income tax reviewer

8/13/2019 Income Tax reviewer

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INCOME TAX REVIEWER AND CASE DIGESTSPAGE- 1

MA. ANGELA LEONOR C. AGUINALDO

ATENEO LAW 2010

CHAPTER 1GENERAL PRINCIPLES

FEATURES OF PHILIPPINE INCOME TAXATION

TAX SITUS! Literally means the place of taxation, or the country that has

jurisdiction to levy a particular tax on persons, property, rights

or business

! The basis of tax situs is the symbiotic relationshipthe state or

unit that gives protection has the right to demand support

SITUS OF PERSONS IN INCOME TAXATION1. Nationality theorya citizen of the Philippines is subject to

Philippine income tax on his worldwide income, if he resides in

the Philippines; or only on his income from sources within the

Philippines if he qualifies as a non-resident citizenhence, hisincome from sources outside the Philippines shall be exempt

from Philippine income tax

2. Domicillary theorylegal residence; an alien is subject to

Philippine income tax because of his residence in the Philippines

3. Sourceplace where the income is derived (based on activity)

PROGRESSIVE V. REGRESSIVE SYSTEM OF TAXATION! Progressive system of taxationrate of tax increases as the tax

base or bracket increases

! Regressive systemthe rate of tax decreases as the tax base or

bracket increases

! Note that we dont have any regressive taxes in the Philippines

GLOBAL V. SCHEDULAR SYSTEM OF TAXATION! Individual income taxation adopted the schedular system of

taxation

! Global systemthe total allowable deductions as well as

personal and additional exemptions, in the case of individuals or

the total allowable deductions only, in the case of corporations,

are deducted from the gross income to arrive at the net taxable

income subject to the graduated income tax rates, in the case of

individuals, or to the 2-tiered income tax rates, in the case of

corporations (all items of gross income, deductions, and personal

and additional exemptions, if any, are reported in one income

tax return, and one set of tax rates are applied on the tax base)

! Schedular systema system employed where the income tax

treatment varies and made to depend on the kind or category ofthe taxpayers taxable income

CHARACTERISTICS OF SCHEDULAR SYSTEM OF TAXATION1. It accords different tax treatment on the income of the

individual taxpayer

2. It classifies income

GENERAL PRINCIPLES OF INCOME TAXATION

WHAT ARE THE GENERAL PRINCIPLES OF INCOMETAXATION?1. A citizen of the Philippines residingtherein is taxable on all income

derived from sources within and without the Philippines;2. A nonresident citizen is taxable only on income derived from sources

within the Philippines;

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 derived from sources within the Philippines: Provided,

That a seaman who is a citizen of the Philippines and 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;

4. An alien individual, whether a resident or not of the Philippines, is

taxable onlyon income derived from sources within the Philippines;

5. A domestic corporation is taxable on all income derivedfrom sources

within and without the Philippines; and

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.

SCOPE OF INCOME TAXATION

DEFINITION OF TERMS


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PERSONS

! It means an individual, a trust, estate or corporation.

CORPORATION

!

It shall include partnerships, no matter how created ororganized, joint-stock companies, joint accounts (cuentas en

participacion), association, 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, coal, geothermal and other

energy operations pursuant to an operating consortium

agreement under a service contract with the Government.

"General professional partnerships" 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.

DOMESTIC! The term "domestic", when applied to a corporation, means

created or organized in the Philippines or under its laws.

FOREIGN

! The term "foreign", when applied to a corporation, means a

corporation which is not domestic.

NONRESIDENT CITIZEN

1. A citizen of the Philippines who establishes to the satisfaction of

the Commissioner the fact of his physical presence abroad with

a definite intention to reside therein.

2. A citizen of the Philippines who leaves the Philippines during

the taxable year to reside abroad, either as an immigrant or foremployment on a permanent basis.

3. A citizen of the Philippines 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. A citizen who has been previously considered as nonresident

citizen and who arrives in the Philippines at any time during

the taxable year to reside permanently in the Philippines shall

likewise be treated as a nonresident citizen for the taxable year

in which he arrives in the Philippines with respect to his income

derived from sources abroad until the date of his arrival in the

Philippines.

5.

The taxpayer shall submit proof to the Commissioner to showhis intention of leaving the Philippines to reside permanently

abroad or to return to and reside in the Philippines as the case

may be for purpose of this Section.

RESIDENT ALIEN

! It means an individual whose residence is within the Philippines

and who is not a citizen thereof.

NON-RESIDENT ALIEN

! It means an individual whose residence is not within the

Philippines and who is not a citizen thereof.

RESIDENT FOREIGN CORPORATION! The term applies to a foreign corporation engaged in trade or

business within the Philippines.

NON-RESIDENT FOREIGN CORPORATION

! The term applies to a foreign corporation not engaged in trade or

business within the Philippines.

FIDUCIARY

! The term means a guardian, trustee, executor, administrator,

receiver, conservator or any person acting in any fiduciary

capacity for any person.

WITHHOLDING AGENT! The term means any person required to deduct and withhold

any tax under the provisions of Section 57.

SHARES OF STOCK

! The term shall include shares of stock of a corporation, warrants

and/or options to purchase shares of stock, as well as units of

participation in a partnership (except general professional

partnerships), joint stock companies, joint accounts, joint


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ventures taxable as corporations, associations and recreation or

amusement clubs (such as golf, polo or similar clubs), and

mutual fund certificates.

SHAREHOLDER! The term shall include holders of a share/s of stock, warrant/s

and/or option/s to purchase shares of stock of a corporation, as

well as a holder of a unit of participation in a partnership

(except general professional partnerships) in a joint stock

company, a joint account, a taxable joint venture, a member of

an association, recreation or amusement club (such as golf, polo

or similar clubs) and a holder of a mutual fund certificate, a

member in an association, joint-stock company, or insurance

company.

