By: Adelaine Faith Zerna LLB4 Page 1 TAXATION LAW Reviewer (Sources:
2012 Bar Examination Syllabus, De Leon 2011, Aban 2009, Dean Quibod Lecture Notes, Callanta Notes, UST Golden Notes 2011)
I. GENERAL PRINCIPLES OF TAXATION
A. Definition and concept of taxation
Taxation is the inherent power of the sovereign, exercised through the legislature, to impose burdens upon the subjects and objects within its jurisdiction, for the purpose of raising revenues to carry out the legitimate objects of the government.
It is the power of the sovereign to impose burdens or charges upon persons, property or property rights for the use and support of the government to be able to discharge its functions. It is one of the inherent powers of the state.
B. Nature of taxation
1) Inherent in sovereignty - There is no need to enact a law to exercise that power as this power springs from the moment a state comes into existence.
2) Legislative in character - Even in the absence of any constitutional provision, the power falls to the legislature as part of the more general power of law-making.
3) It is subject to constitutional and inherent limitations – To a certain extent, Congress will abuse that power. To a certain extent, you have that principle also that the power to tax involves the power to destroy. Congress may abuse that power given to it by the people through the electoral process.
C. Characteristics of taxation
1) An enforced contribution, for its imposition is in no way dependent upon the will or assent of the person taxed;
2) It is generally payable in the form of money, although the law may provide payment in kind;
3) It is laid by some rule of apportionment, which, in case of income taxes, is usually based on ability to pay;
4) Levied upon persons, property or business, acts, transactions, right or privileges, In each case, however it is only a person who pays the tax;
5) It is levied by the State which has jurisdiction over the object taxed. It is necessary that the State has jurisdiction or control over the objects to be taxed in order that the tax can be enforced;
6) Levied by the lawmaking body of the State. The power to tax is a legislative power that only the legislature can exercise. Except:
a) Delegated power of the LGUs pursuant to Art. X, Sec. 5 of the Consitution; b) The President pursuant to Art. VI Section 28 (2) on tariff rates, import an
By: Adelaine Faith Zerna LLB4 Page 2 c) c)Delegation to administrative agencies of the executive branch such as the
BIR, Bureau of Customs and the Department of Finance; and
d) Peoples initiative and referendum under RA 6735 where the people is granted power to take back the legislative’s authority in enacting tax laws.
7) Levied for public purpose. A tax levied for private purpose is unconstitutional and, therefore, void; it constitutes taking of property without due process of law.
D. Power of taxation compared with other powers
A. TAXATION vs. POLICE POWER vs. EMINENT DOMAIN 1) As to purpose:
Taxation – for the support of the government Eminent Domain_- for public use
Police Power – to promote general welfare, public health, public morals, and public safety.
2) As to compensation:
Taxation – Protection and benefits received from the government.
Eminent Domain – just compensation, not to exceed the market value declared by the owner or administrator or anyone having legal interest in the property, or as determined by the assessor, whichever is lower.
Police Power – The maintenance of a healthy economic standard of society.
3) As to persons affected:
Taxation and Police Power – operate upon a community or a class of individuals Eminent Domain – operates on the individual property owner.
4) As to authority which exercises the power:
Taxation and Police Power – Exercised only by the government or its political subdivisions.
Eminent Domain – may be exercised by public services corporation or public utilities if granted by law.
5) As to amount of imposition:
Taxation – Generally no limit to the amount of tax that may be imposed. Police Power – Limited to the cost of regulation
Eminent Domain – There is no imposition; rather, it is the owner of the property taken who is just paid compensation.
By: Adelaine Faith Zerna LLB4 Page 3 6) As to the relationship to the Constitution:
Taxation and Eminent Domain – Subject to certain constitutional limitations, including the prohibition against impairment of the obligation of contracts.
Police Power – Relatively free from constitutional limitations and superior to the non-impairment provisions thereof.
B. TAX vs. LICENSE FEE:
1) As to purpose: Tax imposed for revenue WHILE license fee for regulation. Tax for general purposes WHILE license fee for regulatory purposes only.
2) As to basis: Tax imposed under power of taxation WHILE license fee under police power.
3) As to amount: In taxation, no limit as to amount WHILE license fee limited to cost of the license and expenses of police surveillance and regulation.
4) As to the time of payment: Taxes normally paid after commencement of business WHILE license fee before.
5) As to the effect of payment: Failure to pay a tax does not make the business illegal WHILE failure to pay license fee makes business illegal.
6) as to surrender: Taxes, being lifeblood of the state, cannot be surrendered except for lawful consideration WHILE a license fee may be surrendered with or without consideration.
C. IMPORTANCE OF DISTINCTION BETWEEN TAXES AND LICENSE FEES.
It is necessary to determine whether a particular imposition is a tax or a license fee, because some limitations apply only to one and not to the other.
Furthermore, exemption from taxes does not include exemption from license fees
D. TAXES DISTINGUISHED FROM OTHER IMPOSITIONS:
1) toll – amount charged for the cost and maintenance of property used;
2) compromise penalty – amount collected in lieu of criminal prosecution in cases of tax violations;
3) special assessment – levied only on land based wholly on the benefit accruing thereon as a result of improvements of public works undertaken by government within the vicinity.
By: Adelaine Faith Zerna LLB4 Page 4 5) margin fee – exaction designed to stabilize the currency
6) custom duties and fees – duties charged upon commodities on their being imported into or exported from a country;
7) debt – a tax is not a debt but is an obligation imposed by law.
E. SPECIAL ASSESSMENT vs. TAX
1. A special assessment tax is an enforced proportional contribution from owners of lands especially benefited by public improvements.
