Court pointed out that the taxpayer’s f ailure to make a distinction on the exemption under Sections 134 and 135 of the Tax Code. taxes from ASIA INTERNATIONAL AUCTIONEERS V. are different from withholding taxes. FACTS: Asia International Auctioneers (AIA) received an assessment from the BIR for deficiency VAT. such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. 135 deals with the tax treatment of a specified article (petroleum products) in relation to its buyer or consumer. The burden of taxation is not shifted to the withholding agent who merely collects. records in this case support the conclusion that AIA was assessed not as a withholding agent but. Because an excise tax is a tax on the manufacturer and not on the purchaser. the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person. To distinguish. the incidence and burden of taxation fall on the same entity. enumerates withholding agents as persons to whom the tax amnesty shall not extend to. The excise tax imposed on petroleum products under Sec. Due to this difference. 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its buyers who are international carriers. In other words. the deficiency VAT cannot be “deemed” as withholding taxes merely because they constitute indirect taxes. by withholding. and absent any provision in the Code authorizing the refund or crediting of such excise taxes paid. 134 makes reference to the nature and quality of the goods manufactured (domestic denatured alcohol) without regard to the tax status of the buyer of the said goods while Sec. The BIR argues that AIA is a withholding agent. HELD: The Supreme Court held that both the earlier amendment in the 1977 Tax Code and the present Sec. 135 (a) should be construed as prohibiting the shifting of the burden of the excise tax to the international carriers who buys petroleum products from the local manufacturers. 2012] DOCTRINE: See held. On the other hand. it held that Sec. 135(a) for their purchases of locally manufactured petroleum products.” there can be no outright exemption from the payment of excise tax on petroleum products sold to international carriers. in indirect taxes. AIA availed of the tax amnesty program under RA 9480. the taxpayer cannot shift the tax burden to international carriers who are allowed to purchase its petroleum products without having to pay the added cost of the excise tax. Further. in case of withholding taxes.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 135 (a) in relation to the other provisions on excise tax and from the nature of indirect taxation. as the one directly liable for the said deficiency taxes. apparently led it to mistakenly assume that the tax exemption under Sec. HELD: AIA is not a withholding agent. the Court holds that Sec. among others. 2013) of the First Division. Said provision thus merely allows the international carriers to purchase petroleum products without the excise tax component as an added cost in the price fixed by the manufacturers or distributors/sellers. The exemption found in Sec. the tax due from income payments to entities arising from certain transactions and remits the same to the government. 179115. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 16 of 158 Last Updated: 30 July 2013(v3) . may only be construed as prohibiting the manufacturers-sellers of petroleum products from passing on the tax to international carriers by incorporating previously paid excise taxes into the selling price. CIR [G. Citing its ruling in Philippine Acetylene. See case digest below. the statutory taxpayer. it held that a tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any tax due to it as the manufacturer or seller. like VAT and excise tax. 135 (a) “attaches to the goods themselves” such that the excise tax should not have been paid in the first place. Moreover. considering that the excise taxes attaches to petroleum products “as soon as they are in existence as such. SEPT. Furthermore. Consequently. The BIR contends that AIA is disqualified under RA 9480 which. The sole basis then of the taxpayer’s claim for refund is the express grant of excise tax exemption in favor of international carriers under Sec. the oil companies which sold such petroleum products to international carriers are not entitled to a refund of excise taxes previously paid on the goods. Q: Distinguish indirect withholding taxes. 26.R. Indirect taxes. and there being no express grant under the NIRC of exemption from payment of excise tax to local manufacturers of petroleum products sold to international carriers. who in turn. On the other hand. This is only a case of tax avoidance. JR. on the other hand. After a week. 2013) --------------------------------------------------------------b) Tax Avoidance c) Tax Evasion --------------------------------------------------------------Q: What is the difference between tax avoidance and tax evasion? Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. THE ESTATE OF BENIGNO TODA. The end to be achieved (which is payment of less taxes than that known by the taxpayer to be legally due or non-payment of a tax when it is shown that a tax is due). Upon advice of their lawyer. they decided to organize a corporation to take control of their properties. A course of action which is unlawful. In effect.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. cannot be doubted. the taxpayers acquired 2. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 17 of 158 Last Updated: 30 July 2013(v3) . The two transfers were tainted with fraud since the intermediary transfer (from the corporation to a natural person) was prompted only by the desire to mitigate tax liabilities and not for any business purpose. In DELPHER TRADES CORPORATION V. Q: What is the “substance over form” doctrine? The doctrine provides that taxability is determined by the reality of the transaction rather than the appearance which may be contrived. Is the scheme designed to avoid taxes or evade taxes? This is a case of tax evasion. In the said case. the Supreme Court held that the three factors in tax evasion were present. they changed the nature of their ownership from unincorporated to incorporated form by organizing the corporation to take control of properties and at 4 the same save on inheritance taxes. A sold the same to XYZ Corporation. it usually subjects the taxpayer to further or additional civil or criminal liabilities. sold during the same day the same property to XYZ Corporation. The husband and wife were issued 2. By virtue of this exchange. The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them. and 3. The scheme sought to make it appear that there were two sales of the _________________________________________ 4 Q: Husband and wife own a lot of real estate. Tax evasion. 2. In CIR VS. An evil or deliberate state of mind. Q: ABC Corporation owns the ABC building. Is the scheme designed to avoid taxes or evade taxes? This is a case of tax evasion. Is the scheme designed to avoid taxes or evade taxes? If the properties were to be held by the spouses in the case. [483 SCRA 293]. Note: An example of tax avoidance is when a taxpayer avails of deductions allowed by law. Tax avoidance is the tax saving device within the means sanctioned by law.500 original unissued no par value shares of stocks of the corporation in exchange for their properties. INTERMEDIATE APPELLATE COURT [157 SCRA 349].500 original unissued no par value shares of stock in exchange for their properties. a close business associate of ABC Corporation. it would be tied to the succession proceedings and the consequential payment of estate taxes when the owner dies. a corporation does not die and can hold the property for a period of at least 50 years. It sold the said building to A. Q: What are the three factors to be considered in determining if a scheme is designed to evade taxes? The three factors to be considered are: 1. the taxpayers became stockholders of the corporation by subscription. is a scheme used outside of those lawful means and when availed of. by means which the law permits. the Supreme Court opined that there was nothing wrong or objectionable about the "estate planning" scheme resorted to by the taxpayers. This method should be used by the taxpayer in good faith and at arms length. on 30 August 1989. Q: ABC corporation sold its building to A. PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) subject properties. It is obvious that the objective of the sale to Z was to reduce the amount of tax to be paid especially that the transfer from Z to XYZ would then be subject to only 6% capital gains tax, and not the 30% corporate income tax. The intermediary transaction which was prompted more on the mitigation of tax liabilities than for legitimate business purpose constitutes one of tax evasion (CIR v. CA [327 Phil. 1]). --------------------------------------------------------------5. Exemption from taxation a) Meaning of exemption from taxation b) Nature of tax exemption c) Kinds of tax exemption d) Rationale/grounds for exemption e) Revocation of tax exemption --------------------------------------------------------------Note: Tax exemption of special entities under the Constitution shall be discussed under Chapter 1.I.2.a.(iv) Prohibition against Taxation of religious, charitable entities and educational entities, (v) Prohibition against taxation of non-stock, non-profit institutions, (xii) exemption from real property taxes. 1. Where the President exercises his power under the flexible tariff clause to remove existing protective tariff rates (see Section 28(2), Article VI, 1987 Constitution) 2. The local government may grant exemptions from the payment of local taxes without congressional approval consequent to its power to levy taxes, fees and other charges. (see Section 5, Article X, 1987 Constitution) 3. Where the President enters into and ratify a tax treaty granting certain exemptions subject only to Senate occurrence. Q: May tax exemptions exist by implication? No. In NDC v. CIR [151 SCRA 472], at issue was whether the undertaking signed by the Secretary of Finance in the promissory note can be considered an exemption on taxes on the interest remitted. The Supreme Court ruled in the negative and opined that tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. --------------------------------------------------------------a) Meaning of exemption from taxation --------------------------------------------------------------Q: What is a tax exemption? A tax exemption is defined as a grant of immunity, express or implied, to particular persons or corporations from the obligation to pay taxes. --------------------------------------------------------------b) Nature of tax exemption --------------------------------------------------------------Q: What is the nature of tax exemptions? Tax exemptions are: 1. Mere personal privileges to the grantees; 2. Generally revocable by the government unless founded on contract which is protected by the non-impairment clause; 3. Implies a waiver on the part of the Government of its right to collect what otherwise would be due; and 4. Not necessarily discriminatory so long as the exemption has a rational basis. Q: Who has the power to grant tax exemptions? Both the power to tax and to exempt certain persons are vested in the legislature. In particular, ARTICLE VI, SECTION 28 OF THE CONSTITUTION provides that “No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.” --------------------------------------------------------------c) Kinds of tax exemptions --------------------------------------------------------------Q: What are the kinds of tax exemptions? See table. Q: Enumerate the instances where tax exemptions may be granted other than by act of Congress: PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 18 of 158 Last Updated: 30 July 2013(v3) PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) As to source Constitutional Statutory Contractual Treaty Ordinance Exemption originates from the Constitution Emanating from legislation Based on contractual stipulation Based on treaty provisions Based on an ordinance exempting payment of local government taxes. Q: What is exemptions? the rationale behind tax Tax exemptions are given because: 1. Public interest will be served by the exemption allowed; and 2. Such public benefit or interest is sufficient to offset the monetary loss entailed in the grant of the exemption Q: What are the grounds of tax exemption? Tax exemption may be based on: 1. Contract; 2. Some ground of public policy; and 3. Treaty created on grounds of reciprocity or to lessen the rigors of international double or multiple taxation As to manner of creation Express Implied Expressly granted by organic or statute law Whenever particular persons, properties, or excises are deemed exempt as they fall outside the scope of the taxing provision. As to scope of extent Total When certain persons, property or transactions are exempted from all taxes When certain persons, property or transactions are exempted from certain taxes As to object Personal Those granted directly in favor of such persons as are within the contemplation of the law granting the exemption Those granted directly in favor of a certain class of property Q: Can be there be a tax exemption on the ground of equity? No. The Supreme Court held in DAVAO GULF V. CIR [293 SCRA 76], that there is no tax exemption solely on the ground of equity. Partial --------------------------------------------------------------e) Revocation of tax exemption --------------------------------------------------------------Q: May a tax exemption be revoked? Yes. Since taxation is the rule and exemption therefrom is the exception, the exemption may be withdrawn at the pleasure of the taxing authority. Hence, in MCIAA V. M ARCOS [261 SCRA 667], the Supreme Court noted that Section 234 of the the Local Government Code unequivocally withdrew exemptions from payments of real property taxes granted to natural or juridical persons, including government-owned and control corporations. Since MCIAA is a GOCC, it follows that its exemption granted under a charter prior to the LGC has been withdrawn. In SMART V. CITY OF DAVAO [565 SCRA 237], the Supreme Court noted that the “in lieu of all taxes” clause in its charter has become functus officio with Page 19 of 158 Last Updated: 30 July 2013(v3) Impersonal --------------------------------------------------------------d) Rationale/grounds for exemption --------------------------------------------------------------Note: The rationale for exemption and the grounds for exemption are two different things. The rationale asks the question why tax exemptions are given while the grounds tell us why the State can provide tax exemptions. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) the abolition of franchise tax on telecommunications companies in accordance with the VAT law. in REPUBLIC V. CAGUIOA [536 SCRA 194] held that there is no vested right in a tax exemption and more so when the latest expression of legislative intent renders it continuance doubtful. In the said case, RA 7227 granted private domestic corporations doing business in the Subic SEZ tax exemptions on importations of general merchandise. However, RA 9334 withdrew the tax exemption on the importations of cigars, cigarettes, distilled spirits, fermented liquors and wines. In NITAFAN V. CIR [152 SCRA 284], the Supreme Court held that the salaries of members of the judiciary are subject to income tax as applied to all taxpayers. The payment of income tax by Justices and Judges do not fall within the constitutional protection against decrease of their salaries during their continuance in office. amount equal or greater than the tax being collected (PHILEX MINING V. CIR [294 SCRA 687]). Taxes cannot be the subject of set-off because they are not in the nature of contracts between parties but grow out of a duty to, and, are positive acts, of the Government, to the making and enforcing of which, the personal consent of the taxpayer is not required (REPUBLIC V. M AMBULAO LUMBER [4 SCRA 622]) The erroneous payment of final withholding tax cannot be used to offset or be treated as advance tax payment, and cannot be used against the succeeding final withholding tax. COMMISSIONER OF INTERNAL REVENUE VS. GOULDS PUMPS (PHILS.) INCORPORATED, AUGUST 22, 2012 Note: In one case, DOMINGO V. GARLITOS [8 SCRA 443], the Supreme Court allowed the set-off between taxes and debts. It opined that if the obligation to pay taxes and the taxpayer’s claim against the government are both overdue, demandable, as well as fully liquidated, compensation takes place by operation of law and both obligations are extinguished to their concurrent amounts. In the said case, the taxpayer who has been assessed municipal taxes was allowed to assign in favor of the municipality a final judgment obtained by him against the said municipality to cover the assessment. Atty. Domondon reconciled the rulings of the Supreme Court in DOMINGO V. GARLITOS [8 SCRA 443] and FRANCIA V. IAC [162 SCRA 753] by stating that in the former case, both claims being overdue, demandable, and fully liquidated while in the latter case, the claim against the government was not overdue and demandable as it was already settled. Atty. Domondon submits that when confronted with a bar problem, we follow the doctrine laid down in FRANCIA V. IAC [162 SCRA 753] unless the facts would involve the (1) the application of the principle of solutio indebiti or (2) it involves local government taxes. Q: Is there an exception to the above doctrine? Yes. The exemption cannot be withdrawn if the exception was granted to private parties based on material consideration of a mutual nature, which then becomes contractual and thus covered by the non-impairment clause of the Constitution (MCIAA V. M ARCOS [261 SCRA 667]). --------------------------------------------------------------6. Compensation and set-off --------------------------------------------------------------Q: Can taxes be the subject of compensation between the government and the taxpayer? No. As held in CALTEX VS. COA [208 SCRA 727], taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other. A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. (see FRANCIA V. IAC [162 SCRA 753]) There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay taxes on the ground that the government owes him an PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: Is the civil concept of solutio indebiti applicable to taxation? Yes. In the case of FILINVEST DEVELOPMENT CORPORATION VS. CIR [529 SCRA 605], the Court held that in the field of taxation where the State exacts strict compliance upon its citizens, the State must likewise deal with taxpayers with fairness and honesty. Hence, under the principle of solutio indebiti, the Government has to restore to petitioner the sums representing erroneous payments of taxes. Page 20 of 158 Last Updated: 30 July 2013(v3) 2013) Q: What is recoupment? the doctrine of equitable Q: What is a tax condonation/remission? The condonation of a tax liability is equivalent and is in the nature of a tax exemption. Local Government Code. express or implied. not subject to ex post facto law prohibition 3. civil and administrative liabilities arising from nonpayment of taxes applies only to past tax periods Tax Exemption immunity from civil liability only Q: Do tax laws continue in force even during a period of enemy occupation? Yes. Civil in nature. Tax Treaties/International Agreements. under SECTION 204 OF THE TAX CODE. Not penal in character 4.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. In HILADO V. prospective PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . Presidential Decree/ Executive Order. and 9. COLLECTOR [104 PHIL. (UST V. CIR [100 SCRA 288]. The doctrine provides that where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer is barred by prescription. Compromise --------------------------------------------------------------Q: Can taxes compromise? be the subject of a --------------------------------------------------------------9. 8. 5. Tax Amnesty immunity from all criminal. --------------------------------------------------------------8. it is a grant of immunity. Compromises are allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering into it is duly authorized to do so. to particular persons or corporations from the obligation to pay taxes. payment of internal revenue taxes may be compromised on the grounds of (1) doubtful validity of the assessment or (2) financial incapacity. a tax presently being assessed against a taxpayer may be recouped or set-off against the tax whose refund is now barred by prescription. 1062] --------------------------------------------------------------7. the Supreme Court held that internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect actually enforced by the occupation government. Constitution. Hence. Rulings implemented by the BIR Yes. Construction and interpretation of: a) Tax Laws b) Tax Exemption and exclusion c) Tax Rules and Regulations d) Penal Provisions of Tax Laws e) Non-retroactive application to taxpayers --------------------------------------------------------------Q: What are the sources of tax laws? The sources of tax laws are: 1. Tariff and Custom Code as amended – RA 8181. 7. Decisions of SC/CTA/CA. 4. In fact. Not political in character 2. 6. 2. NIRC as amended – RA 9648. Local Tax Ordinance/City/Municipal Tax Code. Tax Amnesty --------------------------------------------------------------Q: What is a tax amnesty? A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax. Not retroactive in its application Q: Distinguish a tax amnesty from a tax exemption. Revenue Rules and Regulations. This doctrine is inapplicable in the Philippines in light of the lifeblood theory. 3. IAC [196 SCRA 335] Q: What is the nature of tax laws? 1. Income tax returns filed during such Page 21 of 158 Last Updated: 30 July 2013(v3) has application. REPUBLIC V. which are the product of a delegated power to create new and additional legal provisions that have effect of law.R. Respondent filed a Petition for Declaratory Relief with the Regional Trial Court (RTC) of Las Pinas City. tax statutes are strictly construed against the taxing authority because taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. PURISIMA [562 SCRA 251]) and determine the classification of the imported article before tariff may be imposed. 2012] DOCTRINE: Rule and regulations. treaty. As such. It is well-settled that rules and regulations. or partake of the nature of a statute and are just as binding as if they have been written in the statute itself. Q: Is the construction of a tax statute by predecessors binding on the successors? No. there is no need for statutory construction if the tax law is clear. CIR [554 SCRA 411]. Petitioner filed a Motion to Dismiss and alleged that the RTC did not have jurisdiction over the subject matter of the case because respondent was asking for a judicial determination of the classification of wheat. 179579. Unfortunately.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. HYPERMIX FEEDS [G. The construction of a statute by predecessors is not binding on their successors if thereafter the latter Page 22 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . which are the product of a delegated power to create new and additional legal provisions that have the effect of law. international or executive agreement. 2013) period and income tax payments effected are considered valid and legal. the standards prescribed by law. statutory construction is but proper and tax laws shall be liberally interpreted in favor of the taxpayer and strictly against the taxing authority. It is required that the regulation be germane to the objects and purposes of the law. thus. CMO 232007 has already classified the article even before the customs officer had the chance to examine it. if there is an ambiguity in the law. Indeed. and that it be not in contradiction to. As an exception. Also. petitioner Commissioner of Customs diminished the powers granted by the Tariff and Customs Code with regard to wheat importation when it no longer required the customs officer’s prior examination and assessment of the proper classification of the wheat. FACTS: Petitioner issued Customs Memorandum Order (CMO) No. 27-2003 prescribing guidelines. but in conformity with. the Constitution vests the power of judicial review or the power to declare a law. or regulation in the courts. should be within the scope of the statutory authority granted by the legislature to the administrative agency. NO. action for declaratory relief is improper. ordinance. should be within the scope of the statutory authority granted by the legislature to the administrative agency. Q: What is the rationale behind the liberal construction or interpretation of tax statutes? As held in the case of PHILIPPINE HEALTH CARE PROVIDERS V. Section 1403 of the Tariff and customs law mandates that the customs officer must first assess As a general rule. for tariff purposes. the law must be taken as it is devoid of judicial addition or subtraction. they have the force and effect of law and enjoy the presumption of constitutionality and legality until they are set aside with finality in an appropriate case by a competent court ( ABAKADA GURO PARTY LIST VS. --------------------------------------------------------------a) Tax laws --------------------------------------------------------------Q: State the rule on construction interpretation of tax laws? or COMMISSIONER OF CUSTOMS V. including the regional trial courts. HELD: The Supreme Court held that the determination of whether a specific rule or set of rules issued by an administrative agency contravenes the law or the constitution is within the jurisdiction of the regular courts. Rules and regulations issued by administrative or executive officers pursuant to the procedure or authority granted by law upon the administrative agency have the force and effect. instruction. which includes the authority of the courts to determine the validity of the acts of the political departments. Q: Do rules and regulations issued by administrative or executive officers (implementing tax laws) have the force and effect of law Yes. FEBRUARY 1. presidential decree. order. Where the law is clear and unambiguous. in the applicable to importation of wheat. In effect. This is within the scope of judicial power. Taxation is the rule and exemption is the exception. tugboats cannot be considered cargo vessels as they are not meant to carry and transport persons or goods by themselves but are mainly for towing. doctrine of strict interpretation must first be applied. wires. it is not an independent contractor. In NDC V. income. Before applying the principles of tax exemption. only an exemption from property taxes on the poles. Lifeblood theory 2. noted that it is an error to apply the principle of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. CIR [151 SCRA 472]. transformers. As held in the case of QUEZON CITY V. nor are they presumed. MITSUBISHI METAL [181 SCRA 215]). wires. CA & ADMU [271 SCRA 605].” the Supreme Court ruled in the negative. wires. For exemptions from taxation are not favored in law. A tax exemption must be strictly construed against the one claiming the exemption because it is contrary to the lifeblood theory which is the underlying basis for taxes. earnings. fairness and equality of treatment among taxpayers 3. the Supreme Court ruled that the fact that the Secretary of Finance guaranteed the loans of the NDC cannot be taken to mean that the payments of NDC to the Japanese creditors are exempt from withholding since the undertaking was not tantamount to a waiver of collection to taxes which must be express Q: Should the doctrine of strict interpretation of tax exemptions be applied first as a precondition to the application of the principle of tax exemption? Yes. statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. 2013) becomes satisfied that a different construction should be given. Thus. In CIR V. --------------------------------------------------------------b) Tax Exemption and exclusion --------------------------------------------------------------Q: How are tax exemptions construed and interpreted? Tax exemptions should be strictly construed against the taxpayer. in resolving the issue on whether “tugboats” are embraced and included in the term “cargo vessel. The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed (CIR V. Any claim for exemption from the tax statute should be strictly construed against the taxpayer. To minimize differential treatment and foster impartiality. and insulators of the grantee.” Construing this provision strictly against MERALCO. the issue to be resolved was whether MERALCO was exempt from excise tax on its poles. There must first be a determination who are covered by the tax statute before a determination of who are exempted. the Supreme Court held that the provision covers PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: What is the “legislative grace” concept”? The legislative grace concept provides that any tax relief provided is the result of specific acts of Congress that must be applied and interpreted strictly. In MERALCO V. VERA [67 SCRA 352]. before resolving the issue on whether the Institute of Philippine Culture (IPC) of the Ateneo De Manila University was an independent contractor (and as such liable for contractor’s tax). He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. and transformers. The Supreme Court held that the “in lieu of all taxes” provision is limited in scope to taxes “upon the privileges. ABS-CBN [567 SCRA 495]. franchise and poles. the Supreme Court. In LUZON STEVEDORING V.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Q: What are the reasons for strictissimi juris interpretation of tax laws? 1. Taxation is a high prerogative of sovereignty whose relinquishment is never presumed Page 23 of 158 Last Updated: 30 July 2013(v3) . CTA [163 SCRA 647]. The Supreme Court found that the IPC never sold its services for a fee to anyone or was ever engaged in a business apart from or independently from the academic purposes of the Ateneo. Thus. and transformers. In cases of exemptions in favor of a government political subdivision or instrumentality Q: How are tax condonations construed? As held in SURIGAO CONSOLIDATED MINING VS. it is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a government political subdivision or instrumentality. it must construed strictly against the grantee and liberally in favor of the taxing authority. in favor of non tax liability of such agencies. Yes. (see Section 246. rulings and circulars. When the statute granting exemption provides for liberal construction thereof 2. (M ACEDA V.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. rules and regulations promulgated by the CIR would have no retroactive application if to so apply them would be prejudicial to the taxpayers PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 24 of 158 Last Updated: 30 July 2013(v3) . must be construed strictly against the taxpayer and liberally in favor of the taxing authority. CIR [9 SCRA 728]. and it cannot be extended beyond the plain meaning of those terms. Q: Is the rule of strict construction to tax exemptions applicable to government political subdivisions and instrumentalities? No. M ACARAIG [197 SCRA 771]) --------------------------------------------------------------e) Non-retroactive application to taxpayers --------------------------------------------------------------Q: Can BIR retroactively? issuances be applied Q: How are tax amnesties construed? As held in the case of CIR V. If granted. 2013) Q: What the exceptions to the strictissimi juris interpretation of tax laws? 1. provisions granting exemptions to government agencies may be construed liberally. much like a tax exemption. --------------------------------------------------------------d) Penal provisions of tax laws --------------------------------------------------------------Q: How are penal provisions of tax laws construed? Penal provisions of tax laws are strictly construed against the State and liberally in favor of the taxpayer. is never favored nor presumed in law. As held in the case of M ACEDA V. NIRC) Q: When will BIR issuances be not given retroactive application? As provided in SECTION 246 OF THE NIRC. Hence. --------------------------------------------------------------c) Tax rules and regulations --------------------------------------------------------------Q: How are tax rules and regulations construed? As they have the force and effect of law. being in the nature of tax exemptions. In case of special taxes relating to special cases and affecting only special classes of persons 3. In cases of exemptions granted to charitable and educational institutions or their property 5. Q: Why is the rule of strict construction to tax exemptions inapplicable to government political subdivisions and instrumentalities? The reason for the rule does not apply in the case of exemptions running to the benefit of the government itself or its agencies. the terms of the amnesty. BIR issuances may be applied retroactively if its application will not be prejudicial to the taxpayer. If exemption refer to the public property 4. it should be sustained only when expressed in explicit terms. tax rules and regulations are construed strictly against the government and liberally in favor of the taxpayer. M ACARAIG [197 SCRA 771]. a tax amnesty. For these reasons. M ARUBENI CORPORATION [204 SCRA 377]. like that of a tax exemption. In such case the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. property or occupation to be taxed).PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. In PBCOM V. the taxpayer relied and implemented a computation by virtue of a BIR Ruling. --------------------------------------------------------------1. 2. The Supreme Court held that the later BIR ruling cannot be given retroactive application as such would be prejudicial to the taxpayer. object (purpose for which the tax shall be levied). 2013) In CIR V. Page 25 of 158 Last Updated: 30 July 2013(v3) Poverty Eradication and Alleviation Certificate (PEAce) Bond PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . method of collection. Inherent Limitations a) Public purpose b) Inherently legislative c) Territorial d) International comity e) Exemption of government entities. extent (amount or rate of tax to be collected). Q: Is the failure of a taxpayer to consult the BIR before relying on a BIR Ruling imply bad faith on the part of the former? No. and 7. RCBC invoked the non-retroactivity principle of BIR Rulings. Q: When can BIR issuances be given retroactive application even if such would be prejudicial to taxpayers? SECTION 246 OF THE NIRC provides for the following exceptions: 1. or 3. Jurisprudence also provides for another exception. coverage (the persons. Scope and Limitation of Taxation 1. situs (place) of taxation. Inherent Limitations 2. Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based. apportionment of the tax (general or limited to a particular locality or partly general or partly local). CA [267 SCRA 557]. 5. Relying upon previous BIR Rulings in 2001. CIR [302 SCRA 241]. agencies. The said issuance was later reversed in a subsequent BIR Ruling. 370-2011 [OCTOBER 7. nature (kind of tax to be collected). 3. _________________________________________ 5 --------------------------------------------------------------I. RCBC paid no final tax upon the issuance of the bonds. In BIR RULING NO. Constitutional Limitations --------------------------------------------------------------Q: What is the scope of the legislature’s taxing power? The legislative taxing power or discretion extends to the following: 1. 2. The Supreme Court in resolving this matter stated that the non-retroactivity principle does not apply when the ruling involved is null and void for being contrary to the law. and instrumentalities --------------------------------------------------------------What are the inherent limitations on the power to tax? The inherent limitations are those limitations which exist despite the absence of an express constitutional provision thereon. Where the taxpayer acted in bad faith. However. the Supreme Court in resolving the argument that failure to consult with the BIR amounted to bad faith opined that such failure does not imply bad faith especially when the BIR Ruling relied upon was clear and categorical leaving no room for interpretation. Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR. CTA [108 SCRA 143] with regard to its reliance on a Memorandum Circular on the withholding of taxes on film rentals which was revoked by a subsequent memorandum circular. the rulings were all reversed by a BIR Ruling in 2004. The Supreme Court opined that the non-retroactivity of rulings by the CIR is inapplicable where the nullity of the issuance was declared by the Courts and not by the CIR. In CIR V. 2011] the issue was whether RCBC is liable to pay the final withholding tax on interest income realized from the 5 purchase of PEAce Bonds. 4. The same doctrine was applied in the case of ABS-CBN V. 6. such as the previous rulings on the PEACe bonds. CA [267 SCRA 557]. flagrant violation of --------------------------------------------------------------b) Inherently legislative (i) General Rule (ii) Exceptions (a) Delegation to local governments (b) Delegation to the President (c) Delegation to administrative agencies --------------------------------------------------------------Q: Is the power to tax delegable? As a general rule. MUNICIPALITY OF TANUAN [69 SCRA 460] where the Supreme Court held that one of the requisites for the valid exercise of the power of tax is that the tax must be for a public purpose. Inherently legislative or non-delegability of the taxing power – Only the legislature can exercise the power of taxes unless the same is delegated by the constitution or through a law which does not violate the constitution 3. In TIO VS. Delegation to the President to enter into executive agreements and to ratify tax treaties subject to the concurrence by the Senate e. Article X. fees and other charges pursuant to Section 5. Tax exemption of the State Note: The inherent limitations on the power of taxation is also known as the elements. the appropriation of public funds for the construction of feeder roads on land owned by a private person is invalid for being made for other than a public purpose. Delegation of emergency powers to the President (see Section 23(2). VIDEOGRAM REGULATORY BOARD [151 SCRA 208]. of the _________________________________________ 6 The delegation to be valid must comply with the completeness test and the existence of sufficiently determinate standards test. 1987 Constitution) b. tenets or characteristics of taxation. (see Sec. Article VI. The local governments are now given direct authority to levy taxes. Public purpose – the revenues collected from taxation should be devoted to a public purpose. M ACARAIG [197 SCRA 771]) c. the Supreme Court explained that the right of the legislature to appropriate public funds is correlative with its right to tax and as such the power of taxation may only be exercised for public purposes. The power to tax is no longer vested exclusively on Congress. the power to tax is purely legislative and it cannot be delegated. such power should be imposed upon equals out of respect.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. In that case. 5. 2. When the delegation relates merely to 6 administrative implementation (see M ACEDA VS. 1987 Constitution) --------------------------------------------------------------a) Public purpose --------------------------------------------------------------Q: What is meant by “public purpose” as an inherent limitation on the power to tax? The right of taxation can only be used in aid of a public purpose. The rule can also be seen in PEPSI COLA V. Delegation of tariff powers to the President under the flexible tariff clause. It was imposed primarily to answer the need for regulating the video industry. SECRETARY OF PUBLIC WORKS [110 SCRA 331]. particularly d. Article 6. Territoriality or situs of taxation – the taxing power should be exercised only within the territorial jurisdiction of the taxing authority 4. rampant film piracy and intellectual property rights. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 26 of 158 Last Updated: 30 July 2013(v3) . In PASCUAL V. Delegation to the people at large Q: Do local governments have the power to tax? Yes. 28(2). Principle of Comity – Comity is respect accorded by nation to each others as co-equals. delegation is allowed in the following cases: a. As taxation is an act of sovereignty. As exceptions. 2013) The inherent limitations are: 1. the Supreme Court held that the levy of 30% tax on videogram operators is for a public purpose. Thus. only provinces and cities can impose a tax on the transfer of ownership of real property. the basic doctrine on local taxation remains the same in that the power to tax is primarily vested in Congress. Congress cannot abolish what is expressly granted by the fundamental law. A. 166408. Q: Explain the territoriality rule as a limitation on the power of taxation.R. Municipalities are prohibited from imposing said tax that provinces are specifically authorized to levy. However broad the power of taxation may be as to its character and no matter how searching it is in its extent. In CIR V. NAPOCOR V. 2003]. that the power is not inherent in the local government unlike in the national government. NO. ABS-CBN [G. CITY CABANATUAN [G. further. QUEZON CITY V. who sold a parcel of land which he inherited. the contractor is entrusted to design. In fact. 2008] It must be noted. CITY OF ILOILO [164 SCRA 607]. OCTOBER 6. no longer merely by virtue of a valid delegation as before. Now. construct. on the issue of whether a bottling company which sells soft drinks in Iloilo City but operates its bottling plant in another is liable for the excise tax imposed by said City on the distribution. VS. NO. None of them is correct. M ARUBENI [204 SCRA 377]. Its power to tax must always yield to a legislative act which is superior having been passed by the state itself which has the inherent power to tax. commission and handover the project to the employer in a completed state. the Supreme Court. Q: The Municipality of XYZ passed an ordinance imposing a tax on the sale or transfer of real property (local transfer tax). Resolve the controversy.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. property or businesses within its jurisdiction. the acts or privileges of the company is within its jurisdiction. PROVINCE OF LAGUNA [306 SCRA 750]. The Supreme Court held that the contract actually involved two taxing jurisdictions. Under the Local Government Code. the ordinance is void. 149110. refused to pay and argued that such tax can only be collected by the National Government. manufacture and bottling of soft drinks.R. the reference of the 2013 Bar Syllabus as delegation to local governments as an exception to the general rule that the power of taxation is inherently legislative is inaccurate. held that since truck sales were made in the City. While the power to tax may be exercised by local governments. MUNICIPALITY OF TANUAN [69 SCRA 460]. The only authority conferred to Congress is to provide the guidelines and limitations on the local government’s exercise of the power to tax. Page 27 of 158 Last Updated: 30 July 2013(v3) . (see BASCO VS. the Municipality argues that under the Constitution. A municipal corporation has no inherent right to impose taxes. While the _________________________________________ 7 Q: May Congress abolish the power to tax of local governments? No. there is a direct grant of taxing power by the Constitution to the local governments. Thus. in ILOILO BOTTLERS INC. what was 7 involved was a contract on a turn-key basis which the CIR sought to tax as an indivisible contract. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 In a turn key contract. Q: Does the direct grant of taxing power to the local governments mean that the legislature may no longer provide limitations and guidelines to such power? No. APRIL 9. 2013) 1987 Constitution. PEPSI COLA V. it has the power to create its own sources of revenue. such power is necessarily limited only to persons. PAGCOR [197 SCRA 52]) --------------------------------------------------------------c) Territorial (i) Situs of Taxation --------------------------------------------------------------. but pursuant to direct authority conferred by the Constitution. M ANILA ELECTRIC COMPANY VS. On the other hand. OF Note: Previously. the power of taxation is exclusively with the Legislature and that such is merely delegated to local governments in respect of matters of local concern. These services made and completed in Japan are not subject to contractor’s tax as they are rendered outside the taxing jurisdiction of the Philippines. enter into tax treaties with other States. Q: What are the basis or determinants of the situs of taxation? 1. Q: How do we address multiplicity of situs of taxation? The taxing jurisdiction may: 1.e. 2013) construction and installation work were completed in the Philippines. some pieces of equipment and supplies were completely designed and engineered in Japan. Due to the variance in the concept of “domicile” for tax purposes and considering the multiple relationships that may arise with respect to intangible property and the use to which the property may have been devoted. state or political unit that gives protection has the right to demand support Q: What is the effect of multiplicity of situs of taxation? PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 28 of 158 Last Updated: 30 July 2013(v3) . From sources without the Philippines: only Resident Citizens and Domestic Corporations are liable to income tax on income derived from sources without the Philippines 3. 2. Note: The general principles of income taxation under Section 23 of the Tax Code is also known as the situs of income taxation. From sources within the Philippines: all kinds of taxpayers are subject to income tax on income derived from sources within the Philippines. Where tax laws operate outside territorial jurisdiction (i. and/or 2. The symbiotic relationship 2.” The situs of taxation is the place or authority that has the right to impose and collect taxes. when exempted by treaty obligations and when exempted by international comity. all of which may receive the protection of the laws of jurisdiction other than the domicile of the owner thereto. Q: What are the territoriality rule? exceptions to the 1. The power to tax has been preserved except for those matters where an appropriate exemption was provided for. Jurisdiction. taxation of resident citizens on their incomes derived from abroad) 2.e. the same income or intangible property may be subject to taxation in several taxing jurisdictions. provide for exemptions or allowance of deduction or tax credit for foreign taxes. It is not foreign territory for purposes of income tax legislation. Income partly within and partly without the Philippines: Taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. --------------------------------------------------------------(i) Situs of Taxation (a) Meaning (b) Situs of Income tax (c) Situs of property taxes (d) Situs of excise taxes (e) Situs of business tax --------------------------------------------------------------Q: Define “situs of taxation. the Supreme Court held that bases under lease to the US under the Military Bases Agreement remain part of Philippine territory.) --------------------------------------------------------------(b) Situs of Income tax (1) From sources within the Philippines (2) From sources without the Philippines (3) Income partly within and partly without the Philippines --------------------------------------------------------------Q: What is the situs of taxation of income? 1. In REAGAN V. Where tax laws do not operate within the territorial jurisdiction of the state (i. CIR [30 SCRA 968]. As an example.” note that VAT was placed under “Situs of Business taxes” when in fact it is also an excise tax. Q: What is the situs of estate and donor’s taxes? Same rule applies to both. 2013) --------------------------------------------------------------(c) Situs of property taxes (1) Taxes on real property (2) Taxes on personal property --------------------------------------------------------------Q: What is the situs of taxes on real property? The situs of taxes on real property is where the property is located (lex situs) occupation is being conducted. the situs is the domicile of the owner (mobilia sequuntur personam).” While transfer taxes are considered “excise taxes. the tax imposed on gains from sale of shares of stock of a domestic corporation are treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. It is the place where the business or _________________________________________ 8 --------------------------------------------------------------d) International Comity --------------------------------------------------------------Q: Explain the principle of comity as a limitation on the power of taxation. It is either where the property is sold and consumed or where the service is to be performed. Q: What is the situs of VAT? The situs of VAT is the place where the transaction is made. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 29 of 158 Last Updated: 30 July 2013(v3) . For non-resident aliens: taxed on properties situated in the Philippines. This is so because that is the place which gives protection to the business or occupation. For citizens. When the law provides for the situs of the subject of the tax --------------------------------------------------------------(e) Situs of business taxes --------------------------------------------------------------Q: What is the situs of sales of real property? The situs of sales of real property is where the real property is located Q: What is the situs of sales of personal property? The situs of sales of personal property is the place where the sales are perfected and consummated --------------------------------------------------------------(d) Situs of excise taxes (1) Estate Tax (2) Donor’s Tax --------------------------------------------------------------Note: Instead of “Situs of Excise taxes. Q: What is the situs of excise taxes? The situs of excise taxes is where the transaction was performed. whether resident or non-resident.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 2. and resident aliens: taxed on properties wherever situated. The property or income of a foreign state or government may not be the subject of taxation by another. Q: What is the situs of taxes on personal property? If the personal property is tangible: where the property is physically located although the owner resides in another jurisdiction If the personal property is intangible: As a general rule. where the intangible personal property has acquired a business situs in another 8 jurisdiction.” this should have been properly referred to as “Situs of transfer taxes. The exceptions are as follows: 1. CA [357 SCRA 441]. 3. ANGARA [272 SCRA 18]. its agencies. the State may tax itself including its political subdivisions. the said lands and buildings are property of the public dominion and therefore owned by the State. Sec. cooperation and amity with all nations. Thus. agencies. sovereignty being absolute and taxation being an act of high sovereignty. donations or --------------------------------------------------------------e) Exemption of government entities. ruled in the negative. The Supreme Court opined that since MIAA is not a GOCC but instead as government instrumentality vested with corporate powers or a government corporate entity. par. equitability and progressivity of taxation ( Article VI. . Exemptions of GOCCs from local government taxes have been withdrawn by the the Local Government Code PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 30 of 158 Last Updated: 30 July 2013(v3) . 2) 4. the Supreme Court. The point is that a portion of sovereignty may be waived without violating the Constitution. in resolving the issue on whether the lands and buildings owned by the Manila International Airport Authority were subject to real property tax. 1). the portions of the property leased to private entities are subject to real property tax. Non-imprisonment for non-payment of polltax (Article III. However. they cannot be auctioned as they are outside the commerce of man. They are devoted to public use. . military personnel were not tax exempt under the RP-US Military Bases Agreement as they do not directly contribute to the defense and security of the Philippines. endowments. 2013) As held in TANADA V. Q: Are GOCCs subject to local government taxes? Yes. its officials and its citizens. Tax exemption of properties actually. while this may be so." Note that the principle of comity entails an exchange in benefits. Section 28. Section 28. MITSUBISHI METAL CORP [181 SCRA 214]. and instrumentalities --------------------------------------------------------------Q: Is the State subject to tax? Generally. its agencies and instrumentalities. fees or charges of any kind on the National Government. charitable and educational purposes ( Article VI. the Supreme Court held that scrupulous care must be taken when international comity is invoked on the representation that funds involved in the loans are those of a foreign government as we should avoid opening the floodgates to the violation of our tax laws.S. By express provision of the Local Government Code. the State may not be subject to taxation. based on the rationale that the Philippines "adopts the generally accepted principles of international law as part of the law of the land and adheres to the policy of .PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. import and export quotas. nations may surrender some aspects of their state power in exchange for greater benefits granted or derived from a convention of pact. Thus. In MIAA v. Constitutional Limitations a) Provisions directly affecting taxation --------------------------------------------------------------Q: What are the constitutional provisions directly affecting taxation? The direct constitutional provisions on taxation are: 1. by their voluntary act. the Supreme Court ruled that the hauling and transport of household goods and personal effects of U. However. Exemption from taxes of the revenues and assets of educational institutions including grants. etc ( Article VI. 20) 2. and instrumentalities? No. par. CA [495 SCRA 591]. directly. Grant by Congress of authority to the President to fix tariff rates. in SEA-LAND SERVICE V. Section 28. Q: Can local governments tax the national government. Furthermore. In CIR V. The underlying consideration in this partial surrender of sovereignty is the reciprocal commitment of the other contracting states in granting the same privilege and immunities to the Philippines. 3) 5. local governments cannot levy taxes. --------------------------------------------------------------2. Uniformity. it is exempt from real property tax. and exclusively used for religious. par. 1. Q: What is meant by “uniformity”? Uniformity requires that all subjects or objects of taxation similarly situated are to be treated alike or put on equal footing both in privileges and liabilities (SISON V. Q: Should the system of taxation be always progressive? No. TAN [163 SCRA 372].5 million. The Congress shall evolve a progressive system of taxation. 3) Q: What is meant by “equitable”? Equitable means fair. Section 4. tariff bills (Article VI. par. Sec. reasonable proportionate to one’s ability to pay. The rule of taxation shall be uniform and equitable. 2) Non-impairment of the Supreme Court’s jurisdiction in tax cases ( Article VIII. 4) The provision which mandates that money collected on a tax levied for a public purpose shall be paid out for such purpose only (Article VI. Thus. 2(b)) Power of local governments to create its own sources of revenue and to levy taxes subject to Congressional limitations ( Article X. par. LINGAYEN GULF [164 SCRA 27]) --------------------------------------------------------------(iii) Grant by Congress of authority to the President to impose tariff rates (xi) Flexible tariff clause --------------------------------------------------------------Article VI. Section 28.000 while small corner sari-sari stores are consequently exempt as well as sales of farm and marine products. _________________________________________ 9 EO 278 imposing a 10% VAT on the value added by every seller with aggregate gross annual sales of articles and/ or services exceeding P200. 8. the Supreme 9 Court held that EO 278 is equitable as it is imposed only on sales of goods or services by persons engaged in a business with an aggregate gross annual sales exceeding P200. No person shall be imprisoned for debt or non-payment of a poll tax. see also CIR V. ERMITA [469 SCRA 1]. economic and political inequalities or for the promotion of the right to "quality education. ANCHETA [130 SCRA 654]. 7. Section 28. the Supreme Court ruled that the 12% VAT imposition was equitable as it imposes safeguards and limits in the form of VAT exemption granted to gross sales below P1.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. par. and In ABAKADA GURO PARTY-LIST V. par. contributions. 2013) 6. Section 29. Section 28. Section 27. The Supreme Court in TOLENTINO VS. Section 6) Voting requirement in connection with the legislative grant of tax exemption ( Article VI. 10. just. Section 20. In KAPATIRAN V. 3) President’s veto power on appropriation." This is a directive to Congress. 5. even if the VAT is regressive because it is an indirect tax. --------------------------------------------------------------(ii) Uniformity and equality of taxation --------------------------------------------------------------Article VI. --------------------------------------------------------------(i) Prohibition against imprisonment for nonpayment of poll tax --------------------------------------------------------------Article III." These provisions are put in the Constitution as moral incentives to legislation. ( Article XVI. 9. revenue. not as judicially enforceable rights. just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social.000 to his purchase of goods and services PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 31 of 158 Last Updated: 30 July 2013(v3) . it is not prohibited by the Constitution. SECRETARY OF FINANCE [249 SCRA 628] explained that what Congress is required by the Constitution to do is only to "evolve a progressive system of taxation. par. buildings. by law. mosques. All lands. and all lands. 5. 4. non-profit educational institutions used actually. direct. and improvements. directly. Charitable institutions Churches Parsonages or convents appurtenant thereto Mosques Non-profit cemeteries. whether out-patient or confined in the hospital or receives subsidies from the government. LUNG CENTER OF THE PHILIPPINES V. and Q: Does the phrase “actually. and exclusive use of the property for charitable institutions is the direct and immediate and actual application of the property itself to the purpose for which the charitable institution is organized. directly. QUEZON CITY [433 SCRA 119] --------------------------------------------------------------(v) Prohibition against taxation of non-stock. as long as the money received is devoted or used altogether to the charitable object which it is intended to achieve. and subject to such limitations and restrictions as it may impose. 2013) 2. and no money inures to the private benefit of the persons managing or operating the institution. 2. and exclusively used for religious. non-profit educational institutions used actually. Under Article XIV. and exclusively for educational purposes shall be exempt from taxes and duties. directly. directly and exclusively used for religious. Section 28 pertains only to real property taxes ( LLADOC V. and exclusively for educational purposes shall be exempt from taxes and duties. direct. all revenues and assets of non-stock. All revenues and assets of non-stock. and improvements. a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients . directly. churches and personages or convents appurtenant thereto. Upon the dissolution or cessation of the corporate existence of such institutions. as a general principle. tariff rates. QCBAA [3 SCRA 186]) In LUNG CENTER OF THE PHILIPPINES V. does it lose its character as a charitable institution? No. Section 28. authorize the President to fix within specified limits. QUEZON CITY [433 SCRA 119]. The Congress may. and other duties or imposts within the framework of the national development program of the Government. and exclusive use? What is meant by actual. 3. or educational purposes shall be exempt from taxation. --------------------------------------------------------------(iv) Prohibition against taxation or religious. the Supreme Court stated that.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. nonprofit cemeteries. tonnage and wharfage dues. their assets shall be disposed of in the manner provided by law Q: If a hospital also admits paying patients. buildings. CIR [14 SCRA 292]). actually. Q: What are special entities that are granted tax exemptions by the Constitution? Under Article VI. Q: What is meant by actual. import and export quotas. actually. Section 28. 3. and exclusively used” mean that the exemption PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 32 of 158 Last Updated: 30 July 2013(v3) . and educational entities (x) Exemption from real property taxes --------------------------------------------------------------Article VI. charitable entities. the Supreme Court held that the admission of pay patients does not detract from the charitable character of a hospital if its funds are devoted exclusively to the maintenance of the institution as a public charity (see also HERRERA V. charitable. 6. non-profit institutions --------------------------------------------------------------Article XIV. 3. Charitable institutions. Section 4(3). charitable or educational purposes. BISHOP OF MISSIONARY DISTRICT [14 SCRA 991]. In CIR V. the following are exempt from real property taxes: 1. Section 4. The exemption provided for under Article VI. As held in BISHOP OF SEGOVIA V. Lukes argues that it is a non-stock. Are these exempt from real property taxes? No. Lukes Medical Center is a hospital organized as a non-stock and non-profit corporation. 2013) shall only cover property indispensable to the institution? actually charged parking fees on the lots beside its building. and improvements. QCBAA [3 SCRA 186]. directly. the Supreme Court held that the hospital was not exempt from real property tax on the portions of its property not actually. YMCA leased part of its premises to small canteen owners and PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 10 Section 27(B) provides that proprietary educational institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income Page 33 of 158 Last Updated: 30 July 2013(v3) . non-profit educational institution under Article XIV. the Supreme Court ruled that the income from the lease and parking fees were not exempt. Is the school exempt from taxes? As to the “lands. Q: A hospital has a school for training nurses and midwifes. charitable or educational purposes” are exempt from real property taxes. the exemption in favor of property used exclusively for charitable or educational purposes is not limited to property actually indispensable but extends to facilities which are incidental to or reasonably necessary for the accomplishment of its purposes. CA [298 SCRA 83]. buildings. Lukes was liable for income tax at 10% as provided under 10 Section 27(B) of the NIRC. Further. Q: Is a vegetable garden and an unused cemetery adjacent to a convent exempt from payment of real property taxes? Yes. St. but also the adjacent ground or vegetable garden destined to the incidental use of the parish priest in his ordinary life. In CIR V. The unused cemetery is also exempt as it is not used for commercial purposes and instead is used as a place for those who participate in the religious festivities. QUEZON CITY [433 SCRA 119]. charitable and educational objectives. No. buildings and improvements used exclusively for religious. non-profit institution with religious. and exclusively used for charitable purposes. QCBAA [3 SCRA 186]) As to the profits. 