TAXPAYER

! The term means any person subject to tax imposed by this Title.

INCLUDING OR INCLUDES

! The terms when used in a definition contained in this Title,

shall not be deemed to exclude other things otherwise within the

meaning of the term defined.

TAXABLE YEAR

! The term means the calendar year, or the fiscal year ending

during such calendar year, upon the basis of which the net

income is computed under this Title. 'Taxable year' includes, in

the case of a return made for a fractional part of a year under

the provisions of this Title or under rules and regulations

prescribed by the Secretary of Finance, upon recommendation of

the commissioner, the period for which such return is made.

FISCAL YEAR

! The term means an accounting period of twelve (12) months

ending on the last day of any month other than December.

PAID OR INCURRED/PAID OR ACCRUED

! The terms shall be construed according to the method of

accounting upon the basis of which the net income is computed

under this Title.

TRADE OR BUSINESS! The term includes the performance of the functions of a public

office.

SECURITIES

! The term means shares of stock in a corporation and rights to

subscribe for or to receive such shares. The term includes bonds,

debentures, notes or certificates, or other evidence or

indebtedness, issued by any corporation, including those issued

by a government or political subdivision thereof, with interest

coupons or in registered form.

DEALER IN SECURITIES

!

The term means a merchant of stocks or securities, whether anindividual, partnership or corporation, with an established place

of business, regularly engaged in the purchase of securities and

the resale thereof to customers; that is, one who, as a merchant,

buys securities and re-sells them to customers with a view to the

gains and profits that may be derived therefrom.

BANK

! The term means every banking institution, as defined in Section

2 of Republic Act No. 337, as amended, otherwise known as the

General banking Act. A bank may either be a commercial bank,

a thrift bank, a development bank, a rural bank or specialized

government bank.

NON-BANK FINANCIAL INTERMEDIARY

! The term means a financial intermediary, as defined in Section

2(D)(C) of Republic Act No. 337, as amended, otherwise known

as the General Banking Act, authorized by the Bangko Sentral

ng Pilipinas (BSP) to perform quasi-banking activities.

QUASI-BANKING ACTIVITIES


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! The term means borrowing funds from twenty (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 assignment or similarinstruments, with recourse, or of repurchase agreements for

purposes of relending or purchasing receivables and other

similar obligations: Provided, however, That commercial,

industrial and other non-financial companies, which borrow

funds through any of these means for the limited purpose of

financing their own needs or the needs of their agents or dealers,

shall not be considered as performing quasi-banking functions.

DEPOSIT SUBSTITUTES

! The term shall mean an alternative from of obtaining funds

from the public (the term 'public' means borrowing from twenty

(20) or more individual or corporate lenders at any one time)

other than deposits, through the issuance, endorsement, oracceptance of debt instruments for the borrowers own account,

for the purpose of relending or purchasing of receivables and

other obligations, or financing their own needs or the needs of

their agent or dealer. These instruments may include, but need

not be limited to bankers' acceptances, promissory notes,

repurchase agreements, including reverse repurchase

agreements entered into by and between the Bangko Sentral ng

Pilipinas (BSP) and any authorized agent bank, certificates of

assignment or participation and similar instruments with

recourse: Provided, however, That debt instruments issued for

interbank call loans with maturity of not more than five (5) days

to cover deficiency in reserves against deposit liabilities,

including those between or among banks and quasi-banks, shallnot be considered as deposit substitute debt instruments.

ORDINARY INCOME

! The term includes any gain from the sale or exchange of

property which is not a capital asset or property described in

Section 39(A)(1). Any gain from the sale or exchange of property

which is treated or considered, under other provisions of this

Title, as 'ordinary income' shall be treated as gain from the sale

or exchange of property which is not a capital asset as defined in

Section 39(A)(1). The term 'ordinary loss' includes any loss from

the sale or exchange of property which is not a capital asset. Any

loss from the sale or exchange of property which is treated or

considered, under other provisions of this Title, as 'ordinary loss'shall be treated as loss from the sale or exchange of property

which is not a capital asset.

RANK AND FILE EMPLOYEES

! The term shall mean all employees who are holding neither

managerial nor supervisory position as defined under existing

provisions of the Labor Code of the Philippines, as amended.

MUTUAL FUND COMPANY

! The term shall mean an open-end and close-end investment

company as defined under the Investment Company Act.

TRADE, BUSINESS OR PROFESSION! The term shall not include performance of services by the

taxpayer as an employee.

REGIONAL OR AREA HEADQUARTERS

! The term shall mean a branch established in the Philippines by

multinational companies and which headquarters do not earn or

derive income from the Philippines and which act as

supervisory, communications and coordinating center for their

affiliates, subsidiaries, or branches in the Asia-Pacific Region

and other foreign markets.

REGIONAL OPERATING HEADQUARTERS

!

The term shall mean a branch established in the Philippines bymultinational companies which are engaged in any of the

following services: general administration and planning;

business planning and coordination; sourcing and procurement

of raw materials and components; corporate finance advisory

services; marketing control and sales promotion; training and

personnel management; logistic services; research and

development services and product development; technical


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support and maintenance; data processing and communications;

and business development.

LONG-TERM DEPOSIT OR INVESTMENT CERTIFICATES

!

The term shall refer to certificate of time deposit or investmentin the form of savings, common or individual trust funds, deposit

substitutes, investment management accounts and other

investments with a maturity period of not less than five (5)

years, the form of which shall be prescribed by the Bangko

Sentral ng Pilipinas (BSP) and issued by banks only (not by

nonbank financial intermediaries and finance companies) to

individuals in denominations of Ten thousand pesos (P10,000)

and other denominations as may be prescribed by the BS.