2. A special assessment is levied only on land.
3. A special assessment is not a personal liability of the person assessed; it is limited to the land.
4. A special assessment is based wholly on benefits, not necessity.
5. A special assessment is exceptional both as to time and place; a tax has general application.
Republic v. Bacolod, 17 SCRA 632
A special assessment is a levy on property which derives some special benefit from the improvement. Its purpose is to finance such improvement. It is not a tax measure intended to raise revenues for the government. The proceeds thereof may be devoted to the specific purpose for which the assessment was authorized, thus accruing only to the owners thereof who, after all, pay the assessment.
Some Rules:
An exemption from taxation does not include exemption from a special treatment. The power to tax carries with it a power to levy a special assessment.
F. TOLL vs. TAX
1. Toll is a sum of money for the use of something. It is the consideration which is paid for the use of a road, bridge, or the like, of a public nature. Taxes, on the other hand, are enforced proportional contributions from persons and property levied by the State by virtue of its sovereignty for the support of the government and all public needs.
2. Toll is a demand of proprietorship; tax is a demand of sovereignty.
3. Toll is paid for the used of another’s property; tax is paid for the support of government.
4. The amount paid as toll depends upon the cost of construction or maintenance of the public improvements used; while there is no limit on the amount collected as tax as long as it is not excessive, unreasonable, or confiscatory.
By: Adelaine Faith Zerna LLB4 Page 5 5. Toll may be imposed by the government or by private individuals or entities; tax may be
imposed only by the government.
G. TAX vs. PENALTY
1. Penalty is any sanction imposed as a punishment for violation of law or for acts deemed injurious; taxes are enforced proportional contributions from persons and property levied by the State by virtue of its sovereignty for the support of the government and all public needs.
2. Penalty is designed to regulate conduct; taxes are generally intended to generate revenue.
3. Penalty may be imposed by the government or by private individuals or entities; taxes only by the government.
H. OBLIGATION TO PAY DEBT vs. OBLIGATION TO PAY TAX
1. A debt is generally based on contract, express or implied, while a tax is based on laws.
2. A debt is assignable, while a tax cannot generally be assigned.
3. A debt may be paid in kind, while a tax is generally paid in money.
4. A debt may be the subject of set off or compensation, a tax cannot.
5. A person cannot be imprisoned for non-payment of tax, except poll tax.
6. A debt is governed by the ordinary periods of prescription, while a tax is governed by the special prescriptive periods provided for in the NIRC.
7. A debt draws interest when it is so stipulated or where there is default, while a tax does not draw interest except only when delinquent.
Rules re: set off or compensation of debts
General rule: A tax delinquency cannot be extinguished by legal compensation. This is so because the government and the tax delinquent are not mutually creditors and debtors. Neither is a tax obligation an ordinary act. Moreover, the collection of a tax cannot await the results of a lawsuit against the government. Finally, taxes are not in the nature of contracts but grow out of the duty to, and are the positive acts of the government to the making and enforcing of which the personal consent of the taxpayer is not required. (Francia v. IAC, 162 SCRA 754 and Republic v. Mambulao Lumber, 4 SCRA 622)
By: Adelaine Faith Zerna LLB4 Page 6 Exception: SC allowed set off in the case of Domingo v. Garlitos [8 SCRA 443] re: claim for payment of unpaid services of a government employee vis-à-vis the estate taxes due from his estate. The fact that the court having jurisdiction of the estate had found that the claim of the estate against the government has been appropriated for the purpose by a corresponding law shows that both the claim of the government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable as well as fully liquidated. Compensation therefore takes place by operation of law.
Philex Mining Corporation v. Commissioner, 294 SCRA 687 (1998)
Philex Mining Corporation was to set off its claims for VAT input credit/refund for the excise taxes due from it. The Supreme Court disallowed such set off or compensation.
E. Purpose of taxation
PRIMARYTo raise revenue in order to support the government
SECONDARY
1) Used to reduce social inequality
2) Utilized to implement the police power of the State
3) Used to protect our local industries against unfair competition
4) Utilized by the government to encourage the growth of local industries
PAL vs. EDU
It is possible for an exaction to be both a tax and a regulation. License fees and charges, looked to as a source of revenue as well as a means regulation. The fees may properly regarded as taxes even though they also serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is properly called a tax.
CALTEX vs. CIR
Taxation is no longer a measure merely to raise revenue to support the existence of the government. Taxes may be levied with a regulatory purpose to provide means for rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the State.
F. Principles of sound tax system
1) FISCAL ADEQUACY VIOLATION – VALID
Sources of revenue should be sufficient to meet the demands of public expenditure
Revenues should be elastic or capable of expanding or contracting annually in response to variations in public expenditure
Elasticity may be obtained without creating annually any new taxes or any new tax machinery but merely by changes in the rates applicable to existing taxes
By: Adelaine Faith Zerna LLB4 Page 7 Even if a tax law violates the principle of Fiscal Adequacy , in other words, the proceeds
may not be sufficient to satisfy the needs of the government, still the tax law is valid
2) ADMINISTRATIVE FEASIBILITY - VIOLATION – VALID
The tax law must be capable of effective or efficient enforcement
Tax laws should be capable of convenient, just and effective administration
Tax laws should close-up the loopholes for tax evasion and deter unscrupulous officials from committing fraud
There is no law that requires compliance with this principle, so even if the tax law violates this principle; such tax law is valid.
3) THEORETICAL JUSTICE - VIOLATION – INVALID
This principle mandates that taxes must be just, reasonable and fair Taxation shall be uniform and equitable
Equitable taxation has been mandated by our constitution, as if taxes are unjust and unreasonable then they are not equitable, thus invalid.
The tax burden should be in proportion to the taxpayers ability to pay (ABILITY TO PAY PRINCIPLE)
G. Theory and basis of taxation
1. Lifeblood theory Taxes are the lifeblood of the nation.
Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. (CIR vs. ALGUE)
Taxes are the lifeblood of the government and there prompt and certain availability is an imperious need.