2012] DOCTRINE: A proprietary non-profit hospital is subject to 10% tax under Section 27(B) of the Tax Code. Section 4(3) of the Constitution. In LUNG CENTER OF THE PHILIPPINES V. CIR V.” such is beyond the taxing power of the State irrespective of the substantial profits as “all lands. BOARD OF ILOCOS NORTE [51 SCRA 352]. those leased out for commercial purposes are subject to real property tax.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. non-profit educational institutions used actually. Substantial profit is derived from the operation of the said school. It admits both paying and non-paying patients. PROV. the exemption from the payment of the land tax in favor of the convent includes not only the land actually occupied by the building. The Court noted that while YMCA is exempt from real property taxes. (see HERRERA V. Those used by the hospital even if used for paying patients remain exempt from real property taxes. Can the CIR tax YMCA for such income? Yes. non-profit institution for charitable and social _________________________________________ Q: YMCA is a non-stock. LUKES MEDICAL CENTER [SEPTEMBER 26. it will be exempt from taxes if it proves that it is within the coverage of Article XIV. ST. Section 4(3) which exempts all revenues and assets of non-stock. The school is a facility incidental or reasonably necessary for the accomplishment of the purposes of the hospital as the students practice therein. FACTS: St. YMCA failed to prove that it was a non-stock. and exclusively for educational purposes Q: The Philippine Lung Center leased portions of its real property out for commercial purposes. it is not exempt from income tax on the rentals from its property. directly. As held in HERRERA V. Thus. The CIR claimed that St. The last paragraph of Section 27 of the NIRC clearly provides that profits realized by exempt organizations (non-profit clubs) from real property from whatever source and wherever used are taxable. buildings. Section 30(E) and (G) requires that an institution be operated exclusively for charitable purposes to be completely exempt from income tax. QUEZON CITY [433 SCRA 119] still holds. and improvements of St. and exclusively used for religious. charitable and educational purposes shall remain exempt from real property taxes even if there is. 2013) welfare purposes exempt from income tax under Section 11 30(E) and (G) of the NIRC. the statement of the Court must be noted: “Non-profit does not necessarily mean Q: Is the existence of paying patients material to the real property tax exemption of the building. Lukes? No. 2012] was issued by the BIR to implement this decision of the Supreme Court on all private non-profit hospitals and educational institutions starting from January 1. CA [298 SCRA 83]. Section 27(B). That’s for real property taxes. Lukes is not operated exclusively for charitable purposes insofar as its revenues from paying patients are concerned. Lukes remain exempt from real property taxes even if it admits paying patients. in turn. Section 30(E) and (G). the doctrine laid down in LUNG CENTER OF THE PHILIPPINES V. provides that activities conducted for profit shall be taxable. RMC 67-2012 [October 31. and exclusively for educational purposes). like the admission of paying patients. The lands. --------------------------------------------------------------- PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 34 of 158 Last Updated: 30 July 2013(v3) . it must be organized and operated exclusively for educational or charitable purposes. Tax Code (10% preferential tax rate to income of proprietary educational institutions). profits realized from real property by exempt institutions from whatever source or wherever used are taxable.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. their revenues and assets must be used actually. With regard to income taxation. Section 4(3) Article XIV (tax exemption of income of non-stock. This is consistent with the ruling in LUNG CENTER OF THE PHILIPPINES V. Lukes were to lease to private persons portions of its property for profit. and exclusively for educational purposes. If the hospital were to lease to private persons portions of its property for profit. and improvements actually. For Section 27(B) to apply. Section 30(E) and (G) (tax exemption of the income of non-stock non-profit corporations organized and operated exclusively for charitable purposes. directly. directly. if it conducts for-profit activities. The rule now can be laid down as follows: For the income of a non-stock. the real property will not be exempt from real property taxes. 1998. QUEZON CITY [433 SCRA 119]. it will fall within the coverage of Section 30(E) and (G) of the Tax Code. those portions of real property not actually used for charitable purposes shall not be exempt from real property taxes. in the case of a hospital. non-profit educational institutions. admission of paying patients. Such revenue is subject to income tax at 10% under Section 27(B). buildings. St. With regard to taxation of real property. is the property and the profits exempt from taxes? The property will not be exempt from real property taxes and also the profits will not be exempt from income tax. it will not be exempt with regard to that particular income. however. Lukes cannot claim full tax exemption under Section 30 because it has paying patients and this is notwithstanding the fact that it is a non-profit hospital. In this case. the hospital must be non-profit which means that no net income or asset accrues to or benefits any member or specific person and all the activities of the hospital are non-profit. directly and exclusively used for religious. non-profit educational institutions used actually. However. land and improvements of St. QUEZON CITY [433 SCRA 119] where the Supreme Court held that a charitable institution does not lose its character as such and its exemption from real property taxes simply because it derives income from paying patients Q: If St. The lands. On the other hand. Consistent with the ruling in CIR V. Section 27(B) will apply and the income will be taxed at the preferential rate of 10%. while providing for an exemption is qualified by the last paragraph which. non-profit corporation to be totally exempt. In such case. HELD: St. _________________________________________ 11 Section 30(E). directly. NIRC provides that a non-stock corporation or association organized and operated exclusively for charitable purposes is exempt from income tax while Section 30(G) provides that a civic league or organization not organized for profit but operated exclusively for the promotion of social welfare is likewise exempt. Article VI (tax exemption of real property actually. charitable or educational purposes). charitable.” This is affirmed in the constitutional provision with regard to non-stock. Income taxation is another thing. Note: This case is very important because it reconciles the following constitutional and statutory provisions: Section 28.). For their income to be exempt. Pursuant to the ruling in LUNG CENTER OF THE PHILIPPINES V. --------------------------------------------------------------(xiii) No appropriation or use of public money for religious purposes --------------------------------------------------------------Article VI. The Supreme Court shall have the following powers: 2. impost. minister. Review. The OPSF is actually a special fund. or support of any sect. revise. but in the exercise of the police power of the State. while the funds were referred to as taxes. or tariff bill. preacher. Section 5. or toll. except when such priest. but the veto shall not affect the item or items to which he does not object.” the fund nonetheless remains subject to the scrutiny and review of the COA. Each local government unit shall have the power to create its own sources of revenues and to levy taxes. 2. paid.” --------------------------------------------------------------(x) Grant of power to the local government units to create its own sources of revenue --------------------------------------------------------------Article X. fees. shall be transferred to the general funds of the Government. denomination. In this case. In determining whether the creation of the OPSF violate the above provision. modify. 3. All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. --------------------------------------------------------------(viii) President’s veto power on appropriation. or system of religion. The main objective was not revenue but to stabilize the price of oil and petroleum products. reverse. Section 5. applied. or any penalty imposed in relation thereto. --------------------------------------------------------------(ix) Non-impairment of jurisdiction of the Supreme Court --------------------------------------------------------------Article VIII. church. the balance. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 35 of 158 Last Updated: 30 July 2013(v3) . directly or indirectly. revenue. 2013) (vi) Majority vote of Congress for grant of tax exemption --------------------------------------------------------------Article VI. The President shall have the power to veto any particular item or items in an appropriation. final judgments and orders of lower courts in: b. No public money or property shall be appropriated. or dignitary as such. 4. Section 29. and while it is placed in what the law refers to as a “trust liability account. fees and charges subject to such guidelines and limitations as the Congress may provide. sectarian institution. These measures comply with the constitutional description of a “special fund. consistent with the basic policy of local autonomy. All cases involving the legality of any tax. --------------------------------------------------------------(vii) Prohibition on use of tax levied for a special purpose --------------------------------------------------------------Article VI. or employed. for the use. they were exacted not under the power of taxation. Section 28. If the purpose for which a special fund was created has been fulfilled or abandoned. the Supreme Court in OSMENA VS. if any. benefit. or of any priest. Section 27. assessment. 2.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. or affirm on appeal or certiorari. other religious teacher. No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress. as the law or the Rules of Court may provide. Such taxes. Section 29. tariff bills --------------------------------------------------------------Article VI. It is segregated from the general fund. and charges shall accrue exclusively to the local governments. it must be shown that they were collected as taxes – as a form of revenue. revenue. ORBOS [220 SCRA 703] opined that in order for the funds to fall under the prohibition. TORRES [465 SCRA 48]. John Hay. In JOHN HAY V. and 4. Q: How does the principle of “uniformity” relate to the equal protection clause? The test of uniformity is based on the requisites for a valid classification under the equal protection clause. or dignitary is assigned to the armed forces. Under the equal protection classification to be valid. Due process (Article III. 4. 3. One of these is that the former bring in billion-peso investments and thousands of new jobs. No person shall be deprived of life. --------------------------------------------------------------(i) Due Process (ii) Equal Protection --------------------------------------------------------------Article III. it must be noted that by virtue of RA 9400. Q: Is there a violation of the uniformity of taxation or equal protection when the State gives preferential tax treatment to locators inside special economic zones? No. or property without due process of law. However. Section 10) 1. uniformity of taxation is quite similar to the standard of equal protection. or government orphanage or leprosarium. Poro Point and Morong SEZs. CA [301 SCRA 278]. Apply equally to all members of the same class. Section 5) Non-Impairment of Contracts (Article (Article III. it must: clause. The implication of these two cases is that special economic zones can have different tax incentives. for a --------------------------------------------------------------2.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 36 of 158 Last Updated: 30 July 2013(v3) . minister. except when the latter is exercised lawfully as when: 1. the tax is for a public purpose. Be germane to the purpose of the law. LEYTE [69 SCRA 460]. The same rationale was used with respect to locators in the Clark SEZ in the case of COCONUT OIL REFINERS ASSOCIATION V. the Supreme Court ruled that tax exemptions must be strictly and expressly provided for and that the power to grant exemption is only within Congress. ANCHETA [130 SCRA 654]. either the person or property taxed is within the jurisdiction of the government levying the tax. As held in TIU V. 2. Not be limited to existing conditions only. there are substantial differences between the big investors who are being lured to establish and operate their industries in the special economic zones and those business operators outside the zones. LIM [414 SCRA 356]. or to any penal institution. the same incentives have been granted to Clark. the Supreme Court held that taking of property without due process of law may not be passed over under the guise of taxing power. nor shall any person be denied the equal protection of the laws. Section 1. Rest on substantial distinctions. As held in SISON V. Q: How is the “due process” clause applied to taxation? In PEPSI-COLA BOTTLING COMPANY VS. liberty. 2013) preacher. 2. 2. at issue was the extension of benefits given to the Subic SEZ under RA 7227 to the John Hay SEZ via a proclamation. Section 1) Equal protection ( Article III. and 4. in the assessment and collection of taxes notice and opportunity for hearing are provided Q: Should tax incentives be uniform for all special economic zones? Not necessarily. 3. the rule on uniformity of taxation is observed. Constitutional Limitations a) Provisions indirectly affecting taxation --------------------------------------------------------------Q: What are the general (indirect) constitutional limitations on the taxing power? The general constitutional limitations are: 1. Section 1) Religious Freedom (Article III. 3. MUNICIPALITY OF T ANAUAN. The Supreme Court also stated that the equal protection guarantee does not require territorial uniformity of laws. violate the equal protection clause? No. that is. the Supreme Court held that there was no violation of the equal protection clause. the Supreme Court ruled that the higher tax rule only applies on the transition period. PURISIMA [562 SCRA 251]. DEC. what RR 17-99 did was to implement the higher tax rule for the January 1. 2011]. it would be unjust to disregard such disparities and giving them all zero deductions and impose on all the same tax rates. a classification that has a reasonable foundation or rational basis and not arbitrary. buoyant and stable revenue generation. On the other hand.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. In effect. 6. In CIR V. 2000 increase)13 violate the equal protection clause? Yes. This has been reiterated in the recent case of BOCEA V. which gives incentives to BOR/BOC employees. the Supreme _________________________________________ 12 _________________________________________ 13 Under the classification freeze scheme. 1997 provides for a shift from ad valorem taxes to specific taxes on cigarettes. and ease of projection of revenues. 2013) Q: Does the Attrition Law (RA 9335). Q: Does the rule on uniformity require territorial uniformity? No. the Supreme Court noted that taxpayers who are recipients of compensation income have practically no overhead expenses and thus. 181704. Q: Does RR 17-99 (implementing RA 8240 but applying the higher tax rule on the January 1. Q: Does the adoption of a gross system of income taxation to compensation income and a system of net income taxation as regards professional and business income violate the rule on uniformity? No. FORTUNE TOBACCO [SEPTEMBER 28. thus. In British American Tobacco v. professionals and businessmen have no uniformity in terms of costs or expenses necessary to produce their income. in determining whether the imposition of a municipal license tax on tenement houses violates the equal protection clause as such taxes are not imposed in other cities. it would be possible that over time the net retail price of a previously classified brand would increase to a point that its net retail price pierces tha tax bracket to which it was previously classified byt nonetheless it would still be subject to the excise tax rate under the lower tax bracket. The subject of the Attrition Law was revenue generation and collection of the BIR and BOC. the classification is frozen and only Congress can thereafter reclassify the same. 2000 increase would violate the rule of uniformity since brands belonging to the same category would be imposed with different tax rates. In VILLANUEVA V. Q: Does the classification freeze scheme12 under RA 9334 violate the equal protection clause? No. the incentives and sanctions should logically pertain to them and not to other government agencies. To implement the higher tax rule on the January 1. CITY OF ILOILO [26 SCRA 578]. As held in TIU V. CA [301 SCRA 278]. 2000. 2000 increase. the Supreme Court held that the classification freeze does not violate the equal protection clause as it passes the rational basis test and is meant to improve the efficiency and effectivity of the tax administration over sin products while trying to balance the same with state interests. elimination of potential areas for abuse and corruption in tax collection. Camacho [562 SCRA 511]. after a brand of cigarette is classified based on its current net retail price.R. they should not be entitled to make deductions for income tax purposes. In ABAKADA GURO PARTY-LIST V. the equal protection guarantee does not require territorial uniformity of laws. The law provided that (1) the specific tax due from any brand of cigarette within 3 years shall not be lower than the tax due before the new law (higher tax rule) and (2) the specific tax rate shall be increased by 12% on January 1. RA 8240 which took effect January 1. It addresses the concerns in the simplification of tax administration of sin products. Under this scheme. Thus. TEVES [G. ANCHETA [130 SCRA 654]. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 37 of 158 Last Updated: 30 July 2013(v3) . 2011]. The equal protection clause recognizes a valid classification. In SISON V. the municipal ordinances imposing a tax on the sale of bibles were declared unconstitutional as it would impair the free exercise and enjoyment of its religious profession and worship. sheds its cloak of authority and waives its government immunity (see also MERALCO V. Q: A tax ordinance was passed expressly providing for the entity which shall be subject to tax. Section 10. As held in AMERICAN BIBLE SOCIETY VS. thereof. As held in PEPSI-COLA V. The Supreme Court ruled that this was a violation of the uniformity required by the Constitution. as well as its rights of dissemination of religious beliefs. lawfully entered into by them under enabling laws in which the government. Section 5. The statement made by the Court in CIR V. 2013) Court ruled in the negative as the rule on uniformity does not require taxes for the same purpose should be imposed in different territorial subdivisions at the same time. sales of local dealers not acting for or on behalf of merchants established outside the municipality would be exempt from the tax while those acting as agents and consignees of dealers outside the municipality would have to pay the tax. In ORMOC SUGAR V. such as those contained in government bonds or debentures. shall forever be allowed. Q: When can the non-impairment clause be rightly invoked against the withdrawal of a tax exemption? In PROVINCE OF MISAMIS ORIENTAL V. No religious test shall be required for the exercise of civil or political rights. or prohibiting the free exercise Q: Is a tax exemption embodied in a legislative franchise a contractual tax PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 38 of 158 Last Updated: 30 July 2013(v3) .PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Q: A municipality passed an ordinance which imposes a tax on the sale of bibles. No law shall be made respecting an establishment of religion. CITY OF M ANILA [101 SCRA 386]. It is enough that the tax falls equally and impartially on all owners or operations of tenement houses similarly classified or situated. CITY OF BUTUAN [24 SCRA 789]. PROVINCE OF LAGUNA [306 SCRA 750]) What constitutes an impairment of the obligation of contract is the revocation of an exemption which is founded on a valuable consideration because it takes the form and essence of a contract. --------------------------------------------------------------(iii) Religious Freedom --------------------------------------------------------------Article III. --------------------------------------------------------------(iv) Non-impairment of obligations of contracts --------------------------------------------------------------Article III. Is there a violation of the equal protection clause? Yes. the Supreme Court held that the non-impairment clause may be rightly invoked against contractual tax exemptions. No law impairing the obligation of contracts shall be passed. Contractual tax exemptions are those agreed by the taxing authority in contracts. LINGAYEN GULF [164 SCRA 27] to the effect that “a tax is uniform when it operates with the same force and effect in every place where the subject of it is found” should not be taken to mean that territorial uniformity is required. without discrimination or preference. The free exercise and enjoyment of religious profession and worship. Is there a violation of the equal protection clause? Yes. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established entity from the coverage of the tax. CAGAYAN ELECTRIC [181 SCRA 38]. TREASURER [22 SCRA 603]. Is the ordinance valid? No. under the said municipal ordinance. Q: A municipal ordinance was passed imposing a tax on the sale of soft drinks or carbonated beverages by agents/consignees of dealers doing business outside the municipality. the Supreme Court held that a reasonable classification should be in terms applicable to future conditions. acting in its private capacity. CIR [138 SCRA 629]. Refund --------------------------------------------------------------Q: Enumerate the three (3) stages or aspects of taxation. Definition. It is a unilateral tax exemption. The three stages or aspects of taxation are: 1. especially by way of notice and opportunity to be heard be provided. Generally payable in money 3. or exercise of a right or privilege 5. The rule of taxation must be uniform 4. It is not a separate stage of taxation. Explain each. Levied on persons. CAGAYAN ELECTRIC [181 SCRA 38]. Payment 4. Proportional in character.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. nature and characteristics of taxes --------------------------------------------------------------Q: Define taxes. --------------------------------------------------------------L. a corporation is vested by the law with a personality that is separate and distinct from those of the persons composing it. It must be for a public purpose 3. Payment – This is the act of compliance by the taxpayer including whatever remedies are available to him under the law Note: Refund is one of the remedies of the taxpayer. If it appears that the corporate assets have passed into their hands b. Enforced contributions 2. Assessment and collection – This is the act of administration and implementation of the tax law by the executive department through the administrative agencies 3.) Q: What are the characteristics or elements of a tax? (essential elements of a tax) 1. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 39 of 158 Last Updated: 30 July 2013(v3) . Levy 2. since taxes are based on one’s ability to pay 4. The tax should be within the jurisdiction of the taxing authority 2. Paid at regular periods or intervals --------------------------------------------------------------J. A legislative franchise can be withdrawn through amendment or repeal. CIR [7 SCRA 928]. As held in PROVINCE OF MISAMIS ORIENTAL V. (see also CAGAYAN ELECTRIC POWER V. It guarantees against injustice to individuals. property. a franchise does not take the nature of a contractual tax exemption. 5. It must not impinge on the inherent and Constitutional limitations on the power of taxation. Taxes are enforced proportional contributions from persons and property. --------------------------------------------------------------K. Levied by the State having jurisdiction 6. Levied for a public purpose 8. which cannot be revoked without impairing the obligations of contracts. When the stockholders have unpaid subscriptions to the capital of the corporation (liable only to the extent of their unpaid subscriptions). Assessment and collection 3. Levied by the legislature 7. However. they may be held liable for the unpaid taxes: a. It is deemed included in the stage of payment. levied by the state by virtue of its sovereignty for the support of the government and for all its public needs. 2013) exemption (such that it impairs the obligations of contracts when revoked)? No. Q: Can stockholders be held personally liable for the unpaid taxes of a dissolved corporation? No. LEALDA ELECTRIC V. Requisites of a Valid Tax --------------------------------------------------------------Q: What are the requisites of a valid tax? 1. Levy – This refers to the enactment of a law by Congress imposing a tax 2. Stages of taxation 1. License Fee --------------------------------------------------------------Q: Distinguish a tax from a license fee. It is often loosely used to include levies for revenue as well as levies for regulatory purposes such that license fees are frequently called taxes although license fee is a legal concept distinguishable from tax: a license fee is imposed in the exercise of police power primarily for purposes of regulation. Tax as distinguished from other forms of exactions 1. Toll 3. while a tariff should be understood to mean a kind of tax imposed on articles which are traded internationally. Tariff --------------------------------------------------------------Q: Distinguish a tax from a tariff? A tax is an all embracing term to include various kinds of enforced contributions imposed upon persons for the attainment of public purposes. 2013) --------------------------------------------------------------M. Toll --------------------------------------------------------------Q: Distinguish a tax from a toll. See table below. the term "tax" frequently applies to all kinds of exactions of monies which become public funds. TAX Enforced proportional contributions from persons and property TOLL Sum of money for the use of something. TAX Imposed revenue purposes LICENSE FEE Imposed for regulatory purposes Purpose for Basis Imposed under the power of taxation No limit as to the amount of tax Imposed under the police power of the State Amount of license fee that can be collected is limited to the cost of the license and the expenses of police surveillance and regulation Normally paid before the commencement of the business Failure to pay the license fee makes the business illegal Amount --------------------------------------------------------------2. Tariff 2. Special assessment 5. QUEZON CITY [172 SCRA 629]. a consideration which is paid for the use of a property which is of a public nature A demand proprietorship of Time of payment Normally paid after the start of business Failure to pay the tax does not make the business illegal Definition Effect of nonpayment Basis A demand of sovereignty No limit as to the amount of tax Amount Amount of toll depends upon the cost of construction or maintenance of the public improvement used May be imposed by the government or Authority May imposed be only As held in the case of PROGRESSIVE DEVELOPMENT CORPORATION VS.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Debt ----------------------------------------------------------------------------------------------------------------------------1. by the government private individuals or entities --------------------------------------------------------------3. License fee 4. while a tax is imposed under the taxing power primarily for purposes of raising revenues (see also COMPANIA GENERAL DE PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 40 of 158 Last Updated: 30 July 2013(v3) . See table below. " It does not refer solely to a license for regulation. License for the regulation or restriction of nonuseful occupation or enterprises 14 3. In many instances. CITY OF M ANILA [8 SCRA 367]. VS. It is often "used indiscriminately to designate impositions exacted for the exercise of various privileges. Q: Does the above rule apply to all types of license fees? No. Thus. Special Assessment --------------------------------------------------------------Q: Distinguish assessment. But. license taxes are "for the purpose of raising revenues. CIR [22 SCRA 13]. wider discretion in fixing the amount is given to municipal corporations and the exaction may be very large without necessarily being a tax. legally speaking. See table below. the term "license tax" has not acquired a fixed meaning. license fees are commonly called taxes. Q: What are the three types of license fees? The three types of license fees are: 1. in the case of PHYSICAL THERAPY ORGANIZATION OF THE PHILIPPINES V. MUNICIPAL BOARD OF THE CITY OF M ANILA [101 PHIL. It is instead a license tax.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31." in contrast to license fees which are imposed "in the exercise of police power for purposes of regulation." On the other hand. License for revenue only (See VICTORIAS MILLING CO. 2013) TABACOS DE FILIPINAS V. PATSTONE [42 PHIL 818]. the amount of the exaction must only _________________________________________ 14 Basis Based necessity Levied on: (1) persons (2) Property (3) Acts Has on Subject This shouldn’t be a type of license fee." --------------------------------------------------------------4. In the case of license fees for non-useful occupations. CUUNJIENG V. the Supreme Court found the imposed license fee as reasonable as the practice of hygienic and aesthetic massage not as a useful and beneficial occupation which will promote and is conducive to public morals.A. regulating and surveillance. and for the reason that exemption from taxes may not include exemption from license fees. ) be of sufficient amount to include the cost of licensing. it refers to "revenueraising exactions on privileges or activities. VS. Q: What is the importance of determining whether a particular imposition is a tax or a license fee? It is necessary because some limitations apply only to one and not to the other. CIR [22 SCRA 13]) Q: What is a license tax and how do you distinguish it from a license fee? As explained by the Supreme Court in the case of VICTORIAS MILLING CO. Scope PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 general It is exceptional Page 41 of 158 Last Updated: 30 July 2013(v3) . TAX Definition Enforced proportional contribution from persons and property SPECIAL ASSESSMENT An enforced proportional contribution from owners of lands especially or peculiarly benefited by public improvements Based wholly on benefits Levied only on land a tax from a special Q: What should be the extent of the exaction for it to be considered a license fee? As held in the case of G. 1142]. License for the regulation of useful occupation or enterprises 2. This is so because municipal corporations are authorized to enact ordinances to provide for the health and safety and promote the morality. peace and general welfare of its inhabitants. 547] Q: Distinguish a tax from a penalty. It is not a tax although it may be necessary to raise the money to pay the subsidy by means of a tax. money property and services Can assigned be Purpose Intended to raise revenue May be imposed only by the government Authority Mode payment Q: Distinguish a tax from a subsidy? A subsidy is a legislative grant of money in aid of a private enterprise deemed to promote a public welfare. or (2) Private individuals or entities --------------------------------------------------------------5. Debt --------------------------------------------------------------Q: Distinguish a tax from a debt. violation of tax laws may give rise to imposition of penalty Designed to regulate conduct May be imposed by (1) Government. Definition Basis Effect nonpayment TAX DEBT Based on Based on law contract or judgment of Taxpayer No may be imprisonment imprisoned for failure to pay for his failure a debt to pay the tax of Generally May be payable payable in in money. 2013) application both as to time and place Not a personal liability of the person assessed. TAX Enforced proportional contributions from persons and property PENALTY Sanction imposed as punishment for violation of a law or acts deemed injurious.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. his liability is limited only to the land involved individuals Prescription Prescriptive periods for tax are determined under the NIRC Civil Code governs the prescriptive period of debts Person Liable It is a personal liability of the taxpayer See THE APOSTOLIC PREFECT OF THE MOUNTAIN PROVINCE V. TREASURER OF BAGUIO [71 PHIL. See table below. Assignability Not assignable Interest Does not Draws interest if draw interest stipulated or unless delayed delinquent Imposed by Can public imposed authority private be by Q: Distinguish a tax from customs duties and fees Customs Duties and fees are those charged upon commodities on their being imported in or exported from the country. Customs duties are taxes but a tax is a broader term to include not only customs duties but other taxes as well. Authority PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 42 of 158 Last Updated: 30 July 2013(v3) . regulatory. or sumptuary 5. Personal. community tax) Taxes assessed on all property or all property of a certain class within the jurisdiction of the taxing Q: What are the classes or kinds of tax according to who bears the burden? See table below. estate tax and donor’s tax are considered as direct taxes. On the other hand. upon licenses to pursue certain occupations and upon corporate privileges (e. As to scope or authority to impose a) National – internal revenue taxes b) Local – real property tax. real estate tax) Taxes laid upon the manufacture. As to tax rates a) Specific b) Ad valorem c) Mixed 4.g. or Q: What are the classes or kinds of tax according to the determination of amount or tax rates? See table below.g. municipal tax 6. sale or consumption of commodities within the country. other percentage tax and documentary stamp tax are indirect taxes. or poll tax b) Property tax c) Privilege tax 2. Specific Tax which imposes a specific sum by the head or number or by some standard of weight or measurement and which requires no Page 43 of 158 Last Updated: 30 July 2013(v3) Property Tax PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 .g. (e.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. poll tax Taxes of a fixed amount upon all persons of a certain class within the jurisdiction of the taxing power without regard to the amount of their property or the occupations of businesses in which they may be engaged (e. percentage taxes) Indirect Q: Classify the taxes imposed under the Tax Code into direct and indirect taxes. 2013) Q: Distinguish a tax from revenue Revenue is a broad term that includes not only taxes but income from other sources as well. excise tax. value-added tax) --------------------------------------------------------------N. Kinds of taxes 1. value-added tax. Excise privilege tax or power (e. As to purposes a) General or fiscal b) Special.g. corporate and individual income tax) Taxes wherein the tax liability falls on one person but the burden thereof may be shifted or passed to another. As to graduation a) Progressive b) Regressive c) Proportionate --------------------------------------------------------------Q: What are the classes or kinds of tax according to subject or object? See table below. As to burden or incidence a) Direct b) Indirect 3. Direct Taxes wherein both the tax liability as well as the impact or burden of the tax falls on the same person (e. capitation. Income tax.g. value-added tax. As to object a) Personal. capitation. income tax. municipal tax) Taxes levied by the National Government (e. real estate tax) Q: What are the classes or kinds of tax according to graduation? See table below. custom duties) Special. value-added tax) Taxes levied for a special purpose (e. The tax rates are partly progressive and partly regressive The tax rates are fixed (in amounts or in percentage) on a flat tax base) (e. national internal revenue taxes) Taxes levied by the local governments subject to such guidelines and limitations as the Congress may provide (e.g. sumptuary or Q: What are the classes or kinds of tax according to the scope or imposing authority? See table below. real estate tax) A choice between ad valorem or specific depending on the condition attached tax) Regressive Taxes imposed where the tax rate decreases as the tax base increases.g. National (internal revenue taxes) Local (real property tax. General or fiscal or revenue Taxes levied for the general or ordinary purposes of Government (e.g. 2013) assessment beyond a listing and classification of the subjects to be taxed (e.g.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. taxes on distilled spirits) Ad Valorem Tax upon the value of the article or thing subject of taxation (e. income Page 44 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 .g.g.g. Progressive Taxes imposed where the tax rate increases as the tax base increases (e.g. real estate tax) Mixed Mixed Proportionate Q: What are the classes or kinds of tax according to purpose? See table below. protective tariffs. regulatory. PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) --------------------------------------------------------II. NIRC ---------------------------------------------------------Note: This Chapter will include A. Income Tax, B. Estate Tax, C. Donor’s Tax, E. Value-Added Tax and F. Tax Remedies. Other percentages taxes, Excise taxes and documentary stamp tax are not discussed as they are excluded from the bar coverage. compensation, capital gains, passive income, or other income subject to final withholding tax) or (c) both global and schedular may be applied depending on the nature of the income realized by the taxpayer during the year. The current method of taxation under the Tax Code belongs to a system which is partly scheduler and partly global. ---------------------------------------------------------A. INCOME TAX -----------------------------------------------------------------------------------------------------------------------1. Income Tax Systems a) Global Tax System b) Schedular Tax System c) Semi-schedular or semi-global tax system --------------------------------------------------------------Q: What are the kinds of income tax systems? The types of income tax systems are as follows: 1. Global Tax System – where the taxpayer is required to lump up all items of income earned during a taxable period and pay under a single set of income tax rates on these different items of income. Note: Simply put, one rate for all types of gross income. Q: How do you distinguish “schedular treatment from “global treatment” as used in income taxation? Under the schedular tax system, the various types of income (i.e. compensation; business/professional income) are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. On the other hand, under the global tax system, all income received by the taxpayer are grouped together, without any distinction as to type or nature of the income, and after deducting therefrom expenses and other allowable deductions, are subjected to tax at a graduated or fixed rate (see TAN VS. DEL ROSARIO [OCTOBER 3, 1994]). Note: The Philippines had adopted both the global system and the schedular system of taxation. The global system can be found in the income taxation of corporations. The Tax Code subjects them to either the regular corporate income tax or minimum corporate income tax irrespective of the tax base. On the other hand, the schedular system can be found in the income taxation of individuals where the tax rates are progressive in character. 2. Schedular Tax System – where there are different tax treatments of different types of income so that a separate tax return is required to be filed for each type of income and the tax is computed on a per return or per schedule basis. Note: Simply put, varying taxes are imposed on passive income. 3. Semi-Schedular or Semi-Global Tax System – where the tax system is either (a) global (e.g. taxpayer with compensation income not subject to final withholding tax or business or professional income or mixed income – compensation and business or professional income) or (b) schedular (e.g. taxpayer with PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 --------------------------------------------------------------2. Features of the Philippine Income Tax Law a) Direct tax b) Progressive c) Comprehensive d) Semi-schedular or semi-global tax system --------------------------------------------------------------- Page 45 of 158 Last Updated: 30 July 2013(v3) PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) Q: What are the features of the Philippine Income Tax system? The Philippine tax system is: 1. Income tax is a direct tax because the tax burden is borne by the income recipient upon whom the tax is imposed. 2. Income tax is a progressive tax since the tax base increases as the tax rate increases. 3. The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, resident principle and the source principle. 4. The Philippines follows the semi-schedular or semi-global system of income taxation. 4. Types of Philippine Income Tax --------------------------------------------------------------Q: What are the types of Philippine Income Tax (under Title II of the NIRC)? The types of Income tax under Title II of the NIRC are: 1. Graduated income tax on individuals 2. Normal corporate income tax on corporations 3. Minimum corporate income tax on corporations 4. Special income tax on certain corporations (e.g. private educational institutions, FCDUs, and international carriers) 5. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as a capital asset 6. Capital gains tax on sale or exchange of real property located in the Philippines and classified as a capital asset 7. Final withholding tax on certain passive investment incomes 8. Fringe benefit tax 9. Branch profit remittance tax; and 10. Tax on improperly accumulated earnings. --------------------------------------------------------------3. Criteria in imposing Philippine income tax a) Citizenship principle b) Residence principle c) Source principle --------------------------------------------------------------Q: What are the criteria in imposing Philippine income tax? 1. Citizenship or nationality principle – A citizen of the Philippines is subject to Philippine income tax (a) on his worldwide income, if he resides in the Philippines (b) only on his Philippine source income, if he qualifies as a non-resident citizen where his foreign-source income shall be tax-exempt. 2. Residence or domicile principle – An alien is subject to Philippine income tax because of his residence in the Philippines. A resident alien is liable to pay Philippine income tax only from his income from Philippine sources but is tax-exempt from foreign-source income 3. Source of income principle – An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a non-resident alien or non-resident foreign corporation is liable to pay Philippine income tax on income from sources within the Philippines --------------------------------------------------------------5. Taxable Period --------------------------------------------------------------Note: This is apparently misplaced in the Syllabus. For better understanding of the concepts, I moved this to the discussion on Income right before Methods of Accounting. --------------------------------------------------------------6. Kinds of Taxpayers --------------------------------------------------------------Note: It is important to know the different kinds of taxpayers in order to determine the following: (1) gross income for tax purposes (2) exclusions from gross income; (3) exemptions; (4) deductions and (5) income tax rates. The only two exceptions where knowing the taxpayer is immaterial are where the transaction involves (1) sales of shares of stock of a domestic corporation because it is subject to ½ of 1% of stock transaction tax or 5%/10% capital gains tax on net capital gain whether the seller is an individual, citizen or alien or a corporation, domestic or foreign and (2) where the real property sold is a capital asset located in the Philippines which is subject to 6% capital gains tax. --------------------------------------------------------------PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 46 of 158 Last Updated: 30 July 2013(v3) PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) Q: What are the kinds of income taxpayers? The kinds of income taxpayers under Title II of the NIRC are: A. Individuals 1. Citizens (Section 24, NIRC) a. Resident Citizens b. Nonresident Citizens 2. Aliens a. Resident Aliens (Section 24, NIRC) b. Nonresident Aliens (Section 25, NIRC) i. Engaged in trade or business in the Philippines ii. Not engaged in trade or business in the Philippines 3. Estates and Trusts (Section 60, NIRC) a. Revocable trust b. Irrevocable trust B. Corporations 1. Domestic Corporations (Section 27, NIRC) 2. Foreign Corporations (Section 28, NIRC) a. Resident foreign corporations b. Nonresident foreign corporations 3. Partnerships a. Taxable partnership (Section 73(D), NIRC) b. Exempt partnership i. General Professional Partnership (Section 26, NIRC) ii. Joint venture or consortium undertaking construction activity or engaged in petroleum operations with operating contract with the government Note: The depiction of the kinds of taxpayers in the 2013 Bar Syllabus is inaccurate. It is suggested that you classify the taxpayers in the manner above. Note: It is important to know the classification of Philippine citizens on whether they are resident citizens or nonresident citizens to determine what incomes are subject to tax in the Philippines. Resident citizens are taxable on all income derived from sources within and without the Philippines while non-resident citizens are taxable only on income derived from sources within the Philippines. (see Section 22, Tax Code) Q: Who is a resident citizen? A resident citizen is a citizen of the Philippines without the intention of transferring his physical presence abroad whether to stay permanently or temporarily as an overseas contract worker. Q: Who are citizens of the Philippines? The following are considered citizens of the Philippines: 1. Those who are citizens of the Philippines at the time of the adoption of the Constitution 2. Those whose fathers or mothers are citizens of the Philippines 3. Those born before January 17, 1973 of Filipino mothers, who elect Philippine Citizenship upon reaching the age of majority; and 4. Those who are naturalized in accordance with law Read Section 22(E), Tax Code Q: Who is a non-resident citizen? The term “non-resident citizen” means a citizen of the Philippines: 1. who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with intention to reside therein 2. who leaves the Philippines during the taxable year to reside abroad either as an immigrant or for employment on a permanent basis 3. one 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. Page 47 of 158 Last Updated: 30 July 2013(v3) --------------------------------------------------------------a) Individual Taxpayers ----------------------------------------------------------------------------------------------------------------------------(i) Citizens (a) Resident citizens (b) Non-resident citizens --------------------------------------------------------------PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 the CIR held that such a person would be a non-resident citizen. Exemptions – Resident aliens are allowed personal and additional exemptions while non-resident aliens engaged in trade or business in the Philippines are entitled to personal exemptions only by way of reciprocity and not to additional exemptions. NIRC] Note that Section 2. non-resident citizens were required to do so. 9-99. Previously. Q: Should a non-resident citizen file an income tax return or information return covering his income earned abroad? No. In BIR Ruling DA-095-05 [March 29. 1979] enumerates who are deemed “non-resident citizens:” 1. 2000]. who has been previously considered a nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines with respect to his income derived from sources abroad [See Section 22(E). 01-79. the CIR held that for overseas contract workers. 01-79. --------------------------------------------------------------(ii) Aliens (a) Resident Aliens (b) Non-resident Aliens (1) Engaged in trade or business (2) Not engaged in trade or business --------------------------------------------------------------Note: It is important to know the classification of alien taxpayers to know (1) the tax rates to be imposed on their income derived from sources within the Philippines and (2) allowable exemptions and deductions. Tax Code) As to (2): Deductions – Resident aliens can avail of deductions while non-resident aliens not engaged in trade or business cannot avail of deductions. however. is he required to pay taxes for income earned in the United States? No. “most of the time” applies to a contract worker. Contract worker – one who leaves the Philippines on account of a contract of employment which is renew from time to time under such circumstance as to require him to be physically present abroad most of the time (not less than 183 days) Ruling 33-00 [September 5. A resident alien is or non-resident alien engaged in trade or business is subject to the graduated income tax rates (see Section 23. Note: As can be seen from the wording of RR No. Q: If a natural-born Philippine citizen who became a citizen of the United States is later on granted Philippine dual citizenship under RA 9225. However. 01-79 states that to be physically present abroad most of the time during the taxable year. nonresident citizens were required to file an information return. and hence. a contract worker must have been outside the Philippines for not less than 183 days during such taxable year. (see Section 25(B). In RR No. 2001].PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. the time spent abroad is not material as all that is required is for the worker’s employment contract to pass through and be registered with the POEA. 2013) 4. non-resident citizens are no longer required to file the same on their income derived from sources outside the Philippines. will not be required to pay Philippine tax for income earned in the United States. As to (1): Tax rates – A non-resident alien not engaged in trade or business within the Philippines is subject to a flat tax of 25% on income within the Philippines. Immigrant – one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa has been secured 2. under RR No. RR No. In BIR Read Section 22(F) and (G). under RR 05-01 [July 31. 01-79 [January 8. 2005]. Tax Code). Permanent employee – one who leaves the Philippines to reside abroad for employment on a more or less permanent basis 3. Q: What is meant by the phrase “most of the time” as used in determining whether a citizen who derives income from abroad and is physically present abroad is a nonresident? RR No. Tax Code Q: Who is a resident alien? A resident alien is an individual whose residence is within the Philippines and who is not a citizen Page 48 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . and to that end the alien makes the Philippines his temporary home. business. An intention to change his residence does not change his status as a resident alien to that of a nonresident alien. Q: When is the residence of an alien considered lost? _________________________________________ 15 --------------------------------------------------------------(iii) Special class of individual employees (a) Minimum wage earner --------------------------------------------------------------Section 22(GG) and (HH). which in its nature may be promptly 16 accomplished. In GARRISON V. and 2. not the intention to make it a permanent place of abode. although he intends to 17 return to his domicile abroad. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment. Q: Who is a non-resident alien? A non-resident alien is an individual: 1. 16 In other words. definite and extended. trade or exercise of a profession within the Philippines Read Section 25(A)(1). stay is indefinite. RR 2 provides that an alien who has acquired residence in the Philippines retains his status as a resident until he abandons the same and actually departs from the Philippines. If he lives in the Philippines and has no 15 definite intention as to his stay. The Supreme Court further held that. remember. as laid clearly in RR No. the test to determine whether the alien is a non-resident alien engaged in trade or business is whether his total aggregate stay for a taxable year exceeds 180 days. in resolving the contention of US nationals that they cannot be considered resident aliens as they intend to go back to the US on termination of their employment in the Philippines. or the practice of a profession in the Philippines 2. to return to another country is not sufficient to constitute him as a transient. 2013) Q: How is the residency of an alien determined? An alien is considered a non-resident if he stays here for a definite short period of time. One who comes to the Philippines for a definite purpose. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 49 of 158 Last Updated: 30 July 2013(v3) . the Supreme Court held that what the law requires is merely physical or bodily presence in a given place for a period of time. he becomes a resident. the stay is for a definite short period of time. Tax Code Q: How do you determine if a non-resident alien is engaged in trade or business? Once a taxpayer is determined to be a non-resident alien. is a transient. 1990]. whether an alien is a transient or not is determined by his intentions with regard to the length and nature of his stay. Engaged in trade. that an alien is considered a nonresident if he stays here for a definite short period of time. whose residence is not within the Philippines. Again. Q: What are two kinds of non-resident aliens? 1. who is not a citizen thereof Note: Determination is by his intention with regard to the length and nature of his stay (see Section 5. 2. he is a resident. A mere floating intention indefinite as to time. the stay is definite but extended. Not engaged in trade business. indefinite An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. RR 2). CA [JULY 19. A minimum wage worker is actually a resident citizen only that it is exempt from income tax. 2. 17 In other words. Note: This is not a kind of taxpayer. Tax Code In other words. An alien will be considered a resident if the stay here is either: 1.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. the income shall be taxable to the fiduciary. 2013) Q: Is the income of minimum wage earners subject to the graduated income tax rates? No. Tax Code) Q: Is the tax imposed on trusts applicable to all trusts? No. If the trust 21 instrument is revocable. 20 To illustrate by way of example: A died leaving a condo unit which he rents out. (H) and (I). in the grantor. the income shall be taxable to the grantor. overtime pay. 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 b. 21 The trust instrument is “revocable” where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested: a. when an individual dies. for the benefit of a designated person(s) (the beneficiary). night shift differential pay. The rentals that would accrue prior to the settlement of A’s estate would be subject to income tax. Domondon suggests that the word “estate” refers to the mass of properties and assets left behind by the deceased. and hazard pay received by them shall likewise be exempt from income tax (see Section 24. If the trust were an employee’s trust which forms part of an employer’s pension. Tax Code --------------------------------------------------------------(i) Domestic Corporations (ii) Foreign Corporations (a) Resident foreign corporations (b) Non-resident foreign corporations --------------------------------------------------------------Read Section 22(C). A domestic corporation is Q. Minimum wage earners shall be exempt from the payment of income tax on their taxable income. Tax Code) --------------------------------------------------------------(b) Corporations --------------------------------------------------------------Read Section 22(B).PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. the income of such part of the trust. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 50 of 158 Last Updated: 30 July 2013(v3) . its income would be exempt from income tax. --------------------------------------------------------------e) Estates18 and trusts19 --------------------------------------------------------------Note: This is discussed first because they should be properly treated as individuals as their taxable income is computed in the same manner and on the same basis as in the case of an individual (see Section 61. Legal title to the trust property is vested in the trustee while equitable title belongs to the beneficiary. Tax Code as amended by RA 9504) Read Section 61. their holiday pay. Tax Code Note: It is important to know the classification of Philippine citizens on whether they are domestic corporations or foreign corporations to determine what incomes are subject to tax in the Philippines. The income that is subject to income taxation is the “income received by estates of deceased persons during the period of administration or settlement of the estate. The Tax Code does not provide a definition. Tax Code Q: To whom shall the income of a trust be taxable to? If the trust instrument is irrevocable. 19 A trust is a legal arrangement whereby the owner of the property (the trustor) transfers ownership to a person (the trustee) who is to hold and control the property according to the owner’s instructions. in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom. How are the incomes of estates and trusts taxed? The taxable income of estates and trusts is computed in the same manner and on the same basis as in the case of an individual subject to certain exceptions _________________________________________ 18 _________________________________________ An estate is created by operation of law. stock or profitsharing plan that complies with the requirements of tax exemption under Section 60(B) the NIRC. However. (D). Further. leaving properties to his compulsory or other heirs. Q: Define estate for purposes of income taxation.” (see 20 Section 60. Atty. V. following the principal agent relationship theory. a foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein. but a foreign corporation is taxed only on its income from sources within the Philippines. CIR [JUNE 23. it is permitted to deductions from gross income but only to the extent connected with income earned in the Philippines. Domestic corporation Foreign Corporation Resident foreign Corporation one created or organized in the Philippines or under its laws. (see M ARUBENI CORPORATION VS. CIR [JUNE 23. On the other hand.V. XYZ declared and paid cash dividends to ABC. Q: XYZ is a foreign shipping company. the principal-agent relationship is set aside. 1989]). for purposes of income tax. XYZ directly remitted the cash dividends to ABC’s head office in Japan (hence. 1988]) Non-resident foreign corporation Q: ABC Corporation. CIR [SEPTEMBER 14. its business transactions must be continuous. a foreign corporation not engaged in trade or business within the Philippines and not having any office or place of business therein. ( see N. In order that a foreign corporation may be considered engaged in trade or business. if the business transaction is conducted through the branch office. a foreign corporation in Japan and licensed to do engage in business in the Philippines (hence. Q: Enumerate the kinds taxpayers and define each. ABC argues that following the principal-agent relationship theory. the taxpayer is the foreign corporation. Foreign corporations are further classified into (1) resident foreign corporations and (2) nonresident foreign corporations. not the branch or the resident foreign corporation. and not the foreign corporation. see table below. It does not have a branch office in the Philippines and it made only two calls in Philippine ports. REEDERIJ “AMSTERDAM” VS. It is important to know the kinds of foreign corporations for income taxation purposes to determine the allowable deductions. It is understood that the branch becomes its agent here. What kind of foreign corporation is XYZ? XYZ is a foreign corporation not authorized or licensed to do business in the Philippines. its taxable income for purposes of our income tax law consists of its gross income from all sources within the Philippines. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office. one created or organized under the laws of a foreign country. ABC is a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received from a domestic corporation. Consequently. Is ABC correct? No. A casual business activity in the Philippines by a foreign corporation does not amount to engaging in trade or business in the Philippines for income tax purposes. So that when the foreign corporation transacts business in the Philippines independently of its branch. a non-resident foreign corporation) net not only of the 10% final dividend tax but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 51 of 158 Last Updated: 30 July 2013(v3) . a resident foreign corporation) has equity investments in XYZ Company. REEDERIJ “AMSTERDAM” VS. Accordingly. (see N. Corollarily. corporations are classified into (a) domestic corporations and (b) foreign corporations. a domestic corporation. The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. 1988]) tax of 10%.