TAXPAYER! Refers to any person subject to tax imposed by this Title.

PERSONS! It means an individual, a trust, estate or corporation

PERSONS LIABLE TO TAX

CIR V. PROCTER AND GAMBLE204 SCRA 378

FACTS:

PMC paid a 25-35% tax on its income for a relevant year. Thereafter,

deriving at its net income, it declared dividends for the benefit of PMC-

USA. From this declared dividends, it paid a 25% tax, as per taxation

laws. The company did the same for the next few quarters. Then,

contending that it is the withholding agent for the tax paid on thedividends paid to PMC-USA, it requested for the refund of its alleged

overpayments of taxes. The company was denied the refund and

coursing through the CTA, the latter ruled in its favor.

HELD:

The submission of the Commissioner of Internal Revenue that PMC-Phil.

is but a withholding agent of the government and therefore cannot claim

reimbursement of the alleged over paid taxes, is completely meritorious.

The real party in interest being the mother corporation in the United

States, it follows that American entity is the real party in interest, and

should have been the claimant in this case.

Closely intertwined with the first assignment of error is the issue ofwhether or not PMC-U.S.A. is a non-resident foreign corporation under

Section 24(b)(1) of the Tax Code (the subsidiary of an American) a

domestic corporation domiciled in the United States, is entitled under

the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at

least the 20 percentage paid portion (of the 35% dividend tax) spared or

waived as otherwise considered or deemed paid by the government. The

law pertinent to the issue is Section 902 of the U.S. Internal Revenue

Code, as amended by Public Law 87-834, the law governing tax credits

granted to U.S. corporations on dividends received from foreign

corporations, which to the extent applicable reads:

SEC. 902 - CREDIT FOR CORPORATE STOCKHOLDERS IN

FOREIGN CORPORATION.(a) Treatment of Taxes Paid by Foreign Corporation - For purposes of this

subject, a domestic corporation which owns at least 10 percent of the

voting stock of a foreign corporation from which it receives dividends in

any taxable year shall-

(1) to the extent such dividends are paid by such foreign corporation out

of accumulated profits [as defined in subsection (c) (1) (a)] of a year for

which such foreign corporation is not a less developed country

corporation, be deemed to have paid the same proportion of any income,

war profits, or excess profits taxes paid or deemed to be paid by such

foreign corporation to any foreign country or to any possession of the

United States on or with respect to such accumulated profits, which the

amount of such dividends (determined without regard to Section 78)bears to the amount of such accumulated profits in excess of such income,

war profits, and excess profits taxes (other than those deemed paid); and

(2) to the extent such dividends are paid by such foreign corporation out

of accumulated profits [as defined in subsection (c) (1) (b)] of a year for

which such foreign corporation is a less-developed country corporation,

be deemed to have paid the same proportion of any income, war profits,

or excess profits taxes paid or deemed to be paid by such foreign


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corporation to any foreign country or to any possession of the United

States on or with respect to such accumulated profits, which the amount

of such dividends bears to the amount of such accumulated profits.

xxx xxx xxx

(c) Applicable Rules

(1) Accumulated profits defined - For purpose of this section, the term

'accumulated profits' means with respect to any foreign corporation.

(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains,

profits, or income computed without reduction by the amount of the

income, war profits, and excess profits taxes imposed on or with respect

to such profits or income by any foreign country.... ; and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains,

profits, or income in excess of the income, was profits, and excess profits

taxes imposed on or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from the

accumulated profits of what year or years such dividends were paid,

treating dividends paid in the first 20 days of any year as having been

paid from the accumulated profits of the preceding year or years (unless

to his satisfaction shows otherwise), and in other respects treating

dividends as having been paid from the most recently accumulated gains,

profits, or earnings.

There is nothing in the aforecited provision that would justify tax return

of the disputed 15% to the private respondent. Furthermore, as ably

argued by the petitioner, the private respondent failed to meet certain

conditions necessary in order that the dividends received by the non-

resident parent company in the United States may be subject to thepreferential 15% tax instead of 35%. Among other things, the private

respondent failed: (1) to show the actual amount credited by the U.S.

government against the income tax due from PMC-U.S.A. on the

dividends received from private respondent; (2) to present the income tax

return of its mother company for 1975 when the dividends were received;

and (3) to submit any duly authenticated document showing that the

U.S. government credited the 20% tax deemed paid in the Philippines.

CHAPTER 2CLASSIFICATION OF INCOME TAXPAYERS

INDIVIDUALS

CITIZENS

Section 1. The following are citizens of the Philippines:

(1) Those who are citizens of the Philippines at the time of the adoption

of this 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 the accordance with law.

Section 2. Natural-born citizens are those who are citizens of the

Philippines from birth without having to perform any act to acquire or

perfect their Philippine citizenship. Those who elect Philippine

citizenship in accordance with paragraph (3), Section 1 hereof shall be

deemed natural-born citizens.

NONRESIDENT CITIZEN

1. A citizen of the Philippines who establishes to the satisfaction of

the Commissioner the fact of his physical presence abroad with

a definite intention to reside therein.

2.

A citizen of the Philippines who leaves the Philippines duringthe taxable year to reside abroad, either as an immigrant or for

employment on a permanent basis.

3. A citizen of the Philippines 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. A citizen who has been previously considered as nonresident

citizen and who arrives in the Philippines at any time during

the taxable year to reside permanently in the Philippines shall


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likewise be treated as a nonresident citizen for the taxable year

in which he arrives in the Philippines with respect to his income

derived from sources abroad until the date of his arrival in the

Philippines.

5.

