TAXATION I
QUIZZLER ON INCOME TAXATION
FOREWORD
This Reviewer covers the study of the law on Income Taxation which includes:
1. Title II of the National Internal Revenue Code (NIRC) 2. Statutes related or amending the NIRC
3. Related Revenue Regulations, BIR Rulings and other administrative issuances
4. Cases decided by the Supreme Court
As a complement to this reviewer, I suggest you get any book containing the complete codal provisions of the NIRC (either the green codal from Rex Bookstore or the NIRC annotated codal by Casasola and Bernaldo. As for reference books, I would recommend Income Taxation by Mamalateo or Tax Law and Jurisprudence by Vitug and Acosta.
As Albert Einstein puts it, “the hardest thing in the world to understand is the income tax.” May this reviewer serve its purpose in helping us in our efforts in overcoming this challenge and achieve excellence. Yours in Honor and Excellence,
Pierre Martin DL Reyes
OVERVIEW OF INCOME TAXATION
Q: What is an Income Tax?
A: Income Tax has been defined as a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a person’s income, emoluments, profits and the like.
Q: Where is the Philippine Income Tax Law embodied?
A: It is embodied in Title II (Tax on Income) of the National Internal Revenue Code (“NIRC”) as well as in numerous (a) revenue regulations and (b) BIR rulings and other administrative issuances (e.g. Revenue Memorandum Circulars or RMCs).
Q: What are the different income tax systems adopted by the
Philippines?
A: The types of income tax systems adopted 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.
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. 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 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.
Q: How do you distinguish “schedular treatment from “global
treatment” as used in income taxation?
A: 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.
Q: To which system does the method of taxation under the
NIRC belong?
A: The current method of taxation under the NIRC belongs to semi-schedular and semi-global tax system.
Q: What are the features of the Philippine Income Tax Law?
A: The features are as follows: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.
Q: What are the criteria in imposing Income Tax in the
Philippines?
A: The criteria are:
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.
Q: What are the types of Philippine Income Tax?
A: 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.
Q: When is income taxable?
A: Income, gain or profit is subject to income tax when the following conditions are present:
1. There is income, gain or profit
2. The income, gain or profit is received or realized during the taxable year; and
3. The income, gain or profit is not exempt from income tax.
DEFINITION OF TERMS
(SECTION 22, NIRC)
NOTE: It is advisable that you memorize or at the very least familiarize yourself with the following terms as you will encounter these terms in the succeeding provisions. Understanding tax requires knowing the definitions of the technical terms.
Person An individual, a trust, estate or corporation Corporation Includes partnerships, no matter how created
or organized, joint-stock companies, joint accounts, associations, or insurance companies but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum and other energy operations pursuant to an operating agreement under a service contract with the Government
General Professional Partnerships
Partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business
Domestic When applied to a corporation, means created or organized in the Philippines or under its laws Foreign When applied to a corporation, means a
corporation which is not domestic Nonresident citizen The term 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. who works and derives income from
abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. 4. who has been previously considered
a non-resident 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 until date of his arrival in the Philippines
Resident alien An individual whose residence is within the Philippines and who is not a citizen thereof Nonresident alien An individual whose residence is not within the
Philippines and who is not a citizen thereof Resident foreign
corporation
A foreign corporation engaged in trade or business within the Philippines
Nonresident foreign corporation
A foreign corporation not engaged in trade or business within the Philippines
Fiduciary A guardian, trustee, executor, administrator, receiver, conservator or any person acting in any fiduciary capacity for any person
Withholding agent Any person required to deduct and withhold tax under the provisions of Section 57 (Withholding of Tax at source)
Shares of stock Includes shares of stock of a corporation, warrants and/or options to purchase shares of stocks as well as units of participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations and recreation or amusement clubs and mutual fund certificates Shareholder Includes any holder of shares of stock and
others which are considered shares of stock under this code (refer to definition of Shares of Stock)
Taxpayer Any person subject to tax “Including” and
“includes”
When used in a definition, it shall not be deemed to exclude other things otherwise within the meaning of the term
Taxable year Means the calendar year or the fiscal year ending during such calendar year, upon the basis of which the net income is computed Fiscal year Means an accounting period of 12 months
ending on the last day of any month other than December
“Paid or incurred” and “paid or accrued”
Shall be construed according to the method of accounting upon the basis of which net income is computed