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. While a resident foreign corporation is taxable on income solely from sources within the Philippines. of corporate A corporation is itself a taxpaying entity and speaking generally. The transaction becomes one of the foreign corporation. non-resident foreign corporations cannot avail of deductions. the latter becomes the taxpayer. 2013) taxed on its income from sources within and without the Philippines. For definitions. not of the branch. There is joint right of mutual control over the subject matter 4. the joint venture formed for construction purposes shall be considered a taxable corporation. Civil Code) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 52 of 158 Last Updated: 30 July 2013(v3) . and foreign/international financing institution. Should involve joining or pooling of resources by licensed local contractors. 2013) --------------------------------------------------------------(iii) Joint venture and consortium22 --------------------------------------------------------------Q: Are joint ventures taxable? Generally. Q: What are the requirements in order for a joint venture formed for construction purposes be not liable for income tax? In RR No. a joint venture or consortium undertaking construction projects or engaged in petroleum operations with an operating contract with the government are not liable for income tax. yes. 2012]. involving a joint venture between Avida and Aurora.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 1. 3. Contribution by each party 2. Is the joint venture liable for income tax? No. Each shall receive an allocation of saleable house and lot units from the project. Q: May joint ventures involving foreign contractors be treated as a non-taxable corporation? Yes. Profits are shared among the parties 3. provided that the member foreign contractor is: _________________________________________ _________________________________________ 23 22 The requisites of a joint venture are as follows: 1. 010-12 [JUNE 1. construction project is certified by the appropriate government office as a foreign financed/internationally-funded project and that international bidding is allowed under the bilateral agreement between the Philippine government. The local contractors are engaged in construction business. However. One local contractor shall contribute the parcel of land while the other shall contribute the construction and development of the parcel of land into a subdivision. two or more persons bind themselves to contribute money. 23 2010]. 108-2010 [October 19. and 2. covered by a special license as contractor by the PCAB. licensed by the Philippine Contractors Accreditation Board (PCAB) of the DTI. 24 By the contract of partnership. There is a single business transaction rather than a general or continuous transaction. the Court has been asked to determine whether there exists a taxable (unregistered) partnership and not a mere co-ownership. 2. The joint venture itself must likewise be duly licensed as such by the PCAB Absent one of the requirements. For the undertaking of a construction project. a joint venture or consortium formed for the purpose of undertaking construction projects which is not considered as a taxable corporation should be: 1. the CIR held that the joint development agreement between the two is not subject to income tax because joint ventures formed by local contractors for construction purposes are deemed as not falling under the definition of a taxable corporation. It is also important to note in this BIR Ruling that the CIR held that the allocation of saleable units does not constitute as a taxable event as no income is actually realized by Avida or Aurora. Q: Two local contractors entered into a joint development agreement to construct a residential subdivision. property or industry to a common fund with the intention of dividing the profits among themselves (see Article 1767. In BIR Ruling No. 4. --------------------------------------------------------------c) Partnerships24 f) Co-ownerships --------------------------------------------------------------Note: Co-ownerships have been included in this discussion because in most cases. Q: Is a co-ownership corporation? taxable as a Q: A group of insurance companies in the Philippines decided to form a pool and entered into a reinsurance treaty with a nonresident reinsurance company. They did not partition the same and instead invested them to a common fund and divide the Page 53 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . and (b) intent to divide the profits among the contracting parties. property or industry to a common fund. An intent to form the same 2. no matter how created or organized. within the purview of the income tax law. CIR [OCTOBER 18. CIR [OCTOBER 29. Generally participating in both profits and losses 3. namely: (a) an agreement to contribute money. They decided to sell the 3 parcels to C and the 2 parcels to D. They are subject to income tax as if they were corporations whether or not registered with the SEC as a partnership 2. 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. Exempt partnerships – these are partnerships not considered as taxable entities for income tax purposes i. Q: What are the kinds of partnerships under the Tax Code? 1. The common ownership of property does not by itself create a partnership between the owners. Such a community of interest. 1988]). such circumstances indicate a partnership or an association taxable as a corporation (see AFISCO INSURANCE CORPORATION VS. beneficial and economically useful to the business of the ceding companies and the foreign firm. 1999]) No. CIR assessed them for deficiency corporate Q: A and B inherited properties. Where several local insurance ceding companies enter into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with a non-resident foreign reinsurance company. 2013) Q: Is a partnership liable for income tax? Yes. The essential elements of a partnership are two. Here. A co-ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership. General Professional Partnerships). though they may use it for purposes of making gains. Taxable partnerships – these are business partnerships or partnerships which are organized for the purpose of engaging in trade or business. 1985] and PASCUAL V. Is the co-ownership taxable as a corporation? No. and functions through an executive board and its work is indispensable. co-owners. the existence of a juridical personality different from the individual partners. and the freedom of each party to transfer or assign the whole property. income tax.e. bought 3 parcels of land in one transaction and bought 2 more parcels of land in another. property or industry to a common fund. Article 1769(3) of the Civil Code provides that “the sharing of gross returns does not by itself establish a partnership whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. there is no evidence that petitioners entered into an agreement to contribute money. (see OBILLOS v. The term “corporations” includes partnerships. They realized a net profit gain and paid CGT. or a corporation. as far as third persons are concerned as enables each party to make contract. Q: How do you determine if a partnership is taxable? (elements of a taxable partnership) 1. the resulting pool having a common fund. Q: A and B. and that they intended to divide the profits among themselves. Is such a pool subject to corporate taxes and withholding taxes on dividends paid to the non-resident reinsurance company? Yes.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. There must be a clear intent to form a partnership. CIR [JANUARY 25. manage he business and dispose of the whole property. The income tax is imposed not on the professional partnership. In 1988 they sold the first three to Z and the other two were sold to Y in 1989. but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits (see CARAG. at least. trades and offices. 1994]) Q: A and B bought 3 parcels of land in 1976 and 2 parcels of land in 1977. the Supreme Court defined income tax as an amount of money coming to a person or corporation within a specified time. Isolated transactions by two or more persons do not warrant their being considered as an unregistered partnership. Q: Distinguish between a GPP and an ordinary business partnership. They will instead be considered as mere co-owners. It is levied upon the privilege of receiving income or profit. In CONWI V. income of which is derived from engaging in any trade or business. Should they be classified as an unregistered partnership subject to corporate income tax? Yes. or. Income tax is a tax on all yearly profits arising from property. The income from inherited properties may be considered as individual income of the respective heirs only as long as the inheritance or estate is not distributed. interest. Is the contention of the CIR correct? No. Page 54 of 158 Last Updated: 30 July 2013(v3) . the income of the co-ownership arising from the death of a decedent is not subject to income tax. CTA [AUGUST 31. 2013) profits therefrom. JAMORA AND SOMERA LAW OFFICES VS. DEL ROSARIO [OCTOBER 3. 1992].PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. --------------------------------------------------------------7. Section 26 of the NIRC provides that persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities computed on their respective distributive shares of the partnership profit. should the co-owners invest the income of the co-ownership in any income-producing properties. no corporate income tax is due on mere co-ownerships. However. But the moment their respective known shares are used as part of the common assets of heirs to be used in making profits. which is tax exempt. 1972]). after partition. they would be constituting themselves into an unregistered partnership which is consequently subject to income tax as a corporation. Income Taxation a) Definition b) Nature c) General Principles --------------------------------------------------------------Q: Define Income tax. CIR [M AY 25. (see ONA V. A and B realized a net profit from the sale and they individually paid he corresponding capital gains tax. if the activities of the co-owners are limited to the preservation of the property and the collection of the income therefrom. professions. CABALLES. it is but proper that the income from such shares should be considered as part of the taxable income of an unregistered partnership. The CIR assessed them for deficiency income tax arguing that they formed an unregistered partnership. partitioned. whether as payment for services. unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax). Q: Is a GPP liable for income tax? No. we make a distinction. is not itself an income taxpayer. A general professional partnership. A GPP is not considered a taxable entity for income tax purposes. no part of the PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: What is the nature of income tax? An income tax is an excise tax and not a tax on property. or profit from investment. Note: Thus. Before the partition of property. --------------------------------------------------------------d) General Professional Partnerships (GPP) --------------------------------------------------------------Q: What is a GPP? General professional partnership (GPP) are partnerships formed by persons for the sole purpose of exercising their common profession. Q: What is the nature of income? Income is that flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time. Income means the gain derived from capital. Income is the PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 55 of 158 Last Updated: 30 July 2013(v3) . It refers to all wealth which flows into the taxpayer other than as a mere return on capital. mere advance in the value of property or a corporation in no sense constitutes the income specified in the law. whether as payment for services. non-resident alien. --------------------------------------------------------------8. I will discuss (c) when income is taxable (excluding methods of accounting) and (d) tests in determining whether income is earned for tax purposes. the government collects taxes as a source of revenue to finance its activities.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 1922]. nonresident citizen.e. from labor. In exchange for the protection extended by the State to the taxpayer. including profits gained from dealings in property or as well as any asset clearly realized whether earned or not. Tax Code. Income a) Definition b) Nature c) When Income is taxable d) Tests in determining whether income is earned for tax purposes --------------------------------------------------------------Note: The outline provided in the 2013 Syllabus on Income was not well thought of. taxable periods (recall that I said earlier that I would move the discussion here in Income). as stated in FISHER V. I will discuss taxable income (not in the Syllabus). I will discuss the (a) Definition and (b) Nature of Income. the general principles are: Resident Citizen taxable on all income derived from sources within and outside the Philippines taxable only on income derived from sources within the Philippines [By definition of a non-resident citizen. This is how the discussion is going to be: First. Alien (whether resident or nonresident) Domestic corporation taxable on all income derived from sources within and outside the Philippines taxable only on income derived from sources within the Philippines (This applies whether the foreign corporation is engaged or not in trade or business in the Philippines) Foreign corporation Note: Simply put. foreign corporation) are taxable only on income derived from sources within the Philippines. this applies to an overseas contract worker (a citizen working and deriving income from abroad)] taxable only on income derived from sources within the Philippines Non-Resident Citizen --------------------------------------------------------------a) Definition b) Nature --------------------------------------------------------------Q: Define income for tax purposes. and then (iv) methods of accounting. only resident citizens and domestic corporations are taxable on their worldwide income (both income inside and outside the Philippines) while the other types of individual and corporate taxpayers (i. Third. interest or profit from investment. M ANILA ELECTRIC COMPANY [NOVEMBER 15. income tax is imposed on an individual or entity as a form of excise tax or a tax on the privilege of earning income. TRINIDAD [OCTOBER 30. Second. Income may be defined as the amount of money coming to a person or corporation within a specified time. 2013) As stated by the Supreme Court in REPUBLIC OF THE PHILIPPINES VS. Under Section 23. or from both combined. (RR No. Such advance constitutes and can be treated merely as an increase in capital. 2002].2) Thus. Q: What are the general principles of income taxation? Note: We will discuss this again and in more detail and with cases when we discuss situs of income taxation and source of income rules under Part 9 (Gross Income) of Chapter 2 of the Syllabus. Title II. Income means all the wealth which flows into the taxpayer other than a mere return on capital while capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time. INC. RAFFERTY [AUGUST 7. it shows that the corporation’s accumulated profits have been capitalized. the US Court of Appeals (District of Columbia). The capital still belongs to the corporation as there is no separation of interest. The US Supreme Court held that money received as damages must be reported as they constitute income. as windfalls flowing from culpable conduct of third parties are not taxable income. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 56 of 158 Last Updated: 30 July 2013(v3) . "Income. however. 1918]). RAFFERTY [AUGUST 7. stock dividends represent capital and do not constitute as income to its recipient. income is a flow. while income is the service of wealth. instead of distributed to the stockholders or retained as surplus available for distribution. Note under our Tax Code. Thus. In MURPHY V. TRINIDAD [OCTOBER 30. IRS [493 F. 1975]) Q: Is money received as exemplary damages (punitive damages) income? Yes.” (see M ADRIGAL VS. Glenshaw Co was engaged in a protracted litigation with Hartford-Empire Co where the former demanded exemplary damages for fraud and treble damages for injury to its business by reason of the latter’s violation of federal antitrust laws. The mere fact that such payments were extracted from wrongdoers cannot detract from their character as taxable income. Glenshaw contended that punitive damages. The essential difference between capital and income is that capital is a fund. M ANNING [AUGUST 7. Q: What is the difference between income and capital? Income is distinct from capital. If it’s non-physical injuries like mental anguish." as here used. Knowing that there is an exception will suffice for now. This is essentially equivalent to the distribution of a taxable dividend the amount so distributed in the redemption considered as taxable income. Income is gain derived and severed from capital. The stockholder receives nothing out of the corporate assets for his separate use and benefit but a representation of his increased interest in the capital of the corporation. 426]. we must make a distinction. As explained by the Supreme Court in FISHER V. ROMULO [M ARCH 9. V. GLENSHAW GLASS CO. 1922]. A tax on income is not a tax on property.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. The Court also stated that punitive damages cannot be classified as gifts. stock dividends constitute as income if a corporation redeems stock issued so as to make a 25 distribution. Mere issuance thereof is not yet subject to income tax as they are nothing but an enrichment through increase in value of capital investment. Q: Are stock dividends income or capital? Generally. A fund of property existing at an instant of time is called capital. The Commissioner assessed Glenshaw for the deficiency. Capital is wealth. The parties settled. can be defined as "profits or gains. held that the amount received as compensatory damages on for emotional distress and loss of reputation constitutes taxable income. 2013) “fruit” of capital or labor severed from the “tree. Glenshaw did not report the money received as damages from the settlement in its income tax return.S. In COMMISSIONER V. [348 U. Such are considered unrealized gain and cannot be subjected to income tax until that gain has been realized. not taxable. Q: Is money received as compensatory damages income? Yes. the damages are included in gross income and hence taxable but if it’s _________________________________________ 25 The exception to the rule that stock dividends do not constitute income shall be discussed more extensively later. Income as contrasted with capital or property is to be the test. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. 2010]). (see COMMISSIONER VS. However. amounts received as compensation for personal injuries are excluded from gross income and hence. 1918])." (see M ADRIGAL VS. Note: It must be noted. what was involved was physical injuries. that in the Murphy case. when a corporation issues stock dividends.3d 170]. (see CHAMBER OF REAL ESTATE AND BUILDER’S ASSOCIATION. it is excluded from gross income. income is generally recognized when both the following conditions are met: 1. Examples of those exempt from income tax: de minimis benefits and professional fees of GPPs. when the payments were deposited. 2) Q: Distinguish actual constructive receipt. 28 As opposed to the common examples of unrealized forex gains or mere revaluation increments. An exchange has taken place Q: When is income considered received for income tax purposes? 1. The Supreme Court held that the failure to report the said rental income is unjustified as. the lessor was deemed to have constructive received such rentals. _________________________________________ 29 Examples of income constructively received: (1) deposits in banks (2) interest coupons. 3.108A. receipt from Actual receipt may be actual or physical receipt 29 while constructive receipt occurs when money consideration or its equivalent is placed at the control of the person who rendered the service without restriction by the payor (see Section 4. The lessor did not report these payments in his 1957 income tax return. --------------------------------------------------------------c) When income is taxable (i) Existence of income (ii) Realization of income (a) Tests of realization (b) Actual vis-à-vis constructive receipt (iii) Recognition of income --------------------------------------------------------------Q: When is income taxable? (elements of a taxable income) Income.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Q: What doctrine? is the constructive receipt The constructive receipt doctrine provides than an item is treated as income when it is credited to the account of the taxpayer. gain or profit (existence of 26 income) 2. Q: When is income recognized? Following the realization principle. not excluded by law. gain or profit is not exempt from 27 income tax. (3) undistributed share of a partner in the profits of a general partnership PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 57 of 158 Last Updated: 30 July 2013(v3) . 2013) physical injuries. If constructively received by the taxpayer (constructive receipt) _________________________________________ 26 27 As opposed to mere reimbursements or return on capital. The income. 2-40) Income is received not only when it is actually handed to a taxpayer but also when it is merely constructively received by him. gain or profit is subject to income tax when the following conditions are present: 1. income does not only refer to the money a taxpayer receives but includes anything of value. RR 16-2005). As to (3) – Even if there is material gain. then there is no income to speak of. (realization of income) Note: As to (1) – for tax purposes. certain passive incomes excluded from income as they are already subject to final taxes. 1966]. RR No. (see Section 52. or made unconditionally available to the taxpayer. There is income. RR No. In LIMPAN INVESTMENT V. if the material gain is not yet realized by the taxpayer. CIR [JULY 26. gain or profit is received or realized 28 during the taxable year. The earning process is complete or virtually complete 2. The income. If actually or physically received by the taxpayer (actual receipt) 2. the lessees opted to deposit their payments when the lessor refused to accept the same in 1957. As to (2) – An income may have other elements but the law may specifically exclude the same from income for tax purposes i. (see Section 52. no physical possession is required.e. G. Realization/Severance test There is no taxable income until there is a separation from capital of something of exchangeable value. Tax Code Q: What are the different taxable periods provided for in the Tax Code? 1. G. HORST [311 U. thereby supplying the realization or transmutation which would result in the receipt of income.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. CIR. Fiscal period or fiscal year . M ARCH 24. 112] Where stock. Also it does not include the Flow of Wealth Test.R.R. CIR V. Calendar period or calendar year – is an accounting period which starts from January 1 and ends on December 31 2.S. activity or service that produced the income determins whether any gain was derviced from the transaction COLLECTOR V.is an accounting period of 12 months ending on the last day of any month other than December 31. command or control (iii) Economic benefit test. Tax Code Q: What is the general rule for computing the taxpayer’s taxable income? The taxable income shall be computed upon the basis of the taxpayer’s annual accounting period – fiscal year or calendar year as the case may be. 172231. 45544. NO. doctrine of proprietary interest (iv) Severance test (v) All events test --------------------------------------------------------------Note: The enumeration is inaccurate in that realization test and severance test is one and the same. FEBRUARY 12. Read Section 43. 5046. LABUE [351 US 243] All Events Test Income is reportable when all the events have occurred that fix the taxpayer’s right to receive the income and the amount can be determined with reasonable accuracy. Short period – is an accounting period wherein income shall be computed on the basis of a period less than 12 months. ADMINISTRATRIX OF THE ESTATE OF ECHARRI. 2007 The test of taxability is the source (the property. Flow of Wealth Test Q: Enumerate the different tests for income determination and define each. 1939. NO. MACOMBER [252 US 426] Claim of Right Doctrine/Doctrine of Ownership. 3. CTA CASE NO. shares of stock or other assets are transferred by an employer to an employee to secure better --------------------------------------------------------------Taxable Periods --------------------------------------------------------------Read Section 22(P) and (Q). services they are plainly compensation which is taxable income COMMISSIONER V. APRIL 25. The exercise of that power to procure the payment of income to another is the enjoyment and hence the realization of the income by him who exercises it. 1997] --------------------------------------------------------------d) Tests in determining whether income is earned for tax purposes (i) Realization test (ii) Claim of right doctrine or doctrine of ownership. Command or Control The power to dispose of income is the equivalent of ownership of it. Income is not deemed realized until the fruit has been plucked from the tree EISNER V. 2013) (see M ANDARIN HOTELS V. Page 58 of 158 Last Updated: 30 July 2013(v3) Economic Benefits Test/Doctrine of Proprietary Interest PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . ISABELA CULTURAL CORPORATION. options. The dominant purpose of the revenue laws is the taxation of income to those who earn or otherwise create the right to receive it and enjoy the benefit of it when paid HELVERING V. Note: Other methods would include (1) Installment method. but this applies only to corporate taxpayers. Tax period is terminated by the CIR by authority of law (Section 6(D). the net income shall. _________________________________________ 30 Read Section 46. Tax Code) 2. regardless of whether it has been received or not. Taxpayer. Individual taxpayers cannot use the fiscal period. corporations may with the approval of the CIR. (see Section 46. (2) Percentage of Completion Method and (3) 30 Crop year basis. be computed on the basis of such new accounting period. This would include Estates and Trusts and General Professional Partnerships Q: Can a taxpayer change his accounting period? Yes. Expenses are accounted for in the period they are incurred and not in the period they are paid. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 59 of 158 Last Updated: 30 July 2013(v3) . income tax returns. Taxpayer dies 3. other than an individual. Tax Code) Q: Is a corporation required to use only the calendar year? No. If the corporate taxpayer wishes to change his accounting period from fiscal to calendar year. Corporation is newly organized 4. Taxpayer has no annual accounting period 3. Tax Code). However. Q: In what instances shall taxable income be computed on the basis of calendar year? 1. Taxpayer is a general professional partnership 6. As a general rule. The exceptions (where a taxpayer may have a taxable period of less than 12 months) are: 1. changes his accounting period from fiscal to calendar year or from calendar year to fiscal year or from one fiscal year to another (Section 46.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Cash Method – a method of accounting whereby all items of gross income received during the year shall be accounted for in such taxable year and that only expenses actually paid shall be claimed as deductions during the year 2. Tax Code) Q: Distinguish cash method from accrual method of accounting. are required to be made and their income computed for each calendar year. Taxpayer is an individual 5. (RR 2-40). or from one fiscal year to another. Taxpayer is an estate or a trust Q: In what instances shall taxable income be computed on the basis of a short period? The general rule is that the taxable period is always 12 months. (see Section 43. Accrual Method – method of accounting for income in the period it is earned. Taxpayer does not keep books 4. Taxpayer’s accounting period is other than fiscal year 2. Corporation is dissolved 5. Tax Code Crop Year Basis is a method of accounting applicable only for farmers engaged in the production of crops which take more than a year from the time of planting to the process of gathering and disposal of the harvest. whether individuals or for corporations. from calendar year to fiscal year. They are required to use only the calendar year. with the approval of the CIR. 2013) Q: Can an individual compute his income on the basis of a fiscal year? No. file their returns and compute their income on the basis of a fiscal year. Expenses paid or incurred are deductible in the year the gross income from the sale of the crops is realized. --------------------------------------------------------------(iv) Methods of accounting (a) Cash method vis-à-vis accrual method (b) Installment payment vis-à-vis deferred payment vis-à-vis percentage completion (in long term contracts) --------------------------------------------------------------Q: What are two main accounting methods that may be used by taxpayers? The methods are: 1. On the other hand. even if the proceeds of discounted note is not considered as part of the PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 --------------------------------------------------------------9. installation or construction contract covering a period in excess of one year. in Item 6 of Chapter 2 of the 2013 Bar Syllabus. we determined when income is taxable. initial payment. CTA [AUGUST 29. Tax Code) Q: Can a taxpayer use a combination of two or more methods of accounting? No. At the end of the day. On the same day. For now. When the asset sold is an ordinary asset or a capital asset other than property subject to capital gains tax. the whole point of knowing what constitutes gross income and what can be availed of as deductions. I will focus more on the concepts. CA [FEBRUARY 10. A argues that initial payment excludes evidence of indebtedness. Q: Explain the percentage of completion method. Two factual situations can Page 60 of 158 Last Updated: 30 July 2013(v3) . Percentage of Completion Method is a method of accounting applicable in the case of a building. Q: Explain the installment method Installment Method is a method of accounting considered appropriate when collections of the proceeds of sales and incomes extend over relatively long periods of time and there is strong possibility that full collection will not be paid. deductions. 2013) In cash method. exclusions. we determine what is included in gross income (because there are those already subject to final tax). nature and components of gross income. In Item 8. Deferred payment method is a method of accounting considered when payments are made at a later date. The balance was reported as income only in the next four years. whereby gross income derived from such contract may be reported upon the basis of percentage of completion. Is A’s contention correct? Yes. In this part. the seller recognizes the gross profit on sale in proportion to the cash collected during the year. and what exemptions can be availed of. Tax Code) Q: A sold lots to ABC Corp and was paid less than 25%. A reported as income for the year of the sale for the year of the sale only the cash amount received from sale and excluded the amount received from the discounted checks. The transaction remains to be an instalment (not cash) sale as the law expressly excludes evidence of indebtedness in the determination of how much was paid for the year. The rule is that a taxpayer may use any one method of accounting but not a combination of two or more methods of accounting for each type of business during the taxable year. (see Section 48. income is reported in the year payments are received while expenses are deducted in the year paid. Gross Income --------------------------------------------------------------Note: Previously. income is reported in the year it is earned while expenses are deducted in the year it is incurred. (see Section 49. As customers make installment payments. regardless of receipt or disbursement of cash. the income from deferred payment sale of property may be reported under the instalment method or deferred payment method. we looked into the types of taxpayers. The use of a hybrid method of accounting is not allowed ( see CONSOLIDATED MINES VS. the balance was covered by 4 checks. and exemptions is to know how much the taxpayer must pay. 2000]. in accrual method. what is excluded. the income realized from the discounting itself is still a separate taxable income in the year it was converted into cash because it was at this year that there was actual gain on the discounted notes. However. let us understand the concepts. As held in BANAS V. While I may provide certain tax rates on some sources of income. and exemptions. exclusions. In this item.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. tax rate tables will be provided in greater detail and for easier comprehension in the discussion in Items 10-15 of Chapter 2 (NIRC) of the 2013 Syllabus on Taxation of the different kinds of taxpayers. the checks were discounted (exchange for cash at an amount lower than face value) also ABC Corp. what is deducted. 1974]) Q: Explain the deferred payment method. 2. including. Interests 5. he wants a refund or the taxpayer underpaid and hence. Compensation for services in whatever form paid.” This indicates that non-exclusive nature of the enumeration in Section 32(A). commissions and similar items. 1965] Gains. Except when otherwise provided. Tax Code --------------------------------------------------------------a) Definition --------------------------------------------------------------Q: Define gross income. money or otherwise derived from all other illegal source fall within the ambit of “income derived from whatever source” and is subject to income tax. and over which the taxpayers have complete dominion. wages. the following items: 1. AUGUST 31. Annuities 9. irrespective of the voluntary or involuntary action of the taxpayer in producing the income GUTIERREZ V. Partner’s distributive share from the net income of the GPP (see Section 32(A). Royalties 7. b) Concept of income from whatever source derived --------------------------------------------------------------Q: Is the enumeration provided in Section 32(A) exclusive? No. Prizes and winnings 10. 2013) be inferred from most cases on income taxation. This is why it is important to understand the inclusions in gross income. Section 32(A) does not intend the enumeration to be exclusive. CTA CASE NO. Gross income derived from the conduct of trade or business or the exercise of a profession. all income derived from whatever source. 65. CIR. Tax Code --------------------------------------------------------------- PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 61 of 158 Last Updated: 30 July 2013(v3) . AMERICAN AIRLINES [DECEMBER 19. Dividends 8. NIRC) --------------------------------------------------------------c) Gross income vis-à-vis net income vis-àvis taxable income --------------------------------------------------------------Read Section 31. 1989]). and 11. 3. Pensions. inclusions of gross income) (statutory Q: What is meant by the phrase “all income derived from whatever source" The phrase “all income derived from whatever source” encompasses all accessions to wealth. --------------------------------------------------------------9. but not limited to fees. salaries. Rents 6. A gain constitutes taxable income when its recipient has such control over it that as a practical matter. Note: Note that the statutory definition contains the phrase “all income derived from whatever s ource. Note: Income derived from whatever source will be discussed in greater detail later. Gross Income a) Definition b) Concept of income from whatever source derived c) Classification of income as to source --------------------------------------------------------------Read Section 32(A). deductions. the government assesses him for deficiency taxes. Income from whatever sources refers to all income not expressly excluded or exempted from the class of taxable income. Gains derived from dealings in property 4. he derives readily realizable economic value from it. including. exclusions and exemptions because the controversy between the taxpayer and the government in most cases would be in one of these areas. It’s either the taxpayer overpaid and hence. clearly realized. It merely directs that the types of income listed therein be treated as income from sources within the Philippines (see CIR VS.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. but not limited to. Taxable Income = Gross Income Less: Deductions = Net Income Less: Personal and Additional Exemptions = Taxable net income x Tax Rate = Tax Due = Gross Income Less: Deductions = Taxable net income x Tax Rate = Tax Due Net income Note: Some minor matters: 1. Gross income and taxable income from sources within the Philippines 2. Gross income and taxable income from sources without the Philippines 3. No deduction. exclusions and exemptions together. this applies in the case of a non-resident alien not engaged in trade and business in the Philippines. Again. 2. net income. Why do you stop at (2) when it comes to corporations? Well. 2013) Q: Distinguish gross income from net income and taxable income Gross Income All income minus exclusions. no exclusions. no exclusions. exclusions and exemptions. NIRC) This is gross income less the allowable deductions. authorized for such types of income by this Code or other special laws (see Section 31. if any. one must have an idea on how a taxpayer would go about computing how much income tax he is going to pay. Income partly within or partly without the Philippines Note: I’ll discuss this in greater detail under (x)(e) Source Rules in determining income from within and without and (f) Situs of Taxation of this Item in the Syllabus. nothing. I hope that placed things into perspective and highlights the importance and relationship of the concepts of gross income. the income tax is imposed on the net taxable income computed as follows: (1) All income minus exclusions equals gross income. No deduction. To simplify: Individual All Income Less: Exclusions Corporation All income Less: Exclusions --------------------------------------------------------------d) Classification of income as to source --------------------------------------------------------------Q: What are the classifications of income as to source? 1. (2) Gross income less allowable deductions equals net income (in case of corporations. nothing. (In other words. all income subject to income tax) All pertinent items of gross income less deductions and/or personal and additional exemptions. this is already the taxable net income) (3) Net income less personal and additional exemptions (when applicable) equals taxable net income (4) Taxable net income times income tax rates (on the graduated basis or corporate tax rate as the case may be) equals net income tax due (5) Income tax less creditable withholding tax and/or tax credit equals net income tax payable. because the law provides for a “final” tax. By their nature. Q: How do you determine the net income tax payable? In all cases. he just has to pay a tax equal to 25% of such gross income. corporations cannot avail of personal and additional exemptions. Why don’t you follow the computation if the income is subject to final tax or when the gross compensation income tax system applies? Well. Note: To connect to concepts of gross income. there’s no need to go through the computation. taxable income. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 62 of 158 Last Updated: 30 July 2013(v3) . It’s final already and you just have to pay it. Let’s know first the different incomes that would be considered part of gross income and then we determine whether it is within or without. deductions. personal and additional exemptions apply only to natural persons. It’s pointless to determine the source of the income if you don’t know if it’s actually income in the first place. other than when a final tax is imposed or when the gross compensation income tax system applies. deductions.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. the 2013 Bar Syllabus was not well thought of. As to gross compensation income tax system. 2-98). under an employeremployee relationship. Salaries Wages Commissions. 5. For agricultural labor paid entirely in products of the farm where the labor is performed 2. 4.78. Compensation may be paid in money. This includes the cash value of all remuneration paid in any medium other than cash. Section 2. For services by a citizen or resident of the Philippines for a foreign government or an international organization. or in some medium other than money as for example.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. For domestic service in a private home 31 3. 3. Compensation means all remuneration for services performed by an employee for his employer under an employer-employee relationship unless specifically excluded by the Tax Code. Tax Code Note: There are two components to compensation income: (1) the basic compensation income (which we will discuss here) and (2) fringe benefits which is specially treated by the Tax Code. _________________________________________ 31 32 Q: What services? constitutes compensation for Compensation for services. includes payments “in whatever form paid including but not limied to: 1. 2. and Similar items (see Section 32(A)(1)) Q: What are the items not included in compensation income? 1. NIRC) Note: As to (2) – (a) A private home is the fixed place of aboard of an individual or family.3. stocks. Fees PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Casual labor means occasional. If the home is utilized primarily for the purpose of supplying board or lodging to the public as a business enterprise. retirement benefit or separation pay (x) Income from any source whatever ----------------------------------------------------------------------------------------------------------------------------(i) Compensation Income --------------------------------------------------------------Read Section 78. proceeds from life insurance or other types of insurance (viii) Prizes and Awards (ix) Pensions. This means that the labor does not promote or advance the trade or business of the employer. 33 To determine the existence of an employer-employee relationship. For casual labor not in the course of the 32 employer’s trade or business 4. follow the four-fold test: Page 63 of 158 Last Updated: 30 July 2013(v3) . As to (3) – (a) Any remuneration paid for casual labor and does not promote or advance the employer’s trade or business is not considered compensation income. However. (b) The services of a household personnel furnished to an employee (except rank and file employee) by an employer shall be subject to fringe benefit tax. (see Section 78. it ceases to be a private home and remuneration paid for services performed therein is not exempted and should be included in compensation income. Q: Define compensation for income tax purposes. Q: What is the test to determine whether an income is compensation or not? The test is whether such income is received by 33 virtue of an employer-employee relationship. (see Section 78. 2013) --------------------------------------------------------------(e) Sources of income subject to tax (i) Compensation Income (ii) Fringe benefits (iii) Professional Income (iv) Income from business (v) Income from dealings in property (vi) Passive investment income (vii) Annuities. or other forms of property. bonds. any remuneration paid for casual labor but in the course of the employer’s trade or business is considered as compensation. NIRC. incidental or irregular. RR No. living allowances should be treated as income of the recipient. advantages and privileges in return for _________________________________________ 34 Q: Are 13th month pay and other benefits included in compensation income? 1. 2. The payment constituted income to the employee.S.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. This exemplifies the employer’s convenience rule (see COLLECTOR VS. Section 34 expressly provides that no deductions shall be allowed for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship. 2013) Q: If the compensation is paid after separation. the US Supreme Court held that the payment of the tax by the employer was in consideration of services rendered by the employee. The employer has the power to control the employee with respect to the means and methods by which the work is to be accomplished Selection and management of the employee Power of dismissal Payment of wages "Personal Equity and Retirement Account (PERA)" refers to the voluntary retirement account established by and for the exclusive use and benefit of the Contributor for the purpose of being invested solely in PERA investment products in the Philippines. 34 Q: May compensation earners avail of deductions as to their compensation income? No. However. is the payment by the employer taxable income on the part of the employee? Yes. Tax Code) Note: PERA contributions from an employer to an employee do not form part of his gross income (see RR 17-2011 and RA 9505). GSIS. even though voluntary. This is because the condominium corporation furnishes its members and tenants with benefits. 716]. In OLD COLONY TRUST CO. Such amounts form part of the gross income of the corporation. SSS. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 64 of 158 Last Updated: 30 July 2013(v3) . The payment for services. V. COMMISSIONER [279 U.78. was nevertheless compensation for services rendered. HENDERSON [1 SCRA 649]) Q: Are association dues. The Court also added that it cannot be argued that the payment was a gift. of funds placed therein. including all earnings of such funds. 4.1(A) RR No. 2-98] No. 3. they are excluded from gross income (see Section 32(B)(7)(e). whether legal or beneficial. Q: Are living allowances compensation income? treated as A: Generally. In fact. They are not included in compensation income. Remuneration for services constitutes compensation even if the employer-employee relationship no longer exists at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them (see Section 2. SSS. Tax Code) Q: Are GSIS. The deductions are not necessary for the taxpayer to earn the pure compensation income which arose out of an employer-employee relationship. if any amount thereof is paid directly by the employer and paid for the convenience of the latter. will it still form part of compensation income? Yes. the excess of what the recipient employee would have ordinarily incurred for his own subsistence is not taxable income but a business expense of the employer. Medicare and other contributions included in compensation income? No. Medicare and Pag-Ibig contributions and union dues of individuals are not included in compensation income as they are excluded from gross income (see Section 32(B)(7)(f). Q: If an employer pays the income taxes assessable against an employee. membership fees and other assessment charges collected by a condominium corporation from its members and tenants subject to income tax? Yes. The Contributor shall retain the ownership. Holiday and vacation expenses. but not limited to. which must be withheld and deducted by his employer from the compensation income of the employee. (RMC 9-2013 [January 29. It imposed a fringe benefits tax on the fringe benefits received by supervisory and managerial employees. the term “fringe benefit” means any good. Educational assistance to the employee or his dependents. discharge. (see Section 33. RA 8424 was passed. and What is a fringe benefit tax? A fringe benefit tax is a final withholding tax (at 32%) imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee except rank and file employees by the employer. but allows the employer to deduct such fringe benefit tax as a business expense from its gross income. the fringe benefits of rank-and-file 37 employees are treated as part of his compensation income. They constitute as income payments or compensation for beneficial services provided to members and tenants. it has been observed that many of the fringe benefits paid by the employer to his employees are not subjected to income tax and withholding tax on compensation. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted. service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as. recall. effectively recommends such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. driver and others. (b) The LGU having jurisdiction over the homeowners’ association must issue a certification identifying the basic services being rendered by the association and its lack of resources to render such services. 37 A rank-and-file employee means all employees who are holding neither managerial or supervisory position PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 65 of 158 Last Updated: 30 July 2013(v3) . Q: What is the rationale behind the Fringe Benefits Tax? As a general rule. the income recipient is the person liable to pay the income tax. 2. transfer. --------------------------------------------------------------(ii) Fringe benefits (a) Special treatment of fringe benefits (b) Definition (c) Taxable and non-taxable fringe benefits --------------------------------------------------------------Read Section 33. Tax Code and RR 3-98 [JANUARY 1. the following: 1. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 5. Expenses for foreign travel. and (c) the association must present proof that the income and dues are used for the cleanliness. The law mandates that the employer shall assume the fringe benefits tax imposed on the taxable fringe benefits 35 36 of the managerial or supervisory employees. Household personnel. Tax Code Q: What is a fringe benefit? As defined by Section 33(B). Vehicle of any kind. 2013) such payments. assign or discipline employees 36 A supervisory employee is one who. 3. in the interest of the employer. A managerial employee refers to one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire. the association dues and income derived from rentals of the homeowner’s associations may be exempted from tax subject to the following conditions: (a) The homeowners association must be a duly constituted “Association” as defined under Section 3(b) of RA 9904. including maintenance of the facilities in their respective subdivisions and villages. 1998]) _________________________________________ 35 6. 2013] 10. Expense account. suspend. such as maid. security and other basic services need by members. dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations. Membership fees. To plug this loophole. Housing. However. 8. In order to improve collection of income on the compensation income of employees. 7. the State requires the employer to withhold the tax upon payment of the compensation income. lay-off. However. [RMC 65-2012] Note: Pursuant to Section 18 of RA 9904 (Magna Carta for Homeowners and Homeowners’ Association). 9. 4. RR 3-98). Employees provides a monthly fixed amount for the employee to pay his landlord Note: (1) The fringe benefits tax shall be treated as a final tax on the employee which shall be withheld and paid by the employer (see Section 2. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 66 of 158 Last Updated: 30 July 2013(v3) . Q: In what instances is the housing privilege subject to fringe benefit tax? the same shall not be included in the compensation income. Housing unit which is situated inside or adjacent to the premises of a business or factory (it is considered adjacent if its located within the maximum of 50 meters from the perimeter of the business premises) 3.) Note: The above determination is not absolute. Employer purchases a residential property and transfers ownership to the employee 4.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 1998]. In essence. by providing the quarters. 2013) If the recipient of the fringe benefit is a rank and file employee and the benefit is not taxexempt if the recipient of the fringe benefit is not a rank-and-file employee and the benefit is not taxexempt the value of such fringe benefit shall form part of compensation income subcontractors. Employer owns a residential property on installment basis and allows use by the employee 3. the government can avail of the services of soldiers anytime their services are desired.33(D)(1). the grossed-up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and under their respective rates of income tax. the grossed-up monetary value of the fringe benefit represents the whole amount of income received by the employee which includes the net amount of money or net monetary value of property which has been received plus the amount of the fringe benefit tax thereon otherwise due from the employee. Housing privilege of military officials of the 38 AFP 2. It can be argued that such contravenes the fundamental principle that the income tax shall be imposed based on the taxpayer’s ability to pay. Temporary housing for an employee who stays in a housing unit for three months or less (see Section 2. A fringe benefit tax is levied upon the employer. 2000. OBUs and petroleum Why? Pursuant to the employer’s convenience rule. (2) On the taxation of fringe benefits – There is a difference in tax treatment between supervisory and managerial employees on one hand and rank-and-file employees on the other.33(A). but paid by the employer for and in behalf of his employee. In the case of non-resident aliens not engaged in trade or business and alien and Filipino individuals employed in RHQs. Q: What housing privileges are not subject to fringe benefit tax? 1. Employer leases residential property and assigns the same for use by the employee 2. Q: Are expense accounts taxable fringe benefits? General Rule: Expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits Exception: They are not taxable fringe benefits if incurred or reasonably expected to be incurred by _________________________________________ 38 Q: How is the grossed-up monetary value of the fringe benefit determined? It is determined by dividing the actual monetary value of the fringe benefit by 68% (effective January 1. the purpose of getting the grossed-up monetary value is to preserve the benefit to the employer as a whole. 1. RR 3-98] Q: What is meant by “grossed-up monetary value of the fringe benefit?” As defined in RR 3-98 [JANUARY 1. ROHQs of MNCs. 33(D)(5)(a). Employer leases and maintains a fleet of motor vehicles for the use of the business and employees.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 3-98) Q: When is a motor vehicle privilege considered a taxable fringe benefit? 1. or other similar personnel expenses shall _________________________________________ 39 Don’t ask me why there’s a distinction. 2013) the employee in the performance of his duties subject to the following conditions – 1. RR No. Expenses of the employee which are borne by the employer for household personnel such as salaries of household help.33(D)(6). Employer provides employee cash for vehicle purchase 3. (see Section 2. RR No. dues and other expenses in social and athletic clubs subject to fringe benefit tax? Yes. RR No. 3-98) Q: Are expenses for foreign travel by the employee subject to fringe benefits tax? General Rule: Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits.33(D)(3)(g) and (h). Employer purchases vehicle in employee’s name 2. dues. 3-98) Q: Are interest on loans obtained by the employee from the employer subject to fringe benefit tax? Yes. Employer purchases car on installment in name of employee 4. and other expenses borne by the employer for his employee in social and athletic clubs or other smiliar organizations shall be treated as taxable fringe benefits of the employee in full (see Section 2. That’s what the law says! PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 67 of 158 Last Updated: 30 July 2013(v3) . 3-98). 3-98) Q: Are household expenses of employees subject to fringe benefits tax? Yes. (see Section 2. Expenditures are duly receipted for and in the name of the employer 2. RR No. RR No.33(D)(8).33(D).33(D)(2)(a). the expense shall be treated as a taxable fringe benefit. RR 3-98) Note: Personal expenses of the employee paid or reimbursed by the employer to the employee shall be treated as a taxable fringe benefit whether or not the same are duly receipted for in the name of the employer be taxable as fringe benefits (see Section 2. Employer owns and maintains a fleet of motor vehicles for use of business and employees 6. such interest foregone by the employer or the difference of the interest assumed by the employee and the rate of 12% shall be treated as a taxable fringe benefit (see Section 2. If the employer lends money to his employee free of interest or a rate lower than 12%. Employer shoulders a portion of purchase price 5. Exception: In the absence of documentary evidence showing that the travel abroad was in connection with business meetings or conventions. Membership fees. 3-98) (2) Holiday and vacation expenses treated of the employee borne by the employer shall be treated as taxable fringe benefits. (see Section 2. 3-98) Note: The use of an aircraft is not subject to fringe benefits tax but the use of yacht is subject to fringe benefit 39 tax. RR No.33(D)(3). 3-98) Note: (1) Travelling expenses of family members of the employee borne by the employer shall be subject to fringe benefits tax (see Section 2. RR No. Expenditures do not partake of the nature of a personal expense attributable to the employee (see Section 2. personal driver of the employee.33(D)(7)(c). RR No. I can’t fathom why. Q: Are membership fees.33(D)(7). (see Section 2. and 5. insurance. 398 provides that fringe benefits exempted from the payment of the fringe benefits tax may however still form part of the employee’s basic compensation income which is subject to income tax. 005-11 [March 16.33(D)(9)(a) and (b). 2000] PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 68 of 158 Last Updated: 30 July 2013(v3) . De minimis benefits Note: Exemption from fringe benefit tax is not an exemption from other income taxes unless such benefit is also stated expressly to be exempt from other income taxes (refer to the exclusions). the non-taxable fringe 1. regardless of whether or not the recipients of the benefits are managerial or rank-and-file employees. 2011] specifically provided “private” employees. _________________________________________ 40 Q: Enumerate benefits. RR No. contentment. Medical cash allowance to dependents of employees. With a written contract that employee shall remain employed with the employer for a period of time mutually agreed upon by the parties 3. The cost of premiums borne by the employer for the group insurance of his employees (see Section 2. The cost of educational assistance to the employee and his dependents borne by the employer shall be subject to fringe benefits tax (see Section 2. RR No. efficiency of his/her employees. Monetized unused vacation leave credits of private employees not exceeding ten (10) days 40 during the year. 2013) Q: Is the cost of educational assistance to the employee or his dependents subject to fringe benefit tax? General rule: Yes. 41 Introduced by RR 10-00 [December 14. Monetized value of vacation and sick leave credits paid to government officials and 41 employees. 4. as amended recently by RR No. Benefits given to the rank and file employees. Education of the employee is directly connected with employer’s trade or business 2. RRR No. and consequently from income tax. 008-12 [M AY 11. whether granted under a collective bargaining agreement.33(D)(10). In case of dependents. 3. the assistance was provided through a competitive scheme under the scholarship program of the company employer. Fringe benefits exempted by law 3. Contributions of the employer for the benefit of the employee to retirement. not exceeding P750 per employee 42 per semester or P125 per month. Q: What are de minimis benefits? As defined by RR 3-98 [MAY 21. RR No. goodwill. 1998]. Contributions of the employer for the benefit of the employee to the SSS. 2011].23(C). GSIS and other similar contributions 2. 2. Section 2. 2012]. de minimis benefits are benefits of relatively small value offered or furnished by the employer to his/her employees as a means of promoting the health. 005-11 [March 16. the following shall be considered de minimis benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees: 1. Fringe benefits are required by the business or for the convenience of the employer 2. 2000] but referred to employees in general.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 3-98) Q: What are deemed de minimis benefits? As provided in RR No. 3-98) Exceptions: 1. and hospitalization benefit plans This was included in RR 3-98 and in RR 8-00 [August 21. These benefits are exempt from the withholding tax on compensation income. Q: Is the cost of life or health insurance paid for by the employer subject to fringe benefit tax? The cost of life or health insurance and other non-life insurance premiums borne by the employer for his employees shall be treated as taxable fringe benefits except: 1. 2000] 42 Provided under RR 3-98 and RR 8-00 [August 21. engineers and the like (see RR No.000. This was increased by RR 5-2008 [APRIL 17. 10. Q: Is the enumeration of de minimis benefits exclusive? Yes. Otherwise.000 ceiling. RR 8-00 [August 21. 2-98. 9. annual medical check-up. for length of service or safety achievement. RR 8-00 [August 21. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the 49 basic minimum wage per region basis.000. 44 RR 3-98 did not provide for an amount. Gifts given during Christmas and major anniversary celebrations not exceeding P5.000 per annum. hence. _________________________________________ 43 --------------------------------------------------------------(iv) Income from business --------------------------------------------------------------Q: What is business income? Business income refers to gross income derived from the conduct of trade or business or the exercise of a profession. Note: Business income shall be subject to the graduated rates in the case of individuals and the corporate income tax in the case of corporations.500. RR 8-00 [August 21. 2000] provided for an amount of P3. e. 8. Uniform and clothing allowance not exceeding 44 P5. then it is considered compensation income.000.000 48 per employee per annum. 47 RR 3-98 provided for a ceiling of ½ month of the basic salary of the employee. 7. RR 8-00 [August 21. Actual medical assistance. The existence or absence of an employer-employee relationship determines whether the income shall be treated as compensation income or professional income. 2000] provided the amount of P10.000 as the ceiling. 2000]. If there is an employer-employee relationship.g. 2000] increased it to P300. 6. and routine consultations. 2011].000.2 of RR No. it is considered professional income. 49 Introduced by RR 8-00 [August 21. 2000] introduced the P5. 2000] changed the ceiling amount to P10. 2012] to P5. with an annual 47 monetary value not exceeding P10. Laundry allowance not exceeding P300 per 46 month.000. rice per month amounting to not more than 43 P1. 2008] to P1.000 and added the alternative 1 sack of 50kg of rice. which includes. 2013) 4. 46 RR 3-98 provided for an amount of P150. the amount was P350. 