The taxpayer shall submit proof to the Commissioner to showhis intention of leaving the Philippines to reside permanently

abroad or to return to and reside in the Philippines as the case

may be for purpose of this Section.

ALIENS

RESIDENT ALIEN

! It means an individual whose residence is within the Philippines

and who is not a citizen thereof.

NON-RESIDENT ALIEN

! It means an individual whose residence is not within the

Philippines and who is not a citizen thereof.

GENERAL PROFESSIONAL PARTNERSHIP! 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.

Definition Sourcerule

Individuals

Citizens: Residents Within,

without

Non-residents Sec. 22, E w/in

Aliens: Residents Sec. 22, F w/in

Non-

residents

Engaged in

trade or

business

w/in

Not

engaged

Section 25,

A

GPP Sec. 22, B It depends

Estate/trusts Depends

Corporations

Domestic w/in, w/out

Foreign Resident w/in

Non-

resident

w/in

TAN V. CIRGR L-109289, OCTOBER 3, 1994

FACTS:

This case seeks to assail the constitutionality of Republic Act No. 7496,

also commonly known as the Simplified Net Income Taxation Scheme

("SNIT"), amending certain provisions of the National Internal Revenue

Code and, in G.R. No. 109446, the validity of Section 6, Revenue

Regulations No. 2-93, promulgated by public respondents pursuant to

said law.

The several propositions advanced by petitioners revolve around the

question of whether or not public respondents have exceeded their

authority in promulgating Section 6, Revenue Regulations No. 2-93, to

carry out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership The general professional

partnership (GPP) and the partners comprising the GPP are covered by

R. A. No. 7496. Thus, in determining the net profit of the partnership,

only the direct costs mentioned in said law are to be deducted from

partnership income. Also, the expenses paid or incurred by partners intheir individual capacities in the practice of their profession which are

not reimbursed or paid by the partnership but are not considered as

direct cost, are not deductible from his gross income.

The real objection of petitioners is focused on the administrative

interpretation of public respondents that would apply SNIT to partners

in general professional partnerships.

HELD:


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The Court, first of all, should like to correct the apparent misconception

that general professional partnerships are subject to the payment of

income tax or that there is a difference in the tax treatment between

individuals engaged in business or in the practice of their respective

professions and partners in general professional partnerships. The fact ofthe matter is that a general professional partnership, unlike an ordinary

business partnership (which is treated as a corporation for income tax

purposes and so subject to the corporate income tax), is not itself an

income taxpayer. The income tax is imposed not on the professional

partnership, which is tax exempt, but on the partners themselves in

their individual capacity computed on their distributive shares of

partnership profits.

There is, then and now, no distinction in income tax liability between a

person who practices his profession alone or individually and one who

does it through partnership (whether registered or not) with others in

the exercise of a common profession. Indeed, outside of the gross

compensation income tax and the final tax on passive investment income,under the present income tax system all individuals deriving income

from any source whatsoever are treated in almost invariably the same

manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we

were to consider Republic Act No. 7496 as an entirely independent, not

merely as an amendatory, piece of legislation. The view can easily

become myopic, however, when the law is understood, as it should be, as

only forming part of, and subject to, the whole income tax concept and

precepts long obtaining under the National Internal Revenue Code. To

elaborate a little, the phrase "income taxpayers" is an all embracing term

used in the Tax Code, and it practically covers all persons who derive

taxable income. The law, in levying the tax, adopts the mostcomprehensive tax situs of nationality and residence of the taxpayer

(that renders citizens, regardless of residence, and resident aliens subject

to income tax liability on their income from all sources) and of the

generally accepted and internationally recognized income taxable base

(that can subject non-resident aliens and foreign corporations to income

tax on their income from Philippine sources). In the process, the Code

classifies taxpayers into four main groups, namely: (1) Individuals, (2)

Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable

Trusts (irrevocable both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or

"exempt partnerships." Ordinarily, partnerships, no matter how createdor organized, are subject to income tax (and thus alluded to as "taxable

partnerships") which, for purposes of the above categorization, are by law

assimilated to be within the context of, and so legally contemplated as,

corporations. Except for few variances, such as in the application of the

"constructive receipt rule" in the derivation of income, the income tax

approach is alike to both juridical persons. Obviously, SNIT is not

intended or envisioned, as so correctly pointed out in the discussions in

Congress during its deliberations on Republic Act 7496, aforequoted, to

cover corporations and partnerships which are independently subject to

the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified

as corporations nor even considered as independent taxable entities forincome tax purposes. A general professional partnership is such an

example. 4 Here, the partners themselves, not the partnership (although

it is still obligated to file an income tax return [mainly for administration

and data]), are liable for the payment of income tax in their individual

capacity computed on their respective and distributive shares of profits.

In the determination of the tax liability, a partner does so as an

individual, and there is no choice on the matter. In fine, under the Tax

Code on income taxation, the general professional partnership is deemed

to be no more than a mere mechanism or a flow-through entity in the

generation of income by, and the ultimate distribution of such income to,

respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merelyconfirmed, the above standing rule as now so modified by Republic Act

No. 7496 on basically the extent of allowable deductions applicable to all

individual income taxpayers on their non-compensation income. There is

no evident intention of the law, either before or after the amendatory

legislation, to place in an unequal footing or in significant variance the

income tax treatment of professionals who practice their respective

professions individually and of those who do it through a general

professional partnership.


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ESTATES AND TRUSTS

SEC. 60. Imposition of Tax. -

(A) Application of Tax. - The tax imposed by this Title upon individuals

shall apply to the income of estates or of any kind of property held in

trust, including:

(1) Income accumulated in trust for the benefit of unborn or

unascertained person or persons with contingent interests, and income

accumulated or held for future distribution under the terms of the will or

trust;

(2) Income which is to be distributed currently by the fiduciary to the

beneficiaries, and income collected by a guardian of an infant which is to

be held or distributed as the court may direct;

(3) Income received by estates of deceased persons during the period of

administration or settlement of the estate; and

(4) Income which, in the discretion of the fiduciary, may be either

distributed to the beneficiaries or accumulated.