Taxes are the lifeblood of the nation through which the agencies of the government continue to operate and with which the state effects its functions for the benefit of its constituents
Illustrations of the lifeblood theory
Collection of the taxes may not be enjoined by injunction Taxes could not be the subject of compensation or set off A valid tax may result in destruction of the taxpayer’s property Taxation is an unlimited and plenary power
2. Necessity theory
Existence of a government is a necessity and cannot continue without any means to pay for expenses
3. Benefits-protection theory (Symbiotic relationship)
Reciprocal duties of protection and support between State and inhabitants. Inhabitants pay taxes and in return receive benefits and protection from the State
By: Adelaine Faith Zerna LLB4 Page 8 Imprescriptibility of taxes
GENERAL RULE: Taxes are imprescriptible
EXCEPTION: They are prescriptible if the tax laws provide for statute of limitations PRESCRIPTIVE PERIODS:
1) Prescriptive periods for the assessment and collection of taxes 10 years if return is tainted with falsity or fraud
3 years if there is no fraud 2) TARIFF AND CUSTOMS CODE
After the expiration of 1 year from the payment of final duties.
You should impose those custom duties that are supposed to be imposed on the imported articles within the 1 year period, except if it is in the nature of partial liquidation, if there is fraud or protest
3) LOCAL GOVERNMENT CODE
Prescriptive periods for local taxes and real property tax 5 years
10 years if fraud has been employed
Progressive system of taxation vs. regressive system of taxation
A progressive system of taxation means that tax laws shall place emphasis on direct taxes rather than on indirect taxes, with ability to pay as the principal criterion.
A regressive system of taxation exists when there are more indirect taxes imposed than direct taxes.
No regressive taxes in the Philippine jurisdiction
I. Classification of Taxes
As to subject matter or object Personal, poll or capitation tax
o Tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they may be engaged, i.e. community tax.
Property tax
o Tax imposed on property, real or personal, in proportion to its value or in accordance with some other reasonable method of apportionment.
Excise tax
o A charge imposes upon the performance of an act, the enjoyment of privilege, or the engaging in an occupation.
As to purpose
General/fiscal revenue tax is that imposed for the purpose of raising public funds for the service of the government.
By: Adelaine Faith Zerna LLB4 Page 9 A special or regulatory tax is imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the purpose of raising public funds.
As to who bears the burden 1. Direct tax
A direct tax is demanded from the person who also shoul,ders the burden of the tax. It is a tax which the taxpayer is directly or primarily liable and which he or she cannot shift to another.
2. Indirect tax
An indirect tax is demanded from a person in the expectation and intention that he or she shall indemnify himself or herself at the expense of another, falling finally upon the ultimate purchaser or consumer. A tax which the taxpayer can shift to another.
As to the scope of the tax National tax
o A national tax is imposed by the national government. Local tax
o A local tax is imposed by the municipal corporations or local government units (LGUs).
As to the determination of amount 1. Specific tax
A specific tax is a tax of a fixed amount imposed by the head or number or by some other standard of weight or measurement. It requires no assessment other than the listing or classification of the objects to be taxed.
2. Ad valorem tax
An ad valorem tax is a fixed proportion of the value of the property with respect to which the tax is assessed. It requires the intervention of assessors or appraisers to estimate the value of such property before due from each taxpayer can be determined.
As to graduation or rate Proportional tax
o Tax based on a fixed percentage of the amount of the property receipts or other basis to be taxed. Example: real estate tax.
Progressive or graduated tax
o Tax the rate of which increases as the tax base or bracket increases.
Digressive tax rate: progressive rate stops at a certain point. Progression halts at a particular stage.
Regressive tax
o Tax the rate of which decreases as the tax base or bracket increases. There is no such tax in the Philippines.
J. Tax systems
By: Adelaine Faith Zerna LLB4 Page 10 The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation. [Section 28 (1), Article VI, Constitution]
Regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to ―evolve a progressive system of taxation.‖ This is a directive to Congress, just like the directive to it to give priority of the enactment of law for the enhancement of human dignity. The provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights. (Tolentino v. Secretary of Finance.)
Progressive system of taxation vs. regressive system of taxation
A progressive system of taxation means that tax laws shall place emphasis on direct taxes rather than on indirect taxes, with ability to pay as the principal criterion.
A regressive system of taxation exists when there are more indirect taxes imposed than direct taxes.
No regressive taxes in the Philippine jurisdiction Summary of classification of taxes:
personal tax – also known as capitalization or poll tax; property tax – assessed on property of a certain class;
direct tax – incidence and impact of taxation falls on one person and cannot be shifted to another;
indirect tax – incidence and liability for the tax falls on one person but the burden thereof can be passed on to another;
excise tax – imposed on the exercise of a privilege;
general taxes – taxes levied for ordinary or general purpose of the government; special tax – levied for a special purpose;
specific taxes – imposed on a specific sum by the head or number or by some standards of weight or measurement;
ad valorem tax – tax imposed upon the value of the article;
local taxes – taxes levied by local government units pursuant to validly delegated power to tax;
progressive taxes – rate increases as the tax base increases; and regressive taxes – rate increases as tax base decreases.
GENERAL RULE:
- Taxes are personal to the taxpayer. Corporation’s tax delinquency cannot be enforced on the stockholder or transfer taxes on the estate be assessed on the heirs.
EXCEPTIONS:
1. stockholders may be held liable for unpaid taxes of a dissolved corporation if the corporate assets have passed into their hands; and
2. heirs may be held liable for the transfer taxes on the estate, if prior to the payment of the same, the properties of the decedent have been distributed to the heirs.
K. Limitations on the power of taxation
By: Adelaine Faith Zerna LLB4 Page 11 It must be imposed for a public purpose.
If delegated either to the President or to a L.G.U., it should be validly delegated. It is limited to the territorial jurisdiction of the taxing authority.
Government entities are exempted.
International comity is recognized i.e. property of foreign sovereigns are not subject to tax.