2-98) Q: Distinguish professional income from compensation income. RR 8-00 [August 21. As provided in RR No.000 per annum. the fees of CPAs. but is not limited to. It includes the fees derived from engaging in an endeavor requiring special training as a professional as a means of livelihood. not 45 exceeding P10. 2011] provided for an amount of P4. RR No. lawyers. medical allowance to cover medical and healthcare needs. 48 RR 3-98 did not provide for a ceiling amount. and. Employees achievement awards. --------------------------------------------------------------(iii) Professional Income --------------------------------------------------------------Q: Define professional income Professional income refers to fees received by a professional from the practice of his profession provided that there is no employer-employee relationship between him and his clients. shall be subject to income tax as well as withholding tax on compensation income.500. RR 8-00 [August 21. 008-12 [MAY 11. 2000] increased this to P1. This was again increased by RR No. 5. doctors.g. 005-11 [March 16. 005-11 [March 16. Under RR 3-98.57.500 or one (1) sack of 50 kg.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Note: Professional income shall be subject to creditable withholding tax on the rates prescribed under Section 2. maternity assistance. e. all other benefits given by employers which are not included in the enumeration shall not be considered de minimis benefits. Rice subsidy of P1. 45 RR 3-98 simply said “medical benefits” with no corresponding amount. --------------------------------------------------------------(v) Income from dealings in property (a) Types of properties (b) Types of gains from dealings in property --------------------------------------------------------------- PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 69 of 158 Last Updated: 30 July 2013(v3) . The Revenue examiner adjudged A as engaged in business as real estate dealers and required him to pay the real estate dealer’s tax and assessed a deficiency income tax on profits derived from the sale of the lots based on the rates for ordinary income and not as capital gains at capital gain rates. it is a capital asset. conversely. such as good roads. In this case. A engaged in the real estate business and accordingly. assets falling within the exceptions are ordinary assets. Each case must rest upon its own peculiar facts and circumstances (see CALASANZ V. if what is sold is an ordinary asset. any gain from the sale thereof shall form part of the ordinary income which shall be subject either to graduated income tax rates (if an individual) or corporate income tax (if a corporation). Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year 2.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. (2) There is no rigid or fixed formula to determine with finality whether property is a capital or ordinary asset. any gain from the sale thereof shall form part of the ordinary income which shall be subject either to graduated income tax rates (if individual) or corporate income tax (if corporation). it is subject to capital gains tax. If it is an ordinary asset. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business 3. On the other hand. it is a capital asset. Soon after. and Section 132. For example. RR 2) Q: A inherited from his father an agricultural land. the activities of A are indistinguishable from those invariably employed by one engaged in the business of selling real estate. except those enumerated as ordinary assets in Section 39. And necessarily. Note: Thus. The statutory definition of capital assets is negative in nature. Improvements. CIR [144 SCRA 664] Q: What is the importance of knowing if an asset/income is capital or ordinary The tax treatment will vary depend on the nature of the asset. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . Real property used in trade or business of the taxpayer (see Section 39 Tax Code. He had the land surveyed and subdivided into lots. assets falling within the exceptions are ordinary assets. the gains from the sale of the lots are ordinary income taxable in full (see CALASANZ VS. Note: (1) The statutory definition of capital assets is negative in nature. If the asset is not among the exceptions. any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the transaction. A did not sell the land in the condition in which he acquired it. In the course of selling the subdivided lots. if real property is a capital asset. concrete gutters. 1986]) Page 70 of 158 Last Updated: 30 July 2013(v3) Q: What are capital assets? The term capital assets means property held by the taxpayer whether or not connected with his trade or business. the lots were sold to the public at a profit. Is the Revenue Examiner correct? Yes. COMMISSIONER [OCTOBER 9. One strong factor is the business element of development which is very much in evidence. conversely. Property used in trade or business of a character that is subject to allowance for depreciation 4. drainage and lighting system. 2013) Q: What gains from dealings in property are included in the “gross income”? Only gains derived from the sale or exchange of property considered as ordinary assets. Tax Code Q: What are ordinary assets? 1. --------------------------------------------------------------(a) Types of properties (1) Ordinary Assets (2) Capital Assets --------------------------------------------------------------Read Section 39(A)(1). If the asset is not among the exceptions. the gain from the sale thereof shall be subject to the final capital gains tax of 6%. were introduced to make the lots saleable. if what is sold is a capital asset. the property is still an ordinary asset (see Section 3(e). RR No. 7-2003) Note: The conversion from ordinary assets to capital assets is only allowed if the taxpayer is not engaged in the real estate business. then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale. if the seller is habitually engaged in real estate business. In this case. 2000]. Y reported his income from the sales as long-term capital gains. at the time material to this case. Q: Is an equity investment a capital asset? Yes. the CIR was asked to rule on the tax consequences of certain transactions involving a seller that is _________________________________________ 50 50 This ruling also stated that registration with the HLURB or HUDCC shall be sufficient for a seller/transferor to be considered as habitually engaged in the real estate business. Y’s sales of the several lots forming part of his rental business cannot be characterized as other than sales of ordinary assets. If the seller/transferor is not registered with HLURB or HUDCC. second. whether the seller is habitually engaged in real estate business or not. RR No. 2013) Q: Y inherited from his mother several tracts of land. (BIR RULING NO. Y sold the leased lots to the occupants except for one lot which needed filling because of low elevation. The rate of withholding tax will depend on whether. If the real property is a land or building which is not actually used in the business of the sellercorporation and is treated as a capital asset. Said lot was filled and subdivided into smaller lots and sold to the public. but as well the correlative right to receive and enjoy the fruits of the business and property which the decedent had established and maintained. The CIR denied this and ruled that Y was engaged in the business of leasing the lots and the subsequent sale are sales of real property used in trade or business of the taxpayer. Under the circumstances. The following circumstances in combination show unequivocally that the petitioner was. transferred to him was not merely the duty to respect the terms of any contract thereon. As ruled by the Supreme Court in CHINABANK V. the seller is exempt or taxable. he/it may prove that he/it is engaged in the real estate business by offering other satisfactory evidence PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 71 of 158 Last Updated: 30 July 2013(v3) . the gross selling price. . When Y obtained by inheritance the parcels in question. whichever is higher of such land and/or building. the properties should be regarded as ordinary assets. Q: What is the tax consequence if the property is sold by a seller-corporation engaged in real estate business? It depends. Is the CIR correct? Yes. first. asset of the investor the sale or exchange of which results in either a capital gain or a capital loss. 7-2003) Exceptions: Properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than 2 years prior to the consummation of the taxable transactions involving the properties. 2002]. 3(e). and third. CA [JULY 19. This rule applies. 1974]) engaged n real estate business but without any specification as to whether the property is capital or ordinary. these lands were subdivided into lots and leased. If the real property being sold is an ordinary asset. The CIR stated that it is necessary to first determine the character of the real property being sold. whether or not the sellercorporation is engaged in real estate business. an equity investment is a capital.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. not ordinary. In BIR RULING 27-02 [JULY 15. 142-2011. withholding tax rates shall apply. engaged in the real estate business (see TUASON VS. When his mother was still alive. The sales concluded on installment basis of the subdivided lots comprising the last lot do not deserve a different characterization for tax purposes. exchange or disposition of such land or building based on the gross selling price or fair market value. Sec. LINGAD [JULY 31. Q: Can an ordinary asset be converted to a capital asset? General Rule: No. Derived from property not used in trade or business whether or not connected thereto Some types of capital gains are adjusted by the holding period in Section 39(B) Ordinary losses may be deducted from certain types of capital gains The concept of net loss carryover applies to capital gains taxation Income from capital gains tax are not included in the annual income tax return Q: Distinguish actual gain from presumed gain Actual gain There is actual gain whenever an individual or corporation sold shares of stock treated as a capital asset Presumed gain There is presumed gain whenever an individual sold real property treated as a capital asset located in the Philippines or a corporation sold land/building treated as a capital asset located in the Philippines Presumed gain does not consider the cost of the property sold Derived from property used in trade or business Actual gain arrived at by deducting the cost or adjusted basis of the property sold from the amount realized Q: Distinguish long-term capital gain v. Ordinary Gain any gain from the sale or exchange of property which is not a capital asset or property. 2013) Q: Can a capital asset be converted to an ordinary asset? Yes. net capital loss --------------------------------------------------------------Read Section 22(Z). or other disposition of the properties of a taxpayer classified as capital assets. Capital Gain The gains realized from the sale. jurisprudence has consistently held that a capital asset may become an ordinary asset. Short-term capital gain If the capital asset has been held for not more than 12 months Long-term capital gain If the capital asset has been held for more than 12 months Ordinary gains are not adjusted by the holding period in Section 39(B) Only ordinary losses may be deduced from ordinary gains The concept of net operating loss carryover (NOLCO) applies to PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 72 of 158 Last Updated: 30 July 2013(v3) . CALASANZ V. Section 39(A)(2). While RR No. exchange. it cannot be converted to a capital asset (subject to the two year waiting period). short-term capital gain. 7-2003 provides a rule that once an asset is ordinary. CIR [144 SCRA 664] ordinary gains taxation Deductions are usually allowed for ordinary gains Ordinary gains are subject to the graduated rates or corporate income tax rate as the case may be Ordinary income is to be included in the annual income tax return (NELCO) Generally no deductions are allowed from capital gains Capital gains are subject to final taxes --------------------------------------------------------------(b) Types of gains from dealings in property (1) Ordinary gain vis-à-vis capital gain (2) Actual gain vis-à-vis presumed gain (3) Long term capital gain vis-à-vis shortterm capital gain (4) Net capital gain.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Tax Code Q: Distinguish ordinary gain from capital gain. Q: What is the allowable extent of losses from sales or exchanges of capitals assets? (capital loss limitation rule) Losses from sales of exchanges of capital assets shall be allowed to be deducted only to the extent of the gains from such sales or exchanges. See Section 39(C). not an ordinary. Tax Code Q: Is the capital gain from the sale or exchange of a capital asset always taxable in full? (Holding period) No. or an active trader (for his own account) in. asset.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. the shares to him would be capital assets. Tax Code. In the case of a taxpayer other than a 51 corporation. The BIR disallowed the deduction on the basis that the debt was not worthless. The Supreme Court ruled that the equity investment is not indebtedness in the first place but rather capital. (C). Note: The exception (where the capital loss limitation rule will not apply) – If a bank or trust company incorporated under the laws of the Philippines. the loss is deemed to be a loss from the sale or exchange of capital assets. any losss resulting from such sale shall not be subject to the above limitations and shall not be included in determining the applicability of such limitation to other losses. Chinabank wrote-off the investment in its ITR as a bad debt or as an ordinary loss deductible from its gross income. 2000]. securities. 50% if the capital asset has been held for more than 12 months _________________________________________ 51 The holding period is material only if the capital asset is sold by an individual. note or certificate or other evidence of indebtedness issued by an corporation with interest coupons or in registered form. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 73 of 158 Last Updated: 30 July 2013(v3) . loss. a substantial part of whose business is the receipt of deposits sells any bond. --------------------------------------------------------------(5) Computation of the amount of gain or loss --------------------------------------------------------------Note: This involves Section 40 of the Tax Code (Determination of Amount and Recognition of Gains or Loss). the following percentages of the gain upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain: 1." the loss sustained is a capital. The rule thus is that capital loss can be deducted only from capital gains. a Hong Kong subsidiary. (D). In CHINABANK V. In the hands. The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during the same taxable year that the securities have become "worthless. not an ordinary. 100% if the capital asset has been held for not more than 12 months 2. This does not apply to corporations. I’ll discuss this after I complete the discussion on Section 39 (Capital Gains and Losses) --------------------------------------------------------------(6) Income tax treatment of capital loss (a) Capital loss limitation rule (b) Net loss carry-over rule --------------------------------------------------------------Read Section 39(B). First CBC became insolvent. however. When the shares held by such investor become worthless. The Court further stated that assuming that the equity investment of CBC has indeed become "worthless. Shares of stock would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of. CA [JULY 19. debenture. 2013) Q: Distinguish net capital gain and net capital loss Net capital gain means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges Net capital loss means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges. of another who holds the shares of stock by way of an investment. Chinabank made a 53% equity investment in the First CBC Capital (Asia) Ltd. With BSP approval. whichever is higher. it forms part of the ordinary income which shall be subject either to graduated income tax rates (if individual) or corporate income tax (if corporation). if it’s a capital asset. Sale 2. Section 25(B). including pacto de retro sales and other forms of conditional sales Note: (1) The phrase “sale. Exchange. The gross selling price. Section 25(A)(3). Tax Code Q: What is the rule on capital gains from dispositions of real property? The rate of 6% shall be imposed on capital gains presumed to have been realized by the seller from the sale. exchange. The fair market value as shown in the schedule of values of the provincial and city assessors Page 74 of 158 Last Updated: 30 July 2013(v3) --------------------------------------------------------------(7) Dealings in real property situated in the Philippines (9) Sale of principal residence --------------------------------------------------------------- PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . if it is an ordinary asset. Read Section 24(D). or other disposition” includes taking by the government through expropriation GONZALES V. The capital gains tax must be paid within 30 days following each sale or disposition. other than a corporation. the return shall be filed within 30 days following the receipt of the first down payment and within 30 days following the subsequent installment payments. In case of installment sale. Q: Distinguish Net Loss Carry-over (NELCO) from Net Operating Loss Carry-Over (NOLCO). not corporations NOLCO NOLCO is a concept in ordinary income taxation NOLCO is enjoyed by corporations. whether it’s real property or shares of stock that is the subject of the sale. Section 27(D)(5). or 3. exchange.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twelve (12) months. The FMV of real properties located in each zone or area as determined by the CIR after consultation with competent appraisers both from the private and public sectors b. Q: What is the basis of the 6% capital gains tax? Whichever is the higher of: 1. not individuals May be availed over a period three years Q: What are the transactions covered by the capital gains tax? 1. sustains in any taxable year a net capital loss. Note: The capital limitation rule applies to both individual and corporate taxpayers while NELCO only applies to individuals and cannot be availed of by corporate taxpayers. or 2. to reiterate. Other disposition. CTA [121 PHIL. Current fair market value as determined below: a. The tax base shall be the entire selling price. including lacto de retro sales and other forms of conditional sales based on the gross selling price or fair market value as determined by the CIR. NELCO NELCO is a concept in capital gains taxation NELCO is enjoyed only by individuals. or other disposition of real properties located in the Philippines classified as capital assets. 861] May be availed of only during the succeeding year --------------------------------------------------------------(7) Dealings in real property situated in the Philippines (8) Dealings in shares of stock of Philippine corporations --------------------------------------------------------------Note: Again. it is subject to capital gains tax. On the other hand. 2013) Q: What is the net loss carry-over rule (NELCO)? If any taxpayer. it shall be presumed that he did not fully utilize the proceeds of the sale. The excess of the deposit in escrow. then there is no principal place of residence. Tax Code) Q: What is the special rule for disposition of real property made by an individual to the government? As provided in RR 8-98. 2. 2000]: 1. and shall be assessed deficiency capital gains tax. The historical cost or adjusted basis of his old principal residence sold. depending on the agreement of the parties. exchange or disposition of his old principal residence. This is inclusive of 20% interest per annum. is not a pre-requisite to the transfer of ownership to the buyer. The escrow shall be applied in payment of this. If the same is insufficient to cover the entire amount assessed. This is logical because if they are not residents. he shall be liable for deficiency 54 capital gains tax of the utilized portion. (see CHUA V. actual occupancy is not interrupted or abandoned by temporary absence Q: What are the conditions for the exemption of capital gains tax on the sale by a natural person of his principal residence? As provided in RR 13-99 [JULY 26. he must within 30 days from the lapse of the said period the required documents to prove full utilization. where the husband or wife or unmarried individual residence. If there is no full utilization of the proceeds of sale. exchange or disposition must be fully utilized in acquiring or constructing his new principal residence within 18 calendar months from date of its 53 sale. Proof must be submitted. the capital gains tax return will be filed by the seller within 30 days following each sale or disposition of real property. however. Q: Define “principal residence” It is the dwelling house. The transfer of ownership takes effect upon the signing and notarization of the deed of absolute sale. 2013) (see Section 24(D)(1) in relation to Section 6(E). Q: Is the payment of the capital gains tax a pre-requisite to the transfer of ownership to the buyer? No. 8-98 [AUGUST 25. The tax exemption may be availed of only once every 10 years _________________________________________ 52 Q: Who is liable to pay the capital gains tax? The seller is liable to pay the capital gains tax. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 75 of 158 Last Updated: 30 July 2013(v3) . The proceeds from the sale. The 6% capital gains tax due shall be deposited in an account with an authorized agent bank under an Escrow Agreement. or the seller can pay the tax. if any. Payment of the capital gains tax. exchanged disposed shall be carried over to the cost basis of his new principal residence 5. Note: The exemption applies to resident citizens and aliens. under a final capital gains tax of 6%. As provided in RR NO. 55 The buyer has more interest in having the capital gains tax paid immediately since this is a pre-requisite to the issuance of a new Torrens title in his name. The buyer can retain the amount for the capital 55 gains tax and pay it upon authority of the seller. shall be returned to him. It can only be released upon showing that the proceeds have been fully utilized within 18 months. 1998]. 53 To ensure compliance. 3. 4. as 52 amended by RR 14-2000 [NOVEMBER 20. Q: Can the buyer pay the capital gains tax? Yes. in case of disposition of real property made by an individual to the government or to any of its political subdivisions or agencies or to government-owned or controlled corporations.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. or 2. 2003]) _________________________________________ 54 RR 14-2000 added the escrow agreement requirement and conditions relating thereto. computed from the 31st day after the date of sale or disposition of the said old principal residence. he shall remain liable for the remaining balance of the assessment. compute the tax on the gain derived from such sale under the normal income tax rates. exchange or disposition of his old principal residence. If he fails to submit the required documents within 30 days after the lapse of the 18-month period. CA [APRIL 9. the seller may elect to: 1. 1999]. as such transfers are equivalent to a conveyance but without monetary consideration. If the mortgagor does not exercise his right of redemption. Q: ABC Company took out a loan from XYZ bank and mortgaged one of its properties as collateral. 2011]. I will be discussing capital gains taxation of foreclosed mortgaged real properties. 2011] involved a foreclosure sale which took place prior to the effectivity of the General Banking Law. 2009]) Note: (1) To summarize. the capital gains tax due will be based on the bid price of the highest bidder. _________________________________________ 56 Q: If title to property is transferred to one spouse as a result of a court decision in an annulment case. no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. no capital gains taxes if foreclosed properties is redeemed. UPCB [October 23.57 the mortgagor notified the bank of its intention to redeem the property. The most recent case SUPREME TRANSLINER V. (RMC No.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. If there is nonredemption. The relevant BIR issuances (RR 4-99) and relevant cases are outdated and do not reflect the changes introduced by Section 47 of the General Banking Law. 1999] provides that in case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of 56 sale. capital gains tax on the foreclosure sale shall become due. 2011]). ABC was unable to pay so XYZ extrajudicially foreclosed the property and bought it. made in accordance with the Court's Decision granting parties agreement for the distribution of communal property. but not after. BPI FAMILY SAVINGS BANK [FEBRUARY 23. RMC 55-2011 provides that the 1-year period on the foreclosed asset of natural persons and the period within which to pay CGT or CWT and DST on the foreclosure of Real Estate Mortgage shall be reckoned from the date of registration of the sale in the Office of the Register of Deeds For juridical persons in an extrajudicial foreclosure. the CIR held that the transfer of the title of the subject properties are not subject to capital gains tax. but not after the registration of the certificate of sale with the Register of Deeds. In BIR Ruling DA-029-08 [JANUARY 23. Note Section 47 of the General Banking Act. In both BIR Rulings. will capital gains tax still be imposed on the foreclosure sale? RR 4-99 [M ARCH 9. Section 47 of the General Banking Law provides that its right of redemption shall be until. is the transfer subject to capital gains tax? No. title to a house and lot was transferred to the husband by virtue of a decision of the court declaring his marriage with his wife null and void. BPI FAMILY SAVINGS BANK [FEBRUARY 23. The updated BIR issuance on the matter is RMC 552011 [November 10. 2011] Q: If a mortgagee foreclosed the mortgaged property but the mortgagor exercises his right of redemption within the applicable period. which in no case shall be more than 3 months after foreclosure. 2007]. whichever is earlier. SUPREME TRANSLINER V. capital gains must be paid. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 76 of 158 Last Updated: 30 July 2013(v3) . In BIR Ruling DA 287-07 [M AY 8. Before the expiration of the oneyear redemption period. Is XYZ liable to pay the capital gains tax as a result of the foreclosure sale? No. 2013) Note: In the next two questions. 55-2011 [November 10. there is no actual transfer of the mortgaged real property until after the expiration of the one-year period and title is consolidated in the name of the mortgagee in case of non-redemption. judicial persons whose property is being sold pursuant to an extrajudicial foreclosure shall have the right to redeem the property until. 2008]. In such case. The right of redemption shall be reckoned from the approval of the executive judge [ CIR v. In foreclosure sale. This is because before the period expires there is yet no transfer of title and no profit or gain is realized by the mortgagor. the registration of the certificate of foreclosure sale with the Register of Deeds which in no case shall be more than 3 months after foreclosure _________________________________________ 57 The foreclosure sale in the case on which the question is based took place prior to the effectivity of the Act. title to a condominium unit was transferred to the wife as a result of an agreement to distribute communal property executed in the course of annulment proceedings. Other taxpayers other than (1) and (2) such as estates. In case of installment sale. Dealer in securities 2. exchange or other disposition of shares of stock in a domestic corporation except shares. Corporate taxpayer. 2008]) --------------------------------------------------------------(8) Dealings in shares of stock of Philippine corporations (a) Shares listed and traded in the stock exchange (b) Shares not listed and traded in the stock exchange --------------------------------------------------------------Read Section 22(L). Section 28(A) and Section 28(B). (T). and pension funds. the conveyance of the condominium units by the trustee to the individual trustors pursuant to the terms of the BTO contract and without consideration was held not subject to capital gains tax. whether natural or juridical. Investors in shares of stock in a mutual fund company in connection with the gains realized by said investor upon redemption of the said shares of stock 3. (U). (See RR 06-2008 [APRIL 22. who are specifically exempt from NIRC taxes under existing investment schemes and other special laws. whether domestic or foreign 3.000 – 5% Capital gains over P100. All other persons. Q: What is the rule on capital gains from sales of shares of stock? Capital gains tax shall be imposed upon the net capital gains realized during the taxable year from the sale. Individual taxpayer. barter. it is claimed that the assignment and delivery to the individual investors of the developed units is not taxable as it is merely a transfer of property held in trust by the Trustee for the individual trustors. receiving a project management fee. Q: Who are liable for capital gains tax on shares of stock? 1. Section 25(B). the developer makes it appear that it merely manages the construction of the condominium project. the CIR nullified all BIR Rulings exempting the scheme from capital gains tax. in RMC NO. trust funds.000 – 10% The tax base shall only be the gain on the sale and such sale will always be subject to capital gains tax without any exemption. Section 24(C). 2007].PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 2013) Q: Is the assignment and delivery of the developed units to joint owners in a BuildTo-Own (BTO) scheme subject to capital gains tax? In a BTO. In that scheme. 2010]. the present rule is that the assignment and delivery in BTO schemes are subject to capital gains tax. Tax Code Q: What are stocks classified as capital assets? Stocks classified as capital assets mean all stocks and securities held by taxpayers other than dealers in securities. The final tax imposed shall be: Capital gains not over P100. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 77 of 158 Last Updated: 30 July 2013(v3) . trusts. Q: Who are exempt from capital gains tax on shares of stock? 1. Thus. and that the funds as contributed by the individual investors are pooled in a bank with the developer. However. The capital gains tax must be paid within 30 days following each sale or disposition. 055-10 [JUNE 28. In In BIR RULING DA-455-07 [AUGUST 17. Previous BIR rulings have exempted the assignment from capital gains tax. sold or disposed through the stock exchange. the return shall be filed within 30 days following the receipt of the first down payment and within 30 days following the subsequent installment payments. as project manager. Section 25(A)(3). whether citizen or alien 2. Section 27(D). financial intermediaries. Gains derived by dealers in securities 2. and documentary stamp Q: How do you determine the tax base of disposition of stock? Listed and traded through the PSE Sales of stock listed but not traded through the PSE FMV is the actual selling price FMV is the closing price on the day when the shares were sold. barters. 06-08 for the Purpose Revenue Regulations No. whichever is higher. 2008]) However. then the closing price on the day nearest to the date of sale . The taxes to be imposed on sales. exchanged or transferred through the facilities of the local stock exchange.( see Section 127(A) and RR 06-2008 [APRIL 22. 2013]. A tax on the profit of sale on net capital gain is the very essence of the net capital gains tax law. To hold otherwise will ineluctably deprive the government of its due and Page 78 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . 2008]) Note: That under RR 6-2013 [April 11. All assets and liabilities are to be adjusted to fair market values.000 and 10% for any excess. or exchange of the said shares The FMV is the book value of the shares of stock as shown in the financial statements duly certified by an independent CPA nearest to the date of sale. barters. Transactions up to December 31. and Amending Revenue Regulations No. and corporations organized primarily to hold equities in banks 3. what tax is applicable? A percentage tax of ½ of 1% is imposed on the gross selling price of shares of stock if they are listed and sold. transferred. Sales of stock not listed and not traded through the PSE (See RR 06-2008 [APRIL 22. 2012 – stock transaction tax of one-half of one percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock. Monitoring of these Companies and their Stock Transactions. exchanges and other dispositions of shares of stocks of publicly-listed companies that do not comply with the MPO are: a. 2013) Note: This is how you construe the rate of capital gains tax for shares of stock – The tax rate is 5% for a net capital gain not exceeding P100. or such percentage as may be prescribed by the Securities and Exchange Commission (SEC) or Philippine Stock Exchange (PSE). Gains from sales of stock to the extent invested in new shares of stocks in banks. The assignment of the deposits on stock subscriptions results in a net gain. 2012]) Q: Is an assignment of deposits on stock subscriptions subject to capital gains tax? Yes. Exchanges or Other Dispositions of Shares of Stock of Publicly-listed Companies Whose Public Ownership Levels Fall Below the Mandatory Minimum Public Ownership (MPO) Level. exchanges or other dispositions of shares of stock of publicly-listed companies that are required to maintain the minimum public ownership (MPO) of ten percent (10%) of issued and outstanding shares. Transactions after December 31. Barters. etc (if no sale was made on that day in the PSE. b. 16-2012 prescribes the tax treatment of sales.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. tax under Section 175 of the NIRC. 16-2012 Tax Treatment of Sales. Q: If the share of stock is traded through the stock exchange. even if traded through the stock exchange. All other gains which hare specifically exempt from income tax under existing investment incentives and other special laws. Q: What are exempted from capital gains tax on stock transactions? 1.00 and 10% of the net capital gain in excess thereof. a sale of shares by companies not complying with the 10% minimum public float shall be subject to capital gain tax (see RR 16-2012 [November 7. the FMV shall be determined using the Adjusted Net Asset Method. REVENUE REGULATIONS NO.transfer. and the net value thereof shall be the value of the equity.000. 2012 – final tax of 5% on the net capital gain up to P100. control securities (b) Transfer of a controlled corporation --------------------------------------------------------------Disclaimer: I would advise that you get a pack of tissue and some pain relievers. CIR [AUGUST 28. --------------------------------------------------------------(a) Cost or basis of the property sold (b) Cost or basis of the property exchanged in corporate readjustment (1) Merger (2) Consolidation (3) Transfer to a controlled corporation (tax-free exchanges) (c) Recognition of gain or loss in exchange of property (1) General rule (a) Where no gain or loss shall be recognized (2) Exceptions Q: What is the cost or basis for determining gain or loss from the sale or exchange of property If the property is acquired by: Purchase Inheritance The basis is the cost of the property The FMV as of the date of acquisition if the same was acquired the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it Gift PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 79 of 158 Last Updated: 30 July 2013(v3) . --------------------------------------------------------------(a) Cost or basis of the property sold (b) Cost or basis of the property exchanged in corporate readjustment --------------------------------------------------------------Read Section 40(A). RMC 37-2012 [AUGUST 3. 2012] clarified RR 062008 in stating that a Certificate Authorizing Registration [CAR] is still necessary before any transfer of shares of stock not traded in the Stock Exchange may be transferred in the books of a corporation. Tax Code Q: How is gain from the sale or other disposition of property computed? The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain. The 2012 Bar Syllabus broke down this topic. Note: Amount realized is the sum of the money received plus the fair market value of the property (other than money received).PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. I shall follow the said outline. --------------------------------------------------------------(5) Computation of the amount of gain or loss --------------------------------------------------------------Note: Section 40 (Determination of Amount and Recognition of Gain or Loss) can be divided into two parts: (1) Computation of Gain or Loss/Basis for Determining Gain or Loss from Sale or Disposition of Property and the more important topic (2) tax-free exchanges. no sale. or title to any share of stock shall be registered in the books of the corporation unless the receipts of payment of the tax herein imposed is filed with and recorded by the stock transfer agent or secretary of the corporation. 2013) unduly set free from tax liability persons who profited from said transactions (see COMPAGNIE FINANCIERE SUCRES ET DENREES VS. You may experience headaches and nose bleeding in this part. 2006]) Q: What is the effect of non-payment of capital gains tax on stock transactions? As provided in Section 11 of RR 06-2008. In the discussions below. transfer or similar transaction intended to convey ownership of. exchange. to wit: Q: How is loss from the sale or other disposition of property computed? The loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. consolidation. (B) (C)(5). (a) Meaning of merger. the following elements must be present. 2 will be discussed in Part 6 (Items not deductible) of the Syllabus. If there is a loss. In this part. CE PHILIPPINES LTD. if any. Note: The phrase “where no gain or loss is recognized” means that if there is an exchange of property and there is a gain. increased or decreased. VS. 2013) was not acquired by gift except if such basis is greater than FMV of the property at the time of the gift then. the resulting gain is not subject to tax. To be entitled to the computation of the gain or loss from the sale of an investment of a non-resident stockholder using a functional currency other than the Philippine peso. Shares of stock received by transferor – original basis less the money received and fair market value of property received. as the case may be. 2012 --------------------------------------------------------------(c) Recognition of gain or loss in exchange of property (1) General rule PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 80 of 158 Last Updated: 30 July 2013(v3) . and not in Philippine peso. consolidation. Tax Code Q: What is the general rule in the recognition of gain or loss in an exchange of property? As a general rule. Stocks and Securities acquired in Wash Sales The basis of the substantially identical stock so sold or disposed of. the gains shall be taxable.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. securities (b) Transfer of a controlled corporation --------------------------------------------------------------Read Section 40(C)(1) to (3). The phrase appropriately refers to Section 40(C)(2) (merger or consolidation and transfer of a controlled corporation) a. CTA EB 770 (CTA 7688). by the difference. In other words. If there are losses. Gains recognized but loss not recognized where the exchange is not solely in kind (see Section 40(C)(3)) Note: No. No gains or loss recognized if in pursuance of a plan of merger or consolidation where there is an exchange solely in kind (see Section 40(C)(2)) 2. This does not refer to the general rule because in the general rule the gain or loss is recognized. between the price at which the stock or securities was acquired and the price at which such substantially identical stock or securities were sold or otherwise disposed of. the entire amount of the gain or loss shall be recognized upon the sale or exchange of property. SEPTEMBER 20. CIR. control. the basis shall be such FMV For less than an adequate consideration in money or money’s worth Tax-free exchanges the basis of such property is the amount paid by the transferee for the property (a) Where no gain or loss shall be recognized (2) Exceptions (a) Meaning of merger. [see Section 143. to wit: (1) such non-resident stockholder made the said investment in such functional currency. for purpose of determining loss. the losses shall be allowed as deductions. I will focus on Items 1 and 3. plus the amount treated as dividend of the shareholder and the amount of any gain that was recognized on the exchange Property transferred in the hands of the transferee – same as it would be in the hands of transferor increased by the amount of the gain recognized to the transferor on the transfer b. and (2) the investee company in the Philippines uses a functional currency other than the Philippine peso for its financial statements. RR 2] Q: What are the exceptions to the general rule? 1. Gains recognized but loss not recognized in transactions between related parties (see Section 36(B)) 3. the loss could not be used as a deduction from gross income. if there are gains. A shareholder exchanges stock in a corporation. Q: What is the basic consideration in determining whether a consolidation or merger is tax-free? The basic consideration is the purpose of the merger or consolidation. the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock (de facto merger) For a transaction to be regarded as a merger or consolidation under Section 40: PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: A. said person. Merger or consolidation shall be understood to mean 1. solely for stock or securities in another corporation.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. alone or together with others. It must be undertaken for a bona fide business purpose and not solely for escaping the burden of taxation 2. A formed a new corporation called DEF Corp. ABC Corp. Under the agreement. which is a party to the merger or consolidation (property for stock) 2. assets and goodwill of ABC will be transferred to XYZ in exchange for XYZ stocks for each Page 81 of 158 Last Updated: 30 July 2013(v3) . C were majority stockholders of ABC Theatrical Co. In determining if the property transferred constitutes a substantial portion of the property of the transferor. 2013) Q: What are the instances where no gain or loss is recognized (tax-free exchanges or exchanges of property solely in kind) No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation: 1. which is a party to a merger or consolidation solely for the stock of another corporation also a party to a merger or consolidation (stock for stock) 3. 1935]. a party to the merger or consolidation (security for stock) 4. the whole transaction or series of transactions shall be treated as a single unit and every step of the transaction shall be considered 3. In determining if a bona fide transaction exists. property shall be taken to include cash assets. or 2. Is the transfer valid? No. Q: Define merger of consolidation in relation to tax-free exchanges. which is a party to a merger or consolidation. HELVERING [293 US 465.000 XYZ shares to DEF. (2) Control means ownership or stocks in a corporaion possessing at least 51% of the total voting power of all classes of stock entitled to vote 1. A then sold the XYZ shares and paid the corresponding CGT based on a lower cost basis. had 1. Q: A owns all the stock of ABC Corp. the ordinary merger or consolidation. A had ABC transfer all 1. A security holder of a corporation. Here. As held in GREGORY V. exchanges his securities in such corporation. a transfer of assets by one corporation to another must have a business purpose. The merger or consolidation must be undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation. ABC and XYZ agreed to merge. (estate planning or transfer of a controlled corporation) Note: (1) An exchange solely in kind is an exchange of property with property with no money involved. B. She then dissolved DEF and liquidated the assets (the XYZ shares). If property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange.000 shares of XYZ Corp. all business. A corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation. JANUARY 7. not exceeding four (4) persons gains control of said corporation provided that stocks issued for services shall not be considered as issued in return for property. property. They were also majority stockholders of XYZ Theatrical Co which was engaged in the same business. it was a mere device which followed the form of a corporate reorganization to conceal its real character which was a transfer of stock of XYZ shares to A. for he assets to be transferred. 2011] stated that the requisites for the non-recognition of gain or loss of a transfer of property for shares of stock are as follows: (a) the transferee is a corporation. (b) the transferee exchanges its shares of stock for property/ies of the transferor. RUFINO [FEBRUARY 27. they gained control of more than 51% of the shares of the Page 82 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . of course. and distributed to the stockholders of the corporations. acting alone or together with others. the transfer takes the nature of a donation made by the subsidiaries to their parent company contrary to what is contemplated in Section 40(C)(2) of the NIRC. in fact. Together. Shareholders transferred their real property in exchange for more shares in the corporation.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Is the exchange subject to capital gains tax? No. not exceeding four persons. “ the exchange of property for stocks between FDC-FAI and FLI clearly qualify as a tax-free transaction. FILINVEST DEVELOPMENT CORPORATION (JULY 19. 1987]. Is the CIR’s contention correct? No. Inc. Also. A Corp is the surviving corporation. In effect. It is well established that where stocks for stocks were exchanged. and C Corp considered a tax free merger under Section 40(C)(2)? No. However. parties to the merger or consolidation. The intended merger between subsidiaries where issuing any shares re-organization is an upstream a parent company and its the parent company will not be ot the subsidiaries in exchange Q: ABC is a domestic corporation. 614-12 [NOVEMBER 9. gains control of the transferee. such exchange is exempt from capital gains tax.42% of the outstanding shares of Filinvest Land. a domestic corporation.99% of FLI’s shares. The exemption from the tax of the gain derived from exchanges of stock solely for stock of another corporation was intended to encourage corporations in pooling. (c) the transfer is made by a person. whose corporate life was about to expire. since B Corp and C Corp are wholly-owned by A Corp prior to the merger. (FLI). 2012] Q: Filinvest Development Corporation (FDC). as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. (FAI) and 67. is the purpose of the merger. and. alone or together with others. FDC and FAI’s shares add to 70. the intended merger has the effect of dissolving and liquidating the subsidiaries without payment of corresponding taxes. Q: A Corp. The CIR argues that the taxable gain should be recognized for the exchange as FDC’s controlling interest in FLI was decreased as a result of the exchange. B Corp. The criterion laid down by the law is that the merger" must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. the shares issued to FDC should be appreciated in combination with the new shares issued to FAI. As held in CIR v. entered into a merger with its wholly-owned domestic subsidiaries B Corp and C Corp. not exceeding four." It is clear. a holding company. Since the term "control" is clearly defined as "ownership of stocks in a corporation possessing at least fifty-one percent of the total voting power of classes of stocks entitled to one vote. that the purpose of the merger was to continue the business of the Old Corporation. Rather than isolating FDC. Is the merger between A Corp. 2013) stock held in ABC. Pursuant to the merger. The merger in question involved a pooling of resources aimed at the continuation and expansion of business and so came under the letter and intendment of the NIRC exempting from the capital gains tax exchanges of property. FDC and FAI entered into a Deed of Exchange with FLI whereby the former both transfer in favor of the latter parcels of land in exchange for shares of stock of FLI. Inc. The Supreme Court in CIR V. pursuant to a plan of reorganization. B Corp and C Corp will transfer all their assets and liabilities to A Corp. through the New Corporation to which all the assets and obligations of the former had been transferred. combining or expanding their resources conducive to the economic development of the country. BIR RULING NO. is the owner of 80% of the outstanding shares of Filinvest Alabang. (d) as a result of the exchange the transferor. A Corp will not longer issue any shares of stock in consideration of the assets and liabilities transferred. The basic consideration. In effect. gains control of said corporation. there is no requirement that the transferor gains control (that is. A sworn certification on the basis of the property to be transferred b. the Transferors may either be a corporation or an individual. said person alone or together with others. What is essential in a de facto merger is that the Transferee acquires all or substantially all of the properties of the Transferor. of another corporation. Certified true copies of the corresponding latest Tax Declaration of the real properties to be transferred d. the following elements must concur: 1. with the element of permanence and not merely momentary holding. Likewise. (1) the Transferor in a de facto merger is a corporation. while in a transfer to a controlled corporation. 51% of the total voting powers of all classes of stocks of the Transferee entitled to vote) of the Transferee as a prerequisite to enjoying the benefit of non-recognition of gain or loss. The term "control" shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. and liabilities of the Transferor in the case of de facto merger. In determining the 51% stock ownership. Q: What are the similarities and differences between a de facto merger and a transfer of property for shares under Section 40(C)(2) of the Tax Code? De facto merger is in procedure similar to a transfer to a controlled corporation under the same Section 40(C)(2) of the Tax Code of 1997. Certified true copies of the TCT and/or CCT of real properties transferred c. The parties who are applying for confirmation that the transaction is indeed a tax-free exchange shall submit the following: a. and 2. including cash. Is the exchange tax-exempt? It depends. except that at least 80% of the Transferor's assets. privileges. (see RMC 1-02 [April 25. (see RMC 1-02 [April 25. which has the element of permanence and not merely momentary holding Q: What are the administrative requirements in case of tax-free exchanges? 1. there is no automatic _________________________________________ 58 Note that in this BIR Ruling. are transferred to the Transferee. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 83 of 158 Last Updated: 30 July 2013(v3) .PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 2013) corporation entitled to vote. It must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. not exceeding four persons. the CIR ruled that no gain or loss would be recognized if property is transferred to a corporation by a person in exchange for stock in such a corporation of which as a result of such exchange. In BIR Ruling 274-87. Certified true copy of the inventory of other property/ies to be transferred/ Q: What are the differences between a de facto merger and a statutory (ordinary) merger? In a de facto merger. 2002]) Q: What is a de facto merger? To constitute a de facto merger. There must be a transfer of all or substantially all of the properties of the transferor corporation solely for stock. a de facto merger and a transfer to a controlled corporation are different in that. there were 6 transferors. However. including cash. 2002]) Q: What is meant by “substantially all”? As provided by RR 2. Certified true copies of the certificates of stocks evidencing shares of stocks to be transferred e. and (2) in a de facto merger. "substantially all" means the acquisition by one corporation of at least 80% of the assets. the Transferor is not automatically dissolved unlike in the case of a statutory merger. 58 transfer to the Transferee of all the rights. only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five. if the amount of liabilities assumed plus the amount of liabilities to which the property is subjected to exceed the total adjusted basis of the property. agent. but not the loss shall be recognized but not in an amount not in excess of the sum of such money and the fair market value of the property so received. 5. and. as amended. respectively. shall be recognized but in amount not in excess of the sum of the money and the fair market value of such other property received. The applicant/taxpayer shall pay the processing and certification fee of P5. the gain. 2013) 2. then: a. These two along with Page 84 of 158 Last Updated: 30 July 2013(v3) . no gain shall be recognized b. if the money and/or property has the effect of a distribution of a taxable dividend. 2012] provides that rulings issued under Section 40 (C) (2) of the NIRC.000 for each application not involving more than 10 real properties and/or certificates of stock. shall be valid only for ninety (90) days counted from the date of receipt of the ruling by any of the parties to the exchange transaction. If an individual. Note: Take a walk and have a break muna! Q: Is there a prescriptive period for rulings issued in connection to tax-free exchanges? Yes. within this period. If the transferor corporation receives money and/or property in addition to the stock. Q: What is the effect of the assumption of the transferee of the liabilities of the transferor in addition to the transfer of property? Section 40(C)(4) provides that if the taxpayer receives the stock as if it were the sole consideration. The BIR shall issue a certification or ruling confirming that an exchange of property for shares complies with the requisites for it to be tax-free. As to the shareholder. An additional P100 shall be paid for every TCT/CCT and/or certificate of stock in excess of 10. security holder or corporation receives money and/or property in addition to the stock. as part of the consideration. shareholder. as the case may be. However. amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation. another party to the exchange assumes a liability of the taxpayer or acquires property subject to a liability.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 3. such assumption or acquisition shall not be treated as money and/or property and shall not prevent the exchange from being tax-free. there shall be taxed an PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 --------------------------------------------------------------(vi) Passive investment income (a) Interest Income (b) Dividend Income (c) Royalty Income (d) Rental Income --------------------------------------------------------------Note: Earlier we discussed capital gains from dealings in real property and shares of stock. If the corporation distributes it in pursuance of the plan of merger or consolidation. Read Section 40(C)(3) to (4). RMC 40-2012 [August 3. then such excess shall be considered either a capital gain or ordinary gain. Tax Code Q: What is the effect if the tax-free exchange is not solely in kind? 1. the remainder. 6. if any. The information that the transaction is a tax-free exchange and the substituted basis of the properties shall be annotated in the TCT and/or CCT. the gain. 2. If the corporation does not distribute it. The certification or ruling shall contain the substituted basis of the properties. The Certificate Authorizing Registration (CAR) or Tax Clearance (TCL) shall be issued by the RDO/Authorized Internal Revenue Officer on the basis of the BIR certification or ruling 4. or employee of the Registry of Deeds and corporate secretary or the duly authorized officer of the corporation who fails to annotate the information shall be subject to a penalty. shall be treated as capital gain. 3. Every official. but not the loss. if any. The properties and shares of stocks involved in the transfer should be conveyed to the transferee/s and transferor/s. g. and not at the time of actual payment of dividends. Note: This will be discussed in greater detail later in the taxation of individual and corporate taxpayers as I tackle the new BIR issuance on the matter . dividends paid in securities or other property (other than its own stock). interest income from foreign currency bank deposits by a resident citizen) Q: When is dividend income subject to tax? It is taxable at the time of their declaration by the corporation. --------------------------------------------------------------(a) Interest Income --------------------------------------------------------------Q: Define interest income Interest income means the amount of compensation paid for the use of money or forbearance from such use. 2013) certain passive incomes are subject to final tax. whether in money or in other property. are income to the recipients to the amount of the full market value of such property when receivable by individual stockholders. Q: Define passive income Passive income is income derived from any activity in which the taxpayer does not materially participate. Note: To simplify matters – If the distribution is in money. Change in the stockholder’s equity. 77-2012 (Clarifying certain provisions of RR 14-2012 on the proper tax treatment of interest income on financial instruments and other related transactions) Q: Are stock dividends subject to income tax? No. (4) Liquidating dividend --------------------------------------------------------------Q: What are dividends? The term “dividends” means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders. Q: What is the tax treatment of interest income? Interests received or credited to the account of the depositor or investors are included in their gross income. right or interest in the net assets of the corporation 2. Dividends declared in the guise of treasury stock dividend to avoid the effects of income Page 85 of 158 Last Updated: 30 July 2013(v3) --------------------------------------------------------------(b) Dividend Income (1) Cash dividend (2) Stock dividend (3) Property dividend PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . RR No. Schedular rates (e.g. Final tax (e. Q: What are the exceptions to the rule that stock dividends are not subject to income tax? 1. The importance of knowing that an income is subject to final tax is that it is no longer included in his gross income reportable in the annual income tax return. Distribution of treasury stocks 5. If it is in stock. a stock dividend only represents the transfer of surplus to capital account and. as such. is not subject to income tax. it is called a property dividend. If it is in property. Recipient is other than the shareholder 3. Q: Are property dividends taxable? Yes. it is called a cash dividend.REVENUE MEMORANDUM CIRCULAR NO. Cancellation or redemption of shares of sock 4. unless they are exempt from tax or subject to a final tax. As discussed earlier. As provided in Section 251. in which the earnings of a corporation have been invested. 2. If it results from the distribution by a corporation of all its property or assets in complete liquidation or dissolution. Q: What is the tax treatment of passive income? Passive income may be subject to: 1. dividend income received by a domestic corporation from a foreign corporation) 2. since dividend income is taxable whether actually or constructively received. it is called a stock dividend.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. it is called a liquidating dividend. Note: Previously. the loss in the transaction is deductible. made in the form of dividends in order to evade the higher taxes imposed on gross income. the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. commercial or scientific experience. usually for services. 60 If the amount received by the stockholder in liquidation is less than the cost or other basis of the stock. Where a person pays royalty to another for the use of its intellectual property. 1975]) The redemption converts into money the stock dividends which become a realized profit or gain and consequently.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 2011]. However. 2002] and other previous rulings that the transfer by a liquidating corporation of its remaining assets to its stockholders and the receipt of the shares surrendered by the shareholder are not subject to income tax. the gain realized from the transaction by the stockholder. they are taxable as part of compensation income or income derived from self-employment or exercise of a profession. ( see COMMISSIONER VS. Royalties are any payment of any kind received as consideration for the use of or right to use any patent. information concerning industrial. Where a corporation distributes all of its property or assets in complete liquidation or 59 dissolution. Q: What are disguised dividends? These are payments. As realized income. A stock dividend does not constitute income if the new shares confer no different rights or interests that did the old. Stock dividends constitute as income if a corporation redeems stock issued so as to make a distribution. (see CIR VS. 1999]) As provided in Section 252. 2: A stock dividend constitutes income if its gives the shareholder an interest different from that which is former stock holdings represented. all previous rulings to that effect. the stockholder's separate property. trademark. Q: Are liquidating dividends subject to income tax? Yes. Different classes of stocks were issued. design or model. The rule now is that they are subject to income tax. in BIR RULING 479-11 [DECEMBER 5. They are not dividends in legal contemplation because they are not return from investments. MANNING [AUGUST 7. Profits derived from the capital invested cannot escape income tax. --------------------------------------------------------------(c) Royalty Income --------------------------------------------------------------Q: Define royalties. --------------------------------------------------------------(d) Rental Income (1) Lease of personal property (2) Lease of real property (a) Leasehold improvements by lessee (b) VAT added to rental/paid by the lessee (c) Advance rental/long term lease --------------------------------------------------------------- PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 86 of 158 Last Updated: 30 July 2013(v3) . This is essentially equivalent to the distribution of a taxable dividend the amount so distributed in the redemption considered as taxable income. whether individual or corporate. the CIR reversed and set aside the above-cited ruling and Q: What is the tax treatment of royalty income? A sale of royalty on a regular basis for a consideration is considered an active business and any gain therefrom shall be subject to the normal corporate income tax (see RMC 77-2003). CA [JANUARY 20. _________________________________________ 59 There must be a bona fide plan of liquidation involving the transfer of all assets. industrial commercial or scientific equipment. 