(B) Exception. - The tax imposed by this Title shall not apply to

employee's trust which forms part of a pension, stock bonus or profit-

sharing plan of an employer for the benefit of some or all of his

employees (1) if contributions are made to the trust by such employer, or

employees, or both for the purpose of distributing to such employees the

earnings and principal of the fund accumulated by the trust in

accordance with such plan, and (2) if under the trust instrument it is

impossible, at any time prior to the satisfaction of all liabilities with

respect to employees under the trust, for any part of the corpus or income

to be (within the taxable year or thereafter) used for, or diverted to,

purposes other than for the exclusive benefit of his employees: Provided,

That any amount actually distributed to any employee or distributee

shall be taxable to him in the year in which so distributed to the extent

that it exceeds the amount contributed by such employee or distributee.

(C) Computation and Payment. -

(1) In General. - The tax shall be computed upon the taxable income

of the estate or trust and shall be paid by the fiduciary, except as

provided in Section 63 (relating to revocable trusts) and Section 64

(relating to income for the benefit of the grantor).

(2) Consolidation of Income of Two or More Trusts. - Where, in the

case of two or more trusts, the creator of the trust in each instance is the

same person, and the beneficiary in each instance is the same, the

taxable income of all the trusts shall be consolidated and the tax

provided in this Section computed on such consolidated income, and such

proportion of said tax shall be assessed and collected from each trustee

which the taxable income of the trust administered by him bears to the

consolidated income of the several trusts.

SEC. 61. Taxable Income. - The taxable income of the estate or trust

shall be computed in the same manner and on the same basis as in the

case of an individual, except that:

(A) There shall be allowed as a deduction in computing the taxable

income of the estate or trust the amount of the income of the estate or

trust for the taxable year which is to be distributed currently by the

fiduciary to the beneficiaries, and the amount of the income collected by

a guardian of an infant which is to be held or distributed as the court

may direct, but the amount so allowed as a deduction shall be included in

computing the taxable income of the beneficiaries, whether distributed to

them or not. Any amount allowed as a deduction under this Subsection

shall not be allowed as a deduction under Subsection (B) of this Section

in the same or any succeeding taxable year.

(B) In the case of income received by estates of deceased persons during

the period of administration or settlement of the estate, and in the case

of income which, in the discretion of the fiduciary, may be either

distributed to the beneficiary or accumulated, there shall be allowed as

an additional deduction in computing the taxable income of the estate or

trust the amount of the income of the estate or trust for its taxable year,

which is properly paid or credited during such year to any legatee, heir or

beneficiary but the amount so allowed as a deduction shall be included in

computing the taxable income of the legatee, heir or beneficiary.


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(C) In the case of a trust administered in a foreign country, the

deductions mentioned in Subsections (A) and (B) of this Section shall not

be allowed: Provided, That the amount of any income included in the

return of said trust shall not be included in computing the income of the

beneficiaries.

SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of

the tax provided for in this Title, there shall be allowed an exemption of

Twenty thousand pesos (P20,000) from the income of the estate or trust.

SEC. 63. Revocable Trusts. - Where at any time the power to revest in

the grantor title to any part of the corpus of the trust is vested (1) in the

grantor either alone or in conjunction with any person not having a

substantial adverse interest in the disposition of such part of the corpus

or the income therefrom, or (2) in any person not having a substantial

adverse interest in the disposition of such part of the corpus or the

income therefrom, the income of such part of the trust shall be included

in computing the taxable income of the grantor.

SEC. 64. Income for Benefit of Grantor.-

(A) Where any part of the income of a trust (1) is, or in the discretion of

the grantor or of any person not having a substantial adverse interest in

the disposition of such part of the income may be held or accumulated for

future distribution to the grantor, or (2) may, or in the discretion of the

grantor or of any person not having a substantial adverse interest in the

disposition of such part of the income, be distributed to the grantor, or (3)

is, or in the discretion of the grantor or of any person not having a

substantial adverse interest in the disposition of such part of the income

may be applied to the payment of premiums upon policies of insurance on

the life of the grantor, such part of the income of the trust shall be

included in computing the taxable income of the grantor.

(B) As used in this Section, the term 'in the discretion of the grantor'

means in the discretion of the grantor, either alone or in conjunction with

any person not having a substantial adverse interest in the disposition of

the part of the income in question.

SEC. 65. Fiduciary Returns. - Guardians, trustees, executors,

administrators, receivers, conservators and all persons or corporations,

acting in any fiduciary capacity, shall render, in duplicate, a return of

the income of the person, trust or estate for whom or which they act, and

be subject to all the provisions of this Title, which apply to individuals in

case such person, estate or trust has a gross income of Twenty thousand

pesos (P20,000) or over during the taxable year. Such fiduciary or personfiling the return for him or it, shall take oath that he has sufficient

knowledge of the affairs of such person, trust or estate to enable him to

make such return and that the same is, to the best of his knowledge and

belief, true and correct, and be subject to all the provisions of this Title

which apply to individuals: Provided, That a return made by or for one or

two or more joint fiduciaries filed in the province where such fiduciaries

reside; under such rules and regulations as the Secretary of Finance,

upon recommendation of the Commissioner, shall prescribe, shall be a

sufficient compliance with the requirements of this Section.

SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. -

Trustees, executors, administrators and other fiduciaries are indemnified

against the claims or demands of every beneficiary for all payments oftaxes which they shall be required to make under the provisions of this

Title, and they shall have credit for the amount of such payments against

the beneficiary or principal in any accounting which they make as such

trustees or other fiduciaries.

CIR V. VISAYAS ELECTRIC23 SCRA 715

FACTS:

Visayas Electric was given legislative franchise to operate and maintain

an electric light, heat, and power system in the City of Cebu, certain

municipalities in the Province of Cebu, and other surrounding places.

In a board of directors' meeting, respondent company established a

pension fund, known as the "Employees' Reserve for Pensions." Said fund

is for the benefit of its "present and future" employees, in the event of

retirement, accident or disability. Every month thereafter an amount has

been set aside for this purpose. It is taken from the gross operating

receipts of the company. This reserve fund was later invested by the

company in stocks of San Miguel Brewery, Inc., for which dividends have

been regularly received. But these dividends were not declared for tax

purposes.


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It was in a letter that the Auditor General gave notice that as the

company has retained full control of the fund, therefore, the dividends

are not tax exempt; but that such dividends may be excluded from gross

receipts for franchise tax purposes, provided the same are declared forincome tax purposes.

In pursuance of the above letter, the Provincial Auditor of Cebu allowed

the company the option to declare the dividends either as part of the

company's income for income tax purposes or as part of its income for

franchise tax purposes. The company elected the latter. However, as per

report of a revenue examiner, it was found out that the company was the

full custodian of the funds and thus, the corporate income tax was

imposed on the same.

HELD:

The disputed income are not receipts, revenues or profits of the company.

They do not go to the general fund of the company. They are dividendsfrom the San Miguel Brewery, Inc. investment which form part of and

are added to the reserve pension fund which is solely for the benefit of

the employees, "to be distributed among the employees."

Not escaping notice is that by the resolution of respondent company's

board and the setting aside of monthly amounts from its gross operating

receipts for that fund, said company was merely acting, with respect to

such fund, as trustee for its employees. For, indeed, the intention to

establish a trust in favor of the employees is clear. A valid express trust

has thus been created. And, for tax purposes, the employees' reserve fund

is a separate taxable entity. Respondent company then, while retaining

legal title and custody over the property, holds it in trust for the

beneficiaries mentioned in the resolution creating the trust, in theabsence of any condition therein which would, in effect, destroy the

intention to create a trust.

Given the fact that the dividends are returns of the trust estate and not

of the grantor company, we must say that petitioner misconceived the

import of the law when he assessed said dividends as part of the income

of the company. Similarly, the tax court should not have considered them

at all as the company's "receipts, revenues and profits" which are exempt

from income tax.

CIR V. CA, CTA, GCL RETIREMENT PLAN

207 SCRA 487

FACTS:

Private Respondent, GCL Retirement Plan (GCL, for brevity) is an

employees' trust maintained by the employer, GCL Inc., to provide

retirement, pension, disability and death benefits to its employees. The

Plan as submitted was approved and qualified as exempt from income

tax by Petitioner Commissioner of Internal Revenue in accordance with

Rep. Act No. 4917.

Respondent GCL made investsments and earned therefrom interest

income from which was witheld the fifteen per centum (15%) final

witholding tax imposed by Pres. Decree No. 1959.

Respondent GCL filed with Petitioner a claim for refund in the amounts

of P1,312.66 withheld by Anscor Capital and Investment Corp., and

P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed

a second claim for refund of the amount of P7,925.00 withheld by Anscor,

stating in both letters that it disagreed with the collection of the 15%

final withholding tax from the interest income as it is an entity fully

exempt from income tax asprovided under Rep. Act No. 4917 in relation

to Section 56 (b)of the Tax Code.

The refund requested having been denied, Respondent GCL elevated the

matter to respondent Court of Tax Appeals (CTA). The latter ruled in

favor of GCL, holding that employees' trusts are exempt from the 15%

final withholding tax on interest income and ordering a refund of the taxwithheld.

HELD:

It is to be noted that the exemption from withholding tax on interest on

bank deposits previously extended by Pres. Decree No. 1739 if the

recipient (individual or corporation) of the interest income is exempt

from income taxation, and the imposition of the preferential tax rates if

the recipient of the income is enjoying preferential income tax treatment,


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were both abolished by Pres. Decree No. 1959. Petitioner thus submits

that the deletion of the exempting and preferential tax treatment

provisions under the old law is a clear manifestation that the single 15%

(now 20%) rate is impossible on all interest incomes from deposits,

deposit substitutes, trust funds and similar arrangements, regardless ofthe tax status or character of the recipients thereof. In short, petitioner's

position is that from 15 October 1984 when Pres. Decree No. 1959 was

promulgated, employees' trusts ceased to be exempt and thereafter

became subject to the final withholding tax.

To begin with, it is significant to note that the GCL Plan was qualified as

exempt from income tax by the Commissioner of Internal Revenue in

accordance with Rep. Act No. 4917 approved on 17 June 1967. This law

specificallyprovided:

Sec. 1. Any provision of law to the contrary notwithstanding, the

retirement benefits received by officials and employees of private firms,

whether individual or corporate, in accordance with a reasonable privatebenefit plan maintained by the employer shall be exempt from all taxes

and shall not be liable to attachment, levy or seizure by or under any

legal or equitable process whatsoever except to pay a debt of the official

or employee concerned to the private benefit plan or that arising from

liability imposed in a criminal action; . . . (emphasis ours).