Trade or business Includes the performance of the functions of a public office
Securities Means share of stock n a corporation and rights to subscribe for or to receive such shares Dealer in securities A merchant of stocks or securities, whether an
individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and the resale thereof to customers
Bank Every banking institution as defined in RA 337 as amended by RA 8791 (General Banking Act of 2000)
Non-bank financial institution
A financial intermediary as defined in RA 337 as amended by RA 8791 (General Banking Act of 2000) authorized by the BSP to perform quasi-banking activities
Quasi-banking activities
Means borrowing funds from 20 or more personal or corporate lenders at any one time, through the issuance, endorsement, or
acceptance of debt instruments of any kind other than deposits for the borrower’s own account or through the issuance of certificates of assignments or similar instruments, with recourse, or of purchase agreements for purposes of re-lending or purchasing receivables and other similar obligations Deposit substitutes An alternative form of obtaining funds from the
public (the term public means borrowing from 20 or more individual or corporate lenders at any one time), other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account for purposes of re-lending or purchasing receivables and other similar obligations, or financing their own needs or the needs of their agent or dealer
Ordinary Income Any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1) (which defines what capital assets are and those which are not)
Ordinary loss Includes any loss from the sale or exchange of property which is not a capital asset
Rank and file employees
Mean all employees who are holding neither managerial nor supervisory position as defined under existing provisions of the Labor Code Mutual fund
company
An open-end and close-end investment company as defined under the Investment Code Trade, business or
profession
Include performance of services by the taxpayer as an employee
Regional or area headquarters
A branch established in the Philippines by multinational companies
Long-term deposit or investment certificate
Certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with maturity period of not less than 5 years, the form of which shall be prescribed by the BSP and issued by Banks only to individuals in denominations of P10,000 and other denominations as may be prescribed by the BSP Statutory Minimum
Wage
Refers to the rate fixed by the Regional Tripartite Wage and Productivity Boar, as defined by the Bureau of Labor and Employment Statistics (BLES) of DOLE
Minimum Wage earner
A worker in the private sector paid the statutory minimum wage or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned
Relevant Cases assigned:
R
EPUBLIC OF THEP
HILIPPINES VS.
M
ANILAE
LECTRICC
OMPANYGRNO.141314,NOVEMBER 15,2002
FACTS:MERALCO filed with the ERB an application for revised rates, with an average increase of P0.21 per kwh in its distribution charge. The ERB granted a provisional increase of P0.184 per kwh subject to the condition that in the event the ERB determines that MERALCO is entitled to a lesser increase in rates, all excess amounts collected by MERALCO shall be refunded to its customers or credited in their favor. The
Commission on Audit (COA) conducted an examination of the books of accounts and records of MERALCO and thereafter recommended, among others, that: (1) income taxes paid by MERALCO should not be included as part of MERALCO's operating expenses and (2) the "net average investment method" or the "number of months use method" should be applied in determining the proportionate value of the properties used by MERALCO during the test year. The ERB adopted the recommendations of the COA and held that income tax should not be treated as operating expense as this should be "borne by the stockholders who are recipients of the income or profits realized from the operation of their business" hence, should not be passed on to the consumers. The decision directed the reduction of the MERALCO rates by an average of P0.167 per kwh and the refund of such amount to MERALCO's customers beginning February 1994 and until its billing cycle beginning February 1998. ISSUE: Whether income tax should be included in the computation of operating expenses of a public utility?
HELD: NO. Income tax paid by a public utility is inconsistent with the nature of operating expenses. In general, Operating expenses are those which are reasonably incurred in connection with business operations to yield revenue or income. They are items of expenses which contribute or are attributable to the production of income or revenue. On the other hand, Income tax is imposed on an individual or entity as a form of excise tax or a tax on the privilege of earning income. In exchange for the protection extended by the State to the taxpayer, the government collects taxes as a source of revenue to finance its activities. Clearly, by its nature, income tax payments of a public utility are not expenses which contribute to or are incurred in connection with the production of profit of a public utility. Income tax should be borne by the taxpayer alone as they are payments made in exchange for benefits received by the taxpayer from the State. To charge consumers for expenses incurred by a public utility which are not related to the service or benefit derived by the customers from the public utility is unjustified and inequitable. Accordingly, the burden of paying income tax should be Meralco's alone and should not be shifted to the consumers by including the same in the computation of its operating expenses.
C
OMMISSIONER OFI
NTERNALR
EVENUE VS.