60 is taxable income or a deductible loss. the CIR has ruled in BIR RULING 039-02 [NOVEMBER 11. secret formula or process. such royalty is passive income of the owner and is therefore subject to final withholding tax. 2013) taxation 6. as the case may be. RR No. They are payment for services rendered and as such. 2013) Q: Define rental income Rental income refers to the amount or compensation paid for the use or enjoyment of a thing or a right and implies a fixed sum or property amounting to a fixed sum to be paid at a stated time for the use of the property. It includes all amount or property received from the lease contract. hence. Security deposit applied to the rental of the terminal month or period of contract must be recognized as income at the time it is applied.5% Non-Resident alien 25% 25% Q: Should the improvement be capable of being separated from the land in order to be considered a taxable gain? No. --------------------------------------------------------------PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 87 of 158 Last Updated: 30 July 2013(v3) . if so received under a claim of right and without restriction as to its use. by the lessee in consideration for the lease is considered rental. RR No. Q: What is the tax treatment of advanced rental paid by the lessee? Prepaid or advance rental is taxable income to the lessor in the year received. or (2) spread over the life of the lease the estimated depreciate value of the improvements at termination of the lease and report as income for each year of the lease an aliquot part thereof (Section 49. BRUUN [309 US 461] stated that it is not necessary to recognition of taxable gain that the lessor be able to sever the improvement begetting the gain from his original capital. The US Supreme Court in HELVERING V. 32% 25% --------------------------------------------------------------(2) Lease of real property (a) Leasehold improvements by lessee (b) VAT added to rental/paid by the lessee (c) Advance rental/long term lease --------------------------------------------------------------Q: What is the tax treatment of income received from lease of real property? The lease of real property shall be considered as conduct of trade or business on the part of the lessor. directly or indirectly. whether used in business or not. Note: If the security deposit is merely to ensure compliance with the contract (security deposit with acceleration clause). Q: Are improvements made by lessees taxable as income on the part of the lessor? Yes. and regardless of method of accounting employed. it is not income to the lessor until the lessee violates any provision of the contract. taxes paid by the lessee on leased property are part of rental income of the landlord. Vessel Aircraft.5% 7. Therefore. provided that such buildings or improvements are not subject to the removal by the lessee. The lessor may either: (1) report the improvements as income at the time when such improvements are completed based on its fair market value. and not as a passive investment income subject to withholding tax. 2) --------------------------------------------------------------(1) Lease of personal property --------------------------------------------------------------Q: What is the tax treatment of income received from lease of personal property? Rental income on the lease of personal property located in the Philippines and paid to a non-resident taxpayer shall be taxed as follows: Non-Resident foreign corporation 4.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. the rental income therefrom shall be considered as business income which shall be included in the computation of the year-end gross income of the lessor. machineries and other equipment Other assets Q: What is the tax treatment of VAT added to rental or VAT paid by the lessee? Any additional amount paid. GUTIERREZ V. 2013) (vii) Annuities. retirement benefit or separation pay will be discussed later in Exclusions from Gross Income --------------------------------------------------------------(viii) Prizes and Awards --------------------------------------------------------------Q: What are prizes and awards for purposes of income taxation? It refers to the amount of money in cash or in kind received by chance or through luck. 1965]. however. he derives readily realizable economic value from it. They are generally taxable to the extent of the amount received. CIR [CTA CASE NO. 65. The portion of proceeds from insurance that represent a mere return of the premiums is not taxable while the portion that represents the interests is taxable. Note: The taxability of pensions. Page 88 of 158 Last Updated: 30 July 2013(v3) . the amount of the debt is a gift. an individual performs services for a creditor. retirement benefit or separation pay --------------------------------------------------------------Q: What is pension for purposes of income taxation? It refers to the amount of money received in lump sum or on staggered basis in consideration of services rendered given after an individual reaches the age or retirement. income to that amount is realized by the debtor as compensation for his services. Note: The taxability of proceeds from life insurance and returns of premiums from annuity contracts will be discussed later in Exclusions from Gross Income Q: What is the tax treatment of separation pay? Separation pay may or may not be taxable depending on the voluntariness or involuntariness of the cause of separation. proceeds from life insurance or other types of insurance --------------------------------------------------------------Q: What is an annuity for purposes of income taxation? An annuity refers to the periodic installment payments of income or pension by insurance companies during the life of a person or for a guaranteed fixed period of time. a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt. and over which the taxpayers have complete dominion. AUGUST 31. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: May cancellation or forgiveness of indebtedness amount to a gain subject to income tax? Yes. If. clearly realized. except if there is a BIR approved pension plan. for example. who. in consideration of capital paid by him. It includes all income not expressly excluded or exempted from the class of taxable income. A gain constitutes taxable income when its recipient has such control over it that as a practical matter.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Prizes and awards are generally taxable except if specifically mentioned under the exclusions from the computation of gross income Note: The taxability of prizes and awards will be discussed later in Exclusions from Gross Income and Taxation of Individual and Corporate Taxpayers --------------------------------------------------------------(x) Income from any source whatever (a) Forgiveness of indebtedness (b) Recovery of accounts previously written off (c) Receipt of tax refunds or credit (d) Income from any source whatever --------------------------------------------------------------Q: What is meant by the phrase “all income derived from whatever source" The phrase “all income derived from whatever source” encompasses all accessions to wealth. irrespective of the voluntary or involuntary action of the taxpayer in producing the income. whichever is longer. If a corporation to which a stockholder is indebted forgives the debt. The source of the income may be legal or illegal. --------------------------------------------------------------(ix) Pensions. in consideration thereof cancels the debt. If. donor’s tax. (see Section 50. In JAMES V.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. the recovery of amounts deducted in previous years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. Q: Should taxes previously claimed and allowed as deductions but subsequently refunded or granted as tax credit be considered part of gross income? Yes. that we know who are the taxpayers that can be taxed on income within. activity or service that produced the income. as well. deductions. Note: However. Q: What is the Tax Benefit Rule in relation to recovery of accounts previously written off? Under the Tax Benefit Rule or Equitable Doctrine of Tax Benefit. to “gross income” in recognition of the intent of Congress to tax all gains except those specifically exempted. (see CIR VS. the Supreme Court ruled that embezzled money constitutes gross income. if the said taxpayer did not benefit from the deduction if the said bad debt written-off. It is the physical source where the income came from. RR No. RMC No. his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. US [366 US 213]. when refunded or credited. and special assessments) Q: Is an unlawful gain subject to income tax? Yes. non-resident alien. taxes which are not allowable as --------------------------------------------------------------(e) Source rules in determining income from within and without (1) Interests (2) Dividends (3) Rentals (5) Royalties (6) Sale of real property (7) Sale of personal property (8) Shares of stock of domestic corporation --------------------------------------------------------------Q: What is meant by “source of income”? The source of an income is the property. 2013) the transaction has the effect of the payment of a dividend. 2006]). foreign corporation) are taxable only on income derived from sources within the Philippines. then his subsequent recovery shall be treated as a mere recovery or a return of capital. It opined that unlawful. Let us discuss when is income considered within the Philippines and without the Philippines. nonresident citizen. 13-80 [April 10. 1980] provides if a taxpayer receives a tax credit certificate or refund for erroneously paid tax which was claimed as a deduction from his gross income that resulted in a lower net taxable income or a higher net operating loss that was carried over to the succeeding taxable year.e. he realizes taxable income that must be included in his income tax return in the year of the receipt. 2). are not declarable for income tax purposes (income tax. Conversely. If in the year the taxpayer claimed deduction of bad debts written-off. as lawful gain are comprehended within the term “gross income. Now. without or both. hence. Just to reiterate again – Only resident citizens and domestic corporations are taxable on their worldwide income (both income inside and outside the Philippines) while the other types of individual and corporate taxpayers (i. he realized a reduction of the income tax due from him on account of said deduction. --------------------------------------------------------------(f) Situs of income taxation --------------------------------------------------------------Note: The situs of income taxation refers to the General Principles of Income Taxation.” The Court has given a liberal construction PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 89 of 158 Last Updated: 30 July 2013(v3) . not treated as receipt of realized taxable income. BAIER-NICKEL [AUGUST 29. estate tax. Title II. The exception to the general rule that dividends paid by a foreign corporation are from sources without the Philippines is when a foreign corporation derives 50 percent of its gross income from sources within the Philippines for a three-year period ending with the close of its taxable year preceding the declaration of its dividends Income from the sale of real property is sourced in the country where the real property is located. (location of the property or interest in such property) Thus. 2. NIRC) Interests The source of an interest payment is the place of residence of the person obligated to make that payment (residence-of-the-obligor/debtor rule). It is income within the Philippines if the residence of the obligor is in the Philippines. Rents and Royalties The rental income and royalty income derived from the use of property has its source in the country where the property is used or located. (residence of the corporation paying the dividend) Sale of Real Property Thus. (location of real property) Thus. Services Income from services is sourced in the country where the services are performed. It is income without the Philippines if the residence of the obligor is abroad. It is income without if the real property is located abroad. it is income within the Philippines if the real property is located in the Philippines. it is income within the Philippines if the service is performed in the Philippines. it is income without the Philippines. it is income within the Philippines if rents and royalties are derived from property located in the Philippines Dividends Generally. 2013) Q: What are the source of income rules in the Philippines? (Section 42. If the dividend is from the foreign corporation. Purchase of personal property within and its sale without the Philippines. It is income without the Philippines if it is performed abroad.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. a dividend has its source in the country where the corporation paying the dividend is incorporated. Personal property produced (in whole or in part) by the taxpayer within the Philippines and sold without or produced (in whole or in part) by the taxpayer without and sold within the Philippines – the income shall be treated as derived partly from sources within and party from sources without. if the dividend is received from a domestic corporation. it is income within the Philippines. (place of performance of the service) Thus. Sale of Personal Property It depends: 1. or Page 90 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . property. CIR [APRIL 14. the sale of tickets in the Philippines is the activity that produces the income. 1991]. What is controlling is no the place of business. It is a resident foreign corporation. 1987]) Q: In CIR v. 2013) purchase of personal property without and its sale within the Philippines . 1965] and HOWDEN & CO. Thus. It is not required that the foreign corporation be engaged in business in the Philippines. Marubeni. Such services were rendered outside the taxing jurisdiction and thus constitute as income without the Philippines. would the income from the services rendered in connection with the turn-key projects constitute as income from Philippine sources? The answer is both yes and no. but the place of activity that created the income.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. For the source of income to be considered as coming from the Philippines. V. Is the sale of the tickets taxable as income from sources within the Philippines? Yes.” (see CIR VS. 2001]. The answer is.62 While it did not carry passengers and/or cargo to or from the Philippines. Is the cession of the premiums taxable as income from sources within the Philippines? Yes. BOAC [APRIL 30. The tickets exchanged hands here in the country and the payments for fares were also made with Philippine currency. MARUBENI [DECEMBER 18. Is the compensation for services taxable as income from sources within the Philippines? Page 91 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . Philippines. a non-resident foreign corporation under which the latter shall provide services for ABC’s US branch and advice on ABC’s corporate structure. The answer is yes with regard to those services performed in the Philippines. 3. entered into a “Management Service Agreement” with XYZ. there must be continuity of conduct and intention to establish a continuous business. it is sufficient that the income is derived from activity within the Philippines. which is considered the main lifeblood of an airline. however. CIR VS. such as the appointment of a local agent.61 assuming that Marubeni was disqualified from availing of the income tax amnesty. the income is subject to income tax. a domestic corporation. or service giving rise to the income. no with regard to those services rendered in Japan. XYZ was to cede portions of premiums underwritten in the Philippines to the foreign corporations in consideration for the assumption of risk. The original insurance undertakings took place in the Philippines. Shares of stock in a domestic corporation – gains from sale of shares of stock of a domestic corporation are treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. ABC maintains a general sales agent of its tickets in the _________________________________________ 61 62 Remember that case I provided in General Principles. Q: ABC Airways is a foreign airline. 1965]). and not one of a temporary character. income from services rendered in the Philippines. CIR [APRIL 30. is taxable only on income within the Philippines and. In order that a foreign corporation may be regarded as doing business within a State. “Sources” means the activity. (see PHILIPPINE GUARANTY V. ABC maintained a general sales agent and it was engaged in selling or issuing tickets. The site of the source of payments is the Philippines. Q: ABC. Q: XYZ entered into reinsurance contracts with foreign insurance companies not doing business in the Philippines. all performed abroad. JAPAN AIRLINES [MARCH 6. hence. The absence of flight operations to and from the Philippines is not determinative of the source of income/site of income taxation for the test of taxability is the “source. In ABC’s case.any income shall be treated as derived entirely from sources within the country in which sold. being a foreign corporation. and. knowledge or information. The test of taxability is the source and the source of an income is that activity which produced the income. A will receive a sales commission on all sales actually concluded. and Essar. It is immaterial if the non-resident foreign corporation has no properties in the Philippines. activity or service that produced the income. 64 Note that in this case. The Indian tax authorities contended that the transfer of shares was subject to income tax. and the technical advice. Congress has the power to legislate make such vendors liable 66 for sales and use taxes. and. With respect of rendition of labor or personal service. regardless of where the purchase took place. Nevertheless. storage or consumption of goods in that state (not for resale). or commercial. as in the instant case. North Dakota attempted to impose a “use tax”65 on Quill. NORTH DAKOTA [504 US 298. industrial or commercial undertaking. was engaged by a domestic corporation as a commission agent. as of this updated version. However. 2013) Yes. Is A’s contention correct? No. VIH argues that the transfer of shares took place outside the Indian taxing jurisdiction. industrial. It applied its ruling in NATIONAL BELLAS HESS V. 67 HEL was an Indian joint venture between HTIL. the US Supreme Court ruled that there must be physical presence in a state for the corporation to be liable for sales and use taxes. Thus. such vendors are free from stateimposed duties to collect sales and use taxes. has a licensed computer software program that its customers in North Dakota use for checking Quill’s current inventories and for placing orders directly. acquired a controlling interest of CGP holdings. technical. There is therefore no merit in A’s interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the income. DEPARTMENT OF REVENUE OF ILLINOIS [386 US 753] where it held that a seller whose only connection with customers in the State is by common carrier or the mail lacked the requisite minimum contacts with the State. The source of an income is the property.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. but rather as expressed under the expanded meaning of royalties. Thus. 31283. assistance or services rendered in connection with the technical management and administration of any scientific. she failed to prove hat such was the fact. a non-resident citizen. APRIL 25. _________________________________________ 65 Q: Quill Corp is an office supply retailer with no physical presence in North Dakota but it _________________________________________ 63 This confirms the acceptance of the Philippine taxing jurisdiction of the rule that as to intangible property. By virtue of this controlling interest. the services were deemed performed in the Philippines. 66 Note that. a company in the Cayman Islands. CTA [CA-GR SP. Baier-Nickel argued that the services were done in Germany. it is the place where the labor or service is performed that determines the source of income. 2006]) Q: Vodafone International Holdings (VIH). a corporation in Hong Kong. (see PHILAMLIFE V. including HEL. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 92 of 158 Last Updated: 30 July 2013(v3) . 1992]. A RR on the matter is forthcoming. The services covered by the management service agreement fall under the meaning of royalties. it includes “royalties for the supply of scientific. the US Supreme Court opined that if interstate commerce would be subject to intolerable or undesirable burdens because of this. is subject to income tax. the BIR plans to impose a sales tax on online retailers in the opinion that such sellers are no different from merchants who sell their goods in physical stores. venture. A argues that the income is not taxable as A does not reside in the Philippines and that the place of payment of the income is outside the Philippines. the country of use is the country that protects the owner of that property against its unauthorized use by other persons. (see CIR VS. BAIER64 NICKEL [AUGUST 29. M AY 26. project or scheme. an Indian corporation. a corporation in the Netherlands. NO. VIH acquired control over CGP and its subsidiaries. Simply stated. In QUILL CORP V. Q: A. as such. A use tax is a type of excised tax levied in the United States upon otherwise "tax free" tangible personal property purchased by a resident of the assessing state for use. Is Quill liable for the tax? Yes. 1995]). It is not the presence of any property from which one 63 derives rentals and royalties that is controlling. VIH acquired a 52% stake in Hutchinson Essar Limited (HEL)67 in India from Hutchinson Telecom International Limited (HTIL). 1986]) Q: Is the gross income of branches of foreign corporations generated from solicitation of orders from local importers where the branches merely relay to its head office abroad said purchase orders and where the head office is the entity which actually consummates the sale liable for income tax? Yes. the Indian Supreme Court stated that. where there are items included in the overhead expenses incurred by the parent company. construction and other activities. all income accruing or arising. 01-95 [March 21. The structure was in existence over a decade. salaries of Philippine personnel. on the context of taxation of a holding company structure. 2012). is not taxable. the company may claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the total gross income. 1-86 to cover taxation of Philippine branches of foreign corporations engaged in soliciting orders. trading. rental of office building in the Philippines). Can these overhead expenses of the foreign head office be deducted from the gross income of the Philippine branch? It depends. However. VIH was not a short-time investor and it did not introduce any new practice to grant itself a “controlling interest. --------------------------------------------------------------(g) Exclusions from gross income (1) Rationale for the exclusions (2) Taxpayers who may avail of the exclusions (3) Exclusions distinguished from deductions and tax credit (4) Under the Constitution (5) Under the Tax Code (6) Under Special laws --------------------------------------------------------------- PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 93 of 158 Last Updated: 30 July 2013(v3) . In this case. worldwide. the shares of CGP were transferred only for a commercial benefit and not with the object of tax evasion. 2013) hence. CTA & SMITH KLINE [JANUARY 17.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. In VODAFONE INTERNATIONAL HOLDINGS B. 1995] expanded RAMO No. it meant income from capital gains accruing or arising outside India would be fictionally deemed to accrue or arise in India. V. The Supreme Court stated that the section clearly applied to a transfer of capital asset situated in India and could not be expanded to cover indirect transfers of capital assets or property situated in India. the corporate veil may be lifted only if it is established that the transaction was a sham or there was abuse. that in this case. generated from “constructive” trading and commission income derived from brokering activities of Philippine branches of foreign corporations engaged in trading activities. Q: ABC. JANUARY 20. Which contention is correct? The contention of VIH was held to be correct. UNION OF INDIA (SUPREME COURT OF INDIA. of the multinational corporation. 1986]. The words “directly or indirectly” go with the 70 income and not with the transfer of a capital asset. 68 733 OF 2012. 1984]. see also RAMO 4-86 [April 5. whether directly or indirectly through transfer of capital assets situated 69 in India shall be deemed to accrue or arise in India. service contracts. RAMO No. situated in India. Where an expense is clearly related to the production of Philippine-derived income or to Philippine operations (e. the Indian Supreme Court ruled that VIH had no liability to withhold tax as the transaction was between two non-residents with no taxable presence in India. it was not created or used as an instrument for tax avoidance.V. 70 The Indian Supreme Court also noted that the existence of the Direct Tax Code Bill of 2010 which expressly stated that income accuring even from indirect transfer of capital assets situated in India would be deemed to accrue in India but this is not yet in force.g. 1-86 [April 25. CIVIL APPEAL NO. of a capital asset. a multinational company. all of which cannot be definitely allocated or identified with the operations of the Philippine branch. an income tax is imposed on the gross income _________________________________________ 68 It is also important to note. claimed as deduction from gross income its share of the overhead expenses of its foreign head office. ( see COMMISSIONER VS. Under Section 9(1) of the Income Tax Act of India. that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment.” 69 The Indian taxing authorities argued that this was a “look through provision” a “look through” provision so that if there was a transfer. By virtue of RAMO No. Either it can be deducted in full or partly. purchases. g. nonprofit private educational institution used Page 94 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . (e. This part should have instead referred to non-stock. They are subject to another kind of internal revenue tax (e. It is an inherent limitation of the power of taxation that the State be exempt from taxes. non-profit educational institutions as there is an express provision for their exemption from income tax. devices) 3. 2013) Q: What are “exclusions?” The term “exclusions” refers to items that are not included in the determination of gross income because: 1. tax treaty. On this point. gifts. They are income. Amounts that are not included in gross income Not income Are taxes that are not collected Q: Who are the taxpayers who may avail of the exclusions? All taxpayers can avail of exclusions because excluded receipts are not considered as income for tax purposes. gain or profit (e. They represent return of capital or are not income.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. --------------------------------------------------------------(4) Under the Constitution (a) Income derived by the government or its political subdivisions from the exercise of any essential government function --------------------------------------------------------------Note: There is no express provision in the Constitution which provides that income derived by the State is excluded from gross income. Even if they are by definition income. the Syllabus is wrong.g. Q: Distinguish exclusions from gross income from deductions from gross income. life insurance) 2. gain or profits that are expressly exempt from income tax under the Constitution. Exclusions Flow of wealth to the taxpayer which is not treated as part of gross income because it is exempted or it does not come within the definition of income Deductions Amounts which the law allows to be subtracted from gross income in order to arrive at net income Q: What income is excluded from gross income by the Constitution? The assets and revenues of a non-stock. Exclusions Deductions Amounts subtracted from pertinent items of gross income in order to arrive at taxable income upon which the tax rate is applied Part of income Tax Credits Amounts subtracted from the computed tax in order to arrive at taxes payable --------------------------------------------------------------(1) Rationale for the exclusions (2) Taxpayers who may avail of the exclusions (3) Exclusions distinguished from deductions and tax credit --------------------------------------------------------------Q: What is the rationale for the exclusions? Some receipts are excluded from gross income because they are not income. bequests.g. Tax Code. the exclusions are not subject to tax because of policy considerations such as to avoid the effects of double taxation or to provide incentives for certain socially desirable activities. or general or special law. PEZA) Pertain to computation of income the gross Pertains to computation of taxable income Exclusions are something received or earned by the taxpayer but which do not form part of gross income Deductions are something spent or paid in earning gross income Q: Distinguish exclusions from deductions and tax credits. they are subject to tax unless expressly exempted. bequests. but not the interest payments thereon if such _________________________________________ 71 72 They are instead subject to estate or gift taxes (see PIROVANO VS. etc. gratuity. Certain retirement benefits. 72 --------------------------------------------------------------(5) Under the Tax Code (a) Proceeds from life insurance policies (b) Return of premium paid (c) Amounts received under life insurance. Retirement benefits received under RA 7641 and those received by officials and employees of private firms. or be diverted to. Gifts. It is an inherent limitation. if the amount received is on account of services rendered whether constituting a demandable debt or not such as remuneratory donations or the use or opportunity or use of capital. Amounts received by the insured as return of premiums paid under life insurance. As to GOCCs – If they are performing government functions. Proceeds of life insurance. See discussions in General Principles and Exempt Corporations. 1965]) 73 71 It is considered as indemnity rather than income Reasonable private benefit plan means a pension. actually and exclusively for educational purposes shall be exempt from income taxation. and awards. but not damages or compensation recovered for loss of profit in loss or damage to property which would be taxable 5. 2. the following items shall not be included in gross income and shall be exempt from income tax 1. endowment. prizes. Compensation for injuries or sickness whether by suit or agreement including amounts received through accident or health insurance or under the Workmen’s compensation Act. Income exempt under treaty binding upon the Government of the Philippines. and devises but not the income from such property. If they are performing proprietary functions. pensions. including those in sports competition --------------------------------------------------------------Read Section 32(B). (h) Winnings. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 95 of 158 Last Updated: 30 July 2013(v3) . whether individual or corporate. Thus. or both. either during the term or at the maturity of the contract or upon the surrender thereof. gratuities. any purpose other than for the exclusive benefit of the said officials and employees. 6. 2013) directly. amounts are held by the insurer under an agreement to pay interest. payable upon the death of the insured to the heirs or beneficiaries. more particularly: pensions. the receipt is income. 3. Article XIV.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees. 1987 Constitution) Note: Although not expressly provided for. COMMISSIONER [JULY 31. (see Section 4(3). devise or descent (e) Amount received through accident or health insurance (f) Income exempt under tax treaty (g) Retirement benefits. and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for. endowment or annuity contracts. the income of the State are generally excluded from gross income. Tax Code Q: What are deemed excluded from (gross) income under the Tax Code? a. in accordance with a 73 reasonable private benefit plan maintained by the employer provided: _________________________________________ As provided in Section 32(B). 4. NIRC. wherein contributions are made by such employer for the officials or employees. remember that the State as a general rule is exempt from taxation. for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated. bequest. they are exempt unless expressly subject to tax. gratuities. or annuity contracts (d) Value of property acquired by gift. Benefits received by officials and employees of the national and local government pursuant to RA 6686 ii. b. Gross benefits received by officials and employees of public and private entities provided. from their passive investments in the Philippines Income of the Philippine government and its political subdivisions derived from public utilities or in the exercise of essential governmental functions Prizes and awards made primarily in recognition of religious. e.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. likewise exempt. Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. debentures or other certificate of indebtedness with a maturity of more than 5 years Gains from the redemption of shares of stock in a mutual fund company Page 96 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . f. retirement gratuities. Benefits received from the GSIS under Republic Act No. including retirement gratuity received by government officials and employees. that the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement That the benefits granted shall be availed of by an official or employee only once. literary or civic achievement but only if: i. d. GSIS. 8282. Payments of benefits due or to become due to any person (residing in the Philippines) under the laws of the United States administered by the United States Veterans Administration. scientific.000 may be increased through the rules and regulations issued by the Secretary of Finance. 8291. Other benefits such as productivity incentives and Christmas bonus provided that the ceiling of P30. Benefits received by officials and employees not covered by PD 851 iv. after considering. The provisions of any existing law to the contrary notwithstanding. however. and ii. pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions. a. h. c. that the total exclusion shall not exceed P30. among others. SSS. f. upon recommendation of the Commissioner. ii. charitable. d. private or public. educational. Benefits received by employees pursuant to PD 851 iii. c.000 which shall cover: i. Miscellaneous including: items. The recipient is not required to render substantial future services as a condition to receiving the prize or award All prizes and wards granted to athletes in local and international sports competitions whether held in the Philippines or abroad. b. artistic. Medicare and Pag-ibig contributions and union dues of individuals Gains from the sale of bonds. e. 2013) i. Income of foreign governments or financing institutions owned. controlled or enjoying refinancing from such foreign governments and of international or regional financial institutions established by foreign governments g. 7. social security benefits. the effect on the same of the inflation rate at the end of the taxable year. The recipient was selected without any action on his part to enter the contest or proceedings. Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee. (see RR No. Paid to the heirs or beneficiaries 2. Upon the death of the insured 3. whether granted under a CBA or not. the following fringe benefits are not taxable: 1. Fringe benefits authorized and exempted from tax under special laws. Tax Code) Note: Rationale – The interests do not form part of the indemnity but are earnings or income from the use of capital which are taxable. --------------------------------------------------------------(a) Proceeds from life insurance policies --------------------------------------------------------------Q: What are the conditions for the exclusion from gross income of life insurance proceeds? The proceeds of life insurance policies must be: 1. 2013) Also. CTA 8030.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Page 97 of 158 Last Updated: 30 July 2013(v3) . endowment or annuity contracts. Contributions of the employer for the benefit of the employee to retirement. The recipient of the insurance proceeds is a business partner of the deceased and the insurance was taken to compensate the partner-beneficiary for any loss in income PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 --------------------------------------------------------------(b) Return of premium paid (c) Amounts received under life insurance. 2012 that may result as the death of the insured partner 4. CI. or annuity contracts --------------------------------------------------------------Note: Items (b) and (c) refer to the same thing. (2) Reason for the Exclusion – They partake more of indemnity or compensation rather than gain to the recipient Q: Is the concept of revocability or irrevocability in the designation of the beneficiary relevant for purposes of exclusion? No. whether in a single sum or otherwise Note: (1) Payment by reason other than death – Payment for reasons other than death are subject to tax up to the extent of the excess of the premiums paid. 4. NIRC. insurance and hospitalization plans. the interest payments shall be included in the gross income. The recipient of the insurance proceeds is a partnership in which the insured is a partner and the insurance was taken to compensate the partnership for any loss in come that may result from the dissolution of the partnership caused by the death of the insured partner 5. In fact. under Section 33(C). VS. GOVERNMENT OF SINGAPORE INVESTMENT CORPORATION PTE LTD. It is material only in determining whether the proceeds form part of the gross estate or not. endowment. De minimis benefits. Q: In what instances are life insurance proceeds not excluded from gross income? 1. Note: As to 7(a) – A financing institution wholly-owned and controlled by a foreign government is exempt from income tax and final withholding tax with respect to its income derived from investments in T-bonds. that is Section 32(B)(2) which refers to amounts received by insured as return of premium paid by him undr life insurance. 2. Benefits given to rank and file employees. SEPTEMBER 5. 3. (see Section 32(B)(1). 2-40) Q: What is the tax treatment of the interests paid on life insurance proceeds? If the amounts of life insurance proceeds are held by the insurer under an agreement to pay interest thereon. Life insurance policy was transferred for a valuable consideration 3. Life insurance policy is used to secure a money obligation 2. The recipient of the life insurance proceeds is a corporation which the insured was an employee or officer. There is no need for the determination of the revocability or irrevocability in the designation of the beneficiary for purposes of exclusion of the life insurance proceeds from the gross estate. bequest. the proceeds are to be paid to the designated beneficiary. the income from the property acquired and transfers of divided interests shall be included in gross income. Note: (1) Rationale – It is meant to restore the injured party “whole as before the injury. (see Section 32(B)(3). Amounts received through Accident or Health Insurance or Workmen’s Compensation Act as compensation for personal injuries or sickness 2. during the term or b. NCC) --------------------------------------------------------------(f) Income exempt under tax treaty --------------------------------------------------------------- PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 98 of 158 Last Updated: 30 July 2013(v3) . An endowment is where the insurer agrees to pay a sum certain to the insured if he outlives a designated period. endowment.” (2) Note that this is the popular view. devise or descent --------------------------------------------------------------Q: What is the tax treatment of property acquired by gift. If the insured does not die and survives the designated period – the amount pertaining to the premiums are excluded from gross income but the excess shall be considered part of his gross income --------------------------------------------------------------(d) Value of property acquired by gift. devise or descent? _________________________________________ 74 Q: Is the compensation for unearned income as a result of personal injuries or sickness excluded from gross income? Yes. Rationale – they are mere compensation for injuries or sickness suffered and not income Q: What is the tax treatment of proceeds received under endowment policies? 1. upon surrender of the contract (see Section 32(B)(2). As to the income from the property. and the benificary recives the life insurance proceeds – not taxable and excluded from gross income 2. bequest. Note: Rationale – The property is subject to donor’s or estate taxes as the case may be. Either: a. Under a life insurance. The other view is that it is not excluded because such damages merely replace the income which would have been subjected to tax if earned. They represent earnings which were previously taxed. Tax Code) Note: The amount returned is not income but return of capital. It is excluded from gross income and hence not subject to income tax. However. If the insured dies. Tax Code). what is only excluded is the property itself --------------------------------------------------------------(e) Amount received through accident or health insurance --------------------------------------------------------------Q: What kinds of of compensation or damages for injuries or sickness are excluded from gross income? 1. The amounts are received by the insured 74 2. Amounts of any damages received whether by suit or agreement on account of such injuries or sickness Note: The above amounts are absolutely excluded from gross income. 2021. or 75 annuity contract 3. at maturity of the term mentioned in the contract or c. If he dies before that date.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 2013) Q: What are the conditions for amounts received by insured as return of premiums be excluded from gross income? 1. They are also excluded from gross income as they were not earned by the taxpayer as a result of the personal injuries or sickness. 75 An annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property whose ownership is transferred to him at once with the burden of the income (see Art. such as i. terminal leave pay which the CIR withheld a portion allegedly Page 99 of 158 Last Updated: 30 July 2013(v3) . As a consequence of separation of such official or employee from the service of the employer a. From the employer 3. The retirement plan must be submitted to and approved by the BIR (see INTERCONTINENTAL BROADCASTING CORPORATION VS. disability benefits to its employees. In the said case. --------------------------------------------------------------(g) Retirement benefits. Is the interest income from the loans automatically exempt from withholding tax? No. the retiring official or employee has been in the service of the same employer for at least ten (10) years. AMARILLA [OCTOBER 29. Amount received by an official. the taxpayer is burdened to prove the concurrence of the following elements: 1. among other benefits. 2. Retrenchment ii. --------------------------------------------------------------Q: What are the conditions to exempt retirement benefits paid from an employer maintained reasonable private retirement plan from income tax? For the retirement benefits to be exempt from income tax. employee. Because of death. etc. the benefit had been availed of only once 5. sickness. 1992]. MITSUBISHI METAL CORPORATION [JANUARY 22. It is the foreign corporation. a reasonable private benefit plan is maintained by the employer. retired from service. not the foreign government financing institution that is the sole creditor of the domestic corporation 3. Is it proper to subject the interest income to withholding tax? No. CA & GCL RETIREMENT PLAN [M ARCH 23. 1990]. pension. the burden of proof rests upon the party claiming an exemption to prove that it is in fact covered by the exemption.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. or by his heirs 2. it is excluded from gross income by reasons of public policy which recognizes the principles of reciprocity and comity among States. The trust made investments and earned therefrom interest income. Upon retirement. The foreign corporation applied for the loan from one of its government financing institutions. As held by the Supreme Court in CIR V. 2006]) Q: An employer maintains an employees’ trust to provide retirement. said retirement benefits received by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes Q: What are the conditions in order that separation pay may be excluded from gross income? 1. the Supreme Court found that the foreign government financing institution had nothing to do with the sales and loans agreement. As held in CIR V. gratuities. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: A government employee. 2013) Q: What is the reason for the exclusion of income exempt under treaty? Although it is income. he received. and 4. Cessation of business Note: In other words. For any cause beyond the control of such official or employee . pensions. the separation must be involuntary in order for it to be excluded from gross income. Redundancy iii. or other physical disability or b. the retiring official or employee is not less than fifty (50) years of age at the time of his retirement. Q: A domestic corporation entered into a loan and sales contract with a foreign corporation where the latter shall extend a loan to the former and the former shall sell to the latter all copper concentrates to be produced from the machine to be purchased using the loaned amount. including a depository bank under the EFCDS. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. The recipient was selected without any action on his par to enter the contest or proceeding and 3. 2011] now considers the excess contributions as not excludible from gross income and not exempt from income and withholding tax. Made primary in recognition of religious. 027-11 [JULY 1. artistic. prizes. Final withholding tax on interest from any currency bank deposit. Q: Is income earned by a contributor from the investments and reinvestments of his Personal Equity and Retirement Act (PERA) assets subject to income tax? No. SSS. literary. charitable. or civic achievement 2. --------------------------------------------------------------(h) Winnings. BERNANDINO ZIALCITA [OCTOBER 18. not being part of the gross salary or income of a government official or employee but a retirement benefit. As provided in RR No 017-11 [OCTOBER 27. The recipient is not required to render substantial future services as a condition to receiving the prize or award. 1991]. Previously. In fine. GSIS. Q: What are the requisites for the exclusion from gross income of prizes and awards in sports competitions? 1. In the exercise of sound personnel policy. including those in sports competition --------------------------------------------------------------Q: What are the requisites to be met before prizes and awards are excluded from gross income? The prizes and awards are: PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 100 of 158 Last Updated: 30 July 2013(v3) . more commonly known as terminal leave. Sanctioned by their national sports associations --------------------------------------------------------------(6) Under Special laws (a) Personal Equity and Retirement Account --------------------------------------------------------------Note: Special laws granting tax corporations shall be discussed Corporations. terminal leave pay is not subject to income tax. Is terminal leave pay considered part of gross income of the recipient? No. because it was deemed to have been abused and the excess contributions are being made as a form of investment. PHIC and Pag-Ibig contributions in excess of the mandatory contributions were considered exempt from income tax. However. PHIC and Pag-Ibig in excess of the mandatory contributions subject to income tax? Yes. 1. implementing the tax provisions of RA 9505. and awards. CA & EFREN CASTANEDA [OCTOBER 17. investment income of a contributor consisting of all income earned from the investments and reinvestments of his PERA assets in the maximum amount allowed shall be exempt from the following taxes as may be applicable: 1. resigns or is separated from the service through no fault of his own.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. In local and international sports tournaments and competitions 3. Whether held in the Philippines or abroad 4. In COMMISSIONER OF INTERNAL REVENUE VS. (see RE: REQUEST OF ATTY. otherwise known as the Personal Equity and Retirement Account (PERA) Act of 2008. RMC No. the Government encourages unused leaves to be accumulated. 2011]. the Supreme Court held that terminal leave pay received by a government official or employee is not subject to withholding (income) tax. The rationale behind the employee’s entitlement to an exemption from withholding tax on his terminal leave is that commutation of leave credits. scientific. educational. 1990]). The prizes and awards granted to athletes 2. is applied for by an officer or employee who retires. GSIS. exemptions to under Exempt Q: Are contributions to SSS. yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements. 2013) representing income tax thereon. retirement or maturity of bonds. The itemized deductions in Section 34(A) to J and (M) available to all kinds of taxpayers engaged in trade or business or practice of 76 profession in the Philippines 2. they are likewise strictly construed against the taxpayer. or business. barter. ISABELA CULTURAL CORPORATION [G. debentures or other certificates of indebtedness.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Mamalateo’s book. 10% tax on cash and/or property dividends actually or constructively received from a domestic corporation. CIR V. he still states that OSD is available only to an individual taxpayer. whether resident or nonresident. Q: What is the nature of deductions? Deductions partake of the nature of tax exemptions. 172231. including a mutual fund company. Capital gains tax on the sale. The special deductions in Section 37 and 38 as well as in special laws 4. a freedom from a charge or burden to which others are subjected to It is generally a receipt which is excluded from taxable income Q: Who can avail of the deductions provided for under the law? On compensation income of citizens. this excludes citizens and alien residents earning purely compensation income. other than a nonresident alien. exchange. The optional standard deduction in Section 34(L) available to all kinds of taxpayers engaged in trade or business or practice of a profession in the Philippines 3. such as the personal _________________________________________ 76 As it requires that they be engaged in a trade. exchange. 2007] --------------------------------------------------------------(h) Deductions (1) General Rules (2) Return of Capital (3) Itemized Deductions (4) Optional Standard Deduction (5) Personal and additional exemption (6) Items not deductible --------------------------------------------------------------Q: What are deductions? Deductions are items or amounts authorized by law to be subtracted from the pertinent items of gross income to arrive at taxable income. This no longer holds true in light of the amendment introduced by RA 9504. Q: What are the kinds of deductions? 1. such as ordinary and necessary expenses A person exemption is the theoretical personal family and living expense of an individual. The personal and additional exemptions and deductions in Section 35 for premium payments on health and/or hospitalization insurance in Section 34(M) available both to individual taxpayers earning purely compensation income and individual taxpayers engaged in trade or business or practice of a profession Note: As to (2) – In Atty. Q: Distinguish exemption Deduction It is a subtraction a deduction from an Exemption It is an immunity or privilege. and 1) Deductions for premium payments on health and/or hospitalization insurance 2) Personal and additional It is not a receipt but an expenditure which is permitted to be subtracted from income to determine the amount subject to tax It is a reduction of wealth which helped earn the income subject to tax. or other disposition of shares of stock in a domestic corporation. 5. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 101 of 158 Last Updated: 30 July 2013(v3) . Regular income tax. Capital gains tax on the sale. Hence. exemption for head of a family. 2013) 2. 4. or profession. Domestic and resident foreign corporations may now avail of OSD. NO. 3.R. FEBRUARY 12. or profession in the Philippines 1) Itemized deductions but not allowed optional standard deduction 2) Deductions for premium payments on health and/or hospitalization insurance 3) Personal exemptions reciprocity and additional subject to --------------------------------------------------------------(1) General Rules (a) Deductions must be paid or incurred in connection with the taxpayer’s trade. they cannot be availed by citizens and resident aliens whose income is purely compensation income. The deductions must not have been waived 5. 2. with respect to itemized deductions. They are entitled only to PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 102 of 158 Last Updated: 30 July 2013(v3) . Additional requirement relating to withholding Non-resident alien individuals not engaged in trade or business in the Philippines Domestic Corporations and Resident foreign corporations Non-resident foreign corporation Their income (whether compensation or other income) is subject to tax on their gross income. The withholding and payment of the tax required must be shown Note: Remember this! In fact. Nonresident aliens not engaged in trade or business. So remember the general requisites! Their income (whether compensation or other income) is subject to tax on their gross income. business or profession 2. Deductions must be supported by adequate receipts or invoices 3. Deductions must be paid or incurred in connection with the taxpayer’s trade. The requirements of deductibility must be met 3. Hence. business. and resident aliens exemptions 1) Itemized deductions or optional standard deduction 2) Deductions for premium payments on health and/or hospitalization insurance 3) Personal exemptions and additional personal and additional exemptions and premium payments on health and hospitalization insurance. no deductions or exemptions Note: In sum. There must be proof of entitlement to the deductions 4. There must be a specific provision of law allowing the deductions. Tax Code Q: What are the general requisites before deductions are allowed? 1. On income of non-resident aliens engaged in trade. please memorize it as these are the requisites common to all deductions. since deductions do not exist by implication 2. and Nonresident foreign corporations or those foreign corporations not engaged in trade or business in the Philippines However. business or profession (b) Deductions must be supported by adequate receipts or invoices (except standard deduction) (c) Additional requirement relating to withholding --------------------------------------------------------------- Q: What are the general rules to be observed regarding deductions? 1. whether resident or nonresident. Hence.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. all taxpayers except: 1. 2013) resident aliens On incomes (other than compensation income) of citizens. Each deduction would add some requisites in the enumeration. no deductions or exemptions 1) Itemized deductions or optional standard deduction Read Section 34(K). Interest on Indebtedness 3. Depletion 8. 2) Sale of inventory of goods by manufacturers and dealers of properties The amount received by the seller consists of return of capital and gain from sale of goods or properties. which may be gross income or net income. hence. Bad debts 6. The resulting gain or loss is subject to income tax. they are required to deduct the total cost specifically identifiable to the real property or shares of stock sold or exchanged. Their entire gross receipts are treated as part of income. and foreign income taxes (unless the taxpayer does not make use of the tax credit privilege)] 4. Income tax is levied only in income. cost of goods manufactured and sold (in the case of manufacturers) or cost of sales (in the case of dealers) is deducted from gross sales to arrive at gross income. “return of capital” as a to sellers of inventory of goods. business or profession) 2. RR No. Contributions to pension trusts Note: The Secretary of Finance may prescribe ceilings for the allowable itemized deductions. Tax Code PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 103 of 158 Last Updated: 30 July 2013(v3) . estate and donor’s taxes. the amount representing return of capital should be deducted from the proceeds from sales of assets and should not be subject to income tax (see Section 65. Charitable and other contributions 9. trade or profession [except income taxes. Seller of services do not buy and carry nor sell any stock in trade or inventory of property. That portion of the receipt representing return of capital is not subject to income tax. Q: What are the allowable under the Tax Code? (Itemized deductions) The allowable and itemized deductions include: 1. special assessments. Losses 5. hence. Sale of stock in trade by a real estate dealer and dealer in securities Sale of services Read Section 34 last ¶. Research and development expenditures 10. Accordingly.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 2013) --------------------------------------------------------------(2) Return of Capital (a) Sale of inventory of goods by manufacturers and dealers of properties (b) Sale of stock in trade by a real estate dealer and dealer in securities (c) Sale of services --------------------------------------------------------------Q: Discuss deduction. Business Expenses (Expenses in connection with taxpayer’s trade. Depreciation 7. Taxes in connection with taxpayer’s business. They are not ordinarily allowed to compute the amount representing return of capital through cost of sales. Rather. they do not take or assume any risk of loss similar --------------------------------------------------------------(3) Itemized Deductions (a) Expenses (b) Interest (c) Taxes (d) Losses (e) Bad Debts (f) Depreciation (g) Charitable and other contributions (h) Contributions to pension trusts (i) Deductions under special laws --------------------------------------------------------------Note: I will not be discussing Depletion and Research and Development as they are not included in the 2013 Syllabus. The enumeration provided in certain business expenses provide for additional requisites. ISABELA CULTURAL CORPORATION (FEBRUARY 12. public 78 policy. Must not be against law. The taxpayer shall substantiate the expense being This is the general rule which is to be followed for all business expenses. one cannot deduct the illegal income from gross income. The Supreme Court held that one of the requisites for the deductibility of a business expenses is that it must have been paid or incurred during the taxable year. An expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's business Q: What is meant by “paid or incurred during the taxable year?” Paid or incurred during the taxable year means that the deduction shall be taken for the taxable year in which paid or accrued or paid or incurred dependent on the accounting method in which net income is computed Q: ABC Corp failed to claim expenses for professional services that accrued in past years. It must be supported by adequate invoices and receipts 5. The expense must be ordinary and necessary 2. it sought to claim them as deductions during the taxable year of 1986. It is against law and public policy. Isabela Corp failed to claim the expenses for professional services that accrued in 1984 and 1985 during the said years. 2007). the taxpayer must satisfy the BIR that the deductions being claimed are indeed ordinary and necessary expenses incurred during the taxable year carrying on any trade or business. May ABC Corp still claim these expenses as deductions? No. Tax Code Q: What are the requisites for deductibility of business expenses?77 The requisites are: 1. gusto mo pa ng deduction. In COMMISSIONER OF INTERNAL REVENUE VS. It is required that before business or professional expenses are allowed as deductions from gross income. Hence. Ninakaw mo na nga.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Instead. Kapal ng face. morals. including the grossedup monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid (3) Travelling/transportation expenses (4) Cost of materials (5) Rentals and/or other payments for use or possession of property (6) Repairs and maintenance (7) Expenses under lease agreements (8) Expenses for professionals (9) Entertainment/Representation expenses (10) Political campaign expenses (11) Training expenses --------------------------------------------------------------Read Section 34(A). In carrying on the trade or business of the taxpayer 4. Paid or incurred during the taxable year 3. _________________________________________ 77 Q: Discuss the substantiation rule. The tax required to be withheld on the expense paid or payable is shown to have been remitted to the BIR Q: What is meant by ordinary and necessary expenses? An expense is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. It must be reasonable 7. the professional fees should have been claimed as deductions during the years where they were paid or incurred. 2013) --------------------------------------------------------------(a) Expenses (1) Requisites for deductibility (2) Salaries. wages and other forms of compensation for personal services actually rendered. 78 We said that illegal income will form part of gross income because the Code provides for “income from whatever source.” However. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 104 of 158 Last Updated: 30 July 2013(v3) . or public order 6. 