SOCIAL SECURITY BENEFITS, RETIREMENT GRATUITIES AND
OTHER SIMILAR BENEFITS
- received by RC, NRC and RA from foreign government agencies and other private or public institutions.
D BENEFITS FROM US Veterans Administration – by veterans residing in the Phils
E SSS – RA 8282 Tax exempt
F GSIS – RA 8291 Tax exempt
COMMUTATION OR MONETIZED VALUE OF LEAVE PAY
VL SL
IF it forms part of TERMINAL LEAVE PAY NOT taxable NOT taxable
IF given during the taxable year with NOT retirement to:
● GOVERNMENT EMPLOYEES
● RANK-and-FILE
RR – 10 – 2000
TAX EXEMPT TAX EXEMPT
Exempt up to 10 days Unused – taxable
Item # 7 Miscellaneous Items:
I am confident that 1 or 2 on this item will be asked in this coming bar!
4 most important items: Paragraphs a, b, c & d
Par. (a) refers to investment in the Phils. By any of these:
1. foreign government
2. financing institutions controlled or financed by the foreign government
3. regional or international financing institutions established by the foreign government
What are the forms of investments that may be made by these 3 parties?
1. interest income from bank deposits
2. interest income from loan extended to the persons or citizens of the Phils 3. interest income from bonds, debentures and other certificate of indebtedness 4. dividend income because the investment may be in the form of shares of stocks
This now brings us to the case which has yet to be asked in the BAR
CIR vs. MITSUBISHI METAL CORPORATION (181 SCRA 214). I hope this would be asked this coming bar
Export-import bank of Japan is a tax exempt financing institution under the RP- Japan Tax Treaty. It extended 20 M loan to Mitsubishi Metal Corp., a Japanese corporation. The same amount was used by Mitsubishi in extending loan to Atlas Corp., a domestic corp. The contract was quite peculiar because it was denominated as sale, loan, then contract of sale. Loan in the sense that the 20M was extended as loan to Atlas. Sale because there is such an agreement to the effect that the produce of this mining equipment concentrates shall be sold by Atlas to Mitsubishi for a period of 15 years. So, there are mutual stipulations, terms and conditions. The BIR claimed that Mitsubishi is subject to income tax on the interest of the loan. This was protested by Mitsubishi and these were its argument:
1. tax exempt because it came from a tax exempt financing institution- source of 20M is a tax exempt entity (export-import bank of Japan)
2. tax exempt as Mitsubishi is an agent of export-import bank of Japan
BIR denied the protest or request for consideration. The CTA ruled that Mitsubishi is considered as an agent of export-import bank of Japan therefore it should not be taxed on that interest income
RULING: As to argument #1, in a contract of loan, once the contract is consummated, the money will become the exclusive money of the borrower (Art. 1953 NCC, opinion of Tolentino). Applying this, when such contract of loan between export-import bank of Japan and Mitsubishi was consummated, the 20M became the exclusive money of Mitsubishi. It ceased to be the money or property of export-import bank of Japan. The export-export-import bank of Japan was never made a party to the contract of loan executed between Atlas and Mitsubishi. The creditor/lender as clearly stated in the contract is Mitsubishi.
Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES
As to Argument #2, as to the argument that the interest is tax exempt as it was an agent of export-import bank of Japan, the SC said ― there was no clear and convincing evidence that Mitsubishi was agent of export-import bank of Japan. Since Mitsubishi failed to prove that it is entitled to such exemption, the interest income from the loan is subject to tax.
In the ruling of the SC, it made mention of this and it is now found in Sec. 32 B (7, a)--Mitsubishi is not one of those tax exempt entities under the Tax Code. Under the Tax Code, interest income on loan is tax exempt only if the recipient is a foreign government or financing institution controlled or financed by foreign government, or regional or international financing institutions established by the foreign government. Mitsubishi is not one of these financing institutions.
The possible modification is: Mitsubishi is designed as an agent of export-import bank of Japan.
In the problem, it is clear that there is a principal-agent relationship. So, they are considered one and the same if that is the assumption in the problem. The interest income is tax exempt.
But in the actual case as ruled by the SC, Mitsubishi was never made as an agent of export-import bank of Japan. The examiner is aware of that. The source is a tax-exempt entity. That is the argument of Mitsubishi. That is immaterial because in the contract of loan, upon consummation of the same, that money will become the exclusive money of the borrower. You have to check in the problem if the creditor or the lender is not a financing institution controlled or financed by a foreign govt, etc. If not, the interest on the loan is definitely subject to income tax.
This case was the favorite forecast of Prof. Jose Nolledo who died 2 years ago. In 1994, he mentioned that this is a sure Q. in taxation. Again in 1995, he made a prediction that this case will be asked. It was not asked, until he died!!! hehehehe. Hope this will be asked in honor of his memory, hehehe. Mr. Examiner, it’s about time that you ask this case!!!!
Par. (b) Income derived by the Government or its Political Subdivisions:
Sec. 32. Exclusions from Gross income--
(B) 7b. income derived by the Government or its Political Subdivisions--- ― Income derived from any public utility or from the exercise of any essential governmental functions accruing to the Government of the Phils. or to any political subdivision thereof.
Sec. 27. Rates of Income Tax On Domestic Corporations--
(C) Government owned or controlled corporations, agencies or instrumentalities-- ―the provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government EXCEPT the GSIS, SSS, PHIC, PCSO and the PAGCOR, shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry or activity‖
There are 2 requisites for exemption:
a) source - it is an income derived from the exercise of essential governmental functions. If it is derived from the exercise of proprietary function, that is subject to tax; and apply the principle of Strictissimi juris
b) recipient - must be any of the following:
1. Government of the Phils. or Republic of the Phils.
2. political subdivision of the State (LGU)
It does not say national Government. It says Gov't of the Phil. Thus in MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY vs. MARCOS (261 SCRA 667) the SC extensively discussed the distinction between ―Govt of the Phils.‖ and ―National Govt.‖ The SC said these are different. Gov't of the Phils is synonymous with Republic of the Phils but it is different from national gov't. Gov't of the Phils (or RP) refers to instrumentality to which the political authority is exercised through out the Phils. This may include autonomous regions and LGU. LGU is within the contemplation of Govt of the Phils or RP.