C
OURT OFA
PPEALSGRNO.108576,JANUARY 20,1999
FACTS:Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A. Soriano Y Cia", predecessor of ANSCOR. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. Don Andres died, but his estate continued to receive stock dividends as well as his wife Doña Carmen Soriano. Pursuant to a board resolution, ANSCOR redeemed a considerable number of common shares from Don Andres’ estate. As stated in the Board Resolutions, ANSCOR's business purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the company's foreign exchange remittances in case cash dividends are declared. ANSCOR also reclassified some of Doña Carmen’s common shares to preferred shares. After examining ANSCOR's books of account and records, Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source based on the transactions of exchange and redemption of stocks. ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. The CTA ruled that ANSCOR’s redemption and exchange of the stocks of its foreign stockholders cannot be considered as "essentially equivalent to a distribution of taxable dividends" under Section 83(b) of the then 1939 Internal Revenue Act. ANSCOR avers that it has no duty to withhold any tax either from the Don Andres estate or from Doña Carmen based on the two transactions, because the same were done for legitimate business purposes which are (a) to reduce its foreign exchange
remittances in the event the company would declare cash dividends, and to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly, envisioned by Don Andres. It likewise invoked the amnesty provisions of P.D. 67.
ISSUES: (1) May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? (2) Whether ANSCOR's redemption of stocks from its stockholder and the exchange of stocks can be considered as "essentially equivalent to the distribution of taxable dividend" making the proceeds thereof taxable under the provisions of the above-quoted law?
HELD: (1) NO. PD 67 condones the taxpayer. An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for deficiency withholding tax/. As such, it is being held liable in its capacity as a withholding agent and not its personality as a taxpayer. In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer — he is the person subject to tax impose by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still impose on and due from the latter. The agent is not liable for the tax as no wealth flowed into him — he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguish from its duty to pay tax.
(2) The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. The test of taxability under the exempting clause of Section 83(b) is whether income was realized through the redemption of stock dividends. The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder's separate property. Profits derived from the capital invested cannot escape income tax. As realized 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. Hence, the proceeds are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income" subject to tax under Section 22 ( tax on non-resident alien individual) in relation to Section 21 (rates of tax on citizens or residents) of the then 1939 Code. As income, it is subject to income tax which is required to be withheld at source.
M
ADRIGAL VS.
R
AFFERTYGRNO.12287,AUGUST 7,1918
FACTS:Vicente Madrigal and Susana Paterno were legally married prior to Jan 1, 1914. The marriage was contracted under the provisions of law concerning conjugal. On Feb 25, 1915, Vicente Madrigal filed sworn declaration with the Collector of Internal Revenue, showing, as his total net income for the year 1914. Subsequently Madrigal submitted the claim that the said amount did not represent his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife, and that in computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Madrigal should be divided into two equal parts, one-half to be considered the income of Madrigal and the other half of Paterno. The Attorney-General agreed with Madrigal. The
revenue officers unsatisfied sought the opinion of the US Treasury Department. The US CIR reversed the opinion of the Attorney-General and decided against the claim of Madrigal. Madrigal paid under protest and brought the action before the Trial Court which ruled in defendant’s favor. On appeal, petitioner argues that the income should be divided into two equal parts, because of the conjugal partnership existing between him and his wife. The respondents, on the other hand, contend that the taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon capital and property; that the fact that Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal partnership, has no bearing on income considered as income, and that the distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting from the relation of marriage.
ISSUE: Whether the income should be divided into two equal parts because of the conjugal partnership existing between Madrigal and his wife?
HELD: NO. Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. 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. Capital is wealth, while income is the service of wealth. A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." In this case, Paterno, wife of Madrigal, has an inchoate right, a mere expectancy, in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husband's property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. Moreover, the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in the Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law must be given effect.
GENERAL PRINCIPLES OF INCOME TAXATION (SECTION 23, NIRC)
Q: What are the general principles of income taxation in the
Philippines?
A: Except as otherwise provided in this Code, the general principles are: 1. A citizen of the Philippines residing therein is taxable on all
income derived from sources within and outside the Philippines (Citizenship principle)
2. A non-resident citizen (of the Philippines) is taxable only on income derived from sources within the Philippines (Citizenship principle)
3. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines (Citizenship principle)
4. An alien individual whether a resident or not of the Philippines is taxable only on income derived from sources
within the Philippines (Residence and source of income principle)
5. A domestic corporation is taxable on all income derived from sources within and outside the Philippines (Citizenship principle)
6. A foreign corporation, whether engaged or not in trade or business in the Philippines is taxable only on income derived from sources within the Philippines (source of income principle).
In other words, under Title II, only resident citizens and domestic corporations are taxable on their worldwide income while the other types of individual and corporate taxpayers are taxable only on income derived from sources within the Philippines. (Remember this!)
KINDS OF INCOME TAXPAYERS
NOTE: Before we proceed to income taxation proper, it is important to know the different kinds of taxpayers first. This is because in analyzing any problem involving income taxation, the first thing to do is to determine who the taxpayer is.