Constitutional limitations Indirect
a) Due process clause b) Equal protection clause c) Freedom of the press d) Religious freedom e) Non-impairment clause f) Law-making process
One-subject – One-title Rule
3 readings on 3 separate days Rule except when there is a Certificate of Emergency Distribution of copies 3 days before the 3rd reading.
g) Presidential power to grant reprieves, commutations and pardons, and remit fines and forfeitures after conviction by final judgment.
Direct
a) Revenue bill must originate exclusively in H.R. but the Senate may propose with amendments.
b) Non-imprisonment for non-payment of poll tax. c) Taxation shall be uniform and equitable.
d) Congress shall evolve a progressive system of taxation.
e) Tax exemption of charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements ADE (actually, directly , exclusively) used for charitable, religious, and educational purposes.
f) Tax exemption of all revenues and assets used actually directly and exclusively for educational purposes of:
Non-profit non-stock educational institutions.
Proprietary or cooperative educational institutions subject to limitations provided by law including:
o restriction on dividends
o provisions for re-investments.
g) Tax exemption of grants, endowments, donations or contributions ADE for educational purposes, subject to conditions prescribed by law.
By: Adelaine Faith Zerna LLB4 Page 12 i) SC power to review judgments or orders of lower courts in all cases involving – Legality of any tax. Impost or toll, Legality of any penalty imposed in relation thereto.
L. SITUS OF TAXATION
Place of taxation
The State where the subject to be taxed has a situs may rightfully levy and collect the tax In determining the situs of taxation, you have to consider the nature of the taxes
Example:
1) Poll tax, capitation tax, community tax Residence of the taxpayer
2) Real property tax or property tax Location of the property
We can only impose property tax on the properties of a person whose residence is in the Philippines.
EXCEPTIONS TO THE TERRITORIALITY RULE
A) Where the tax laws operate outside territorial jurisdiction
1) TAXATION of resident citizens on their incomes derived from abroad B) Where tax laws do not operate within the territorial jurisdiction of the State 1) When exempted by treaty obligations
2) When exempted by international comity Situs of tax on real property
LEX REI SITUS or where the property is located REASON:
The place where the real property is located gives protection to the real property, hence the property or its owner should support the government of that place
Situs of property tax on personal property MOBILIA SEQUNTUR PERSONAM
movables follow the owner
movables follow the domicile of the owner RULES:
1) TANGIBLE PERSONAL PROPERTY
Where located, usually the owners domicile 2) INTANGIBLLE PERSONAL PROPERTY
By: Adelaine Faith Zerna LLB4 Page 13 EXCEPTION: The situs location not domicile: Where the intangible personal property has acquired a business situs in another jurisdiction
The principle of ―MobiliaSequnturPersonam‖ is only for purposes of convenience. It must yield to the actual situs of such property.
Personal intangible properties which acquires business situs here in the Philippines: 1) Franchise which is exercised within the Philippines
2) Shares, obligations, bonds issued by a domestic corporation
3) Shares, obligations, bonds issued by a foreign corporation, 85% of its business is conducted in the Philippines
4) Shares, obligations, bonds issued by a foreign corporation which shares of stock or bonds acquire situs here
5) Rights, interest in a partnership, business or industry established in the Philippines
These intangible properties acquire business situs here in the Philippines, you cannot apply the principle of ―MobiliaSequnturPersonam‖ because the properties have acquired situs here.
Situs of income tax 1. Domicillary theory
The location where the income earner resides in the situs of taxation 2. NATIONALITY THEORY
The country where the income earner is a citizen is the situs of taxation i. SOURCE RULE
The country which is the source of the income or where the activity that produced the income took place is the situs of taxation.
Situs of sale of personal property
The place where the sale is consummated and perfected Situs of tax on interest income
The residence of the borrower who pays the interest irrespective of the place where the obligation was contracted
CIR vs. BOAC
Revenue derived by an of-line international carrier without any flight from the Philippines, from ticket sales through its local agent are subject to tax on gross Philippine billings Situs of excise tax
By: Adelaine Faith Zerna LLB4 Page 14 HOPEWELL vs. COM. OF CUSTOMS
The power to levy an excise upon the performance of an act or the engaging in an occupation does not depend upon the domicile of the person subject to the exercise, nor upon the physical location of the property or in connection with the act or occupation taxed, but depends upon the place on which the act is performed or occupation engaged in.
Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the place where the respective transaction is perfected and consummated
M. Double taxation
Taxing same property twice when it should be taxed but once. Taxing the same person twice by the same jurisdiction over the same thing.
Also known as duplicate taxation PEPSI COLA vs. CITY OF BUTUAN
There is no constitutional prohibition against double taxation in the Philippines. It is something not favored but is permissible, provided that the other constitutional requirements is not thereby violated
KINDS OF DOUBLE TAXATION 1) DIRECT DOUBLE TAXATION
Double taxation in the objectionable or prohibited sense Same property is taxed twice
REQUISITES:
A) The same property is taxed twice when it should only be taxed once;
B) Both taxes are imposed on the same property or subject matter for the same purpose; C) Imposed by the same taxing authority;
D) Within the same jurisdiction; E) During the same period; and
F) Covering the same kind or character of tax 2) INDIRECT DOUBLE TAXATION
Not legally objectionable
If taxes are not of the same kind, or the imposition are imposed for different taxing authority and this may involve the same subject matter
EXAMPLES:
A) The taxpayers warehousing business although carried on in relation to the operation of its sugar central is a distinct and separate taxable business
By: Adelaine Faith Zerna LLB4 Page 15 B) A license tax may be levied upon a business or occupation although the land or property used in connection therewith is subject to property tax
C) Both a license fee and a tax may be imposed on the same business or occupation for selling the same article and this is not in violation of the rules against double taxation D) When every bottle or container of intoxicating beverages is subject to local tax and at the same time the business of selling such product is also subject to liquors license
E) A tax imposed on both on the occupation of fishing and of the fishpond itself
F) A local ordinance imposes a tax on the storage of copra where it appears that the finished products manufactured out of the copra are subject to VAT
Means employed to avoid double taxation 1) Tax deductions
2) Tax credits
o An amount allowed as a deduction of the Philippine Income tax on account of income taxes paid or incurred to foreign countries. It is given to a taxpayer in order to provide a relief from too onerous a burden of taxation in case where the same income is subject to a foreign income tax and the Philippine Income tax. o WHO CAN CLAIM TAX CREDIT
1) Citizens of the Philippines 2) Domestic corporations CITY OF BAGUIO vs. DE LEON
The argument against double taxation may not be invoked where one tax is imposed by the state and the other imposed by the city, 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, calling or activity by both the state and a political subdivision thereof. And where the statute or ordinance in question applies equally to all persons, firms and corporations placed in a similar situation, there is no infringement of the rule on equality.