In so far as employees' trusts are concerned, the foregoing provision

should be taken in relation to then Section 56(b) (now 53[b]) of the Tax

Code, as amended by Rep. Act No. 1983, supra, which took effect on 22

June 1957. This provision specifically exempted employee's trusts from

income tax and is repeated hereunder for emphasis:

Sec. 56. Imposition of Tax. !(a) Application of tax. !The taxes imposedby this Title upon individuals shall apply to the income of estates or of

any kind of property held in trust.

xxx xxx xxx

(b) Exception. ! The tax imposed by this Title shall not apply toemployee's trust which forms part of a pension, stock bonus or profit-

sharing plan of an employer for the benefit of some or all of his

employees . . .

The tax-exemption privilege of employees' trusts, as distinguished from

any other kind of property held in trust, springs from the foregoingprovision. It is unambiguous. Manifest therefrom is that the tax law has

singled out employees' trusts for tax exemption.

And rightly so, by virtue of the raison de'etre behind the creation of

employees' trusts. Employees' trusts or benefit plans normally provide

economic assistance to employees upon the occurrence of certain

contingencies, particularly, old age retirement, death, sickness, or

disability. It provides security against certain hazards to which members

of the Plan may be exposed. It is an independent and additional source of

protection for the working group. What is more, it is established for their

exclusive benefit and for no other purpose.

The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in

order to encourage the formation and establishment of such privatePlans for the benefit of laborers and employees outside of the Social

Security Act.

It is evident that tax-exemption is likewise to be enjoyed by the income of

the pension trust. Otherwise, taxation of those earnings would result in a

diminution accumulated income and reduce whatever the trust

beneficiaries would receive out of the trust fund. This would run afoul of

the very intendment of the law.

The deletion in Pres. Decree No. 1959 of the provisos regarding tax

exemption and preferential tax rates under the old law, therefore, can

not be deemed to extent to employees' trusts. Said Decree, being a

general law, can not repeal by implication a specific provision.

CORPORATIONS

SEC. 22. Definitions - When used in this Title:

xxx


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(B) The term "corporation" shall include partnerships, no matter how

created or organized, joint-stock companies, joint accounts (cuentas en

participacion), association, 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 engagingin petroleum, coal, geothermal and other energy operations pursuant to

an operating consortium agreement under a service contract with the

Government.

xxx

DOMESTIC CORPORATIONS! Are those created or organized in the Philippines or under its

laws

AS DISTINGUISHED FROM CO-OWNERSHIP!

There is co-ownership whenever the ownership of an undividedthing or right belongs to different persons. Contrary stipulation

is void. (CC)

FOREIGN CORPORATIONS! Resident foreign corporationIt is a foreign corporation engaged

in trade or business within the Philippines! Non-resident corporationit is a foreign corporation not

engaged in trade or business within the Philippines.

OA V. CIR45 SCRA 74

FACTS:Petitioners were surviving heirs of Julia Baales. An action for partition

of estate was instituted wherein Oa was appointed as the

administrator. He was also appointed as the guardian of the minor

children. No partition took place however. Instead, the funds and

properties were used to increase income. It was invested in many things.

The income derived was then divided equally among the petitioners.

This prompted the Commissioner to hold that there was a formed

unregistered partnership and subjected them to corporate income tax.

HELD:

The petitioners pose for our resolution the following questions: (1) Under

the facts found by the Court of Tax Appeals, should petitioners be

considered as co-owners of the properties inherited by them from the

deceased Julia Buales and the profits derived from transactionsinvolving the same, or, must they be deemed to have formed an

unregistered partnership subject to tax under Sections 24 and 84(b) of

the National Internal Revenue Code? (2) Assuming they have formed an

unregistered partnership, should this not be only in the sense that they

invested as a common fund the profits earned by the properties owned by

them in common and the loans granted to them upon the security of the

said properties, with the result that as far as their respective shares in

the inheritance are concerned, the total income thereof should be

considered as that of co-owners and not of the unregistered partnership?

And (3) assuming again that they are taxable as an unregistered

partnership, should not the various amounts already paid by them for

the same years 1955 and 1956 as individual income taxes on their

respective shares of the profits accruing from the properties they ownedin common be deducted from the deficiency corporate taxes, herein

involved, assessed against such unregistered partnership by the

respondent Commissioner?

It is thus incontrovertible that petitioners did not, contrary to their

contention, merely limit themselves to holding the properties inherited

by them. Indeed, it is admitted that during the material years herein

involved, some of the said properties were sold at considerable profit, and

that with said profit, petitioners engaged, thru Lorenzo T. Oa, in the

purchase and sale of corporate securities. It is likewise admitted that all

the profits from these ventures were divided among petitioners

proportionately in accordance with their respective shares in the

inheritance. In these circumstances, it is Our considered view that fromthe moment petitioners allowed not only the incomes from their

respective shares of the inheritance but even the inherited properties

themselves to be used by Lorenzo T. Oa as a common fund in

undertaking several transactions or in business, with the intention of

deriving profit to be shared by them proportionally, such act was

tantamonut to actually contributing such incomes to a common fund and,

in effect, they thereby formed an unregistered partnership within the

purview of the above-mentioned provisions of the Tax Code.


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and that they intended to divide the profits among themselves.

Respondent commissioner and/ or his representative just assumed these

conditions to be present on the basis of the fact that petitioners

purchased certain parcels of land and became co-owners thereof.

In Evangelists, there was a series of transactions where petitionerspurchased twenty-four (24) lots showing that the purpose was not limited

to the conservation or preservation of the common fund or even the

properties acquired by them. The character of habituality peculiar to

business transactions engaged in for the purpose of gain was present.

The sharing of returns does not in itself establish a partnership whether

or not the persons sharing therein have a joint or common right or

interest in the property. There must be a clear intent to form a

partnership, the existence of a juridical personality different from the

individual partners, and the freedom of each party to transfer or assign

the whole property.