The only two exceptions where knowing the taxpayer is immaterial are (1) where the transaction involves sales of shares of stock of a domestic corporation because it is subject to 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.
Q: What are the kinds of income taxpayers?
A: 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 that the definitions of all the kinds of taxpayers mentioned above can be found in Section 22, NIRC. This is why it is important to memorize them!)TAX ON INDIVIDUALS (EXCEPT ESTATES AND TRUSTS)
(SECTIONS 24-26, NIRC)
Q: Who are the individual taxpayers?
A: They are: 1. Citizens a. Resident Citizens b. Nonresident Citizens 2. Aliens a. Resident Aliens b. Nonresident Aliensi. Engaged in trade or business in the Philippines ii. Not engaged in trade or business in the Philippines
Q: Who are citizens of the Philippines?
A: 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
Q: What is meant by “residence”?
A: Residence refers to an individual’s habitual place of abode to which whenever absent, he has the intention of returning.
Q: Why is it important to determine whether a citizen is a
resident or non-resident?
A: It is important because a person will be taxable on his worldwide income if he is a resident citizen and he shall also be taxable on his income from sources within the Philippines. If he is a non-resident, he shall be exempted on his income from sources outside the Philippines.
Q: Why is there a distinction?
A: A resident citizen is taxed on his worldwide income because he receives protection from the Philippine government even outside the country. As to a non-resident, the Philippines retains personal jurisdiction over the person of the citizen no matter how long he lives in a foreign country for as long as he remains a citizen.
Q: Who is a non-resident citizen?
A: The term 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. who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.
4. who has been previously considered a non-resident 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 until date of his arrival in the Philippines
Relevant cases assigned:
C
ONWI VS.
C
OURT OFT
AXA
PPEALSG.R.L-48532,AUGUST 31,1992
FACTS: Petitioners are Filipino citizens and employees of Procter and Gamble Philippines. Said corporation is a subsidiary of Procter & Gamble, a foreign corporation based in the US. During the years 1970 and 1971 petitioners were assigned, for certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines, during which petitioners were paid U.S. dollars as compensation for services in their foreign assignments. When petitioners filed their income tax returns for the year 1970, they computed the tax due by applying the dollar-to-peso conversion on the basis of the floating rate. However, in 1973, petitioners filed with the CIR, amended income tax returns for the above-mentioned years, this time using the par value of the peso pursuant to CB Circular No. 289 as the basis for converting their respective dollar income into Philippine pesos for purposes of computing and paying the corresponding income tax due from them. The aforesaid computation as shown in the amended income tax returns resulted in the alleged overpayments, refund and/or tax credit. Accordingly, claims for refund of said over-payments were filed with respondent Commissioner. CTA agreed with CIR’s contention that the proper rate of conversion of petitioners' dollar earnings for tax purposes is the prevailing free market rate of exchange and not the par value of the peso. Petitioners contend that since their dollar earnings do not fall within the classification of foreign exchange transactions and thus, not included in the coverage of CB Circular No. 289 which provides for specific instances when the par value of the peso shall not be the conversion rate used, their earnings should be converted for income tax purposes using the par value.
ISSUE: Whether petitioner’s dollar earnings should be computed using the par value?
HELD: NO. CB Circular No. 289 shows that the subject matters involved therein are export products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing and investments — nothing by way of income tax payments. Thus, petitioners are in error by concluding that since C.B. Circular No. 289 does not apply to them, the par value of the peso should be the guiding rate used for income tax purposes. The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a definite amount of money which came to them within a specified period of time of two years as payment for their services. The law provides that a tax imposed upon the taxable net income received during each taxable year from all sources by every individual, whether a citizen of the Philippines residing therein or abroad or an alien residing in the Philippines, determined in accordance with the schedule. The earnings must be computed based on the uniform rate of exchange from US dollars to pesos for internal revenue tax purposes for the years 1970 and 1971. They are not exempted from this. Petitioners forget that they are citizens of the Philippines, and their income, within or without, and in these cases wholly without, are subject to income tax. Since petitioners already paid in accordance with the uniform rate, there is no reason for CIR to refund any taxes.
Relevant revenue regulations:
R
EVENUER
EGULATIONN
O.
9-99
Issued May 24, 1999 amends RMO No. 30-99 by prescribing non-resident citizens, overseas contract workers and seamen to file information returns (BIR Form 1701C or the new computerized Form 1703). Said form, together with other relevant supporting papers, shall be filed to the Foreign Post or the Revenue District Office which has jurisdiction over the place of residence of the taxpayer not later than April 15 following the taxable year. The 1998 returns filed after April 15 but not later than July 15, 1999 will not be subject to penalty charges.