1999 Bar: there was a Q regarding GOCC. Do government-owned and controlled corporations form part of the Govt of the Phils (RP) or national govt?
It is believed that GOCC are within the contemplation of national govt. so that if the income is received by GOCC, since it is not covered by this (2nd requirement), even if it is an income derived from the exercise of essential Governmental functions, that may be subject to tax.
Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES
But this is qualified by Sec. 27 C, as amended by RA 9337. Under Sec. 27 C, as amended, it grants exemptions to 4 GOCC:
a) GSIS b) SSS c) PHIC d) PCSO
PAGCOR is no longer a tax exempt GOCC. This is the amendment introduced by RA 9337 which took effect July 1, 2005. So, even if the recipient is not an LGU, as it is a GOCC, exemption is granted to the 4 GOCC under Sec. 27 C. PAGCOR was deleted from the list.
Take note of Paragraphs C & D (favorite Bar Q).
Par. (c) Prizes and Awards:
Sec. 32. Exclusions from Gross Income-
(B) 7c. Prizes and Awards-- ― Prizes and awards made primarily in recognition of religious, charitable, scientific , educational, artistic, literary, or civic achievement but only if:
(i) the recipient was selected without any action on his part to enter the contest or proceeding; and
(ii) the recipient is not required to render substantial future services as a condition to receiving the prize or award
The Tax Code is strict with regard to Paragraph C. There are 3 requisites in Par. C. while in Par. D, there is only 1, sanctioned by their respective sports association (Phil. Olympic Committee (RA 7549)
3 requisites for exemption under Par. C:
1. prize must be received in recognition with SCRALEC ( scientific, religious, artistic, charitable, literary, educational, or civic achievement);
2. No action on his part to enter the contest or proceedings;
3. Unconditional receipt of such prize---meaning that the recipient is not required to render substantial future services as a condition to receiving the prize or award
2000 Q#10: Jose Miranda, a young artist and a designer, received a prize of P100,000 for winning in the on-the-spot- peace contest sponsored by a local Lions Club. Shall the reward be included in the gross income of the recipient for tax purposes? Explain
Answer: Yes it is in recognition of his artistic achievement but since he performed an act—
he qualified as a contestant-- we pointed out that in the absence of the 3 requisites, the 100,000 received must be subject to tax. Exemptions must be strictly construed against the taxpayer.
Par. (d) – Prizes and Awards in Sports Competition Sec. 32. Exclusions from Gross Income--
(B) 7d Prizes and awards in sports competition-- ― All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Phils or abroad and sanctioned by their national sports association‖
Sec. 32 B 7d provides only 1 of the Rules under RA 7549. RA 7549 (which is the one you will find in 32 B 7d) provides that the recipient is exempt form income tax; it is excluded from Gross income.
There are other Rules which are not incorporated in the Tax Code; the other Rule is: the donor or contributor of the award is not subject from donor's tax. If you read Sec. 101 A (3) (Note this as this is a favorite Q under donor's tax), this particular contribution or donation is not covered, but it is still exempt. The donor or contributor is exempt from donor's tax, not under the tax code but by virtue of RA 7549.
Q: Is the contribution a deductible contribution?
According to RA 7549, it is a deductible contribution. But if you read Sec. 34 H (Exemptions), it enumerates all those deductible contributions, and this is not one of them.
To reiterate, it is deductible not under the provisions of the Tax Code but because of RA 7549. It is RA 7549 that is the source of the Rule that the donor of the award is exempt from donor's tax. It is also the law that allows the contributions as deductible from the Gross income of the donor or contributor.
Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES
1996Q#10: Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council, a sports association duly accredited by the Philippine Boxing Association.
Onyoc received the amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor's tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land refuse to pay. Decide
Answer: The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the income tax. RA 7549 explicitly provides that ―All prizes and awards granted to athletes in local and international sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax‖.
Neither is the BIR correct in collecting the donor's tax from Ayala Corporation. The law is clear when it categorically stated ―that the donor's tax of said prizes and awards shall be exempt from the payment of the donor's tax.
But this Q may be asked also: How about the amount of the contributions, can that be claimed as deductible contributions?
Under RA 7549, YES. (You must state the # of the law to impress the examiner... 75—
grade you must obtain; 49—avoid this, mortal sin!)
So to summarize, in paragraph d, the following are exempted:
1. the recipient of the award—exempt from income tax 2. contributor/donor of the award-- exempt from donor's tax
3. Contributor/donor is allowed to claim the same as deductible contribution. This is based on RA 7549 and not on the Tax Code.
Under the Old Tax Code, the following items were EXCLUDED from Gross Income:
a) Informer's reward
Under the Present Tax Code (as amended by RA 8424 Sec. 282), this informer's reward is now subject to 10% FT (effective Jan. 1, 1998);
b) Interest income on Govt. securities
This has been deleted from the enumeration under the Present Tax Code. This means that it is now taxable
c) Interest income from bank deposit maintained under the Expanded Foreign Currency Deposit System
Under the Old Tax Code, it made no distinctions, irrespective of the recipient or depositor, tax exempt. Under the Present Tax Code, if it is received by Resident Taxpayer it is now subject to 7.5% FT. It is exempt only if the recipient is a Nonresident taxpayer (Individual or corporate)