VILLANUEVA vs. CITY OF ILOILO
An ordinance imposing a municipal tax on tenement houses was challenged because the owners already pay real estate taxes and also income taxes under the NIRC. The Supreme Court held that there was no double taxation. The same tax may be imposed by the National Government as well as the local government. There is nothing inherently obnoxious in the exaction of license fees or taxes with respect to the same occupation, calling or activity by both the state and a political subdivision thereof. Further, a license tax may be levied upon a business or occupation although the land used in connection therewith is subject to property tax.
3) Provide for exemption
4) Enter into treatise with other states 5) Allowance on the principle of reciprocity
By: Adelaine Faith Zerna LLB4 Page 16 DOCTRINES ON DOUBLE TAXATION
1) Direct Double Taxation (DDT) is not allowed because it amounts to confiscation of property without due process of law
2) You can question the validity of double taxation if there is a violation of the Equal protection clause or Equality or Uniformity of Taxation
3) All doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer
Escape from taxation I. SHIFTING
Shifting is the transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to someone else
Process by which such tax burden is transferred from statutory taxpayer to another without violating the law
It should be borne in mind that what is transferred is not the payment of the tax, but the burden of the tax
Only indirect taxes may be shifted; direct taxes cannot be shifted Ways of shifting the tax burden
1) FORWARD SHIFTING
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.
Example:
- Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer, who also shifts it to the final purchaser or consumer
2) BACKWARD SHIFTING
When the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factors of production
Example:
- Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price is reduced, and from the latter to the wholesaler, or finally to the manufacturer or producer
2) ONWARD SHIFTING
When the tax is shifted two or more times either forward or backward Example:
By: Adelaine Faith Zerna LLB4 Page 17 - Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the retailer, we have three shifts in all.
Impact and Incidence of Taxation
Impact of taxation is the point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the person who must pay the tax to the government. He is also termed as the statutory taxpayer-the one on whom the tax is formally assessed. He is the subject of the tax
Incidence of taxation is that point on which the tax burden finally rests or settle down. It takes place when shifting has been effected from the statutory taxpayer to another. Statutory Taxpayer
The Statutory taxpayer is the person required by law to pay the tax or the one on whom the tax is formally assessed. In short, he or she is the subject of the tax.
In direct taxes, the statutory taxpayer is the one who shoulders the burden of the tax while in indirect taxes, the statutory taxpayer is the one who pay the tax to the government but the burden can be passed to another person or entity.
Relationship between impact, shifting, and incidence of a tax
The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the result. Thus, the impact in a sales tax (i.e. VAT) is on the seller (manufacturer) who shifts the burden to the customer who finally bears the incidence of the tax.
Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence is the setting or coming to rest of the tax.
II. CAPITALIZATION
Reduction is the price of the taxed object equal to the capitalized value of future taxes on the property sold
This is a special form of backward shifting, where the burden of future taxes which the buyer may have to pay is shifted back to the seller in the form of reduction in the selling price
III. TRANSFORMATION
The manufacturer in an effort to avoid losing his customers, maintains the same selling price and margin of profit, not by shifting the tax burden to his customers, but by improving his method of production and cutting down or other production cost, thereby transforming the tax into or earn through the medium of production.
IV. TAX AVOIDANCE
Also known as ―tax minimization‖ not punished by law
Tax avoidance is the exploitation of the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liability
By: Adelaine Faith Zerna LLB4 Page 18 DELPHERS TRADERS CORP vs. IAC (157 SCRA 349)
The Supreme Court upheld the estate planning scheme resorted to by the Pacheco family in converting their property to shares of stock in a corporation which they themselves owned and controlled. By virtue of the deed of exchange, the Pacheco co-owners saved on inheritance taxes. The Supreme Court said the records do not point anything wrong and objectionable about this estate planning scheme resorted to. The legal right of the taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them by means which the law permits cannot be doubted.
Example:
Following the ―holding period rule‖ in capital gains transaction, by postponing the sale of the capital asset until after twelve months from date of acquisition you can reduce the tax on the capital gains by 50%
V. TAX EXEMPTION
It is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected.
Exemption is allowed only if there is a clear provision there for.
It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis.
Exemptions are not presumed, but when public property is involved, exemption is the rule and taxation is the exemption.
Rationale for granting tax exemptions
Its avowed purpose is some public benefit or interests which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of the exemption. The theory behind the grant of tax exemptions is that such act will benefit the body of
the people. It is not based on the idea of lessening the burden of the individual owners of property.
Grounds for granting tax exemptions
May be based on contract. In such a case, the public, which is represented by the government is supposed to receive a full equivalent therefor, i.e. charter of a corporation. May be based on some ground of public policy, i.e., to encourage new industries or to foster charitable institutions. Here, the government need not receive any consideration in return for the tax exemption.
May be based on grounds of reciprocity or to lessen the rigors of international double or multiple taxation
Note: Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor.
By: Adelaine Faith Zerna LLB4 Page 19 Nature of tax exemption
It is a mere personal privilege of the grantee.
It is generally revocable by the government unless the exemption is founded on a contract which is contract which is protected from impairment.
It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and so is prejudicial thereto.
It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis.