Q: Who is a resident alien?
A: A Resident alien is an individual whose residence is within the Philippines and who is not a citizen thereof. He is taxed in the same manner as a resident citizen, except that only his income from Philippine sources is taxable. His income from foreign sources is not liable to Philippine income tax.
Q: Who is a non-resident alien?
A: A non-resident alien is an individual whose residence is not within the Philippines and who is not a citizen thereof. A non-resident alien is further classified into (a) engaged in trade or business in the Philippines or (b) not engaged in trade or business in the Philippines. As provided in Section 25(A)(1), if the aggregate period of his stay is 180 days during any calendar year, he shall be deemed a “non-resident alien doing business in the Philippines (“180-day Rule”).
Q: What are the graduated income tax rates on taxable income
of individuals?
A: In relation to Section 23 of the NIRC, the taxable income (i.e. the pertinent items of gross income less deductions and/or personal and additional exemptions authorized for such types of income by the Tax Code or other special laws) derived for each taxable year:
1. From all sources within and without the Philippines by resident citizens;
2. From all sources within the Philippines only by a non-resident citizen including overseas contract workers;
3. From all sources within the Philippines only, by a resident alien or a non-resident alien engaged in trade or business in the Philippines
Shall be subject to the graduated income tax in accordance with the following schedule provided under Section 24:
Not over P10,000 5%
Over 10,000 but not over P30,000 P500 + 10% of excess over P10,000
Over P30,000 but not over P70,000 P2,500 + 15% of the excess over P30,000
Over P70,000 but not over P140,000 P8,500 + 20% of the excess over P70,000
Over P140,000 but not over P250,000 P22,500 + 25% of the excess over P140,000
Over P250,000 but not over P500,000 P50,000 + 30% of the excess over P250,000
Over P500,000 P125,000 + 32% of the
Note the following:
1. The taxable income here does not include
a. Tax on certain passive income under Section 24(B) b. Capital gains from sale of shares of stock not traded in
the Stock exchange under Section 24(C)
c. Capital gains from sale of real property under Section 24(D)
(These are subject to preferential tax rates. See next question)
2. For married individuals, the husband and wife shall compute separately their individual income tax based on their respective total taxable income provided that if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income (see also
M
ADRIGAL VS.
R
AFFERTY above andC
OMMISSIONER V.
S
UTER below)3. Under RA 9504, minimum wage earners shall be exempt from the payment of income tax on their taxable income. Holiday pay, overtime pay, night shift differential pay and hazard pay shall likewise be exempt from tax.
Q: What are the incomes subject to preferential tax rates and
what are the tax rates applicable to each?
A:
As a general rule, income, gain or profit derived by an individual during the taxable year shall be subject to the graduated income tax rates. As exceptions, certain income subject to tax are not subject to the graduated tax rates stated previously and are subject to preferential tax rates. They are:1. Tax on certain passive income under Section 24(B)
a. Interests, royalties, prizes and other winnings under Section 24(B)(1)
b. Cash and/or property dividends under Section 24(B)(2) 2. Capital gains from sale of shares of stock not traded in the
Stock exchange under Section 24(C)
3. Capital gains from sale of real property under Section 24(D) 4. Compensation income of alien and Filipino employees of
a. Regional or area headquarters and regional operating headquarters of MNCs under Section 25(C)
b. Offshore Banking Units under Section 25(D)
c. Foreign petroleum service contractors and sub-contractors under Section 25(E)
The preferential rates are as follows: Interests, royalties,
prizes and other winnings
Citizens and Resident aliens are subject to 20% except:
a. Interest income from a depository bank which is subject to 7.5%
b. Interest income from long-term deposit or investment which is tax-exempt
c. Royalty on books as well as other literary works and musical compositions which are subject to 10%
d. Prizes amounting to P10,000 or less which shall be subject to the graduated income tax rates
e. Winnings from PCSO which are tax-exempt
If the recipient of the above passive income is a non-resident alien engaged in trade or business in the Philippines, the rate is 20% except:
a. Royalties on books as well as other literary works and musical compositions which shall be subject to 10% BUT cinematographic films and similar works are subject to 25% tax as provided in Section 28, NIRC
b. Interest income from long-term deposit or investment which is tax-exempt
c. Prizes amounting to P10,000 or less which shall be subject to the graduated income tax rates d. Winnings from PCSO which are
tax-exempt
If the recipient is a non-resident alien not engaged in trade or business in the Philippines, the rate is 25%.