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. General Foods claimed as deductions its advertising expenses for its product “Tang. This is a capital expenditure which should be spread out over a reasonable period of time. amusement and recreation expenses provided that they are connected to the development and operation of the trade. GENERAL FOODS (PHILS. there is no doubt such expenditures are deductible as business expenses. A taxpayer is entitled to deduct the ordinary and necessary expenses paid in carrying on his business from his gross income from whatever source. If. In ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION VS. 1930] Q: Are “advertising expenses” deductible from gross income? It depends on the nature of the advertising expense. Q: What are the types of business expenses specifically included in the Tax Code as deductions? As provided in Section 34(A)(1)(a). Commissioner [39 F.” The CIR disallowed the deduction arguing that the advertising expenses are not business expenses but capital expenditures. In COMMISSIONER OF INTERNAL REVENUE VS. then. 2003]. Reasonable allowance for travel expenses in the pursuit of trade. business or profession and that it is not contrary to law. The Supreme Court ruled in favor of the CIR. Reasonable allowance for entertainment. Reasonable allowance for salaries or other compensation for personal services actually rendered to the taxpayer 2. it is the duty of the BIR to make an estimate of deduction that may be allowed in computing the taxpayer’s taxable income bearing heavily against the taxpayer whose inexactitude is of his own making. Note: The burden is on the taxpayer to prove entitlement to a claimed deduction. the Supreme Court held that this is not deductible because it is a capital Page 105 of 158 Last Updated: 30 July 2013(v3) In the latter case. Cohan v. Q: What is the Cohan Principle? If there is a showing that expenses have been incurred but the exact amount thereof cannot be ascertained due to the absence of documentary evidence. Q: Is the enumeration of business expenses provided in the Tax Code exclusive? _________________________________________ 79 Q: ABC Corporation paid a PR firm to campaign for the sale of ABC’s additional capital stock. however. except as to the question of the reasonableness of amount. 2d Cir. 1981). business or profession 3.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. public policy or public order.) INC. This was akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as business expenses but as capital expenditures. then normally they should be spread out over a reasonable period of time The protection of brand franchise is analogous to the maintenance of goodwill or title to one’s property. The second type involves expenditures incurred. 2013) deducted with sufficient evidence such as official receipts or other adequate records. No. 2d 540. COMMISSIONER OF INTERNAL REVENUE (JANUARY 27. Is the compensation paid to the PR firm deductible as a business expense? No. these are: 1. The advertising expense incurred by General Foods fall under the second type. [APRIL 24. in whole or in part. he may claim depreciation allowance PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . the expenditures are for advertising of the second kind. If the expenditures are for the advertising of the first kind. Reasonable allowance for rentals and or other payments required for the continued use or premium of the property for the purpose of the trade or business and to which property the taxpayer has not taken or is not taking title or in which he has no 79 equity. 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. 4. morals. 5. 1981). wages and other forms of compensation for personal services actually rendered. 8. 6. Q: Are salaries deductible? Yes provided that they comply with the following requisites: 1. 4. Q: What are some factors that may be considered in determining the reasonableness of the compensation paid for services? They are: 1. 7. promotion expenses and commission or fees for the sale of stock reorganization are capital expenditures. The general economic conditions There is no fixed test in determining the reasonableness of a given bonus as compensation. RR No. (see Section 70. The salaries must be for personal services actually rendered 2. Are police protection fees and gifts for an exhibition for charitable purposes deductible as a business expense? No. COLLECTOR OF INTERNAL REVENUE [NOVEMBER 29. COMMISSIONER OF INTERNAL REVENUE (JANUARY 27. 2-40) --------------------------------------------------------------2) Salaries. The bonus when added to salaries is reasonable when measured by the amount and quality of the services performed with Page 106 of 158 Last Updated: 30 July 2013(v3) . you look at what is ordinarily paid for such service in like enterprise in like circumstances (see Section 70. RR No. They are given for personal services actually rendered 3. 3. As held in ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION VS. at issue in this case is the deductibility of the expenses incurred for police protection and for gifts and parties in connection with the boxing and wrestling exhibition that Calanoc financed and promoted whose proceeds would be given to the orphans and destitute children of the Child Welfare Workers Club of the Social Welfare Commission. payments purely for the personal services actually rendered. Expenses relating to the recapitalization and reorganization of the corporation. The payment must be made in good faith The character of the taxpayer’s business The volume and amount of its net earnings The locality in which the business is in The type and extent of the services rendered The salary policy of the corporation The size of the particular business The employee’s qualifications and business venture 9. including the grossedup monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid --------------------------------------------------------------Q: What is the rule on the deductibility of compensation payments? The test of deductibility in the case of compensation payments is whether they are reasonable and PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: Are bonuses to employees allowable deductions from gross income? Yes provided that: 1. As to the gifts and parties. In CALANOC VS. 2. They are made in good faith 2.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. The salaries must be reasonable in amount. This depends on many factors and the situation must be considered as a whole. they were deemed excessive considering that the purpose of the exhibition was for a charitable cause. The Supreme Court held that the police protection fees were not deductible as they are illegal since it was consideration for the performance of functions required of policemen by law. 2013) expenditure. litigation expenses incurred in defense or protection of title are capital in nature and not deductible. 1961]. 2) Note: To determine if reasonable. Q: Are litigation expenses deductible as a business expense? No. contributed to the consummation of the sale? No. VS. Are the supervision fees deductible? No.M. 1982]. Hoskins & Co.. In KUENZLE & STREIFF. 2013) relation to the business of the particular taxpayer. In C..The Supreme Court held that the said bonuses cannot be deducted because there is no evidence that the said officers did any work which would be the basis of the grant of the bonuses. COLLECTOR OF INTERNAL REVENUE [OCTOBER 20. Is the disallowance proper? It would depend on the nature. In AGUINALDO INDUSTRIES CORPORATION VS. COLLECTOR [106 PHIL. --------------------------------------------------------------(3) Travelling/transportation expenses --------------------------------------------------------------Q: What are the requisites for deductibility of travelling or transportation expenses? 1. an experienced realtor. HOSKINS & CO. and supervision fees at total of P185. it could have been deducted since Hoskin was an experienced realtor.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. INC. 1969]. an amount when combined with his salary and bonuses is double the XYZ’s income. If allowed. The Supreme Court stated that if it was a one-time payment. the Supreme Court held that the bonuses to its resident officers and employees were reasonable taking into account the situation at the time when the services were rendered: unsettling conditions after the war. One of the requisites for --------------------------------------------------------------(4) Cost of materials --------------------------------------------------------------Q: What are the requisites for deductibility of cost of materials? The charges for materials and supplies shall be only to the amount that they are actually consumed and used in operation during the year for which the return is made. (see KUENZLE & STREIFF V. was paid supervision fees in the amount of P100. 1969]) the deductibility of bonuses is that they are given for personal services actually rendered. extent. Q: A. bonus. HOSKINS & CO. It must be incurred in the pursuit of the taxpayer’s trade or business 3. Aguinaldo Industries sought to claim as deductions the bonuses given to its corporate officers from the sale of one of its properties. INC. and he use of foreign exchange which resulted in diminution of the amount of business. 355]. COMMISSIONER OF INTERNAL REVENUE [NOVEMBER 28. Hoskins representing 50% of the 8% supervision fees the company received as managing agent for Paradise Farms. the P100.000 annually by XYZ Corporation for a threeyear project. and quality of the services actually rendered by the resident officers and employees. claimed as deductions the payment of P100.000 which is double the company’s reported net income.M. In this case.000 to its founder and controlling stockholder. C. It must be paid or incurred while away from home 2. 1959].000 supervision fee was being paid every year (for three years) for the entire duration of the company’s project with Paradise Farms. COMMISSIONER OF INTERNAL REVENUE [NOVEMBER 28. VS. VS. Hoskin would be receiving on his salary. INC. COMMISSIONER OF INTERNAL REVENUE [FEBRUARY 25. by virtue of their positions. provided that the cost of such Page 107 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . the Supreme Court held that such was not deductible for failing to pass the reasonableness test. However. the imposition of controls on exports and imports. Q: ABC Corporation claimed as deductions bonuses it gave to its non-resident president and vice-president and the bonuses it gave to its resident officers and employees. The company gave its resident officers and employees much more. The deductions for bonuses given to resident officers and employees were disallowed for being excessive and for no special reason. It must be reasonable and necessary Q: Can a bonus given to corporate officers be deducted from gross income from the sale of one of its properties on the representation that corporate officers. RR No. Expenses paid in the operation and repair of 3. Must be paid or incurred during the taxable year 2. However. 2-40) Q: What are the allowable deductions by a lessee? The lessee may deduct the amount of rent paid or accrued including all expenses which under the terms of the agreement. use or possessor 3. telephone. RR No. business or exercise of the profession 3. kickback or other similar payment --------------------------------------------------------------(7) Expenses under lease agreements --------------------------------------------------------------Q: What are the allowable deductions by a lessor? Since the rentals are considered as income of the lessor (owner of the property. 19-86) --------------------------------------------------------------(5) Rentals and/or other payments for use or possession of property --------------------------------------------------------------Q: What are the requisites for deductibility of rental expenses? 1. 6. be directly related to or in furtherance of the conduct of the trade. used in such offices. or for the account of the lessor. Property must be used in trade or business 4. RR No.01. not be contrary to law. 4. Subjected to withholding tax of 5%. The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life. amusement and recreation expenses? Such expenses must: 1. 5. light. 2013) materials and supplies has not been deducted in determining the net income for any previous year (see Section 67. If the payments are so arranged as to constitute advance rentals. such lessor may deduct all ordinary and necessary expenses paid or incurred during the taxable year which are attributable to the earning of the income. public policy or public order 4. and The hire of office assistants --------------------------------------------------------------(9) Entertainment/Representation expenses --------------------------------------------------------------Q: What is the rule on the deductibility of representation or entertainment. otherwise. it shall be disallowed as a deduction --------------------------------------------------------------(8) Expenses for professionals --------------------------------------------------------------Q: What are the allowable deductions for professionals? 1. 19-86) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 108 of 158 Last Updated: 30 July 2013(v3) . water. transportation equipment used in making professional calls Dues to professional societies and subscriptions to professional journals The rent paid for office rooms The expenses of the fuel. Made as a condition to the continued use or possession of property 2. The cost of supplies used by him in the practice of his profession --------------------------------------------------------------(6) Repairs and maintenance --------------------------------------------------------------Q: Discuss the deductibility of repairs expenses. the lessee is required to pay to.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. does not constitute a bribe. Taxpayer has not taken or is not taking title to the property or has no equity other than that of a lessee. morals. such payment will be duly apportioned over the lease term (see Section 3. but keep it in an ordinary working condition. (see Section 2. etc.01. extraordinary repairs (those which prolong its life or add material value) are not deductible 2. may be deducted as a business expense. the court should PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: Are political deductible? campaign expenses We must distinguish between (1) the candidate. b) to be responsible for the preservation of the records of contributions and expenditures together with all pertinent documents. documents or supporting papers. RMC 15-2013 requires every candidate. however. determine from all available data. or contributor and (2) the supplier of the goods and services pertaining to the campaign expenditures. 2002] provides that: 1. We know (or should know) that contributions given to candidates or political parties are not subject to donor’s tax (see Section 13. The appropriate amount of withholding tax if applicable should have been withheld therefrom and paid to the BIR 7. Q: A. Sellers of goods or properties – 0. Zamora. the amount properly deductible as representation expenses. a hotel owner. It may. with that said. political party.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. In view of this. not exceed such ceilings prescribed by the Secretary of Finance. we now answer whether political campaign expenses are deductible. In ZAMORA VS. As to the candidate. Is the disallowance proper? Yes. Any unexpended balance from any contribution to a candidate or party shall be subject to income tax. COLLECTOR OF INTERNAL REVENUE [M AY 31. Now. they are tax exempt and thus there’s no need for any deduction at all. On appeal. it is subject to income tax (see Section 2. then such lower amount shall be used. political party. when supporting documents reflect a lower amount. for at least three years after the holding of the election to which they pertain and for the productions for inspection by the COMELEC or its duly authorized representative. or contributor. but others were without vouchers or chits. Sellers of services – 1% of their net revenues as representation expenses. the CTA only allowed 50% of the promotional expenses as deductions because it was found in the Central Bank dollar allocation that his wife went abroad on a combined business and medical trip. Further. If they are Page 109 of 158 Last Updated: 30 July 2013(v3) . the Supreme Court held CTA did not commit error in allowing as promotion expenses in A’s income tax returns at merely one-half. RR 7-2011). must be duly substantiated by adequate proof 6. In order for the campaign expenditure to be tax-exempt. treasurer of the party and person acting under authority of that candidate or treasurer a) to keep detailed. Q: Is there a ceiling on entertainment. be subject to income tax. These contributions are intended to finance the operation expenditures of a candidate. such amounts will be automatically subjected to income tax. 1963]. it is not possible to determine the actual amount covered by supporting papers and the amount without supporting papers. claimed as deduction promotion expenses incurred by his wife for the promotion of the hotel. a hotel owner. When some of the representation expenses claimed by the taxpayer were evidenced by vouchers or chits. claimed as deduction promotion expenses incurred by his wife for the promotion of the hotel. The Supreme Court stated that promotional expenses are deductible but must be substantiated. or upon presentation of a subpoena duces tecum duly issued by the COMELEC. Half of the said expenses were disallowed as deductions because on the finding that his wife went abroad on a combined business and medical trip. the political campaign expenses are not deductible. If it is not fully utilized. that there is no more than oral proof to the effect that payments have been made for representation expenses allegedly made by the taxpayer and about the general nature of such alleged expenses. amusement and recreational expenses? Yes. 2013) 5.5% of their net sales as representation expenses 2. if the candidate fails to include certain campaign expenditures in the Statement of Expenditures to be filed with the COMELEC. However. full and accurate records of all contributions received and expenditures incurred. that accordingly. it must be fully utilized. If they are fully utilized. RA 7166). --------------------------------------------------------------(10) Political campaign expenses --------------------------------------------------------------Note: I will use this as an opportunity to discuss the import of RR 8-2009 in relation to RMC 63-09 and RR 7-2011 in relation to RMC 15-2013 which are recent BIR issuances on the matter of political campaign expenses. RR 10-2002 [JULY 10. CTA CASE 695. The interest must have been stipulated in writing 11. in case of interest incurred to acquire property used in trade. the interest payment arrangement must not be between related taxpayers 8. APRIL 30. it is submitted that they cannot still be deducted either as a business expense or as a contribution. RR 8-2009 subjects the following to a 5% creditable withholding tax: (a) payments made by the political parties and candidates of local and national elections for their campaign expenditures. Tax Code --------------------------------------------------------------(1) Requisites for deductibility (2) Non-deductible interest expense --------------------------------------------------------------- Q: When is interest expense not deductible from gross income? 1. business. the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. Q: What are the requisites for the deductibility of interest expenses from gross income? The requisites are: 80 1. the interest must not be incurred to finance petroleum operations 9. The interest expense must have been paid or incurred during the taxable year. the same was not treated as a capital expenditure 10. MONTENEGRO V. There must be indebtedness 2.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 1965) However. There should be an interest expense paid or incurred upon such indebtedness 3. 2013) not fully utilized and hence subject to income tax. The allowable deduction have been reduced by an amount equal to 33% of the interest income subject to final tax (see RR 13-2000 [NOVEMBER 20. The interest must be legally due 7. The indebtedness must be connected with the taxpayer’s trade. and (b) payments made by individuals or juridical persons for their purchases of goods and services intended to be given as campaign contributions to political parties and candidates. Such interest shall be allowed as a deduction in the year the indebtedness is paid. 6. If the indebtedness is payable in periodic amortization. as to the supplier of the goods or services. an indebtedness on which an interest is paid in advance through discount or otherwise. The training expenses must constitute ordinary and necessary business expenses of a taxpayer. --------------------------------------------------------------(b) Interest (1) Requisites for deductibility (2) Non-deductible interest expense (3) Interest subject to special rules --------------------------------------------------------------Section 34(B). _________________________________________ 80 Indebtedness is something owned unconditionally obligated or bound to pay by one who is PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 110 of 158 Last Updated: 30 July 2013(v3) . RMC 63-2009 provides that such 5% creditable withholding tax shall be allowed as a tax credit or deduction against the total income tax liability of the supplier of goods or services. 2000]) --------------------------------------------------------------(11) Training expenses --------------------------------------------------------------Q: Discuss the deductibility of training expenses as a business expense. COMMISSIONER. or exercise of profession. he may avail of a deduction. The indebtedness must be that of the taxpayer 4. business or exercise of profession 5. interest incurred to acquire property used in trade. If both the taxpayer and the person to whom the payment has been made or is to be made are “related” persons specified under Section 36(B). Q: Enumerate the cases when no deduction is allowed because the loan is between related taxpayers. the purchase of machinery and equipment. among other things. Between the fiduciary of a trust and the fiduciary of another trust with the same grantor 6. Between two corporations – where one corporation owns more than 50% of the other 4. lineal descendant) 2. Paper Industries claimed as deductions against gross income interest payments on loans for the purchase of machinery and equipment. Q: What is the rule on interest periodically amortized? The amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. Interest expense equal to 33% of the interest income subject to final tax Such interest shall be allowed as a deduction in the year the indebtedness is paid. profession (d) Reduction of interest expense/interest arbitrage ----------------------------------------------------------------------------------------------------------------------------(a) Interest paid in advance (b) Interest periodically amortized --------------------------------------------------------------Q: What is the rule on interest paid in advance? PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . business.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. If the indebtedness is used to finance petroleum exploration. ascendant. profession --------------------------------------------------------------- Q: May the taxpayer choose to treat interest expense as capital expenditure? Yes. should the taxpayer elect to deduct the interest payments against its gross income. Between a grantor and fiduciary of a trust 5. the taxpayer cannot at the same time capitalize the interest payments because that would constitute double tax benefits which is not authorized by law In PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES VS. The Supreme Court ruled that Paper Industries is entitled to its claimed deduction for interest payments on loans for. 1995]. Between members of the family (brother. Between a fiduciary of a trust and a beneficiary of such trust --------------------------------------------------------------(c) Interest expense incurred to acquire property for use in trade. 1. business. 3. The general Page 111 of 158 Last Updated: 30 July 2013(v3) Read Section 36(B). COURT OF APPEALS [DECEMBER 1. sisters. Section 34(B)(3) provides that at the option of the taxpayer. Tax Code --------------------------------------------------------------(3) Interest subject to special rules (a) Interest paid in advance (b) Interest periodically amortized (c) Interest expense incurred to acquire property for use in trade. the interest payments on the said loans should have been capitalized instead and claimed as a depreciation deduction taking into account the adjusted basis of the machinery and equipment (original acquisition cost plus interest charges) over the useful life of such assets. However. 4. 2013) 2. business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. Between an individual and a corporation – where the individual paid interest on a loan granted by the corporation more than 50% of the capital stock of which is owned by the individual 3. The CIR disallowed the deduction on the ground that because the loans had been incurred for the purchase of machinery and equipment. the said interest expense. 2000]. Another illustration of this is when a taxpayer borrows money from the bank (interest payments on which can then be claimed as expense and thus a 32% benefit) then deposits it in a bank (and subsequently suffers only a 20% final withholding PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Yes. The Supreme Court held that although interest payment for delinquent taxes is not deductible as tax under Section 34(C) of the Tax Code. In BIR RULING NO. The general rule that interest payments on a legally demandable loan are deductible from gross income must be applied. It does not matter if the taxpayer actually intended to save taxes. Vda. shall be reduced if the taxpayer has derived certain interest income which had been subject to final withholding tax. VDA. In this case. the CIR does not dispute that the interest payments were made on loans incurred in connection with the carrying on of the registered operations of Paper Industries. She contends that the interests due from her tax obligations are deductible from gross income.e. 1960]. It is also defined as a circumstance which is presumed to exist because by putting excess funds in deposits/securities subject to 20% withholding. business or exercise of profession shall be allowed as a deduction from his gross income. however. DE PRIETO [SEPTEMBER 30. business. --------------------------------------------------------------(c) Taxes (1) Requisites for Deductibility Page 112 of 158 Last Updated: 30 July 2013(v3) . She claimed as deduction the total interest on account of the delinquency. the amount of interest expense paid or incurred by a taxpayer within a taxable year on indebtedness in connection with his trade. PNB argues that the said bonds were given by the Government for payment for its liabilities to PNB and hence. 006-00 [JANUARY 5. Neither does the CIR deny that such interest payments were legally due and demandable under the terms of such loans. or exercise of a profession from an existing indebtedness shall be reduced by an amount equal to 33% of the interest income earned which had been subject to final withholding taxes. Q: Do tax indebtedness? obligations constitute Q: What is interest arbitrage? Interest arbitrage results in the reduction of the interest expense by a percentage of the interest income subject to final tax.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. de Prieto conveyed real property by way of gifts to her four children. Although as a general rule. The CIR ruled that this limitation on the deductibility of interest expenses applies whether or not a tax arbitrage scheme was entered into by the taxpayer --------------------------------------------------------------(d) Reduction of interest expense/interest arbitrage --------------------------------------------------------------Q: What is the limitation on the amount of interest expense allowed to be deductible? The amount of interest expense paid or incurred by a taxpayer in connection with his trade. and in fact paid by Paper Indusries during the tax year. taxpayers are able to avoid the 32% tax which will happen if the same funds are invested in revenue-generating activities. the taxpayer is not precluded thereby from claiming said interest payment as deduction under Section 34(B) of the same Code. In COMMISSIONER OF INTERNAL REVENUE VS. The CIR has been unable to point to any provision of the Tax Code or any other Statute that requires the disallowance of the interest payments made by Paper Industries. It is a well-settled rule that tax obligations constitute indebtedness for purposes of deduction from gross income of the amount of interest paid on indebtedness. i. the financing of the purchase of machinery and equipment actually used in the registered operations of Paper Industries. it has not engaged in a tax arbitrage scheme. 2013) rule is that interest expenses are deductible against gross income and this certainly includes interest paid under loans incurred in connection with the carrying on of the business of the taxpayer.. She was assessed for donor’s gift taxes including interests due thereon. PNB requested the BIR to exclude the interest income derived by it from treasury bonds in the determination of the interest expense not allowable as deduction as gross income. tax) thus benefiting by 12% representing the difference the 32% deduction and the 20% withholding tax. business or profession 4. Taxes are not specifically excluded by law from being deducted from the taxpayer’s gross income --------------------------------------------------------------(3) Treatments of surcharges/interests/fines for delinquency (4) Treatment of special assessment --------------------------------------------------------------Q: Are surcharges. The payments must be for taxes 2. business or profession 2. as discussed. It must be paid or incurred within the taxable year 3. It must be incurred in connection with trade. 2013) (2) Non-deductible taxes (3) Treatments of surcharges/interests/fines for delinquency (4) Treatment of special assessment (5) Tax credit vis-à-vis deduction --------------------------------------------------------------Read Section 34(C). Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (special assessments) 5. Tax Code --------------------------------------------------------------(1) Requisites for Deductibility (2) Non-deductible taxes --------------------------------------------------------------Q: Who are entitled to deduct taxes from gross income? Taxes are deductible as such only by the taxpayer upon which they are imposed. 3. COLLECTION [14 SCRA 33] Note: However. paid or accrued during the taxable year in connection with the trade or business or profession of the taxpayer are deductible from gross income except: 1. Tax must be imposed by law on and payable by the taxpayer (indirect taxes not included) 5. GUITIERREZ V. Philippine income tax 2. national or local. deduction is only allowed if and to the extent that the taxes for which deduction is claimed are connected with income from sources within the Philippines.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. interest and fines for delinquency deductible? No. Foreign income taxes unless the taxpayer does not make use of the tax credit privilege under Section 34(C)(3). Q: What is the effect of a refund or credit of deducted taxes? The taxes that are allowed as deductions. shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction (Tax Benefit Rule) (see Section 34(C)(1)) Q: Are special assessments deductible? It depends. business or exercise of a profession if the payment of such assessment is ordinary and necessary to the conduct of trade. VAT Note: In the case of nonresident alien individual or a foreign corporation. To allow them to be deducted defeats the prescribed punishment. when refunded or credited. Section 34(C)(1) provides that all taxes. Construction of local benefits which increase the value of the property assessed – the Page 113 of 158 Last Updated: 30 July 2013(v3) Q: Are all taxes deductible from gross income? PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . Interest on deficiency taxes may be allowed as deduction (considered as interest on indebtedness). Maintenance or repair of local benefits – deductible as an expense incurred in trade. 1. No. Estate and donor’s taxes 4. Q: What are the requisites deductibility of taxes? for the 1. the 20% sales discount shall be treated as a tax deduction and no longer as a tax credit. their net income for foreign sources was zero and. The Supreme Court held that to allow an alien resident to deduct from his gross income whatever taxes he pays to his own government is incompatible with the status of the Philippines as a sovereign state. US citizens residing in the Philippines who derives income wholly from sources within the Philippines.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. The present rule is that only resident citizens and domestic corporations can claim a tax credit. In COMMISSIONER OF INTERNAL REVENUE VS. 2007] and M. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 114 of 158 Last Updated: 30 July 2013(v3) . 2-40) Q: What are the remedies for a taxpayer who has paid income taxes to a foreign country for which he would also be liable for Philippine income tax? 1. 2008]. Tax credit against the Philippine income tax due. DSQS [JUNE 29. RR No. This is because the foreign government will have the power to reduce the tax income of the Philippine government simply by increasing their tax rates. Deduction from gross income Note: Rationale for allowing tax credit for foreign taxes – to address indirect double taxation. starting taxable year 2004. 2008]) Note that at the time this case was decided. HOLDING CORPORATION V.E. Also. Note: This would include members of GPPs and estates. there was no need to apply the tax credit. _________________________________________ 81 Q: Is the 20% sales discount granted by establishments to qualified senior citizens considered a tax credit or a tax deduction? In M. COURT OF APPEALS [M ARCH 3.E. the Supreme Court noted that under RA 9257 or the Expanded Senior Citizens Act of 2003. (See CARLOS SUPERDRUG CORP. 81 LEDNICKY [JULY 31. HOLDING CORPORATION V. 1964]. COURT OF APPEALS [M ARCH 3. Q: What is the difference between a tax credit and tax deduction? A tax credit is a peso-for-peso deduction from the taxpayer’s tax liability or a full recovery while a tax deduction only benefits the taxpayer to the extent of a percentage of the amount granted as a discount. Subtracted from the tax Subtracted from the income before the tax is computed Q: May a resident alien deduct from their gross income income taxes they paid to their government? No. 2013) payments should be treated as capital expenditures and hence are not deductible (see Section 83. Tax Credit Reduces the taxpayer’s liability peso for peso Tax Deduction Reduces taxable income upon which the tax liability is calculated Q: Who are allowed to avail of credit against tax for taxes of foreign countries? Only those subject to tax on worldwide income (resident citizen and domestic corporations) may avail of tax credits because they pay taxes for foreign sources income twice (in the Philippines and abroad) and the tax credit is meant to lessen the impact of double taxation. 2. --------------------------------------------------------------(5) Tax credit vis-à-vis deduction --------------------------------------------------------------Q: What is a tax credit? A tax credit is the amount subtracted from an individual’s or entity’s tax liability to arrive at the total tax liability. Q: Distinguish a tax credit from a tax deduction. in this case. sought to deduct from their gross income the income taxes they have paid to the US government. thus. resident aliens were still allowed to claim a tax credit. V. (2) Other types of losses (a) Capital losses (b) Securities becoming worthless (c) Losses on wash sales of stocks or securities (d) Wagering Losses (e) NOLCO --------------------------------------------------------------Read Section 34(D).PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. the formula is this: 2. the following conditions must concur: 1. taxes paid to a foreign country when such taxpayer is entitled to a foreign tax credit and he does not choose to exercise such right. Note: Actually. Q: How shall the amount of the loss deductible be determined? The amount of loss deductible is limited to the difference between the value of the property immediately preceding the loss and its value immediately thereafter but shall not exceed an Page 115 of 158 Last Updated: 30 July 2013(v3) --------------------------------------------------------------(d) Losses (1) Requisites for deductibility PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . The right to deduct foreign tax paid is only an alternative to the taxpayer’s right to the foreign tax credit. which the taxpayer’s taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. the formula is this: (2) The loss shall not be allowed as a deduction if such loss was claimed as a deduction for estate tax purposes (see Section 34(D)(1)(c)) (3) It is not required that the loss must be a result of transactions in the taxable year only. which the taxpayer’s taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year. the loss must have been incurred in the business. Note: Again for the mathematically unimpaired. The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken. The losses must actually be sustained and charged off within the taxable year 2. Tax Code Q: What are the conditions for deductibility of losses? In order that losses may be allowed as deductions. trade or profession of the taxpayer or incurred in any transaction entered into for profit though not connected with his trade or business 5. Q: What are the limitations on credit for foreign taxes? The amount of the credit shall be subject to the following limitations: 1. declaration of loss is filed within 45 days from the occurrence of the casualty loss Note: (1) Losses are deductible only by the person sustaining them. Note: For those who have not yet been rendered mathematically impaired by law school. In the case of an individual. The taxpayer need only prove that a closed and completed transaction sets the loss in the taxable year or in the year claimed and it is not compensated by insurance or otherwise. In the case of casualty loss. mas madali naman i-memorize ang formula instead of trying to memorize and make some sense out of those two sentences. Loss is not compensated by insurance or otherwise 4. Evidenced by a closed and completed transaction 3. 2013) Note: Also important is this case is the statement made by the court on the exception: a taxpayer may only be allowed to deduct from his gross income. They are purely personal and cannot be used as deductions by another The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken. theft. the loss resulting therefrom shall be considered as a loss from the PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 116 of 158 Last Updated: 30 July 2013(v3) .000 to be depreciated for 20 years. Q: Define casualty. 2009] provides for policies and guidelines for the reporting of casualty losses. What are casualty losses? These are the loss or physical damage suffered by property used in trade. or depreciated cost reduced by any 82 insurance or other compensation received. or the profession that results from unforeseen. theft or embezzlement (casualty losses) 3. it was lost due to fire and for the loss. How much can you deduct? Get the depreciated cost which is now 100. Q: What are the kinds of losses allowed to be deducted from gross income? 1. you received P50. Losses from casualty. RR No. and unusual in character. robbery. A declaration of loss filed with the CIR or his deputies within a certain period as prescribed in the RR after the occurrence of the casualty. the substantiation requirements are: 1. 12-77) _________________________________________ 82 For example.000 and deduct the insurance received. such capital losses may only be deducted from capital gains unless a final tax on the capital transaction is imposed. unexpected. unexpected or unusual nature.000. Q: What is the rule with respect to loss resulting from stocks becoming worthless? If the securities become worthless during the taxable year and are capital assets. Proof of the elements of the loss claimed RMO 31-2009 [OCTOBER 16. (see Section 1. and embezzlement for purposes of tax deduction Casualty means the complete or partial destruction of property resulting from an identifiable event of a sudden. business. robbery. On the 10th year. or embezzlement? Generally. you purchased a piece of machinery for the value of 200. Ordinary losses 2. 2013) amount equal of the cost or other adjusted basis of the property. identifiable events that are sudden. Net operating loss (where there is a carryover of deductions) Q: What are the substantiation requirements for losses arising from casualty.000 from your insurance. Q. under RR 12-77 [OCTOBER 6. The amount that can be deducted is then 50. or embezzlement 2. Theft Embezzlement Q: What is the rule with respect to loss resulting from shrinkage in the value of the stock A person cannot deduct from gross income any amount claimed as a loss merely on account of shrinkage in value of such stock through fluctuations of the market or otherwise. Criminal appropriation of another’s property to the use of the taker Fraudulent appropriation of another’s property by a person to whom it has been entrusted or into whose hands it has lawfully come --------------------------------------------------------------(2) Other types of losses (a) Capital losses (b) Securities becoming worthless (c) Losses on wash sales of stocks or securities (d) Wagering Losses --------------------------------------------------------------Q: Discuss the deductibility of capital losses. Capital losses may not be deducted from ordinary gains. theft.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. theft. Q: What are ordinary losses? These are losses that are incurred by a taxable entity as a result of its day to day operations conducted for profit or otherwise. 1977]. 000 and on December 15. --------------------------------------------------------------(e) NOLCO --------------------------------------------------------------Q: What is a net operating loss? Net Operating loss refers to the excess of allowable deduction over gross income of a business for any taxable year. consolidation. Provided. The net operating loss of the business or enterprise 2. Provided. purchased 100 additional shares for P80. Shares of stock becoming worthless in the hands of an investor are capital assets. he sold the 100 shares purchased on December 1. Read Section 38. 2012. Q: Are losses from wash sales deductible? No. whose taxable year is the calendar year. 2013) sale or exchange. On January 2. for P80. further. as such capital losses are allowed to be deducted only to the extent of capital gains.000. shall be carried over as a deduction from gross income 5. A loss incurred by a dealer in securities with respect to a transaction made in the ordinary course of the business of such dealer is deductible. 2012. This is an exception to the general rule that losses from sales or exchanges of stock or securities are deductible as losses from sales or exchange of property. for the next 3 consecutive taxable years immediately following the year of such loss 6. which had not been previously offset as deduction from gross income 4. 2012. Losses from wagering transaction shall be allowed only to the extent of the gains from such transactions. This will not apply to a loss incurred by a dealer in securities. Because of the provisions of Section 38. no loss from the sale is allowable as a deduction. 2012. purchased 100 shares of common stock in the ABC Company for P100. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 117 of 158 Last Updated: 30 July 2013(v3) . of capital assets. or combination. Tax Code Q: What is a wash sale? Wash sale is a sale or other disposition of stock or securities where substantially identical securities are acquired or purchased within a 61-day period. on the last day of such taxable year.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. or the transferor gains control of: (a) not less than 75% in nominal value of outstanding issued shares or paid up capital of Q: Discuss the deductibility of wagering losses. Example: A. Tax Code and Section 131. RR 2) Q: What is meant by “substantial change in the ownership of the business or enterprise?” The 75% equity rule or ownership or interest rule shall only apply to a transfer or assignment of the taxpayer’s net operating losses as a result of or arising from the said taxpayer’s m erger or consolidation or business combination with another person. beginning 30 days before the sale and ending 30 days after the sale. any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction 7. a net operating loss carryover shall be allowed only if there has been no substantial change in the ownership of the business or enterprise. the shareholders of the transferor/assignor. on December 1. (see Section 38. The transferee or assignee shall not be entitled to claim the same as a deduction from gross income except when as a result of the said merger. Q: What are the requisites for the deductibility of NOLCO from gross income? 1.000. for any taxable year immediately preceding the current taxable year 3. Q: XYZ entered into a merger agreement with ABC. RR 14-01 [AUGUST 27. cannot avail of the benefit of NOLCO)? Yes. the net operation losses of each of the cement corporations are preserved after the proposed share swap and may be carried over and claimed as a deduction from their respective gross income because there is no substantial change in the ownership of either of the three cement companies. such as. three cement companies (Republic. Should the deduction be allowed? PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 118 of 158 Last Updated: 30 July 2013(v3) . privileges. whether directly or indirectly. Q: Discuss the relationship between NOLCO and the Minimum Corporate Income Tax (MCIT) Domestic and resident foreign corporations are liable to the 2% MCIT (computed based on gross income) whenever the amount of MCIT is greater than the normal income tax due (which would be computed with the benefit of NOLCO if any). but not limited to. Under this agreement. the rights. With regard to NOLCO. 144-85 [AUGUST 26. XYZ claimed these losses as a deduction against its gross income. with regard to foreign exchange losses. NOLCO of the taxpayer shall not be transferred or assigned to another person. assigned and conveyed to XYZ as the surviving corporation. the CIR held that. Domestic and resident foreign corporations subject to normal corporate income tax No. In BIR RULING 30-00 [AUGUST 10. In PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES VS. the Supreme Court ruled that the deduction was improper. powers and franchises of the said ABC were to be transferred. consolidation or any form of business combination of such taxpayer with another person. properties. 1990] and BIR RULING NO. under the plan. Q: Who are the taxpayers who are entitled to the deduct NOLCO from gross income? 1. the company had over preceding years accumulated losses. The annual decline in the value of property is not normally allowable as a deduction. 1985]. COURT OF APPEALS [DECEMBER 1. 2013) the transferee/assignee in case transferee/assignee is a corporation or the (b) Not less than 75% of the interest in the business of the transferee/assignee in case he transferee/assignee is not a corporation. 2000]. the CIR held that since. 2001] provides that the three-year reglementary period on the carry-over of NOLCO shall continue to run notwithstanding the fact that the corporation paid its income tax under the MCIT computation Q: Are foreign exchange losses deductible? No. the transfer or assignment thereof through merger. the annual increase in value of an asset is not taxable income because such increase has not yet been realized. can each of the corporations continue to carry-over their respective net operating losses? It depends on the nature of the integration plan. Any individual engaged in trade or business or in the exercise of his profession 2. Q: Will the three-year reglementary period on the carry-over of NOLCO continue to run notwithstanding that the corporation is subject to MCIT (and hence. Before merger. such corporation cannot enjoy the benefit of NOLCO when it is subject to MCIT. Q: If several corporations enter an agreement to integrate their respective businesses. Thus. Hence. In BIR RULING 206-90 [OCTOBER 30. 1995]. The increase in value could only be taxed when a disposition of the property occurred which was of such a nature as to constitute a realization of such gain. the corporation are not dissolved but merely integrated for a specific bona fide purpose. Fortune and Blue Circle) sought the opinion of the CIR on the tax implications of their integration plan. The same conclusion obtains to losses. To allow the deduction claimed by the surviving corporation would be to permit one corporation or enterprise to benefit from the operating losses accumulated by another corporation or enterprise. to be allowable the loss must be realized.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Q: What is meant by “actually charged off?” The phrase means that the amount of money lent by the taxpayer to his debtor has been recorded in his books of account as a receivable that has actually become worthless of as of the end of the taxable year. arising from money lent or form uncollectable amounts of income from goods sold or services rendered. The agreement provided for a distribution of assets of the mine upon termination. ABC and XYZ entered into two compromises: the first involved alleged indebtedness by XYZ from the advances of ABC and the second involved long-term loans guaranteed by ABC. Tax Code Q: What are bad debts? Bad debts shall refer to those debts resulting from the worthlessness or uncollectibility. Conclusive evidence must be presented to show that the taxpayer’s receivable from a debtor has definitely become worthless. In no case may a receivable from an insurance or surety company be written-off from the taxpayer's books and claimed as bad debts deduction unless such company has been declared closed due to insolvency or for any such similar reason by the Insurance Commissioner In both cases. shall ascertain the worthlessness and uncollectibility of the bad debts and it shall approve the writing off of the said indebtedness from the banks. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable 2. The same must actually be charged-off within the taxable year 5. 6. that the said receivable has been cancelled and written-off from the said taxpayers’ books of account. COMMISSIONER OF INTERNAL REVENUE [APRIL 16. not because it was forgiven. 2008]. 2013) --------------------------------------------------------------(e) Bad Debts (1) Requisites for deductibility (2) Effect of recovery of bad debts --------------------------------------------------------------Read Section 34(E). business or practice of profession 3. in whole or in part. ABC deducted the amounts as bad debt. However. the requisites for deductibility of bad debts are: 1. 1-4 should still be complied with. In PHILEX MINING CORPORATION VS. The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. 1999] provides for two exceptions to requisite no. The debts are uncollectible despite diligent efforts exerted by the taxpayer Note: RR 5-99 [March 10. 5. Q: What are the conditions for bad debts to be deductible? As provided in RR 5-99 [March 10. 1. a provision that is more consistent with Page 119 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . the Supreme Court held that Philex cannot deduct the amounts as bad debt. through the Monetary Board. However. requisites nos. The BSP. 2. XYZ’s mine suffered continuing losses which led to ABC. Is the deduction proper? No. The same must be connected with the taxpayer’s trade.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. That deduction would be allowed because the debt was worthless. books of accounts at the end of the taxable year. Q: What is meant by “actually ascertained to be worthless?” The phrase means that a debt is not worthless simply because it is of doubtful value or difficult to collect. of amounts due the taxpayer by others. Q: How do you distinguish bad debts from loss? Voluntary cancellation or forgiveness of a debt does not give rise to a deductible loss. if the debt is actually worthless. namely: Q: ABC mining entered into a management contract with XYZ mining. ABC made advances of cash and property. there may be a bad debt deduction. 1999].s withdrawal as manager and cessation of mine operations. The same must not be sustained in a transaction entered into between related parties 4. As for the amounts that Philex paid as guarantor to Baguio Gold’s creditors. Philex cannot claim the advances as a bad debt deduction from its gross income. In FERNANDEZ HERMANOS. COURT OF APPEALS [M AY 8. VS. 1996]. The advances were not "debts" of Baguio Gold to Philex inasmuch as the latter was under no unconditional obligation to return the same to the former. the debts were not yet due and demandable at the time that Philex paid the same. 2013) a partnership than a creditor-debtor relationship. there is no contractual basis for the execution of the two compromise agreements in which Baguio Gold recognized a debt in favor of Philex. PRC here failed to prove the worthlessness of the amounts receivable. In PHILIPPINE REFINING COMPANY VS. was still operating at the end of the taxable year. the Supreme Court held that the deduction was improper. Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer. who must prove by convincing evidence that he is entitled to the deduction claimed. The Supreme Court stated that before a debt can be considered worthless. the debt is not considered worthless and therefore not deductible. Land. Q: What is the effect of recovery of bad debts? The recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of the income tax benefit of said deduction (equitable doctrine of tax benefit or tax benefit rule) --------------------------------------------------------------(f) Depreciation (1) Requisites of computing depreciation allowance (2) Methods of computing depreciation allowance (a) Straightline method (b) Declining-balance method (c) Sum-of-the-years-digit method --------------------------------------------------------------Read Section 34(F). cannot be depreciated because its value continues to increase. the CTA disallowed the same as there was no iota of documentary evidence to prove the worthlessness of the debts sought to be deducted. _________________________________________ 83 Q: ABC. Page 120 of 158 Last Updated: 30 July 2013(v3) . COMMISSIONER OF INTERNAL REVENUE [SEPTEMBER PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Not all tangible property can be depreciated. Tax Code --------------------------------------------------------------(1) Requisites of computing depreciation allowance --------------------------------------------------------------Q: What is depreciation? Depreciation is the gradual diminution in the useful 83 value of tangible property resulting from wear and tear and normal obsolescense.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. XYZ suffered substantial losses but continued to operate. the taxpayer must also show that it is indeed uncollectible even in the future. INC. The Court opined that assuming that in this case there was a valid and subsisting debt and that the debtor was incapable of paying the debt. ABC made a partial write-off of the losses and deducted the amount in its return. at issue was PRC’s (now Unilever) claimed of bad debt deduction. Philex’s advances should be treated as investments in a partnership. Philex failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income. it could not claim the advances as a valid bad debt deduction. Consequently. It has been held that if the debtor corporation. although losing money or insolvent. In this connection. Is the deduction proper? No. Is the declaration by the taxpayer that a debt is worthless sufficient for it to claim a bad debt deduction? No. an investment company made advances to XYZ under an agreement that a portion of its net profits would go to ABC. 30. the debt is still not deductible as a worthless debt because the debtor was still in operation. for example. 1969]. On appeal. In this case. free of income tax. in other words. the recovery. 1966]. has pronounced as having strong persuasive effect. In fact. In its defense. The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. which the Supreme Court. COMMISSIONER OF INTERNAL REVENUE [SEPTEMBER 5. VS. It must be for property used in the trade. the CTA applied rates of depreciation in accordance with Bulletin F of the US Federal Internal Revenue Service. In BASILAN ESTATES. Depreciation as a deduction is allowed so that the owner of the assets can set _________________________________________ 84 RR 12-2012 [OCTOBER 12. the company deducted from gross income the value of the depreciation based on this reappraised value. it changed the depreciable value of the assets by increasing it to conform with the increase in cost of their replacement. It is entitled to see to it that from earnings the value of the property invested is kept unimpaired so that at the end of any given term of years. the taxpayer can not only recover the acquisition cost. INC. COMMISSIONER OF INTERNAL REVENUE [JULY 26. For then. 2012] Deductibility of Depreciation Expense as it relates to purchase of vehicles Guidelines to claim depreciation as a deduction in gross income: Like those with limited duration PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 121 of 158 Last Updated: 30 July 2013(v3) . and 4. 2013) The term is also applied to amortization of the value 84 of intangible assets. It must be charged off during the taxable year. not matters of right. The BIR found that ABC claimed excessive depreciation of its buildings. however. The allowance for depreciation must be reasonable 2. On appeal. The reason is that deductions from gross income are privileges. A statement on the allowance must be attached to the return Q: Can an asset be depreciated beyond its acquisition cost? No. without making provision out of earnings for its replacement. The Supreme Court held that such value cannot be deducted from gross income as it was beyond the acquisition cost. in 1950 to 1953. Recovery in due time through depreciation of investment made is the philosophy behind depreciation allowance. In 1950. Should the findings of the CTA be affirmed? Yes provided there no arbitrariness and abuse of discretion on the part of the CTA. Q: What are the requisites for the deductibility of a depreciation expense? 1. but should be determined by a consideration of actual facts. but also make some profit. or profession 3. In LIMPAN INVESTMENT CORPORATION VS. business. 1967]. to gradually recover the acquisition cost. More importantly. the Supreme Court opined that depreciation is a question of fact and is not measured by theoretical yardstick. ABC Limpan argued that that some of its buildings are old and out of style. the CTA found that the depreciation was excessive. Limpan has not shown any arbitrariness or abuse of discretion on the part of the CTA. they are entitled to higher rates of depreciation than those adopted by the BIR in its assessment.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. of an amount more than the invested capital in an asset will run counter to the purpose of a depreciation allowance. Accordingly. the original investment remains as it was in the beginning aside some money to buy a replacement or. the use of which in the trade or business is definitely limited in duration. Q: What is depreciation? the rationale behind Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste. Basilan Estates claimed deductions for the depreciation of its assets up to 1949 on the basis of their acquisition cost. The findings of the tax court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion. the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation. hence. no deduction in the gross income shall be allowed for depreciation of the following: 1. its entities. and 2. Yachts. It results Q: What contributions are deductible in full? Donations to the following institutions are deductible in full: 1. The value of which should not exceed P2. the following shall be disallowed as deductions in the gross income: 1. or any of the domestic corporation or association specified in the Tax Code 2. helicopters.000 3. Not exceeding 10% (individuals) or 5% (corporations) of the taxpayer’s taxable income before charitable contributions 4. such as official receipts or other adequate records. Input taxes on the purchase of non-depreciable vehicles and all input taxes on maintenance expenses. and/or conduct of the trade or business or profession of the taxpayer Generally. All maintenance expenses on account of nondepreciable vehicles. in a constant charge over the useful life. Sum-of-theyears-digit method --------------------------------------------------------------(g) Charitable and other contributions (1) Requisites for deductibility (2) Amount that may be deducted --------------------------------------------------------------Read Section 34(H). In addition. Made within the taxable year 3. Decliningbalance method It is an accelerated method of depreciation which writes off a relatively larger amount of the asset’s cost nearer the start of its useful life than does the straight line. 2. management.400. and 4. It must be substantiated with sufficient evidence. 2013) 1. airplanes. Land vehicles with a value of more than P2. Donations to the Government. political subdivisions or fully owned corporations exclusively for undertaking priority activities in accordance with the national priority plan to be determined by NEDA Page 122 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . Tax Code Q: What are the conditions for deductibility of charitable contributions? The requisites are: 1. Evidenced by adequate receipts or records --------------------------------------------------------------(2) Methods of computing depreciation allowance (a) Straightline method (b) Declining-balance method (c) Sum-of-the-years-digit method --------------------------------------------------------------Q: What are the methods of computing depreciation allowance and define each? Straight-line method The annual depreciation charge is calculated by allocating the amount to be depreciated equally over the number of years of the estimated useful life of the property. Only one vehicle for land transport is allowed for the use of an official or employee 2. and/or aircrafts. Actually paid or made to the Philippine Government or any political subdivision thereof. There is a direct connection or relation of the vehicle to the development. operation.400. It results in a decreasing charge over the useful life It is an accelerated method of depreciation that provides higher depreciation expense in the earlier years and lower charges in the later years.000 Exception: the taxpayer is in the business of transport operations or lease of transportation equipment and the vehicles purchased are used in such operations.