It is not transferable except if the law expressly provides so. Kinds of tax exemption according to manner of creation
1) Express or affirmative exemption
When certain persons, property or transactions are, by express provision, exempted from all certain taxes, either entirely or in part.
2) Implied exemption or exemption by omission
When a tax is levied on certain classes of persons, properties, or transactions without mentioning the other classes.
TN: Every tax statute makes exemptions because of omissions. No tax exemption by implication
It must be expressed in clear and unmistakable language CALTEX vs. COA
In claiming tax exemption, the burden of proof lies upon the claimant It cannot be created by mere implication
It cannot be presumed that you are entitled to tax exemption You must prove it
RULE:
Taxation is the rule and exemption is the exception PROPERTY TAX – GOVERNMENT PROPERTY
Properties owned by the government whether in their proprietary or governmental capacity are exempt from real estate tax
TEST:
- OWNERSHIP
Once established that it belongs to the government, the nature of the use of the property whether proprietary or sovereign becomes immaterial.
Exemption of public property from taxation does not extend to improvements therein made by occupants or claimants at their own expense.
Kinds of tax exemptions according to scope or extent 1) TOTAL
By: Adelaine Faith Zerna LLB4 Page 20 When certain persons, property or transactions are exempted, expressly or impliedly from all taxes
2) PARTIAL
When certain persons, property or transactions are exempted, expressly or impliedly from certain taxes, either entirely or in part.
3) There can be no simultaneous exemptions under two laws, when one grants partial exemption while other grants total exemption.
Does provision in a statute granting exemption from ―all taxes‖ include indirect taxes?
NO. As a general rule, indirect taxes are not included in the grant of such exemption unless it is expressly stated.
VI. TAX REMISSION OR TAX CONDONATION
The word ―remit‖ means to desist or refrain from exacting, inflicting or enforcing something as well as to restore what has already been taken. The remission of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Such a set of taxes is a class by itself and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike. [Juan Luna Subd. V. Sarmiento, 91 Phil 370]
The condition of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only when expressly provided in the law. [Surigao Consolidated Mining v. Commissioner of Internal Revenue, 9 SCRA 728]
VII. TAX AMNESTY
Tax amnesty, being 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 to collect what otherwise would be due it and, in this sense, prejudicial thereto. It is granted particularly to tax evaders who wish to relent and are willing to reform, thus giving them a chance to do so and thereby become a part of the new society with a clean slate. [Republic v. Intermediate Appellate Court, 196 SCRA 335]
Like tax exemption, tax amnesty is never favored nor presumed in law. It is granted by statute. The terms of the amnesty must also be construed against the taxpayer and liberally in favor of the government.
Tax amnesty v. tax condonation v. tax exemption
A tax amnesty, being a general pardon or intentional overlooking by the Statute of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law, partakes of an absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it and, in this sense, prejudicial thereto, particularly to tax evaders who wish to relent and are willing to reform are given a chance to do so and therefore become a part of the society with a clean slate.
Like a tax exemption, a tax amnesty is never favorednor presumed in law, and is granted by statute. The terms of the amnesty must be strictly construed against the taxpayer and literally in favor of the government. Unlike a tax exemption, however, a tax amnesty has limited applicability as to cover a particular taxing period or transaction only.
By: Adelaine Faith Zerna LLB4 Page 21 There is a tax condonation or remission when the State desists or refrains from exacting, inflicting or enforcing something as well as to reduce what has already been taken. The condonation of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only when expressed in the law.
Tax exemption, on the other hand, is the grant of immunity to particular persons or corporations of a particular class from a tax of which persons and corporations generally within the same state or taxing district are obliged to pay. Tax exemptions are not favored and are construed strictissimijurisagainst the taxpayer.
CIR vs. RIO TUBA
> Law granting partial refund partakes the nature of a tax exemption and therefore must be strictly construed against the taxpayer
CIR vs. TOUR SPECIALIST
> Gross receipts subject to tax under the tax code do not include monies or receipts entrusted to the taxpayer which do not belong to it and does not redound to the taxpayers benefit, and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts.
VIII. TAX EVASION
It is also known as ―tax dodging‖ It is punishable by law
Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of tax.
YUTIVO vs. CTA
Tax evasion is a term that connotes fraud through the use of pretenses or forbidden devices to lessen or defeat taxes
ELEMENTS OF TAX EVASION
Tax evasion connotes the integration of three (3) factors:
1) The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or paying no tax when it is shown that tax is due
2) An accompanying state of mind which is described as being ―evil‖, ―in bad faith‖, ―willful‖, or ―deliberate‖ and not ―accidental‖
3) A course of action (or failure of action) which is unlawful INDICIA of FRAUD IN TAX EVASION
1) Failure to declare for taxation purposes true and actual income derived from business for two (2) consecutive years; or
2) Substantial underdeclaration of income tax returns of the taxpayer for four (4) consecutive years coupled with unintentional overstatement of deductions
By: Adelaine Faith Zerna LLB4 Page 22 Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from the circumstances of the case.
REPUBLIC vs. GONZALES (13 SCRA 638)
Failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two (2) consecutive years is an indication of his fraudulent intent to cheat the government of its due taxes.
N. Construction and interpretation
a) Tax laws1. Legislative intent – Tax statutes are to receive reasonably construction with the view to carry out their purpose and intent. If there is some issue on construction and interpretation, we determine what was the intent of the legislators. We go back to the deliberations, debates, arguments.
2. When there is doubt – In case of doubt, they are construed strictly against the government and liberally in favor of the taxpayer. Tax laws are, therefore, given liberal construction for the reason that taxes are burdens.