Cash and Property Dividends
They shall be subject to the following rates: 6% beginning January 1, 1988
8% beginning January 1, 1999 10% beginning January 1, 2000 Applies to citizens and resident aliens Capital Gains from sale
of shares of stock of a domestic corporation
If the shares of stock is listed but not traded in PSE, the rates are:
a. Not over P100,000 – 5% b. In excess of P100,000 – 10% If the shares of stock is listed and traded in the PSE, it is subject to 1% of stock transaction tax.
(Note that that this is one of the only two exceptions where the kind of taxpayer is immaterial. The rates is uniform whether the seller is an individual, citizen or alien or a corporation, domestic or foreign) Capital gains from sale of
real property
Subject to final tax of 6% based on the gross selling price or current fair market value as determined by the Commissioner in accordance with Section 6(E), NIRC whichever is higher.
However, if the buyer is the government or any of its political subdivisions or to GOCCs (buyer, not recipient of capital gains), the tax liability shall be either the graduated income tax rates under Section 24(A) or the 6% stated above whichever is higher. If the recipient of the capital gain from sale of real property is an alien whether engaged or not engaged in trade or business in the Philippines, he shall be subject to 6% based on the gross selling
price or fair market value, whichever is higher.
Compensation income of alien and Filipino employees of Regional or area headquarters and regional operating headquarters, Offshore Banking Units, Foreign petroleum service contractors and sub-contractors.
The applicable tax rate is 15% on their gross income from sources within the Philippines.
Relevant revenue regulations:
R
EVENUER
EGULATIONN
O.
8-98
This amended pertinent portions of RRs Nos. 11-96 and 2-98 relative to the tax treatment of the sale, transfer or exchange of real property. Specifically, the Capital Gains Tax (CGT) Return will be filed by the seller within 30 days following each sale or disposition of real property. Payment of the CGT will be made to an Authorized Agent Bank (AAB) located within the Revenue District Office (RDO) having jurisdiction over the place where the property being transferred is located. Creditable withholding taxes, on the other hand, deducted and withheld by the withholding agent/buyer on the sale, transfer or exchange or real property classified as ordinary asset will be paid by the withholding agent/buyer upon filing of the return with the AAB located within the RDO having jurisdiction over the place where the property being transferred is located. Payment will have to be done within 10 days following the end of the month in which the transaction occurred, provided, however, that taxes withheld in December will be filed on or before January 25 of the following year.
R
EVENUER
EGULATIONN
O.
10-98
This prescribes the regulations to implement RA No. 8424 relative to the imposition of income taxes on income derived under the Foreign Currency Deposit and Offshore Banking Systems. Specifically, interest income which is actually or constructively received by a resident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit will be subject to a final withholding tax of 7.5%. The depository bank will withhold and remit the tax. If a bank account is jointly in the name of a non-resident citizen, 50% of the interest income from such bank deposit will be treated as exempt while the other 50% will be subject to a final withholding tax of 7.5%. The Regulations will apply on taxable income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is taxable.
Q: Is a co-ownership a taxable entity for the purpose income
tax?
A: No. A co-ownership is not considered a separate taxable entity or a corporation as defined under Section 22(B). The owners in a co-ownership report their share of the income from the property owned in common by them in their individual tax returns for the year.
The co-ownership is not converted into a partnership where the transactions of the co-owners intended to liquidate the co-ownership are few or isolated and the element of habituality is not present.
Relevant cases:
O
BILLOS VS.
C
OMMISSIONERG.R.NO.L-68118,OCTOBER 29,1985
FACTS: Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots located at Greenhills. The next day he transferred his rights to his four children, the petitioners, to enable them to build their residences. The Torrens titles issued to them would show that they were co-owners of the two lots. After holding the two lots for more than a year, the petitioners resold them. They derived from the sale a total profit. They treated the profit as a capital gain and paid an income tax. One before the expiration of the five-year prescriptive period, the CIR required the four petitioners to pay corporate income tax in addition to individual income tax on their shares thereof. The CIR considered the share of the profits of each petitioner as a " taxable in full (not a mere capital gain of which ½ is taxable) and required them to pay deficiency income taxes. Thus, the petitioners are being held liable for deficiency income taxes and penalties in addition to the tax on capital gains already paid by them. The theory of the CIR is that the four petitioners had formed an unregistered partnership or joint venture. The petitioners protested. The CTA sustained the CIR’s assessment. Hence, this appeal.
ISSUE: Whether the petitioners should be considered to have formed an unregistered partnership?