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. a foreign corporation whether resident or non-resident cannot be accredited as a done institution. non-profit corporation or organization must be created or organized under Philippine laws and that an NGO must be a non-profit domestic corporation. 1. Funded by the employer (employer contributes cash) 4. Tax Code Q: What are the requisites for deductibility of contributions to pension trust? 1. health. etc. 2013) 2. Donations to foreign institutions or international organizations pursuant to agreements. Social welfare institutions 4. at issue was whether or not international organizations with home offices based abroad are qualified to be granted donee institution status (accreditations as NGO). Pension plan is reasonable and actuarially sound 3. Note: A non-government organization shall refer to a non-stock. research. purposes 3. Republic Act 10028 (Expanded Breastfeeding Promotion Act) The law provides that the expenses incurred by a private health and non-health facility. establishments or institutions shall secure a "Working MotherBaby-Friendly Certificate" from the Department of Health to be filed with the Bureau of Internal Revenue. Payment has not yet been allowed as deduction Q: When are limitations? donations subject to When the donation is made to: 1. Donations to accredited Non-Government Organizations (non-profit domestic 85 corporation) --------------------------------------------------------------(h) Contributions to pension trusts --------------------------------------------------------------Read Section 34(J).PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Accredited domestic corporations for religious. the CIR ruled that a non-stock. treaties entered into by Government or special laws 3. In BIR RULING 19-01 [M AY 10. establishment or institution. NGOs (not accredited) The limitations are 10% of net income for individual taxpayers and 5% of net income for corporate taxpayers. The government for public purposes 2. That the deduction shall apply for the taxable period when the expenses were incurred 2. Employer must have established a pension or retirement plan for the payment of reasonable pension to its employees 2. shall be deductible expenses for income tax purposes up to twice the actual amount incurred provided: 1. establishments and institutions shall comply with the provisions of this Act within six (6) months after its approval 3. character-building and youth and sports development. Amount contributed must no longer be subject to the control of the employer 5. --------------------------------------------------------------(i) Deductions under special laws --------------------------------------------------------------Q: Name some special laws which provide for deductible business expenses. charitable. cultural or charitable purposes or a combination thereof. educational. _________________________________________ 85 NGOs are accredited by the PCNC (Philippine Council for NGO Certification) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 123 of 158 Last Updated: 30 July 2013(v3) . social welfare. before they can avail of the incentive. 2001]. That all health and non-health facilities. no part of the net income of which inures to the benefit of any private individual. Q: Is an international NGO qualified to be granted accreditation? No. scientific. non-profit domestic corporation organized and operated exclusively for scientific. That such facilities. in complying with the provisions of this Act. PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) 2. Republic Act Development Act) 8502 (Jewelry Industry (c) Partnerships --------------------------------------------------------------Read Section 34(L), Tax Code Q: What is meant by “Optional Standard deduction?” Section 34(L) provides that in lieu of the itemized deductions, an individual subject to tax excluding a nonresident alien may elect a standard deduction of not exceeding 40% of his gross sales or gross receipts, as the case may be. In the case of a domestic corporation and a resident foreign corporation, it may elect a standard deduction in an amount not exceeding 40% of its gross income. A non-resident alien (whether engaged or not) and a non-resident foreign corporation cannot claim OSD. The election to use OSD when made in the return shall be irrevocable for the taxable year for which the return is made. The law provides for a deduction from taxable income of fifty percent (50%) of expenses incurred in training schemes in connection with the Act and which shall be deductible during the financial year the expenses were incurred. 3. Republic Act 8525 (Adopt a school act) The law provides for a deduction from the gross income equivalent to fifty percent (50%) of expenses incurred in connection with the said act. 4. Republic Act 9999 (Free Legal Assistance Act) The law provides that a lawyer or professional partnerships rendering actual free legal services, as defined by the Supreme Court, shall be entitled to an allowable deduction from the gross income, the amount that could have been collected for the actual free legal services rendered or up to ten percent (10%) of the gross income derived from the actual performance of the legal profession, whichever is lower 5. RA No. 9994 (Expanded Senior Citizens Act) in relation to RR 7-2010 [July 20, 2010] The law provides that discounts given to senior citizens on certain goods and services shall be deductible from gross income. Also, private establishments employing senior citizens shall be entitled to additional deductions from gross income equivalent to fifteen (15%) of the total amount paid as salaries and wages to senior citizens. 6. RA No. 7277, as amended (Magna Carta of Disabled Persons) in relation to RR 7-2010 [July 20, 2010] The law provides that sales discounts given to persons with disabilities shall be deductible from gross income subject to certain conditions. Q: Who may avail of the OSD? 1. A citizen, whether resident or non-resident 2. Resident alien 3. Taxable estate or trust Note: A non-resident alien and a non-resident foreign corporation cannot claim OSD. Q: What are the rules in the determination of the amount of OSD? RR 16-2008 [NOVEMBER 26, 2008] provides for the following rules: 1. For individuals a. If on accrual basis of accounting, the OSD shall be based on gross sales b. If on cash basis of accounting, the OSD shall be based on gross receipts c. Cost of sales and cost of services are not allowed to be deducted for purposes of determining the basis of the OSD 2. For corporations a. It shall be based on gross income --------------------------------------------------------------(4) Optional Standard Deduction (a) Individuals, except non-resident aliens (b) Corporations, except non-resident foreign corporations PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 124 of 158 Last Updated: 30 July 2013(v3) PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) Note: The basis of the 40% OSD for individual taxpayers shall be gross sales or gross receipts, not gross income, because the “cost of sales” and the “cost of services” are not allowed to be deducted for purposes of determining the basis of OSD. Q: What is the rationale behind personal and additional exemptions under the Tax Code? Exemptions are fixed at arbitrary amounts intended to substitute for the disallowance of personal or living expenses as deductible items from the taxable income of certain individual taxpayers. The amounts represent roughly the equivalent of the taxpayer’s minimum subsistence and those of his dependents.(see PANSACOLA V. CIR [NOVEMBER 16, 2006]) Q: What are the rules in the determination of the amount of OSD of GPPs? RR 2-2010 [FEBRUARY 18, 2010] amended Sections 6 to 7 of RR 16-2008 with respect to the determination of the OSD of GPPs. A GPP is not subject to income tax but the partners shall be liable to pay income tax on their separate and individual capabilities for their respective distributive share in the net income of the GPP. For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation. The GPP may claim itemized deductions or in lieu thereof may opt to avail of the OSD allowed to corporations. The net income determined by either claiming the itemized deductions or OSD from the GPP’s gross income is the distributable net income from which the share of each partner is determined. If the GPP availed of the itemized deductions in computing its net income, a partner may still claim itemized deductions from his share in the net income of the partnership. However, if the GPP availed of the OSD in computing its net income, the partner can no longer claim further deduction from his share in the said net income. Q: Which kinds of individual taxpayers can avail of personal and additional exemptions? Citizens and resident aliens are allowed personal and additional exemptions; nonresident aliens engaged in trade or business in the Philippines are entitled to personal exemptions only by way of 86 reciprocity but not to additional exemptions. Q: How should credited? these exemptions be These exemptions must first be credited against gross compensation income; the excess, if any, can be used to offset taxable net income. Q: What is personal exemption allowed to individual taxpayers? All individual taxpayers, regardless of status, shall be allowed a basic personal exemption of P50,000. 87 --------------------------------------------------------------(5) Personal and additional exemption (RA. 9504, Minimum Wage Earner Law) (a) Basic Personal Exemptions (b) Additional exemptions for taxpayer with dependents (c) Status-at-the-end-of-the-year rule (d) Exemptions claimed by non-resident aliens --------------------------------------------------------------Read Section 35, Tax Code _________________________________________ 86 Thus, for a nonresident alien, his entitlement to personal and additional exemption depends on whether he is engaged in trade or business and his country of residence allows exemption to Filipinos. If not engaged, he will not be allowed the exemption. Note as well that employees of ROHQs, OBUs, and FCDUs are not entitled to personal and additional exemptions as they are subject to tax on gross income without the benefit of deductions/ exemptions. 87 Note that, previously, the amount of personal exemption depended on the status of the individual taxpayer. It was P20,000 for single individuals, P32,000 for legally married and P25,000 for head of a family. As amended by RA 9504, all individuals, regardless of status, are entitlted to a basic personal exemption of P50,000. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 125 of 158 Last Updated: 30 July 2013(v3) PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) Q: Can a benefactor88 of a PWD whose civil status is single avail of the “head of family” status to be entitled to personal exemption? It is no longer necessary. RA 9442, which amends RA 7277 or the Magna Carta for Persons with Disability, provides that a benefactor of a PWD whose civil status is single shall be considered as “head of family” and, as such, shall be entitled to personal exemption. However, the terms “head of family” and “his/her dependents” for purposes of availing personal exemption have been eliminated in view of an amendment brought about by RA 9504. The rule is that individual taxpayers regardless of status are entitled to the personal exemption. [see RR NO. 001-09 [DECEMBER 9, 2008]. Q: May parents and siblings be considered as additional exemptions? No. parents and siblings are considered dependents only for purposes of qualifying an individual to become head of a family but not for purposes of additional exemptions. Q: Are senior citizens supported and living with a taxpayer considered as additional tax exemptions? No. The word “dependent” does not include senior citizens. Q: Is a foster child considered a dependent? Yes. RA 10165 or “The Foster Care Act of 2012” amended the NIRC to include a “foster child” in the term “dependent.” Thus, foster parents may claim an addition exemption of P25,000 for each dependent (which includes the foster child) not exceeding 4. Q: What is the rule for married individuals? In the case of married individuals where only one spouse is deriving gross income, only such spouse shall be allowed the personal exemption. Q: What are the additional exemptions allowed to individual taxpayers? There shall be allowed an additional exemption of 89 P25,000 for each dependent not exceeding four. Q: What is the rule for spouses and legally separated spouses? The additional exemption for dependents can be claimed by only one of the spouses. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children. Q: Who is a “dependent” under the Tax Code? A dependent means a legitimate, illegitimate, or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. 90 Q: What is the “status-at-the-end-of-theyear” rule or the “change-of-status” rule with respect to personal and additional exemptions? This means that whatever is the status of the taxpayer at the end of the calendar year shall be used for purposes of determining his personal and additional exemptions. As held in PANSACOLA V. CIR [NOVEMBER 16, 2006], what the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid. Q: Are illegitimate children considered for additional exemptions? Yes. By express wording of the law, a dependent includes an illegitimate child. _________________________________________ 88 A benefactor refers to any person, whether related or not to the person with disability, who takes care of him/her as a dependent 89 Previously, the amount was P8,000. 90 Note that Illegitimate children are included in the definition of dependents and in the entitlement for additional exemption. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 126 of 158 Last Updated: 30 July 2013(v3) CA). Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made (capitalized interest. living or family expenses (c) Amount paid for new buildings or for permanent improvements (Capital expenditures) (d) Amount expended in restoring property (major repairs) (e) Premiums paid on life insurance policy covering life or any other officer or employee financially interested (f) Interest expense. Tax Code Q: What items are not deductible from gross income? A: No deduction shall in any case be allowed in respect to: 1. Read Section 36. 3. became 21 years old or became gainfully employed at the close of such year. see COMMISSIONER VS. 2013) A change of status of the taxpayer during the taxable year generally benefits. the rule is applied as follows: 1. Between two corporations more than 50% in value of the outstanding stock of each of which is owned by the same individual if either one of the companies is a holding company d. Losses from sales or exchanges of property directly or indirectly between related persons a. his estate may still claim the personal and additional exemptions for himself and his dependents as if he died at the close of such year. or if such dependents married. If the taxpayer dies during the taxable year. and losses from sales of property between related parties (g) non-deductible interest (h) non-deductible taxes (i) non-deductible losses (k) losses from wash sales of stock or securities --------------------------------------------------------------_________________________________________ 91 The rule of thumb is that which will be beneficial to the taxpayer. bad debts. (Capital expenditures. In the following cases. 2. see PAPER INDUSTRIES VS.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. If the taxpayer marries or should have additional dependents during the taxable year. Premiums paid on any life insurance policy covering the life of any officer or employee or of any person financially interested in any trade or business carried on by the taxpayer. living or family expenses 2. Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. becomes 21 years old or becomes gainfully employed during the taxable year. Personal. 4. Between the grantor and a fiduciary of any trust e. he may claim the corresponding additional exemption in full for such year. Between an individual and a corporation more than 50% in value of the outstanding stock of which is owned by such individual (except in the case of distributions in liquidation) c. SORIANO) 3. the taxpayer may still claim the same exemptions as if the spouse or any oth e dependents died. or corporate when the taxpayer is directly or indirectly a beneficiary under such policy 5. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . but does not 91 prejudice him. Between members of a family b. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust Page 127 of 158 Last Updated: 30 July 2013(v3) --------------------------------------------------------------(6) Items not deductible (a) General Rules (b) Personal. If the spouse or any of the dependents dies or if any such dependent marries. individual. I shall discuss an important topic in light of RR No. is a domestic transfer pricing issue when income are shifted in favor of a related company with special tax privileges such as Board of Investments (BOI) Incentives and Philippine Economic Zone Authority (PEZA) fiscal incentives or when expenses of a related company with special tax privileges are shifted to a related company subject to regular income taxes or in other circumstances. Is GSK’s contention correct? Yes. 7. 6.” The “economically relevant characteristics of the situations being compared” may make it necessary to consider other transactions that impact the transfer price under consideration. Non-deductible interest Non-deductible taxes Non-deductible losses Losses from wash sales of stock or securities true taxable income or to prevent evasion of taxes.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Canada’s minister for internal revenue reassessed GSK because the prices it paid for the ingredient were greater than an amount that would have been reasonable in the circumstances had they been dealing at arm’s length. allocate. Read Section 50. intra-firm transactions between related parties or associated enterprises. two Canadian pharmaceutical companies purchase the same ingredient for between $194 and $304 per kg from arm’s length suppliers. Now.512 and $1. Previously. GLAXOSMITHKLINE [2012 SCC 52. apportion. 9. GSK was paying for at least some of the rights and benefits under the Licence Agreement as part of the purchase prices for ranitidine from Adechsa. 2008] states that while the BIR is still revising the final draft of the RR on transfer pricing. the Licence Agreement could not be ignored in determining the reasonable amount paid to Adechsa PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 128 of 158 Last Updated: 30 July 2013(v3) . 8. During the same period. GSK argues the License and Supply Agreement it entered with Adechsa should be considered in determining if it is an arm’s length transaction. While transfer pricing issue typically occurs in crossborder transactions. The objective is to determine what an arm’s length purchaser would pay for the property and the rights and benefits together where the rights and benefits are linked to the price paid for the property. 2013] which provides the guidelines on transfer pricing implements this authority of the CIR to review controlled transactions among associated enterprises and to allocate or distribute their income and deductions in order to determine the appropriate revenues and taxable income of the associated enterprises involved in controlled transactions Note: Since we mentioned related parties. In this case. As such. Typically. 2013) f. 2013]) Note: Section 50 of the Tax Code refers to the power of the CIR to distribute. Tax Code Q: What is transfer pricing? Transfer pricing is generally defined as the pricing of cross-border. is being used to allocate income away from a company subject to regular income taxes. a transfer price occurs between a taxpayer of a country with high income taxes and a related or associated enterprise of a country with low income taxes.651 per kg. entitled to income tax exemptions. the Philippines does not have any guidelines on transfer pricing unlike in other jurisdictions. As held by the Supreme Court of Canada in HM V. it can also occur in domestic transactions. 2012]. RMC 026-08 [March 24. a proper application of the arm’s length principle requires that regard be had for the “economically relevant characteristics” of the arm’s length and non-arm’s length circumstances to ensure they are “sufficiently comparable. Between a fiduciary of a trust and a beneficiary of such trust. we have Transfer pricing guidelines which give life to Section 50 of the Tax Code. the BIR as a matter of policy subscribes to the OECD Transfer Pricing Guidelines in the interim. Such circumstances will include agreements that may confer rights and benefits in addition to the purchase of property where those agreements are linked to the purchasing agreement. . One context where transfer pricing issue occurs domestically is where one associated enterprise. OCTOBER 18. and shift income and expenses between related taxpayers to reflect their Q: GSK purchased a pharmaceutical ingredient from Adechsa. RR 22013 [January 23. 2013] or the Transfer Pricing Guidelines. 2-2013 [January 23. when income and/or expenses are shifted to a related party in order to minimize tax liabilities (see RR 22013 [January 23. a related nonresidency company for between $1. the taxpayer should present proof or substantiation that the conditions of the controlled transaction satisfy the arm‟s length principle. 2008] adopts the arm’s length standard as the ultimate test for determining the fairness of related party transactions. 2-2013 [January 23. or (2) reasonably accurate adjustments can be made to eliminate the effect of any such differences. and that the result falls within the arm‟s length range (i. (see methods below) Step 3: Determine the arm’s length results. the Bureau must determine the point within the arm‟s length range to which it will adjust the condition of the controlled transaction. Accordingly. all economically relevant characteristics of the situations being compared should be sufficiently similar so that: (1) none of the differences (if any) between the 2.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. For such price or margin comparisons to be meaningful. the Bureau requires sufficient and verifiable information on such entity The selection of a transfer pricing method is aimed at finding the most appropriate method for a particular case. Note: RR No.e. The Regulations also adopt the following arm’s length pricing methodologies to be used as appropriate: 1. no adjustment should be made. that the arm‟s length range is different from the one asserted by the tax administration). Comparable Uncontrolled Price (CUP) Method The CUP Method evaluates whether the amount charged in a controlled transaction is at arm‟s length by reference PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 129 of 158 Last Updated: 30 July 2013(v3) . the CIR may make appropriate allocations to reflect an arm’s length interest rate for use of such loan or advance. price or margin) falls outside the arm‟s length range asserted by the Bureau.e. such is applied on the data of independent party transactions to arrive at the arm‟s length result. More likely. 3. Thus. _________________________________________ 92 The arm's length interest rate shall be the rate of interest which was charged or would have been charged at the time the indebtedness arose in independent transaction with or between unrelated parties under similar circumstances. Step 2: Identify the tested party and the appropriate transfer pricing method. it is generally difficult to arrive at a specific ratio or range of deviation that may be considered as arm‟s length. the method that provides the most reliable measure of an arm‟s length result shall be used. The tested party is the entity to which a transfer pricing method can be most reliably applied to and from which the most reliable comparables can be found. However. where a member of a group of controlled entities makes a loan or advances directly or indirectly or becomes a creditor of another member of such group and charges no interest.g. In some cases. 1. For an entity to become a tested party. If the relevant condition of the controlled transaction (i. 2013] also adopted the arm‟s length principle as the most appropriate standard to determine transfer prices of related parties situations being compared can materially affect the price or margin being compared. 2013] Transfer Pricing Guidelines The Regulations prescribe the 3-step approach in the application of the arm’s length principl e: Step 1: Conduct a comparability analysis. The arm‟s length principle is based on a comparison of the prices or margins adopted or obtained by related parties with those adopted or obtained by independent parties engaged in similar transactions. the transfer pricing analysis would lead to a range of ratios. 2013) which applies not only to payment for goods but also to payment for services. If the taxpayer is unable to establish this fact. If the relevant condition of the controlled transaction (e. 2-2013 [January 23. RR No. or chargest interest at a rate which is not equal to an arm’s92 length rate. Q: What is the “arm’s length bargaining standard” with respect to the determination of the taxable income on inter-company loans or advances in relation to transfer pricing? RMC 026-08 [M ARCH 24.g. price or margin) that is the most reliable to establish whether the conditions of a transaction are arm's length. Once the appropriate transfer pricing method has been identified. it will be possible to apply the arm‟s length principle to arrive at a single figure or specific ratio (e. price or margin) is within the arm‟s length range. The standard to be applied in every case is that of an uncontrolled taxpayer dealing at arm’s length with another uncontrolled taxpayer. CPM focuses on the gross mark-up obtained by a supplier who transfers property or provides services to a related purchaser. 1989]. Esso claims that the margin fees it paid to the Central Bank on the remittances are ordinary and necessary expenses and should be deducted from its gross income. This method examines the net profit margin relative to an appropriate base such as costs. demanded in the absence of a stipulation to that effect. INC. The BIR assesses FDC for deficiency income by unilaterally imputing an “arm’s length” interest rate on its advances. COMMISSIONER OF INTERNAL REVENUE [JULY 7. Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Office in New York. for its disposal abroad. Note: The case below would have been decided differently if we had an RR on Transfer Pricing at that time. Cost Plus Method (CPM) . CPM is most useful where semi-finished goods are sold between associated enterprises or where the controlled transaction involves the provision of services. 4. Profit Split Method (PSM) . According to the case of CIR V. it seeks to value the functions performed by the reseller of a product. no interest 93 shall be due unless expressly stipulated in writing. distributed or reallocated. it can never be said therefore that the margin fees were appropriate and helpful in the development of petitioner's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively _________________________________________ 93 Q: Filinvest Development Corporation (FDC) extended advances in favour of its affiliate. VS. Despite the seemingly broad power of the CIR to distribute. This method is generally appropriate where the final transaction is made with an independent party. This is true even if the CIR is able to prove that the interest expense was in fact claimed by FDC. and that the price in the uncontrolled transaction may need to be substituted for the price in the controlled transaction. Transactional Net Margin Method (TNMM) . The resale price method evaluates whether the amount charged in a controlled transaction is at arm‟s length by reference to the gross profit margin realized in comparable uncontrolled transactions. 3. Any difference between the two prices may indicate that the conditions of the commercial and financial relations of the associated enterprises are not arm‟s length.RPM is applied where a product that has been purchased from a related party is resold to an independent party. FDC disputes this by saying the CIR lacks authority to impute theoretical interest and the rule is that interests cannot be The case would have been decided differently if we had an RR on Transfer Pricing. Q: Are margin fees deductible business expenses? No. The Supreme Court held that margin fees are not necessary and ordinary expenses. Essentially. the method attempts to value the functions performed by the supplier of the property or services. The margin fees are not expenses in connection with the production or earning of petitioner's incomes in the Philippines. Esso made profit remittances to its New York Head Office. 2013) to the amount charged in a comparable uncontrolled transaction in comparable circumstances.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. sales or assets attained by the member of a group of controlled taxpayers from a controlled transaction. the same does not include the power to impute theoretical interest even with regard to controlled taxpayers’ transactions. 2011]. In ESSO STANDARD EASTERN. 2. The term in the definition of gross income that even those income “from whatever source derived” is covered still requires that there must be actual or at least probable receipt or realization of the time of gross income sought to be apportioned. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 130 of 158 Last Updated: 30 July 2013(v3) . 5. apportion and allocate gross income under Section 50.PSM seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate) by determining the division of profits (or losses) that independent enterprises would have expected to realize from engaging in the transaction or transactions. Finally. Essentially.. Resale Price Method (RPM) . which is a separate and distinct income taxpayer from the branch in the Philippines.TNMM operates in a manner similar to the cost plus and resale price methods in the sense that it uses the margin approach. under the Civil Code. Is FDC’s contention correct? Yes. FILINVEST DEVELOPMENT CORPORATION [JULY 19. Income derived from any of their real properties 2. As noted by the Supreme Court IN CIR V. non-profit corporations – While generally exempt. Income from cafeterias. Non-stock. non-profit educational institutions – 1. with all the net income _________________________________________ 94 Means any trade. and exclusively for educational purposes. Tax Code Q: What is the tax treatment of proprietary education institutions and hospitals which are non-profit? Section 27(B) of the Tax Code provides that they shall pay a tax of 10% on their taxable income except: 1. and exclusively for educational purposes 2.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Any activity conducted from profit regardless of disposition thereof Page 131 of 158 Last Updated: 30 July 2013(v3) Q: What is meant by the terms “proprietary” and “non-profit?” Proprietary means private while non-profit means no net income or asset accrues to or benefits any member or specific person. directly. business.” Q: What is meant by “unrelated trade. or other activity. they shall be subject to internal revenue taxes on income from trade. or other activity”? It means any trade. business or other activity. the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. directly. non-stock. or TESDA. LUKES MEDICAL CENTER [SEPTEMBER 26. business or other activity. the conduct of which is not substantially related to the exercise or performance by such institution of its primary purpose or function. they remain liable for 1. However. Their exemption refers only to revenues derived from assets used actually. Q: What are the guidelines for the tax exemption of non-stock. the tax shall be imposed on the entire taxable income at 30% or asset devoted to the institution’s purposes and all its activities. 94 business. non-profit educational institutions. or other activity exceeds 50% of the total gross income derived by such 95 proprietary educational institution and hospital which are non-profit from all sources. Certain passive incomes subject to final tax 2. 95 Is any private schoolm maintained and administered by private individuals or groups with an issued permit to operation from the Department of Education or CHED. canteens and bookstores are also exempt if they are owned and operated by the educational institution and are located within the school premises 3. 2012]. 2013) --------------------------------------------------------------(7) Exempt Corporations (a) Proprietary educational institutions and hospitals (b) Government owned or controlled corporations (c) Others ----------------------------------------------------------------------------------------------------------------------------(a) Proprietary educational institutions and hospitals --------------------------------------------------------------Read Section 27(B). as the case may be PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . If the gross income from unrelated trade. “non-profit” does not necessarily mean “charitable. the conduct of which is not related to the exercise or performance by such educational institution of their educational purposes or functions 4. business. ST. nonprofit corporations and private educational institutions as provided in RMC 76-03? Non-stock. The interest income on bank deposits and yields from deposit substitutes may be exempt from income tax if there is showing that said income will be used actually. Lukes was liable for income tax at 10% as provided under Section 27(B)96 of the NIRC. however. In this case. Such revenue is subject to income tax at 10% under Section 27(B). Lukes cannot claim full tax exemption under Section 30 because it has paying patients and this is notwithstanding the fact that it is a non-profit _________________________________________ 96 Section 27(B) provides that proprietary educational institutions and hospitals which are non-profit shal pay a tax of ten percent (10%) on their taxable income 97 Section 30(E). PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . nonprofit institution for charitable and social welfare purposes exempt from income tax under Section 30(E) and (G) of the NIRC. including foreign currency deposits. no net income or asset accrues to or benefits any member or specific person. Q: Reconcile the tax treatment of proprietary educational institutions and hospitals which are non-profit under Section 27(B) and nonstock. with all the net income or asset devoted to the institution’s purposes and all its activities. 4. while the St. Section 30(E) and (G) requires that an institution be operated exclusively for charitable purposes to be completely exempt from income tax. non-profit charitable institutions under Section 30(E) and (G). 1. For Section 27(B) to apply. business or other activity is still taxable 2. NIRC provides that a non-stock corporation or association organized and operated exclusively for charitable purposes is exempt from income tax while Section 30(G) provides that a civic league or organization not organized for profit but operated exclusively for the promotion of social welfare is likewise exempt. St. is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. Bank deposits and foreign currency deposits are exempt from withholding tax but they must show proof that such income is used to fund proposed projects for their institution’s improvement 3.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. To be exempt from income taxes. However. non-stock charitable institution under Section 30(E) as it was not operated exclusively for charitable purposes. Thus. the Supreme Court ruled that St. LUKES MEDICAL CENTER [SEPTEMBER 26. The CIR claimed that St. Lukes is not operated exclusively for charitable purposes insofar as its revenues from paying patients are concerned. On the other hand. St. Private educational institutions – They shall be exempt from VAT but must be accredited with either the DepEd or CHED. Lukes Medical Center is a hospital organized as a non-stock and non-profit corporation. ST. as a proprietary non-profit hospital. Lukes did not qualify as a non-profit. income derived from trade.97 Decide. Section 30(E) and (G). LUKES MEDICAL CENTER [SEPTEMBER 26. St. it remains to be a proprietary non-profit hospital under Section 27(E) as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. It admits both paying and nonpaying patients. For proprietary educational institutions and hospitals which are non-profit to avail of the preferential tax rate. 2012]. in turn. Interest income from any bank deposits or yield on deposit substitutes. shall be subject to tax. 2013) 3. however. while providing for an exemption is qualified by the last paragraph which. in CIR V. In CIR V. Section 30(E) requires that the charitable institution must be organized and operated exclusively for charitable purpose. is that such income from activities conducted for profit. It is nevertheless allowed to engage in “activities conducted for profit” without losing its tax exempt status for its not-for-profit activities. the hospital must be non-profit which means that no net income or asset accrues to or benefits any member or specific person and all the activities of the hospital are non-profit. regardless of the disposition made of such income. ST. hospital. They shall be withholding agents for their employees’ compensation income subject to withholding tax. Lukes argues that it is a non-stock. provides that activities conducted for profit shall be taxable. They shall be withholding agents for their employees’ compensation income subject to withholding tax. Page 132 of 158 Last Updated: 30 July 2013(v3) Q: St. Lukes. 2012]. The consequence. PAGCOR V. agencies and instrumentalities owned and control by the government liable to pay income tax? All corporations. GSIS SSS Phil Health 98 Local Water Districts PCSO 2005 which the BIR issued to implement the VAT law subjecting PAGCOR to VAT is invalid for being contrary to RA 9337. or a mutual aid association or a non-stock corporation organized by employees providing for the payment of life. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . Cemetery company owned and operated exclusively for the benefit of its members 5. or instrumentalities owned or controlled by the government shall pay such rate of tax upon their taxable income except: 1. Q: RA 9337 amended Section 27(C) of the Tax Code and excluded PAGCOR from the enumeration of GOCCs exempt from the payment of corporate income tax. Thus. sickness. agricultural or horticultural organization not organized principally for profit 2. charitable. Government educational institution 10. or other benefits exclusively to the members of such society. athletic. Is PAGCOR subject to income tax? No. Nowhere in RA 9337 is it provided that PAGCOR can be subjected to VAT. the same was merely granted to the acquiescence of the House Committee on Ways and Means to the request of PAGCOR. 3. or cultural purposes. officer or any specific person 6. alteration or repeal by Congress. The argument that the withdrawal of the exemption violates the nonimpairment clause will not hold since any franchise is subject to amendment. accident. Non-stock corporation or association organized and operated exclusively for religious. order or association. Farmers or mutual typhoon or fire insurance company. or association. Labor. Tax Code) Note: That is the general rule. not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual 7. operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system. the provision of RR 16_________________________________________ 98 Inserted by RA 10026. 5. The Supreme Court held that the original exemption of PAGCOR from corporate income tax was not made pursuant to a valid classification based on substantial distinction so that the law may operate only on some and not on all. Tax Code Q: Are GOCCs. 2013) --------------------------------------------------------------(b) Government owned or controlled corporations --------------------------------------------------------------Read Section 27(C). or non-stock corporation or their dependents 4. agencies. A beneficiary society. mutual or cooperative telephone company or like Page 133 of 158 Last Updated: 30 July 2013(v3) (see Section 27(C). Mutual savings bank not having a capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit 3. Tax Code Q: What are the exempt corporations enumerated in Section 30 of the Tax Code? 1. however. chamber of commerce. A non-stock and non-profit educational institution 9. mutual ditch or irrigation company. Business league. scientific. or for the rehabilitation of veterans. made clear that PAGCOR remains to be exempt from VAT.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. no part of its net income or asset shall belong to or inure to the benefit of any member. or board of trade. order. Civil league or organization not organized for profit but operated exclusively for the promotion of social welfare 8. The Court. 4. The provisions of special laws or general laws may provide otherwise. Instead. 2. 2011] --------------------------------------------------------------(c) Others --------------------------------------------------------------Read Section 30. organizer. BIR [M ARCH 15. (see DUMAGUETE CREDIT COOPERATIVE V. The CTA ruled against the credit cooperative stating that withholding tax on income payments subject to FWT includes said interests as “interests from similar arrangements. Q: Are all the activities of the enumerated exempt corporations exempt from tax? No. 2010]). The fact that “similar arrangements” is preceded by banking terms means that those subject to withholding must have deposit peculiarities. the income of whatever kind and character of the organizations mentioned above from any of their properties. or form any of their activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under the Code. As clarified by RMC 35-2012 [AUGUST 3.” Is CTA’s ratio correct? No. and 11. SINCO EDUCATIONAL CORP [OCTOBER 23. Q: A credit cooperative was assessed deficiency withholding tax on interest from savings and time deposits of its members. fruit growers. Note: The exemption refers to income received by these corporations from undertakings which are essential to or necessarily connected with the purposes for which hthey were organized and operated. non-profit educational institution charges tuition and other fees for the different services it renders. or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales. etc and on interest income from a depository bank under the EFCDS of non-stock. 2012]. non-profit educational institutions? As provided in RMC 76-03 [November 14. CIR [JANUARY 22. dues. It does not in itself make a school a profitmaking enterprise. Since interest from any Philippine currency bank deposit yield or any other monetary benefit from deposit substitutes are paid by banks. The provision in the National Internal Revenue Code of 1977 which granted income tax exemption to such recreational clubs was omitted in the current list of tax exempt corporations under National Internal Revenue Code of 1997. and royalties derived from sources within the Philippines are subject to the 20% final withholding tax and interest income derived by them from a depository bank under the expanded foreign currency deposit system shall be subject to 71/2% final withholding tax. 2013) organization of a purely local character. and fees collected from members for the sole purpose of meeting its expenses. non-profit corporations and non-stock. 2003]: For non-stock non-profit corporation. In CIR V. their interest income from currency bank deposits and yield or any other monetary benefit from deposit substitute instruments and from trust funds and similar arrangement.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. recreation. and other non-profit purposes (hereinafter referred to as "recreational clubs") are not exempt from income tax. the Supreme Court held that the amount of fees charged by the school depends upon the policy and a given administration at a given time and is not conclusive of the purposes of the institution. Q: Are recreational clubs exempt from income tax? No. Q: If a non-stock. less the necessary selling expenses on the basis of the quantity of produce finished by them. as amended. other entities such as cooperative are not required to withhold the corresponding tax on the interest from savings and time deposits of its members. the income of which consists solely of assessments. 1956]. Farmers. They are subject to income tax on income of whatever kind and character from any of their properties (real or personal) or from any of their activites (unrelated) conducted for profit. real or personal. G. does the institution lose its tax-exempt status? No. preferential treatment accorded to members of cooperatives who are exempt in the same way as the cooperative themselves. This is also consistent with the PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: What is the difference in tax treatment on interest income from currency bank deposits and yield. Page 134 of 158 Last Updated: 30 July 2013(v3) . Notwithstanding that they are exempt corporations. clubs which are organized and operated exclusively for pleasure. regardless of the disposition made of such income. the taxable income derived for each taxable year: 1. non-profit corporations. on or before the 14th day of the fourth month following the end of its taxable year.000 and upper brackets. Certification of actual utilization of the said income. In relation to Section 23 of the NIRC. Resident citizens are taxable on income from all sources within and without the Philippines. Those topics I have discussed previously. These assets can be in the form of real properties that return rental income. th --------------------------------------------------------------10. On the other hand. If you look closely at Part 10 to 15 of the reviewer which deals with the taxation of the different taxpayers. the same is not passive income. I will no longer discuss or I will not discuss extensively. Taxation of resident citizens. 2013) Unlike non-stock. Note: I stated several pages back that I would focus on the concepts first and that I would discuss the tax rates at a later time. 100 Only difference really is the source of income Page 135 of 158 Last Updated: 30 July 2013(v3) . Generally. Board Resolution by the school administration on proposed projects to be funded out of the money deposited in banks or placed in money markets. All other individuals are taxable only on income from sources within the Philippines. nonresident citizens. Q: Differentiate passive income. for nonstock non-profit education institutions.000 but not over P30. the interest income from currency bank deposits and yield from deposit substitute instruments used actually. Q: What is the income tax rate imposed on ordinary income? It shall be subject to the graduated income tax with 99 rates from 5% to 32%. From all sources within the Philippines only by a non-resident citizen including overseas contract workers. my focus on these parts will be the tax rates and no longer the concepts and principles. Again. That time is now. ordinary income from Ordinary income is income other than capital gain and those incomes which fall under the category of passive income. and 3. 2. Tax Code PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 _________________________________________ 99 For ordinary income over P10. shares of stock in a corporation that earn dividends or interest income received from savings. passive income is income generated by the taxpayer’s assets. From all sources within and without the Philippines by resident citizens. directly and exclusively in pursuance of their purposes as an educational institution. if the income is generated in the active pursuit and performance of the corporation’s primary purposes. by a resident alien or a non-resident alien engaged in trade or business in the 100 Philippines. 3.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Certification from their depository banks as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7 ½% tax on interest income under the expanded foreign currency deposit system. non-resident aliens a) General rule that resident citizens are taxable on income from all sources within and without the Philippines b) Taxation on compensation income c) Taxation of business income/income from practice of profession d) Taxation of passive income e) Taxation of capital gains --------------------------------------------------------------Read Section 24(A). shall be subject to the graduated income tax in accordance with the following schedule provided under Section 24 Note: Again for the n time. 2. are exempt from the 20% final tax and 7 ½% tax on interest income under the expanded foreign currency deposit system imposed provided they submit on an annual basis submit to the Revenue District Office concerned an annual information return and duly audited financial statement together with the following: 1. it’s basically a summary of what we already have discussed except for a few topics. From all sources within the Philippines only. a fixed amount is added to the taxable amount subject to the graduated income tax rate. If the total exceeds P30. Gains not subject to capital gains tax PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 --------------------------------------------------------------Page 136 of 158 Last Updated: 30 July 2013(v3) . OBUs 3. The tax is 25% of the entire or gross income received from sources within the Philippines and 15% of the gross income received as compensation. As to (a)(2) – Separation pay is part of taxable compensation income when the separation is involuntary.g. Note that the value of such fringe benefits and de minimis in excess of the ceiling is included in the determination of the P30. If any cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses. night shift differential pay. overtime pay. they shall be included in the taxable compensation income. RHQ or ROHQ of MNCs 2. salaries and other emoluments by reason of his employment by: 1. Q: What incomes graduated rates? are subject to the 1. If he is not an employee of the corporation. age or length of service. 2013) Q: Differentiate the tax treatment of the income of non-resident aliens engaged in trade or business in the Philippines and those nonresident aliens not so engaged. whether rank-and-file or managerial or supervisory in excess of the ceiling prescribed. and Other benefits not exempt (4) Director’s fees (b) Non-monetary compensation (1) Fringe benefit not subject to tax --------------------------------------------------------------Note: Let’s just reiterate and clarify the topics here. Passive income not subject to final tax 4. it is not treated as compensation income because of the absence of an employer-employee relationship. As to (a)(3) – Retirement benefits shall be part of taxable compensation income if such benefits were received by an employee who fails to meet the minimum requirements of a reasonable private benefit plan (e. if the director is at the same time an employee of the employer/corporation constitute compensation income. and 13 month pay in addition to the basic salary/wage exceed P30. Foreign petroleum service contractor or subcontractors Q: How is the income tax of married individuals computed? Married individuals shall compute separately their individual income tax based on their respective total taxable income. De minimis benefits granted by an employer to employees. 13th month pay. Minimum wage earners shall be exempt from the payment of income tax on their taxable income.000. When the aggregate amount of monetary benefits th like bonuses.000. Engaged in trade or business Subject to income tax in the same manner as an individual citizen and a resident alien on taxable income received from sources within the Philippines Not engaged in trade or business --------------------------------------------------------------b) Taxation on compensation income (i) Inclusions (iii) Exclusions (iii) Deductions ----------------------------------------------------------------------------------------------------------------------------(i) Inclusions (a) Monetary compensation (1) Regular salary/wage (2) Separation pay/retirement benefit Not otherwise exempt (3) Bonuses.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Fringe benefits given to rank-and-file employees 2. It is instead income derived from the conduct of trade or business or exercise of a profession As to (b)(1) – The following fringe benefits form part of compensation income: 1. Compensation income 2. As to (a)(4) – Director’s fees. their holiday pay. the same shall be divided equally between them for the purpose of determining their respective taxable income Q: Is the income of minimum wage earners be subject to the graduated income tax rates? No. the excess shall be taxable gross income. Business income and income from practice of profession 3. and hazard pay received by them shall likewise be exempt from income tax. Further.000 benefits excluded from gross income. I will include the tax rates for all taxpayers instead of separating the discussion. Section 28(A)(7). Remember our previous discussions. 14-2012 [NOVEMBER 7. Section 28(B)(1). To simplify matters. As to (iii)(c) – I’d like to reiterate that the exemption of the minimum wage is actually an exclusion. --------------------------------------------------------------c) Taxation of business income/income from practice of profession --------------------------------------------------------------Note: We already discussed this. An individual taxpayer can claim as deduction from his gross income the premium payment for health and/or hospitalization insurance for an amount not exceeding P2. Section 25(A)(2). Some points lang. Read Section 34(M). Tax Code Note: The relevant and recent BIR issuance on the matter is RR No. This is to make it easier to memorize and so we can better highlight the differences in tax treatment.400 per family during the taxable year provided the gross family income does not exceed P250. Section (D)(3). PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 137 of 158 Last Updated: 30 July 2013(v3) . you should know by now that they’re not entitled to any deduction or exemptions. we shouldn’t dwell too much here especially on personal exemptions and additional exemptions. --------------------------------------------------------------d) Taxation of passive income (i) Passive income subject to final tax (a) Interest income (b) Royalties (c) Dividends from domestic Corporations (d) Prizes and other winnings (ii) Passive income not subject to final tax ----------------------------------------------------------------------------------------------------------------------------(a) Interest income --------------------------------------------------------------Read Section 24(B)(1). not a deduction. Well. and 4. Section (B)(5). The next part I will discuss extensively and with the corresponding final tax rates. 2013) (iii) Exclusions (a) Fringe benefits subject to tax (b) De minimis benefits (c) 13th month pay and other benefits and payments specifically excluded from taxable compensation income --------------------------------------------------------------Note: We need not discuss this any further. Section 27(D)(1). Overtime pay 3. Tax Code Q: May a taxpayer deduct from his gross income premium payments for health and hospitalization insurance? Yes. Note: Only a non-resident alien not engaged in trade or business in the Philippines cannot claim this deduction. What is important to note is that such income is subject to the graduated income tax rates. It is tax-exempt! We have also discussed that in the kinds of taxpayers. Only one spouse claiming the additional exemption for dependents shall be entitled to this deduction. Holiday pay 2. Hazard pay Let’s discuss briefly health and hospitalization insurance. Nightshift differential. Also note that following income of a minimum wage worker are also exempt from tax: 1.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 2012] which clarifies and sums up the proper tax treatment of interest income earnings on financial instruments and other related transactions.000 for the taxable year. Section 25(B). --------------------------------------------------------------(iii) Deductions (a) Personal exemptions and additional exemptions (b) Health and hospitalization insurance (c) Taxation of compensation income of a minimum wage earner --------------------------------------------------------------Note: Again. Non-resident alien b. h. in case of zero-coupon instruments and securities upon their original issuance. The interest payors in such a case are required to withhold 20% creditable withholding tax pursuant to section 7 of RR 14-2012 4. The long-term deposits or investments must have a maturity period of not less than 5 years The long-term deposits or investments must be in the denominations of P10. 2013) REVENUE REGULATIONS NO. The final withholding tax shall accrue. Except those specifically exempted by law. Resident foreign corporation a. Non-resident aliens engaged in trade or business d. common or individual trust funds. any other income such as gains from trading. Interest income derived from a depository bank under the expanded foreign currency deposit system (EFCDS) 25% (flat tax rate imposed on gross income) 30% Interest income derived from government debt instruments and securities They are considered “deposit substitutes. c. Resident foreign corporation a. Interest from Philippine currency bank deposits and yield from deposit substitute and from trust funds or similar arrangements d. Note: As clarified in RMC 77-2012 [November 22. a resident alien or a nonresident alien engaged in trade or business in the Philippines. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 138 of 158 Last Updated: 30 July 2013(v3) . The long-term deposit or investment certificates under name of the individual. 14-2012 [NOVEMBER 7. Resident aliens c. subject to 20% final withholding tax. a final tax shall be imposed on the entire income.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 3. 2012] Interest income derived by domestic and resident foreign corporations from long-term deposits NOT issued by banks or investment certificates that are NOT considered deposits or deposit shall be subject to 30% regular corporate income tax. Domestic corporation d. Note: If the bank account is jointly in the name of a nonresident and a resident. etc evidences by certificates in the BSP-prescribed form The long-term deposits or investments must be issued by banks only. Resident aliens c. final withholding tax shall accrue upon payment of the interest. 2012] – The mere issuance of government debt instruments and securities is deemed as falling within the coverage of "deposit substitutes" irrespective of the number of lenders at the time of origination. Thus. Citizens b. Depositor is an individual citizen (resident or nonresident). Note: As clarified in RMC 77-2012 [November 22. foreign exchange gain shall not be covered by income tax exemption. f. Citizens b. 50% shall be treated as exempt and the remaining 50% shall be subject to the final tax of 7 ½. Non-resident alien not engaged in trade or business a. deposit substitutes. provided the following requisites are met: a.000 and other BSPprescribed denominations The long-term deposits or investments should not be pre-terminated. e. Four years to less than five year – 5%. 20% g. Non-resident foreign corporation 2. Domestic corporation e. Interest derived from long long-term deposits or investments Derived from FCDUs: They are exempt from tax. In case of interest bearing. 2012] – Proper Tax Treatment of Interest Income Earnings on Financial Instruments and Other Related Transactions 1. If the deposit or investment is pre-terminated. a. the form of savings.” The same tax treatment as above is applied. Three years to less than four years – 12% If less than three years – 20%. Non-resident foreign corporations 7½% Tax-exempt b. The long-term deposits or investments must be in a. Residents b. Section 28(B).Non-resident foreign corporation (shall form part of their gross income Page 139 of 158 Last Updated: 30 July 2013(v3) Interest income derived all other instruments Any other debt instrument not within the coverage of deposit substitutes shall be subjected to a creditable withholding tax of 20%. 2012] The 20% creditable withholding tax (CWT) on interest income derived from any other debt instrument shall be imposed on each Interest payment to be made beginning on November 23. 2013) Derived by FCDUs: investment until maturity. or non-resident alien engaged in trade or business in the Philippines) invests in a long-term deposit or investment which has a remaining maturity period of less than 5 years and said investor holds the said deposit or PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . 10% Q: Using the abovementioned facts. resident aliens and non-resident aliens engaged in trade or business and domestic corporations and resident foreign corporations 25% . 2012. Section 27(D)(1). Section 25(A)(2). or accounts as of November 23. Non-residents 5. securities. and local commercial banks 6. 2012 (date of effectivity of RR 12-2012).PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. literary works. irrespective of the instruments’ and securities’ date of issuance. Interest income derived banking units of OBUs The individual depositor or investor who acquired the instrument shall be subject to 20% FWT on his interest income because the remaining maturity period is less than 5 years (RMC 81-2012) a. other OBUs. If the foreign currency transactions are with residents other than OBUs and local commercial banks. Q: An individual depositor or investor (a citizen. whether resident or nonresident. Income derived by OBUs from foreign currency transactions with nonresidents. resident alien. let us say the investors held the instrument for less than 5 years upon exercising his call option. b. Section 25(B). What is the FWT due? The individual depositor or investor who acquired the instrument shall be subject to the graduated rates of FWT provided in Sections 24(B)(1) and Sections 25(A)(2) depending on the period he held the same (RMC 81-2012) Tax-exempt --------------------------------------------------------------(b) Royalties --------------------------------------------------------------Read Section 24(B)(1). Tax Code Q: What is the proper tax treatment on individual taxpayers of income derived from royalties? Royalties (except books. This covers all interest income from current outstanding instruments. What is the FWT due? 10% Tax-exempt from offshore a.Non-resident aliens not engaged in trade or business (shall form part of their gross income) 30% . Note: As clarified in RMC 77-2012 [November 22. Section 28(A)(7).Citizens. musical compositions 20% . Citizens b. Non-resident foreign corporation corporation. Section 28(A)(7)(d) and Section 28(B)(5)(b). 2013) Royalties from books. prizes and other winnings? Prizes amount to more than P10. if applicable 2. 