3. Where the language is plain - But when the language of the tax law is plain and clear, which does not require independent interpretation or construction, the rule of strict construction against the government is not applicable where the language of the tax statute is plain and there is not doubt as to its legislative intent.
b) Tax exemption and exclusion General rule:
o In the construction of tax statutes, exemptions are not favored and are construed strictissimijurisagainst the taxpayer. The fundamental theory is that all taxable property should bear its share in the cost and expense of the government.
o Taxation is the rule and exemption is the exemption.
o He who claims exemption must be able to justify his claim or right thereto by a grant express in terms ―too plain to be mistaken and too categorical to be misinterpreted.‖ If not expressly mentioned in the law, it must be at least within its purview by clear legislative intent.
Exceptions
1) When the law itself expressly provides for a liberal construction thereof.
2) In cases of exemptions granted to religious, charitable and educational institutions or to the government or its agencies or to public property because the general rule is that they are exempt from tax.
Strict interpretation does not apply to the government and its agencies
Petitioner cannot invoke the rule on stritissimijuris with respect to the interpretation of statutes granting tax exemptions to the NPC. The rule on strict interpretation does not apply in the case of exemptions in favor of a political subdivision or instrumentality of the government. [Maceda v. Macaraig]
By: Adelaine Faith Zerna LLB4 Page 23 Davao Gulf v. Commissioner, 293 SCRA 76 (1998)
A tax cannot be imposed unless it is supported by the clear and express language of a statute; on the other hand, once the tax is unquestionably imposed, ―a claim of exemption from tax payers must be clearly shown and based on language in the law too plain to be mistaken.‖ Since the partial refund authorized under Section 5, RA 1435, is in the nature of a tax exemption, it must be construedstrictissimijurisagainst the grantee. Hence, petitioner’s claim of refund on the basis of the specific taxes it actually paid must expressly be granted in a statute stated in a language too clear to be mistaken.
Exemption of the buyer does not extend to the seller
Exemption of the principal does not extend to the accessory SURIGAO vs. COLLECTOR of CUSTOMS
Tax refunds, condonations and amnesties, they being in the nature of tax exemptions must be strictly construed against the taxpayer and liberally in favor of the government.
II. National Internal Revenue Code of 1997, as amended (NIRC)
A. Income taxationIncome is the flow of wealth which goes into the hands of the taxpayer other than the return of capital.
1. Income tax systems a) Global tax system
This is also known as the totality or the aggregate approach.The Global System of Taxation of Income follows the principle that all income are one and the same. There is no variance as to the type, the purpose, the character and the kind of income.
b) Schedular tax system
This is also known as differentiated or segregated approach. The Schedular System of Taxation recognizes that income are different from each other. There is a distinction and differentiation on tax treatment and character. A type of income is to be differentiated from another type of income. All income are not one and the same.Also includes the system of ―pay-as-you-go‖
c) Semi-schedular or semi-global tax system 2. Features of the Philippine income tax law
a) Direct tax b) Progressive c) Comprehensive
d) Semi-schedular or semi-global tax system 3. Criteria in imposing Philippine income tax
a) Citizenship principle b) Residence principle
By: Adelaine Faith Zerna LLB4 Page 24 c) Source principle
4. Types of Philippine income tax a) Compensation income
b) Business/Trade/Professional Income c) Passive Income
One which the taxpayer merely waits for the amount/income to come in. Examples: Royalties, Interests, Prizes.
d) Capital Gains
Derived from sale of capital assets (Sec. 22, NIRC) or properties 5. Taxable period
a) Calendar period b) Fiscal period c) Short period
6. Kinds of taxpayers and taxes imposed (Sec. 23, NIRC) a) Individual taxpayers
(i) Citizens
(a) Resident citizens
Taxable on all income derived from sources within and without the Philippines.
(b) Non-resident citizens
Taxable only on income derived from sources within the Philippines. But if working abroad, taxable only on income derived from sources within. TN: Seamen who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker.
(ii) Aliens
(a) Resident aliens
One who permanently stays in the Philippines or goes out less than 183 days.
(b) Non-resident aliens
(1) Engaged in trade or business
One who stays in the Philippines for more than 180 days. (2) Not engaged in trade or business
TN: These persons are taxable only on income derived from sources within. (iii) Special class of individual employees
(a) Minimum wage earner
The statutory minimum wage earners are no longer taxable. They are exempted from payment of income tax. The determination of statutory wages is determined on a regular basis by the RTWPB. (R.A. 9504, July 2008)
b) Corporations
(i) Domestic corporations (ii) Foreign corporations
(a) Resident foreign corporations (b) Non-resident foreign corporations (iii) Joint Venture and Consortium
By: Adelaine Faith Zerna LLB4 Page 25 c) Partnerships
In the case of business partnerships, they are taxed like corporations. d) General professional partnerships
e) Estates and trusts
In the case of estates and trusts, they are taxable like individuals. f) Co-ownerships
7. GROSS INCOME
A. (Sec. 32, NIRC) Sources of income but not limited to the following:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property; (4) Interests;
(5) Rents; (6) Royalties; (7) Dividends; (8) Annuities;
(9) Prizes and winnings; (10) Pensions; and
(11) Partner's distributive share from the net income of the general professional partnership.
B) Exclusions from Gross Income (Exempt from Tax):
(1) Life Insurance.- When you are indemnified for such loss or insurance proceeds are paid for such loss, what you have is a return of capital. That is excluded and not subject to income tax.
But if such amounts are held by the insurer under an agreement to pay interest, then, income is earned by way of the interest but not on the principal amount covering the proceeds of the policy.
(2) Amount Received by Insured as Return of Premium. - These are return of premiums.
They represent return of capital. They are not income.
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest,
devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income.
By: Adelaine Faith Zerna LLB4 Page 26
(4) Compensation for Injuries or Sickness. - These are forms of indemnity. These are return of capital. Actual damages in payment for hospitalization and other medical expenses are not income. Moral damages are not income. But if they are damages for payment of loss of income or loss of earning capacity, then, they are taxable income.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
Retirement benefits received under Republic Act No. 7641 (Labor Code) and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer
REQUIREMENTS FOR EXCLUSION:
(1) The private benefit plan must be registered by the employer of with the BIR.