HELD: No. It is an error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code simply because they allegedly contributed to buy the two lots, resold the same and divided the profit among themselves. The sharing of gross returns does not of 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 must be an unmistakable intention to form a partnership or joint venture. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later.
A Co-Ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation.
Q: What is a general professional partnership?
A General professional partnership (GPP) are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.
Q: Is a GPP liable for income tax?
A: No. A GPP is not considered a taxable entity for income tax purposes. 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.
Relevant cases:
C
OMMISSIONER V.
S
UTERG.R.NO.G.R.NO.L-25532,FEBRUARY 28,1969
FACTS: A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed by herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the limited partners. The limited partnership was registered with the SEC. The firm engaged, among other activities, in the importation, marketing, distribution and operation of automatic phonographs, radios, television sets and amusement machines, their parts and accessories. In 1948, Suter and limited partner Spirig got married and thereafter, limited partner Carlson sold his share in the partnership to Suter and his wife. The limited partnership had been filing its income tax returns as a corporation, without objection by the CIR until in 1959 when the CIR, in an assessment, consolidated the income of the firm and the individual incomes of the partners-spouses Suter and Spirig resulting in a determination of a deficiency income tax against Suter. Suter protested but was denied by the CIR. He appealed to the CTA reversed the CIR’s assessment. Hence, this appeal by the CIR.
ISSUE: (1) Whether or not the partnership was dissolved after the marriage of Suter and Spirig and the subsequent sale to them by the remaining partner, Carlson, of his participation in the partnership? (2) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be disregarded for income tax purposes, considering that respondent Suter and his wife actually formed a single taxable unit?
HELD: (1) NO. A husband and a wife may not enter into a contract of general copartnership, because under the Civil Code, which applies in the absence of express provision in the Code of Commerce, persons prohibited from making donations to each other are prohibited from entering into universal partnerships. It follows that the marriage of partners necessarily brings about the dissolution of a pre-existing partnership. The CIR failed to observe that William J. Suter "Morcoin" Co., Ltd. was not a universal partnership, but a particular one. A universal partnership requires either that the object of the association be all the present property of the partners, as contributed by them to the common fund, or else "all that the partners may acquire by their industry
or work during the existence of the partnership". William J. Suter
"Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the partners were fixed sums of money. The subsequent marriage of the partners does not operate to dissolve it, as such marriage is not one of the causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce.
(2) NO. The capital contributions of partners Suter and Spirig were separately owned and contributed by them before their marriage; and after they were joined in wedlock, such contributions remained their respective separate property. Thus, the individual interest of each consort in in the limited partnership did not become common property of both after their marriage in 1948. The partnership has a juridical personality of its own, distinct and separate from that of its partners. The limited partnership's separate individuality makes it impossible to equate its income with that of the component members. As the limited
partnership under consideration is taxable on its income, to require that income to be included in the individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would even conflict with the Code: for the Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compañia colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code taxes the latter on its income, but not the former, because it is in the case of compañias colectivas that the members, and not the firm, are taxable in their individual capacities for any dividend or share of the profit derived from the duly registered general partnership. The difference in tax rates between the income of the limited partnership being consolidated with, and when split from the income of the spouses, is not a justification for requiring consolidation; the revenue code, as it presently stands, does not authorize it, and even bars it by requiring the limited partnership to pay tax on its own income.
As to CIR’s argument that the income of the limited partnership is constructively the income of the spouses and forms part of the conjugal partnership of gains, the conjugal partnership of gains is not a taxable unit. What is taxable is the "income of both spouses” in their individual capacities. Though the amount of income (income of the conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given taxable year, their consequences would be different, as their contributions in the business partnership are not the same.
T
ANG
UAN V.
CTA
G.R.NO.76573,SEPTEMBER 14,1989
FACTS: Tan Guan and Sia Lin, Chinese nationals, organized and registered the Philippine Surplus Company, a general partnership. For the same year the partners and the partnership filed separate income tax returns. The partnership paid no income tax. A registered general partnership is exempt from income tax although it is required to file income tax returns.Profits, whether or not distributed, are considered income of the partners. Acting upon a confidential report that the Philippine Surplus Company posted in its book fictitious expenses for the purpose of avoiding taxes, the Bureau of Internal Revenue investigated in 1954 the books and papers of said partnership disallowed certain expense deduction for being fictitious. The BIR investigators discovered that the expenses were not supported by receipts; that the names of the payees in the aforesaid entries were erased; and that the said payees did not report the sums in question in their income tax returns for 1948. Hence, the BIR assessed deficiency income tax against Tan Guan. Tan Guan appealed to the CTA which affirmed the assessment of the CIR. Tan Guan’s MR was denied by the CTA. Hence, this appeal.