30% if no tax treaty and does not comply with the tax-sparing provision --------------------------------------------------------------(c) Dividends from domestic Corporations --------------------------------------------------------------Read Section 24(B)(2).000 or less to Shall form part of ordinary income Q: What is the proper tax treatment on dividends from domestic corporations? a. literary works. Tax Code Q: What is the proper tax treatment on individual taxpayers of income derived from royalties. only resident citizens and domestic corporations would be subject to tax on dividends received from foreign corporations as they taxable on income without the Philippines. --------------------------------------------------------------(d) Prizes and other winnings --------------------------------------------------------------Read Section 24(B)(1). I shall discuss later the topic of tax treatment on dividends received from a domestic corporation by a non-resident foreign corporation in relation to the tax-sparing provision and tax treaties. however. Resident foreign corporation 10% 20% 25% (flat tax rate imposed on gross income) Tax-exempt (treated as inter-corporate dividends) Resident foreign PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 140 of 158 Last Updated: 30 July 2013(v3) . 15% if no tax treaty but satisfies the tax-sparing provision 3. Section 25(A)(2). and Section 25(B).000 20% . Note: In other words. whether resident or nonresident. Just the tax rates. Section 25(A)(2). Tax treaty rate. are subject to the 15% branch profit remittance tax 1. musical compositions 10% . Non-resident engaged in trade or business a. whether resident or nonresident.Citizens. Resident aliens a. resident aliens and non-resident aliens engaged in trade or business 25% .Non-resident aliens not engaged in trade or business (shall form part of their gross income) Prizes amounting P10. just the basics lang muna for dividends received by corporate taxpayers.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Non-resident aliens not engaged in trade or business a. resident aliens and nonresident aliens engaged in trade or business 25% . Section 27(D)(4). Q: What is the proper tax treatment on dividends from foreign corporations? The income shall form part of the gross income of the corporation but the situs of the income becomes material except for a resident citizen and domestic corporation which is taxed on worldwide income.Non-resident aliens not engaged in trade or business (shall form part of their gross income) a.Citizens. Section 25(B). For now. Tax Code Note: I’ll discuss the tax treatment of dividends of all kinds of taxpayers here na so it’s simpler. Domestic corporation b. Individual taxpayers exempt from income tax a) Senior citizens b) Minimum wage earners c) Exemption granted under international agreements --------------------------------------------------------------Note: No need to discuss minimum wage earners. --------------------------------------------------------------PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 141 of 158 Last Updated: 30 July 2013(v3) .000 On sale of real property in the Philippines held as a capital asset --------------------------------------------------------------11. 5% of the net capital gains 10% of the net capital gains 6% of the gross selling price. Taxation of non-resident aliens engaged in trade or business a) General rules b) Cash and/or property dividends c) Capital gains Exclude: Non-resident aliens not engaged in trade or business --------------------------------------------------------------Note: There is no need for an extensive discussion here. remember that is the only tax which makes no distinction as to who the taxpayer is so we follow the standard rates. non-resident aliens engaged in trade or business are taxed at 20%. whether an individual or a corporation. 2013) PCSO and Winnings Lotto Tax-exempt (ii) Passive income not subject to final tax --------------------------------------------------------------Q: What is the tax treatment of passive incomes which do not meet the conditions for them to be subject to final tax? Such incomes shall be included in gross income of the taxpayer and shall be subject to the graduated income tax rates. As to exemption granted under international agreements. whichever is higher. Note: (1) Shares listed and traded in the stock exchange are not subject to capital gains tax. As to capital gains. Let’s discuss the treatment of senior citizens. are required to file their income tax return and pay the tax. qualified senior citizens deriving returnable income during the taxable year. Q: What is the tax treatment of senior citizens for purposes of income tax? Generally. Q: What is the tax treatment on capital gains on sales or exchanges of capital stock and real property? On sale of shares of stock of a domestic corporation not listed and not traded through a local stock exchange held as a capital asset a. such shall be subject to the ½ of 1% stock transaction tax. subject to the graduated income tax rates. certain persons and entities are exempt from taxation because the Philippines is a signatory to tax treaties which provide for such exemptions.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. the gain will form part of ordinary income. Capital gains in excess of P100. whether from compensation or otherwise. --------------------------------------------------------------12. Capital gains not over P100. The general rule is that non-resident aliens engaged in trade or business shall be subject to the graduated income tax rate like citizens and resident aliens. (2) If the real property is not a capital asset.000 b. Instead. exchange. or the current market value at the time of sale. or other disposition of other capital assets --------------------------------------------------------------Note: This applies to all taxpayers. In the case of dividends. --------------------------------------------------------------e) Taxation of capital gains (i) Income from sale of shares of stock of a Philippine corporation (a) Shares traded and listed in the stock exchange (b) Shares not listed and traded in the stock exchange (ii) Income from the sale of real property situated in the Philippines (iii) Income from the sale. Tax Code 28(A)(1). Gross Income --------------------------------------------------------------13. Let’s focus instead on Item (a) so we can discuss the normal corporate income tax rate and the minimum corporate income tax (MCIT). Just refer to the previous discussions. Taxation of domestic corporations a) Tax payable b) Allowable deductions c) Taxation of passive income d) Taxation of capital gains e) Tax on proprietary educational institutions and hospitals f) Tax on government-owned or controlled corporations. Taxable Income means the pertinent items of gross income specified in the Code.) Q: Define taxable income and gross income for purposes of corporate income taxes. For domestic corporations and resident foreign corporations. Shall mean gross sales less sales returns. 007-10 [JULY 20. For resident foreign corporations: 1. MCIT is imposed on the gross income of domestic and resident foreign corporations. Q: Why is the distinction of the two relevant for purposes of corporate income tax? 1. 2. Different rates of tax apply on certain passive incomes. 2013) However. the effective rate is now 30%. and 2. RCIT is imposed on its gross income. if any authorized for such types of income by the Code or other special laws. Q: What is the regular corporate income tax (RCIT) imposed on corporations? The rate of RCIT imposed on corporations is 30%. For nonresident foreign corporations. discounts. Regular Corporate Income Tax (RCIT) is imposed on taxable income. Net income and taxable income is used interchangeably when it comes to corporations. Note that it was 35% effective November 1. allowances and cost of goods sold. We already discussed those. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 142 of 158 Last Updated: 30 July 2013(v3) . 2009. Note: I will discuss the regular or normal corporate income tax rate as it applies to resident foreign corporations and nonresident foreign corporations here na rin. (see RR No. For corporations. The rate is imposed on taxable income from sources within the Philippines. 2005 but on January 1.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. When applicable. The rate is imposed on taxable income from sources within and without the Philippines. For domestic corporations: 1. 2010]. 2. agencies. The returnable income is in the nature of compensation income but he qualifies as a minimum wage earner. Section Section 28(B)(1). he shall be exempt under the following cases: 1. or instrumentalities --------------------------------------------------------------Note: I will no longer discuss Items (b) to (e). less the deductions and/or personal and additional exemptions. taxable income would mean net income. _________________________________________ 101 101 --------------------------------------------------------------a) Tax payable (i) Regular tax (iii) Minimum corporate income tax (MCIT) ----------------------------------------------------------------------------------------------------------------------------(i) Regular tax --------------------------------------------------------------Read Section 27(A). If the aggregate amount of gross income earned by the Senior Citizen during the taxable year does not exceed the amount of his personal exemptions (basic and additional) Note that the exemption of senior citizens from income tax does not extend to all types of income earned during the taxable year such as those subject to final taxes. capital gains from sales of shares of stock not traded in the stock exchange are. the President upon recommendation of the Secretary of Finance may allow domestic and resident foreign corporations the option to be taxed at 15% of gross income after the following conditions have been satisfied: 1. However. Baka dumugo mga ilong natin. Section 28(A)(2). Resident Foreign corporation Q: Which corporate taxpayers are exempted from MCIT? 1. 2. Q: Which corporate taxpayers can be subject to MCIT? 1. As provided under Section 27(A)(1) and Section 28(A)(1). a tax effort ratio of 20% of the GNP 2. Different rates of tax apply on certain passive incomes. Firms that are taxed under a special income tax regime. as amended by RR 12-2007 [October 10. Upon election of the gross income tax option. The rate is imposed on gross income from all sources within the Philippines. 2.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 3. 2013) 2. Domestic corporation 2. (d) Corporations exempt from MCIT (e) Applicability of the MCIT where a corporation is governed both under the regular tax system and a special income tax system --------------------------------------------------------------Section 27(E) and Section 28(A)(2). a 0. Resident foreign corporations engaged in business as ROHQs 4. Resident foreign corporations engaged as OBUs 3. a VAT tax effort of 4% of GNP 4. not included in the gross income as well as interest from foreign loans and intercorporate dividends which are subject to final tax rates. --------------------------------------------------------------(iii) Minimum corporate income tax (MCIT) (a) Imposition of MCIT (b) Carry forward of excess minimum tax (c) Relief from the MCIT under certain conditions PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 143 of 158 Last Updated: 30 July 2013(v3) . Tax Code Q: What is the minimum corporate income tax (MICT?) A minimum corporate income tax of 2% of gross income shall be imposed on a domestic corporation and resident foreign corporation beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations when: 1. it shall be irrevocable for 3 consecutive taxable years during which the corporation is qualified Note: I’m sure when you read the enumeration. 1998]. just memorize it nalang. a ratio of 40% of income tax collection to total tax revenues 3. Tax Code and RR 9-98 [August 5. you thought of this: WTF is this shit?!?! Well. Let’s not waste time and energy explaining each item of the enumeration. such operation has zero or negative taxable income (see Section 27(E).9% ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP This option is available to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed 55%. Resident foreign corporations engaged in business as international carriers 2. For nonresident foreign corporations: 1. The gross income includes those income sourced from certain passive incomes including capital gains. the MCIT is greater than the RCIT for the taxable year. 2007]) Q: May the President allow domestic and resident foreign corporations the option to be taxed on their gross income? Yes. and gross income. For sure. tax cannot cover MCIT since the basis for the first is the annual net taxable income. Thus. ROMULO [MARCH 9. the primary purpose of any legitimate business is to earn a profit. 1998]. Q: What is the difference between RCIT and MCIT? The tax base of RCIT is taxable income while the tax base of MCIT is gross income. Page 144 of 158 Last Updated: 30 July 2013(v3) . 2007]: For purposes of MCIT. PAL [JULY 7. It is thus more limited than the gross income used in the computation of basic corporate income tax. 2010]). allowances and cost of services/direct cost. In COMMISSIONER VS. V. The two terms have their respective technical meanings. 2009]. Q: For purposes of MCIT. the cost of goods and other direct expenses from gross sales. Note: “Cost of goods sold” shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use while “cost of services” shall mean all direct costs and expenses necessarily incurred to provide the services required by 102 the customs and clients. as amended by RR 12-2007 [October 10. discounts. As noted by the Supreme Court in COMMISSIONER VS. the same items must be _________________________________________ 102 This only shows that deductions are not taken into account in MCIT. inclusions and exclusions/deductions from gross income for MCIT purposes are limited to those directly arising from the conduct of the taxpayer’s business. If apart from deriving income from these core business activities there are other items of gross income realized or earned by the taxpayer during the taxable period which are subject to the normal corporate income tax. while the basis for the second is gross. Hence. except real property. the capital is not being taxed. in case of sale of goods. V. which is the basis for basic corporate income tax. whichever is lower and this is in lieu of all other taxes. PAL under PD 1590 (its franchise) was liable only for basic corporate income tax or franchise tax. or gross revenue less sales returns. the tax rate was lowered. INC. the term "gross income" means gross sales less sales returns. certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. It is imposed in lieu of the RCIT. Furthermore. 2009]. 2010] answered this in the negative. and cannot be used interchangeably. which is the basis for the MCIT under Section 27(E). MCIT is included in “all other taxes” from which PAL is exempted. other items of gross income are realized or earned by the corporation. in case of sale of services. Since the tax base was broader. what is gross income? As provided in RR 9-98 [August 5. The MCIT serves to put a cap on such tax shelters.e. it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions and other stratagems. As a tax on gross income. Continued and repeated losses after operations of a corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect. PAL [JULY 7.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Q: Is MCIT a tax on capital and an additional tax imposition? The Supreme Court in CHAMBER OF REAL ESTATE AND BUILDER’S ASSOCIATION. ROMULO [MARCH 9. are these items included as part of gross income? Yes. discounts. The Supreme Court noted there is a distinction between taxable income. the MCIT is not an additional tax imposition. i. and allowances and cost of goods sold. INC. The CIR contends that PAL is subject to MCIT while it was the contention of PAL that the MCIT was included in the “in lieu of all other taxes” provision. Thus. 2013) Q: What is the purpose of MCIT? As held in the case of CHAMBER OF REAL ESTATE AND BUILDER’S ASSOCIATION. The MCIT is imposed on gross income which is arrived at by deducting the capital spent by the corporation in the sale of its goods. the basic corporate income PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Q: What if apart from the income from core business activities. Taxation of resident foreign corporations a) General rule b) With respect to their income from sources within the Philippines c) Minimum corporate income tax d) Tax on certain income Exclude: Page 145 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . It shall include substantial losses sustained due to fire. its “registered” activity shall be subject to the special tax regime tax while its “unregistered” activity shall be subject to the RCIT. flood and the like. robbery. To illustrate: Year RCIT MCIT Excess MCIT against RCIT 25. The amount of income tax payable now becomes 35. For the carry-over to apply. the corporation can credit the excess MCIT is has so far which totals 65.000. Q: Explain the carrying forward of excess MCIT against normal income tax. storm.000 (tax to be paid) 60.000 1999 60. the firm will have to pay the RCIT of P100. Note that with respect to the excess MCIT of 25. the Secretary of Finance can suspend its imposition on any corporation which suffers losses on account of Prolonged labor dispute Defined as losses arising from a strike staged by the employees which lasted for more than six (6) months within a taxable period and which has caused the temporary shutdown of business operations. except income exempt from income tax and income subject to final withholding tax 104 This is the tax to be paid because MCIT > RCIT 105 This Is the tax to be paid because MICT < RCIT --------------------------------------------------------------14.000 Force majeure 1998 50. in the case of a BOI-registered enterprise. RR No.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31.000.000 (tax to be 105 paid) 75. To this amount.000 40.27(E)(1). Q: Can the suspended? imposition of MCIT be _________________________________________ 103 This means that the term "gross income" will also include all items of gross income enumerated under Section 32(A) of the Tax Code.000 2000 100. You cannot credit the MCIT against the MCIT or other losses. as amended.000 (tax to be 104 paid) 100. 2013) included as part of the taxpayer's gross income for 103 computing MCIT. that can be claimed as tax credit against the normal income tax up to the year 2001 or three years from payment of the MCIT in 1998 and only when the RCIT is greater than MCIT. 9-98) Note: So. Any excess MCIT against the normal income tax is creditable within the next three (3) years from payment thereof. Q: Discuss the applicability of the MCIT where the corporation is governed by both under the regular income tax system and special tax income tax system.000 Legitimate business reverses In the year 2000.000. (see Section 2. theft or embezzlement. In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system. This term shall also include armed conflicts like war or insurgency. Yes. since the RCIT is greater than MCIT. the normal tax should be higher than the MCIT. or for other economic reason as determined by the Secretary of Finance. earthquake. It means a cause due to an irresistible force as by "Act of God" like lightning.000. the MCIT shall apply on operations covered by the regular income tax system. 15% if no tax treaty but satisfies the tax-sparing provision 3. Ito medyo madugo. a resident foreign corporation is taxed in the same manner as a domestic corporation. a tax sparing provision may be stipulated. nonresident foreign corporations are also subject to RCIT only that it is imposed on their gross income as compared to domestic and resident foreign corporations (on their taxable income). However. In the Philippines. the dividend is subject to: 1. For instance. Page 146 of 158 Last Updated: 30 July 2013(v3) . interest from foreign loans and intercorporate dividends. For non-resident foreign corporations. if applicable 2.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. We have already discussed them in domestic corporations. I will not discuss the other topics here. the foreign investor would be paying the same total amount of taxes due to the foreign country and the Philippines. MCIT is imposed on gross income. Tax treaty rate. It may be subject to RCIT or MCIT as the case may be. if the usual tax rate is 35 percent but a concession rate accrues to the country of the 106 investor rather than to the investor himself. it was 20% which represents the difference between the RCIT of 35% and the 15% tax on dividends. The rates are just different for certain passive incomes. To obviate this. 2013) (i) International carrier (ii) Offshore banking units (iii) branch profits remittances (iv) Regional or area headquarters And regional operating headquarters Of multinational companies --------------------------------------------------------------Note: I will not discuss this part na. PROCTER & GAMBLE PHILIPPINES [DECEMBER 2. the principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for the obvious reason of encouraging foreign investments. taxes exempted or reduced are considered as having been fully paid. This is so because they’re not entitled to deductions. --------------------------------------------------------------14. With tax sparing. 107 Note that previously. which represents the different between the regular income tax of 30% and 107 the 15% tax on dividends. Taxation of nonresident foreign corporations a) General rule b) Tax on certain income (i) interest on foreign loans (ii) intercorporate dividends (iii) Capital gains from sale of shares of stock not traded in the stock exchange Exclude: (i) Non-resident cinematographic film owner. the 15% tax on dividends received by a non-resident foreign corporation from a domestic corporation is imposed subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 15%. _________________________________________ 106 Q: What is the tax treatment on dividends received from a domestic corporation by a non-resident foreign corporation? PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 This means that. Just to stress the point. at the end of the day. I will zero in on dividends. 30% if no tax treaty and does not comply with the tax-sparing provision Q: What is a tax-sparing provision? As explained in the case of CIR V. The RCIT in the case of nonresident foreign corporation is already imposed on gross income! The gross income would include those income sourced from certain passive incomes except capital gains from sales of shares of stock. lessor or distributor (ii) Non-resident owner of lessor of vessels chartered by Philippine nationals (iii) Non-resident owner or less or aircraft machineries and other equipment --------------------------------------------------------------Note: As a general rule. They cannot be subject to MCIT. 1999]: A more general way of mitigating the impact of double taxation is to recognize the foreign tax as a tax credit. The CTA. the _________________________________________ 113 Here. 3. Tax Liability with no rates "X" Foreign Corporation income 109 Foreign Tax rate (50%) 110 RP Tax Rate (30%) Foreign Tax Credit 111 "X" tax payable to Foreign "X" tax payable to RP 400 200 120 120 80 120 Q: Is it required that the foreign country must give a “deemed paid” tax credit for the dividend tax waived by the Philippines making applicable the preferred dividend tax rate of 15%? As ruled in CIR V. in response. a US Corporation. 2009. Tax Liability with Preferential Rate and without Tax Sparing "X" Foreign Corporation income Foreign Tax rate (50%) RP Tax Rate (15%) Foreign Tax Credit "X" tax payable to Foreign "X" tax payable to RP 400 200 60 60 140 60 Q: When does a non-resident foreign corporation become entitled to the 15% FWT? In INTERPUBLIC GROUP OF COMPANIES.” It is the foreign jurisdiction that will allow the “deemed paid” tax credit. 109 Income (400) x Foreign Tax Rate (50%) = 200 110 Income (400) x RP Tax Rate (30%) = 120 111 [Income (400) x Foreign Tax Rate (50%)] – Foreign Tax Credit (120) = 80 112 The additional 60 will be considered as tax deemed paid or also known as the “phantom tax. COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO. The Code only requires that the foreign country shall allow the corporation a “deemed paid” tax credit in an amount equivalent to the percentage points waived by the Philippines. Procter & Gamble uses the old rates. it may avail of the preferential FWT rate of 15% on cash dividends received from a domestic corporation during the taxable year 2006. raised the question of whether the US corporation is entitled to the FWT at the rate of 15% or the rate of 20% in accordance with the RP-US Tax Treaty. INC. 2009. the total tax payable of the foreign corporation is 200. 1. In the administrative claim. the total tax payable of the foreign corporation is still the same at 200. Tax Liability with Preferential Rate and with Tax Sparing "X" Foreign Corporation income Foreign Tax rate (50%) RP Tax Rate (15%) Foreign Tax Credit "X" tax payable to Foreign "X" tax payable to RP 400 200 60 112 120 80 60 _________________________________________ 108 The example provided in the case of CIR v. the US corporation alleged that. This example modifies the example provided in the case and uses the current rates effective January 1. 7796 DATED FEBRUARY 21. VS. Here. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 147 of 158 Last Updated: 30 July 2013(v3) . concluded that if the country of domicile of the recipient corporation allows a credit against the tax imposable 113 by it an amount equivalent to 20% of the dividends remitted from a Philippine domestic corporation to corporations domiciled therein. 15% effective January 1. the Tax Code does not require that the foreign country’s tax laws deemed the parent-corporation to have paid the dividend tax waived by the Philippines. as a non-resident foreign corporation. who owns 30% of the total and outstanding voting capital stock of a Philippine advertising company filed a claim for the refund or issuance of a TCC for overpaid FWT on dividends withheld and remitted by the Philippine company. applying the ruling in CIR V. "X" Foreign preferential Corp. 1999]. PROCTER & GAMBLE PHILIPPINES [DECEMBER 2. "X" Foreign Corp. 1999]. 2013) Q: Illustrate the application of the taxsparing provision by providing an example.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Now. 2. 2011]. Note that the foreign tax rate and the foreign corporation income are hypothetical. "X" Foreign Corp. PROCTER & GAMBLE PHILIPPINES [DECEMBER 2. The CIR. 108 The total tax payable of the foreign corporation is now 140. a UK nonresident foreign corporation. are subject to the final tax of 32%. as amended. the CIR also contended that the US company’s transactions were bereft of any tax treaty relief application with the International Tax Affairs Division (ITAD). FEBRUARY 27. the dividend is subject only to the FWT of 15%. CIR [CTA CASE NO." However. which logically would include those received from Philippine corporations. 7923. VS. it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). Q: What is the meaning of most-favoured nation (MFN) and how is it applied to applications for tax treaty reliefs? The most-favoured nation simply means that a country which is the recipient of this treatment must. Mirant made income payments to VHL enterprises. SECOND VIEW: No. The CTA noted that under those treaties. a tax treaty relief application “is not made a condition precedent by law. _________________________________________ 114 Note: In SAL OPPENHEIM J R.The CTA noted that Mirant did not make such application. receive equal advantages as the "most favoured nation" by the country granting such treatment. which are both non-resident foreign 115 corporations. while not having a fixed place of business have established “permanent establishments” in the Philippines because they have “furnished services through their employees or other personnel for a period or periods the aggregate of which is more than 183 days in a twelve-month period. it is submitted that we adopt the first view. 2013) dividends remitted are subject to FWT at the preferential rate of 15% in accordance with Section 28 (b)(5)(b) of the Tax Code of 1997. All rulings relative to the application. FEBRUARY 21. As provided in RMO 072-10 [AUGUST 25. a corporation organized and existing under the laws of the British Virgin Islands are subject to 15% FWT. 2011]. 2007].PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. & CIE KOMMANDITGESELLSCHAFT AUF AKTIEN VS. 115 Note that the applicable tax rate is now 30%. In BIR RULING DA-145-07 [M ARCH 8. The CIR noted that the International Business Companies Ordinance of the Territory of the British Virgin Islands does not impose any tax on dividends from foreign sources. 7796 DATED FEBRUARY 21. under RMO 01-2000. a US nonresident foreign corporation and to WES World.” Note: For purposes of the bar. On this point. the ITAD is the sole office charged with the receiving of tax treaty relief applications (TTRA). SM Investments asked for the BIR’s opinion on whether the cash dividends declared by them to Asia Opportunities Limited. 7796. Most tax treaties would have a MFN clause making a PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 148 of 158 Last Updated: 30 July 2013(v3) . Mirant filed for a refund contending that the two foreign corporations have created “permanent establishments” in the Philippines and thus making applicable the lower withholding tax rate under the RP-UK and RP-US tax treaties. Thus. INC. In MIRANT V. the CTA ruled that the same is not necessary. COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO. is the dividend received by the non-resident foreign corporation subject to the 15% FWT? Yes. 2011]. implementation and interpretation of the provisions of Philippine tax treaties shall emanate from ITAD. In INTERPUBLIC GROUP OF COMPANIES. VHL and WES World. 2012]. the CTA held that an availment of a tax treaty provision must be preceded by an application for a tax treaty relief with the BIR's International Tax Affairs Division. Q: If the foreign country does not impose a tax on the dividend. Q: Is there a need for an application for a tax treaty relief with the International Tax Affairs Division (ITAD)114 in order to avail of the benefit? FIRST VIEW: Yes. The CTA stated that even with respect to the applicability of the 20% FWT under the RP-US Tax Treaty. COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO. before the benefits may be extended to such corporation. It accordingly withheld the tax due on these interest payments. A foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it. Thereafter. All tax treaty relief applications relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). the CTA finally held that the income payments of Mirant to VHL and WES. 2010]. As such. For such use. INC. the Philippines as those allowed to their German counterparts. [JUNE 25. An improperly accumulated earnings tax (IAET) equal to 10% is imposed for each taxable year on the improperly accumulated taxable income of each corporation. Q: XYZ Corporation is a domestic corporation which entered into a license agreement with ABC Corporation. Is XYZ’s contention correct? No. the Supreme Court held that the concessional tax rate of 10% provided for in the RP-Germany Tax Treaty could not apply to taxes imposed upon royalties in the RP-US Tax Treaty since the two taxes imposed under the two tax treaties are not paid under similar circumstances and do not contain similar provisions on tax crediting. INC. _________________________________________ 116 Closely-held corporations are those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals.C. XYZ 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. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. JOHNSON AND SONS. or the phrase “paid under similar circumstances” as referring to the manner of payment of taxes and not the subject matter of the tax which is royalties. the allowable foreign tax credit on both treaties is the amount actually paid in the Philippines. therefore. 1999]. 2002]. Page 149 of 158 Last Updated: 30 July 2013(v3) . The CIR applied the ruling in CIR V. 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.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. Domestic corporations not falling under the aforesaid definition are. a nonresident foreign corporation based in the US pursuant to which the former was granted the right to use trademark. Further. patents and technology owned by the latter. the RP-Germany Tax Treaty allows for crediting against German income and corporate tax of 20% of the gross amount of royalties paid under the law of the Philippines. In ITAD RULING 102-02 [M AY 28. where the Supreme Court interpreted the MFN clause. the RP-US Tax Treaty does not provide for the similar crediting of 20% of the gross amount of royalties paid. Improperly Accumulated earnings of corporations --------------------------------------------------------------Read Section 29. Energizer Philippines claims that its royalty payments to Eveready Battery are subject to the preferential tax rate of 15% pursuant to the MFN clause of the RPUS Tax Treaty in relation to the RP-Netherlands Tax Treaty. S. In CIR V. publicly-held corporations. The CIR found that the RP-US and RP-Netherland tax treaties show a similarity on the manner of payment of taxes. S. 2013) benefit which is more advantageous accorded to one country demandable. JOHNSON AND SONS. XYZ paid royalties to ABC and subjected the same to the 25% withholding tax on royalty payments. It is not proved that the RP-US Tax Treaty grants similar tax reliefs to residents of the US in respect of the taxes imposable upon royalties earned from sources within PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 --------------------------------------------------------------16. Tax Code Q: What is an improperly accumulated earnings tax? This is the income tax imposed on a corporation if its earnings and profits are accumulated (undistributed) instead of being divided and distributed to its stockholders. On the other hand. Thus. the royalty payments by Energizer to Eveready are subject to the preferential tax rate of 15% of the gross amount of royalties pursuant to the "most-favored-nation" provision of the RP-US tax treaty in relation to the RP-Netherlands tax. 1999]. that is. [JUNE 25. XYZ claimed for a refund and argues that the withholding tax should only be 10% pursuant to the mostfavoured nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty.C. It is imposed on domestic corporations which are 116 classified as closely-held corporations. PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) Q: Define “improperly accumulated taxable income.” The term “improperly accumulated taxable income” means taxable income adjusted by: 1. 2. 3. 4. Income exempt from tax Income excluded from gross income Income subject to final tax; and The amount of net operating loss carry-over deducted; and 5. Reduced by the sum of: a. dividends actually or constructively paid; and b. income tax paid for the taxable year c. amount reserved for the reasonable needs of 117 the business In relation to 5(c), RMC 35-2011 [March 14, 2011] states that the amount that may be retained, taking into consideration the reasonable needs of the business shall be 100% of the paid-up capital or the amount contributed to the corporation representing the par value of the shares of stock. Any excess capital over and above the par shall be excluded. As a general rule, the IAET shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits accumulate instead of being divided or distributed. As provided in RR 2-01, this refers to all domestic corporations which are classified as closely held corporations. A closely held corporation are those at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock is owned directly or indirectly by not more than 20 individuals. As exceptions, the IAET shall not apply to: 1. Publicly-held corporations 2. Banks and other non-bank financial intermediaries; and 3. Insurance companies 4. GPPs 5. Non-taxable joint ventures 6. Enterprises registered under SEZs (see RR 2-01 [FEBRUARY 12, 2001]). Q: What is the purpose and nature of IAET? The imposition of IAET discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed (see CYNAMID PHILIPPINES INC VS. CA [JANUARY 20, 2000]) The IAET is being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation (see RR 2-01 [FEBRUARY 12, 2001]). Q: What is the main factor to consider in holding a corporation liable for IAET? The touchstone of the liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would not generally make the accumulated or undistributed earnings subject to the tax. However, if there is a determination that a corporation has accumulated income beyond the reasonable needs of the business, the 10% improperly accumulated earnings tax shall be imposed. [see RR 2-01 [FEBRUARY 12, 2001]). Q: What corporations are subject to IAET? _________________________________________ 117 Q: What circumstances are indicative of a purpose to avoid the income tax with respect to shareholders? 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. (see Section 29(C)(1), Tax Code) Page 150 of 158 Last Updated: 30 July 2013(v3) Added by RR 2-01. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) Moreover, the fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs (including reasonably anticipated 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 the contrary (see Section 29(C)(2), Tax Code) RR 2-01 adds three more instances, namely: 1. Investment of substantial earnings in unrelated business or in stock or securities of an unrelated business 2. Investment in bonds and other long term securities 3. Accumulation of earnings in excess of 100% of paid up capital 3. Earnings reserved for compliance with any loan or obligation established under a legitimate business agreement 4. In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments in the Philippines. 5. Earnings required by law to be retained 6. Anticipated losses or reserves in business. Q: What is the “Immediacy Test?” The Immediacy Test is used to determine the “reasonable needs” of business” in order to justify an accumulation of earnings. Under this test, the term "reasonable needs of the business" are hereby construed to mean the immediate needs of the business, including reasonably anticipated needs. The corporation should be able to prove an immediate need for the accumulation of the earnings and profits, or the direct correlation of anticipated needs to such accumulation of profits. Otherwise, such accumulation would be deemed to be not for the reasonable needs of the business, and the penalty tax would apply. In M ANILA WINE MERCHANTS V. CIR [FEBRUARY 20, 1984], Manila Wine Merchants (MWM) invested in several companies and bought shares in Wack Wack Golf and Country Club and likewise acquired US Treasury Bills. CIR found that MWM had unreasonably accumulated a surplus. On appeal, the CTA ruled that the purchase of shares were harmless. However, the CTA also ruled that the purchase of US Treasury Bills was in no way related to the business of importing and selling wines and ordered MWM to pay IAET on the said treasury bills. One of the contentions of MWM was that it will be used to aid its importations The Supreme Court ruled against MWM. It noted that the bonds were bought in 1951 and until 1961; it was never used to aid MWM’s importations. To justify an accumulation of earnings and profits for the reasonably anticipated future needs, such accumulation must be used within a reasonable time after the close of the taxable year. In CYNAMID V. CA [JANUARY 20, 2000], Cynamid argued that the increase of working capital by a corporation justifies accumulating income. It invoked the Bardahl Formula which allowed retention, as working capital reserve, sufficient amounts of liquid assets to carry the company though one operating Page 151 of 158 Last Updated: 30 July 2013(v3) In CIR v. TUASON [M AY 15, 1989], the CIR assessed Tuason, Inc. for IAET. The CIR presumed that when Tuason, Inc. accumulated profits, the purpose was to avoid the income tax on its shareholders on the finding that it was a mere holding or investment company. Tuason contended it was for the purpose of expanding their business as a real estate broker. The Supreme Court ruled that Tuason was liable for IAET. Tuason was a mere holding company as it was not involved itself in the development of the subdivisions but merely subdivided its own lots and sold them for bigger profits. It derived its income from interest, dividends, and rental from the sale of realty. The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. The company's failure to distribute dividends to its stockholders was clearly for reasons other than the reasonable needs of the business. Q: What is meant by “reasonable needs”? Reasonable needs means the immediate needs of the business. Examples of what can be considered reasonable needs include: 1. Allowance for the increase of accumulated earnings up to 100% of the paid-up capital 2. Earnings reserved for building, plant or equipment acquisitions PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) cycle and pay all of its current liabilities and any extraordinary expenses reasonably anticipated. The Supreme Court ruled that, as stressed by American authorities, the formula is used only for administrative convenience and not a precise rule. The Court found that in companies where the formula was applied, they had operating cycles shorten than that of Cynamid. The ratio of current assets to current liabilities should be used to determine the sufficiency of working capital which ideally should be 2:1. Cyanamid’s ratio is 2.21:1 and, thus, there was no need to infuse working capital. non-resident foreign corporation. AbbotPhils claims that by virtue of this, it is exempt from the IAET. Is this contention correct? Yes. In BIR RULING 25-02 [JUNE 25, 2002], the CIR ruled that Abbot-Phils was exempt from IAET. Since Abbott-Phils. is a wholly-owned subsidiary of AbbottUS, such shares will be considered as being owned proportionately by the Abbott-US shareholders. The ownership of a domestic corporation for purposes of determining whether it is a closely held corporation or a publicly held corporation is ultimately traced to the individual shareholders of the parent company. Thus, where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered publicly-held corporation. As of the year-end 2000, Abbott-US had 101,272 shareholders holding a combined 1,545,934,133 shares of common stock and the twenty largest shareholders of Abbott-US as of September 30, 2001 own an aggregate of 30.1 percent of Abbott-US' issued and outstanding shares. Thus, Abbot-Phils is a publicly-held corporation exempt from IAET. Q: In determining if profits are reasonably accumulated for business needs, the intention of the taxpayer is reckoned at what time? It is reckoned at the time of accumulation. In M ANILA WINE MERCHANTS V. CIR [FEBRUARY 20, 1984], one of the contentions of MWM was that it held on to said bonds for several years to wait for 60% of its stock to be owned by Filipinos so it can purchase its own lot and building. The Supreme Court stated that to determine if profits are reasonably accumulated for business needs, the controlling intention is that manifested at the time of accumulation and not later ones. The second reason given by MWM was too indefinite and was a mere afterthought. Q: Are there ways by which to avoid liability from IAET? Yes, when the accumulation is justified reasonable needs of the business such as: by --------------------------------------------------------------17. Exemption from tax on corporations --------------------------------------------------------------Note: I have already discussed this. See exempt corporations. 1. Accumulation up to 100% of the paid-up capital 2. For definite corporate expansion projects or programs 3. For buildings, plants or equipment acquisitions 4. For compliance with a loan covenant or preexisting obligation under a legitimate business agreement 5. When there is a legal prohibition for its distribution 6. In the case of Philippine subsidiaries of foreign corporations, undistributed earnings intended or reserved for investments within the Philippines --------------------------------------------------------------18. Taxation of partnerships --------------------------------------------------------------Note: We already discussed this. To reiterate, all partnerships si subject to income tax in the same manner and at the same rate as a corporation except: a. GPP b. Joint venture of consortium formed for the purpose of: i. Undertaking construction projects ii. Engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. Q: Abbot-Phils, a domestic corporation, is a wholly owned subsidiary of Abbot-US, a PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 152 of 158 Last Updated: 30 July 2013(v3) To improve the government’s cash flow PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . Agents or employees of withholding agents 2. thus resulting in a more efficient tax collection system? Q: Who is the withholding agent? The withholding agent is the one who has control. Taxation of general professional partnerships --------------------------------------------------------------Note: I already discussed GPPs. To provide the taxpayer a convenient manner to meet his probable income tax liability 2. It is not a tax. the procedure used by the taxpayer. Q: Who are required by law to withhold on income payments? 1. 2013) --------------------------------------------------------------19. However. To ensure the collection of the income tax which could otherwise be lost or substantially reduced through the failure to file the corresponding returns 3. It is paid 2. the Supreme Court stated that the Tax Code is silent as to when the duty to withhold taxes arises. Each partner shall report as gross income his distributive share. the net income of the GPP shall be computed in the same manner as a corporation. 4. income is reportable when all the Page 153 of 158 Last Updated: 30 July 2013(v3) Q: What is the purpose of the withholding tax system? 1. Just remember that these three points. Withholding tax a) Concepts b) Kinds c) Withholding of VAT d) Filing of return and payment of taxes withheld e) Final withholding tax at source f) Creditable withholding tax g) Timing of withholding --------------------------------------------------------------Read Section 57 to 58 Tax Code --------------------------------------------------------------a) Concepts --------------------------------------------------------------Q: What is a withholding tax? Withholding tax is a method of collecting income tax in advance from the taxable income of the recipient of income. In this case. GPPs may claim OSD. the Court inquired into the nature of accrual method of accounting.e. to determine when the duty to withhold the taxes arose. actually or constructively received. The obligation to withhold is compulsory as it makes such withholding agent personally liable for payment of the tax. It becomes payable (i. or enforceable) 3. To minimize tax evasion. The obligation to withhold is imposed upon the buyer-payor of income but the burden of tax is really upon the seller-income earner. The withholding agent holds the amount withheld from the income of another person in trust for the government until paid. Persons having control of the payment and claiming the expense 3. it is legally due. Such liability of the withholding agent is direct and independent from the liability of the income recipient. the persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities for their respective distributive share in the net income of the GPP. demandable. It noted that under the accrual basis method of accounting. 1999]. Second. Payor having control of the payment where payment is made through brokers Q: When does the obligation to withhold arise? Either when: 1. First. CA [OCTOBER 12. The duty to withhold is different from the duty to pay income tax. or receipt of the funds that is subject to income tax and to be withheld and remitted to the BIR. Third. --------------------------------------------------------------20.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. the GPP as an entity is not liable for income tax. It is accrued as an asset or expense In FILIPINAS SYNTHETIC FIBER CORPORATION V. and to the modus vivendi of withholding tax at source come. in the net income of the partnership. custody. and from whom he derives his legal right to file a claim for refund. 2010]. In CIR V. surcharges. First. The payee also has the right to ask for a refund if the tax withheld is more than PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 154 of 158 Last Updated: 30 July 2013(v3) . The claim must be filed with the BIR within the two-year period from the date of payment of the tax 2. 2010]. 2011]) --------------------------------------------------------------b) Kinds (i) Withholding of final tax on certain incomes (ii) Withholding of creditable tax at source --------------------------------------------------------------Q: What are the two kinds of withholding tax? 1. 2013) events have occurred that fix the taxpayer’s right to receive the income and the amount can be determined with reasonable accuracy. Q: What are the requisites to be complied with in a claim for refund of unutilized withholding tax? Payee of income is required to report the income and/or pay the difference between the tax withheld and the tax due on the income. Q: Is the withholding agent who filed the claim for tax refund obliged to remit the same to the taxpayer? Yes.In CIR V. the person entitled to claim a tax refund is the taxpayer. otherwise. The right of the withholding agent to claim a refund of erroneously or illegally withheld taxes comes with the responsibility to return the same to the taxpayer. Generally. The liability for payment of the tax rests primarily on the payor as a withholding agent. he nevertheless has the obligation to remit the same. However. if the taxpayer does not file the claim. he would be unjustly enriching himself at the expense of the principal taxpayer from whom the taxes were withheld. Second. the Supreme Court ruled that while the withholding agent has the right to recover the taxes erroneously or illegally collected. It must be shown on the return that the income received was declared as part of the gross income 3. The fact of withholding must be established by a copy of statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld (see CIR V. MIRANT [JUNE 15. his authority to file the income tax return and remit the tax withheld to the government includes the authority to file a claim for refund and to bring an action for recovery of such claim.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. he is considered a taxpayer under the Tax Code as he is personally liable for the withholding tax as well as for deficiency assessments. Such method is allowed by law in reporting incomes. A withholding agent has a legal right to file a claim for refund. 1. Final withholding tax (FWT) 2. the withholding agent may file the same. SMART COMMUNICATIONS [AUGUST 25. should the amount withheld be finally found to be less than the amount that should have been withheld. Q: May a withholding agent file a claim for tax refund? Yes. Creditable Withholding Tax (CWT) Q: Differentiate final withholding tax (FWT) from creditable withholding tax (CWT). and penalties. CWT Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. it was submitted that rule allowing the withholding agent to file the claim is applicable only when the withholding agent and the taxpayer are related parties. The differences are as follows: FWT The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. SMART COMMUNICATIONS [AUGUST 25. as an agent of the taxpayer. The Supreme Court disagreed and stated that such relationship is not required. ROMULO [M ARCH 9. (see Section 58(E). CWT . He shall submit an annual information return containing the list of payees and income payments.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. FWT . Tax Code) --------------------------------------------------------------d) Filing of return and payment of taxes withheld (i) Return and payment in case of government employees (ii) Statement and returns --------------------------------------------------------------Q: Who is obliged to file the return and pay the tax withheld? The withholding agent shall file the return and pay the tax: 1. 1998].within 25 days from the close of each calendar quarter for FWT 2. amount of taxes withheld for each payee and other pertinent information. INC. 2010]) --------------------------------------------------------------c) Withholding of VAT --------------------------------------------------------------Note: Wait lang. Payments by government agencies. The payee is not required to file an income tax return for the particular income. RR 2-98 [April 17. Tax Code Note: I will discuss employees in the private sector na rin. if any. 2013) the tax due. 51 and Sec. 1998] and CHAMBER OF REAL ESTATE AND BUILDER’S ASSOCIATION. Anyway. (creditable withholding VATT) Q: What is the effect of non-payment of CWT to the transfer of real property? No registration of any document transferring real property shall be effected by the Register of Deeds unless the CIR or his duly authorized representative has certified that such transfer has been reported and the capital gains or CWT. Naligaw ito sa 2013 Syllabus. The income recipient is still required to file an income tax return. RR 2-98 [APRIL 17. He shall furnish the recipient of the income a written statement showing the income or other payments made by him during such quarter or year. 52 of the NIRC. Last time I checked Income Tax ang pinaguusapan natin. and the amount of the tax deducted and withheld therefrom. as amended by RR 1-2006 [DECEMBER 29. Q: Since CWT is but an approximation. has been paid. what happens if there is excess payment or deficiency in payment? The excess of the amount of tax so withheld over the tax due on his return shall be refunded. 2005]: Page 155 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . Tax Code) (see Section 2. the difference shall be paid. Payments are made to a non-resident whose services are considered as VAT-taxable in which case the 12% will be withheld by the payor (final withholding VAT) 2. (see Section 58(A). as prescribed in Sec. Q: What are the other obligations of the withholding agent with respect to the return and payment of the tax withheld? 1. in which case the government entity will withhold 5% on its payments. Tax Code) --------------------------------------------------------------(i) Return and payment in case of government employees --------------------------------------------------------------Read Section 78 to 83. If the income tax collected at source is less than the tax due on his return.not later than the last day of the month following the close of the quarter during which withholding was made. Tax Code) Q: What are the types of withholding VAT? 1. (see Section 58(B) and (C).78.57(A) and (B). V. let’s enumerate for now the types of withholding VAT leaving an extensive discussion of withholding VAT kapag we’re in VAT na. Q: What income payments are exempted from the requirement of withholding tax on compensation? As provided in SECTION 2. 2. (see Section 58(D). Q: If the backwages. Tax Code) The return shall be filed and the payment made within 25 days from the close of each calendar quarter (see Section 81. Thus. Accordingly. Every employer shall submit to the CIR an annual information return containing a list of employees. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 156 of 158 Last Updated: 30 July 2013(v3) . or during the period of his dismissal from the service which was subsequently ruled to be illegal. whichever is higher. _________________________________________ 118 Minimum wage earners are exempt from income tax. allowances and benefits. Persons having control of the payment of wages or salaries are authorized to deduct and withhold upon such wages or salaries the withholding tax due thereon. the return of the amount deducted and withheld upon any wage shall be made: 1. allowances. file the return and pay the tax upon wages? Every employer making payment of wages shall deduct and withhold upon such wages the applicable tax except in the case of minimum wage 118 earners. or instrumentality. allowances and benefits awarded in a labor dispute subject to withholding tax? Yes. agency. allowances and benefits are subject to withholding tax on wages. (see RMC 39-2012 [August 3. allowances. In this case. Tax Code) Q: Who should withhold the tax due thereon? The employers are mandated to withhold taxes on wages and this includes those backwages. accompanied by copies of the written statements. Q: What are the other obligations of the employer with respect to the withholding of tax on wages? 1. Backwages. they are in control of the payment of backwages. Compensation income of government employees with salary grades 1 to 3.000 pesos per month. if the employer is the Government or any political subdivision. The said back wages. Every employer shall furnish to each such employee a written statement confirming wages paid by the employer during the calendar year and the amount of tax deducted and withheld 2. the total amount of compensation income of each employee. by the officer or employee having control over the payment of such wage. Compensation income of individuals that do not exceed the statutory minimum wage or P5. the CIR answered this question in the affirmative. the garnishees are the persons owning debts due to the employer or in possession or control of credits to which the employer are entitled. 2. 2013) 1. (see Section 79(A). and benefits awarded in a labor dispute constitute remunerations for services that would have been performed by the employee in the year when actually received. withhold. 2012]. or 2. Q: Are backwages.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. 2012]) Q: Who is obliged to deduct. Tax Code) However. and other information as may be deemed necessary. allowances. the total amount of taxes. disputes are received by virtue of a labor dispute award through garnishment of debts due to the employer and other credits to which the employer is entitled to subject to withholding tax? In RMC 39-2012 [August 3. garnishees of a judgment award in a labor dispute are constituted as withholding agents with the duty of deducting the corresponding withholding tax on wages due thereon in an amount equivalent to five percent (5%) of the portion of the judgment award representing the taxable backwages. in order to ensure the collection of the appropriate withholding taxes on wages. allowances and benefits. by any officer duly designated for the purpose (see Section 82. and benefits awarded in a labor dispute. 12-2001) 2-98. However. special aliens) 3. 1998]? It shall be presumed that the hospital or clinic has collected the professional fee of the said medical practitioner and shall.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. (see Section 2. Also. they are described as “withholding taxes-at-source. if Page 157 of 158 Last Updated: 30 July 2013(v3) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 . amended by RR No. Informer’s Reward to Persons Instrumental in the Discovery of the Violations of the Tax Code. the withholding tax shall not apply whenever there is proof that no professional fee has in fact been charged by the medical practitioner and paid by his patient. Withholding tax on compensation income for services done in the Philippines 3. non-resident aliens not engaged in trade or business. professional fees. whichever is applicable.57. Income payments to entities where their gross income is subject to tax (i.1. income payments to partners of GPPs. as Q: What are the three general types of creditable withholding taxes? The three types of creditable withholding taxes are: ========== END OF REVIEWER ============ Thank you for using my reviewer. be liable for the withholding of the tax vis-a-vis each and every patient admitted into the hospital or clinic under the care of the said medical practitioner.e. Passive Incomes 2. (see Section 2. accordingly. Withholding tax on money payments made by the government Q: What is the rule on creditable withholding of income payments to medical petitioners as laid down in RR 13-98 [August 14. in the payor’s books. The withheld taxes remitted to the BIR are treated as deposits or advances on the actual tax liability of the taxpayer. Exception: Where the income is not yet paid or payable but the same has been recorded as an expense or asset. in the payor’s books. Q: What are the four general types of income payments subject to FWT? 1. whichever is applicable. subject to adjustment at the proper time when the actual tax liability can be fully and finally determined. Again. Expanded withholding tax on certain income payments made by private persons to resident taxpayers (e. 1. whichever comes first. 1998]) --------------------------------------------------------------g) Timing of withholding --------------------------------------------------------------General rule: The obligation of the payor to deduct and withhold tax arises at the time an income payment is paid or payable or the income payment is accrued or recorded as an expense or asset. please share it to others. non-resident foreign corporations.g. Fringe Benefits 4. RR 2-98 [April 17. the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes.” This means that the income tax of the recipient of income is withheld and deducted at the source and at the time of accrual or payment of the expense by the withholding agent-payer of income. RR No. income payments to brokers.4. taxes withheld on certain payments are but intended to approximate the tax due from the payee. 2013) --------------------------------------------------------------e) Final withholding tax at source --------------------------------------------------------------Q: What is meant by withholding tax at source? Since the withholding taxes are deducted by the withholding agent when the income payments are paid or payable.57. etc) 2. --------------------------------------------------------------f) Creditable withholding tax (i) Expanded withholding tax (ii) Withholding tax on compensation --------------------------------------------------------------Q: What is meant by creditable withholding tax? Under the CWT tax system. if you find it useful. Prayer to St. AMDG. Joseph of Cupertino who while on earth did obtain from God the grace to be asked at your examination only the questions you knew.com. obtain for me a like favour in the examinations for which I am now preparing. Joseph of Cupertino for success in Examinations O Great St. pray that my girlfriend and I do well and pass the bar exams. please email me at pmreyestax@gmail. 2013) it’s not so much to ask.PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 158 of 158 Last Updated: 30 July 2013(v3) . Pray for us. Ateneo Law Batch 2013 and all the other barristers who will come to possess this reviewer. good luck to us all. Through Christ our Lord. For comments. and suggestions. Amen. In return I promise to make you known and cause you to be invoked. St. corrections. Joseph of Cupertino.