(2) Length of service – the retiring official or employee has been in the service of the same employer for at least ten (10) years
(3) Age – the retiring official or employee is not less than fifty (50) years of age at the time of his retirement
(4) That the benefits shall be availed of by an official or employee only once. Absence of one, the said retirement benefits are taxable.
Suppose there is a higher standard of retirement, which will prevail? If the employer sets up a higher standard than the one set up by your tax code, it will be standards of the employer that will be prevail. If you retire lower than the standards set up required by the tax code, your retirement it will be taxable.
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.
This refers to separation pay.As a rule, separation pay is taxable. It becomes excluded when it is payment by reason of death, sickness or other physical disability or for any cause beyond the control of the said official or employee.
If you resign and you are given a separation pay, that is taxable because that is a cause within the control of the employee.
There are resignations which are beyond the control of the employee such as in the case of mergers or consolidations. The separation pay given in such circumstances is excluded because despite the resignation, it is a cause beyond the control of the employee.
The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, 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, private or public.
By: Adelaine Faith Zerna LLB4 Page 27
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.
Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282.
Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees.
As a rule, prizes and awards are taxable. They are excluded in the instances provided.
(7) 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 Philippines or abroad and sanctioned by their national sports associations.As a rule, prizes and awards in sports competition are taxable. They are excluded under the conditions aforementioned.
(8) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year.
(9) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals.
(10) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years.
(11) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code.
8. Optional Standard Deduction:
Before, only individuals engaged in business or practice their profession, who are citizens and resident aliens (excluding non-resident aliens) can avail of OSD. The availment of the OSD is also now allowed to corporations.
It used to be 10% of the gross income. It is now 40% of the gross income. 9. Personal Exemptions:
By: Adelaine Faith Zerna LLB4 Page 28 Before, we used to have the scaling of the status of the individual – single, head of the family or married. Now, regardless of your status, you have a personal exemption of P 50,000.
Additional Exemptions:
It used to be P 8,000, maximum of 4. It is now increased to P 25,000, maximum of 4. 10. Resident Citizen’s income from outside the Philippines:
The foreign income of the resident citizen is not anymore treated as schedular. It will be treated as global. All income from foreign source is taxed at 5% to 32%. There is no distinction as to the kind of income, as long as they are from a foreign source.
11. Corporate income tax
Income in general – the rate is 35%. Beginning January 1, 2009), the corporate income tax will be reduced to 30%.
The rate of 30% of non-resident foreign corporations is at gross (without the benefit of deductions). For the domestic and resident foreign corporations, the 30% tax is based on taxable income, with the benefit of deductions.
The treatment of the foreign source income of a domestic corporation, regardless of the nature of that income, is at a global rate of 30%.
In the case of GOCCs, the rule is that they are taxable. Those which are not taxable are GSIS, SSS, PhilHealth and PCSO. PAGCOR has been removed under RA 9337 as being exempted. So, PAGCOR is already taxable.
In the case of proprietary educational institutions and hospitals, they are subject, as a rule, to the regular corporate income tax. Unless, under the predominance test, where they are entitled to a 10% tax on their taxable income provided that the predominant income is the educational or hospital income. If the predominant income (more than 50%) of the proprietary educational or hospital is from unrelated income or unrelated business, then, it will be subject to regular rates.
12. MINIMUM CORPORATE INCOME TAX or MCIT
Minimum Corporate Income Tax on Domestic Corporations. (Sec. 27, NIRC) —
A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.
Minimum Corporate Income Tax on Resident Foreign Corporations. (Sec. 28, NIRC) —
A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection.
The MCIT applies to both domestic corporations and to the resident foreign corporations.
In its application, the tax due computed during the tax year at 35% is compared to the 2% of gross income. The tax due payable is whichever is higher.
By: Adelaine Faith Zerna LLB4 Page 29 When we say that the MCIT applies beginning on the 4th taxable year immediately following the year in which the corporation commenced business, it means that newly established corporations will not yet be subject to the MCIT. When the corporation has been in the business and operating for 4 years or more at the time this tax became effective, then, that provision is covered.
Prior to RA 9337, the MCIT was annualized – you determine the tax to be paid, whether MCIT or 35%, at the end of the year. When RA 9337 took effect in 2005, the application of the MCIT is now on a quarterly basis.
Corporations are required to file quarterly returns. In the case of corporations subject to MCIT, they have to determine at the end of the quarter the taxable income computed under the MCIT and under the 35% rate.
There is no 4th quarter return for you will have the annual return.
13. Imposition of Improperly Accumulated Earnings Tax. (Sec. 29, NIRC)
The improperly accumulated earnings tax is in addition to your income tax. This actually operates more as a penalty tax or a surtax. It is imposed on the improperly accumulated taxable income of the corporation. For improperly accumulating earnings beyond the reasonable needs of the business, the corporation will be subject to 10% on the improperly accumulated taxable income.
When corporations are set up and it continues to accumulate profits beyond the reasonable means of the business, the tax code penalizes these corporations because corporations should not accumulate beyond its business needs. It should distribute their earnings to the stockholders, to the owners of the corporations, whether individuals or corporations. Otherwise, if they would accumulate earnings beyond the reasonable means of the business, then, it would be penalized and subject at 10% improper accumulated earnings tax on the basis of improperly accumulated taxable income. This is in addition to the regular corporate income tax that it will pay.
The improperly accumulated earnings tax 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 to accumulate instead of being divided or distributed.
So as not to be penalized, the corporation has to declare dividends. If the corporation accumulates earnings, there must be a business purpose for it not to be penalized.
This penalty tax will not apply to:
1. Publicly-held corporations; (corporations which are traded in the stock
exchange)
2. Banks and other non-bank financial intermediaries
3. Insurance companies
Remember that the distribution of dividends to the individual taxholders is a taxable distribution, except when the distribution is made to another corporation where it is tax-free distribution of dividends.