ISSUE: Whether the right of the CIR to assess the deficiency tax has prescribed? (2) Should the deduction claimed by Philippine Surplus Co. as a business expense be allowed?
HELD: (1) YES. If the income tax return was false and fraudulent, the CIR’s right has not prescribed. If not, the assessment issued is void because of prescription. Here, the ITR was false or fraudulent as Philippine Surplus Co. claimed deductions of fictitious expenses for the purpose of avoiding the declaration of profits which eventually would be taxable as income of Tan Guan and Sia Lin, and that the names of the payees in the corresponding entries of the expenses involved in the books of accounts were erased. The returns being false or fraudulent, the CIR has not lost his right to issue the assessment. With respect to Tan Guan’s contention that he should be given the same treatment as Sia Lin, who was absolved by the CIR, suffice it to say that the Government is not bound by the errors committed by its agents.
the expenses were fictitious or non-existent. Said conclusion was prompted by the absence of supporting receipts in the voucher covering the expenses and by the failure of the recipients thereof to declare them in their income tax returns
TAX ON CORPORATIONS
(SECTIONS 27-30, NIRC)
Note: The corresponding changes introduced by RA 9337 (Amending the NIRC of 1997) have already been integrated in the discussions below on corporate income tax. All provisions and rates mentioned here are updated as of March 1, 2009.
Q: What is a corporation under the NIRC?
A: A corporation includes partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies but does not include:
a. general professional partnerships
b. joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum and other energy operations pursuant to an operating agreement under a service contract with the Government. It classified into domestic and foreign.
Q: How do you distinguish a domestic corporation from a
foreign corporation?
A: The Philippines adopts the “law of incorporation test” under which a corporation is considered as a domestic corporation if it is organized or created in accordance with or under the laws of the Philippines and it is foreign if it is organized or created under the laws of a foreign country. A domestic corporation is taxable on all income derived from sources within and without the Philippines while a foreign corporation is taxable only on income derived from sources within the Philippines.
A foreign corporation is further classified into resident foreign corporation and nonresident foreign corporation.
Q: What is the difference between a resident foreign
corporation and non-resident foreign corporation?
A: A Resident foreign corporation is foreign corporation engaged in trade or business within the Philippines. “Resident” here is used to describe a corporation organized under the laws of a foreign country which does business in the Philippines and it not being used in its ordinary sense that the foreign corporation acquires residence in the Philippines. A good example of a resident foreign corporation is the Philippine branch of a foreign corporation. For income tax purposes, only the income of the Philippine branch from sources within the Philippines is subject to income tax while the income of the Philippine branch and the foreign head office arising from foreign sources are exempt. On the other hand, a nonresident foreign corporation is a foreign corporation not engaged in trade or business within the Philippines. The term “non-resident” here means not engaged in trade or business in the Philippines. Except as provided in the NIRC, gross income from sources within the Philippines paid to a non-resident foreign corporation shall be subject to income tax that must be withheld by the Philippine payor of the income and remitted to the BIR.
Q: What are two types of resident foreign corporations?
A: The two types are:1. those exempt from income tax because they are not engaged in trade or business in the Philippines (e.g. regional or area headquarters)
2. those subject to income tax at a. 10% preferential tax rate
b. 30% regular corporate income tax or 2% minimum corporate income tax whichever is higher (e.g. Philippine branches of foreign corporations engaged in trade and business in the Philippines; regional operating headquarters of MNCs)
Note: Now, let us go to the tax rates and computations on income taxes on corporations. First, let us start with the flat rate rates.
Q: What is the regular corporate income tax (RCIT)?
A: Section 27(A)(1) and Section 28(A)(1) of the NIRC provide that, except as otherwise provided for in the Code, the rates of RCIT on taxable income from worldwide sources of a domestic corporation or from sources within the Philippines of a foreign corporation during the taxable year are as follows:
1. 35% effective November 1, 2005 2. 30% effective January 1, 2009.
In case of corporations adopting the fiscal year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases, and other transactions occur. Their income and expenses for the fiscal year shall be deemed earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period divided by twelve. To illustrate:
If a corporation is under the fiscal accounting period (April 2008 to March 2009, how shall the Income tax due for fiscal year 2008 be computed?
On the other hand, as provided in Section 28(B)(1), the rate of RCIT on the gross income from all sources within the Philippines for a non-residence foreign corporation during the taxable year are as follows:
1. 35% effective November 1, 2005 2. 30% effective January 1, 2009.