In the present case, there is clear evidence of co-ownership between thepetitioners. There is no adequate basis to support the proposition that

they thereby formed an unregistered partnership. The two isolated

transactions whereby they purchased properties and sold the same a few

years thereafter did not thereby make them partners. They shared in the

gross profits as co- owners and paid their capital gains taxes on their net

profits and availed of the tax amnesty thereby. Under the circumstances,

they cannot be considered to have formed an unregistered partnership

which is thereby liable for corporate income tax, as the respondent

commissioner proposes.

And even assuming for the sake of argument that such unregistered

partnership appears to have been formed, since there is no such existing

unregistered partnership with a distinct personality nor with assets thatcan be held liable for said deficiency corporate income tax, then

petitioners can be held individually liable as partners for this unpaid

obligation of the partnershipIn the instant case, petitioners bought two

(2) parcels of land in 1965. They did not sell the same nor make any

improvements thereon. In 1966, they bought another three (3) parcels of

land from one seller. It was only 1968 when they sold the two (2) parcels

of land after which they did not make any additional or new purchase.

The remaining three (3) parcels were sold by them in 1970. The

transactions were isolated. The character of habituality peculiar to

business transactions for the purpose of gain was not present.

AFISCO INSURANCE CORPORATION V. CIR

GR 112675, JANUARY 25, 1999302 SCRA 1

FACTS:

The petitioners are 41 non-life insurance corporations, organized and

existing under the laws of the Philippines. Upon issuance by them of

Erection, Machinery Breakdown, Boiler Explosion and Contractors' All

Risk insurance policies, the petitioners entered into a Quota Share

Reinsurance Treaty and a Surplus Reinsurance Treaty with the

Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a

non-resident foreign insurance corporation. The reinsurance treaties

required petitioners to form a pool. Accordingly, a pool composed of the

petitioners was formed on the same day.

The pool submitted its financial statements and they were accordingly

assessed for deficiency corporate taxes to which they tried to opposed but

unfortunately was denied.

HELD:

Ineludibly, the Philippine legislature included in the concept of

corporations those entities that resembled them such as unregistered

partnerships and associations. Parenthetically, the NIRC's inclusion of

such entities in the tax on corporations was made even clearer by the tax

Reform Act of 1997.

In the case before us, the ceding companies entered into a Pool

Agreement or an association that would handle all the insurancebusinesses covered under their quota-share reinsurance treaty 31 andsurplus reinsurance treaty with Munich. The following unmistakably

indicates a partnership or an association covered by Section 24 of the

NIRC:

(1) The pool has a common fund, consisting of money and other valuables

that are deposited in the name and credit of the pool. 33 This commonfund pays for the administration and operation expenses of the pool.


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(2) The pool functions through an executive board, which resembles the

board of directors of a corporation, composed of one representative for

each of the ceding companies.

(3) True, the pool itself is not a reinsurer and does not issue any

insurance policy; however, its work is indispensable, beneficial and

economically useful to the business of the ceding companies and Munich,

because without it they would not have received their premiums. The

ceding companies share "in the business ceded to the pool" and in the

"expenses" according to a "Rules of Distribution" annexed to the Pool

Agreement.

CHAPTER 3TAX BASE AND TAX RATES

TAX BASE AND TAX RATES: INDIVIDUALSIncome Source of income Tax rates Additional information

Resident Citizens and Resident Aliens

Taxable

Income

Liability for income tax

1.

Resident citizenwithin and withoutthe Philippines

2. Non-resident citizen including OFWs

within

3. Resident alienwithin

As of January 2000, graduated rate

of 5%-32%

Husband and wife, subject to the provision of

Section 51 (D) hereof, shall compute separatelytheir individual income tax based on their

respective total taxable income.

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.

N.B: given a basket of income, if it doesn't fallwithin the passive income, then it is taxable

income and the graduated rate of 5-32% will beapplied accordingly.

For example, a resident citizen derives interest

income from his bank deposit abroad. The

interest income shall be treated as regular

income. The interest income contemplated in

passive income is interest earned in bank

deposits in the Philippines.


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Interests, Royalties, Prizes and otherwinnings1. Interest on any currency bank deposit,

yield or other monetary benefits from

deposit substitute, trust fund andsimilar arrangement

2. Royalties in general

3. Prize exceeding P10,000

4. Other winnings except PCSO and lotto

sweepstakes

Final tax of 20%

*there is emphasis on the holding period and not

the maturity period.

Royalty from books, literary works, and

musical compositionsFinal tax of 10%

Prize less than P10,000 Regular income

Interest under the expanded foreign

currency deposit systemFinal tax of 7 ! %

There is a preference to promote the increase in

foreign exchange reserves

Dividends:

Dividend from a domestic corporation or

from a joint stock company, insurance or

mutual fund company, and regional

operating headquarters of multinational

company, or share in the distributable net

income after tax of a partnership (except a

general professional partnership), joint

stock or joint venture or consortium taxable

as a corporation

1998: 6%

1999: 8%

Current: Final tax of 10%

Dividend income from a foreign corporation doing

business in the country is considered as regular

income and would be taxed with the

corresponding graduated rate.

*Dividends don't stop with those coming from

shares of stock.

Passive Income

Capital gains on shares of stock

On sale of shares of stock of a domestic

corporation not listed and traded through alocal stock exchange, held as capital asset

On the net capital gain:

Not over P100,000---------------finaltax of 5%

On any amount in excess of

P100,000-------------------------------------

-----------final tax of 10%

Sale of shares of stock of a domestic corporation

through a local stock exchange or thru initial

public offering pays the stock transaction tax and

other percentage taxes, and having paid this tax,shall not be subject to the rules on income tax


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MA. ANGELA LEONOR C. AGUINALDOATENEO LAW 2010

Capital gains on real propertyOn sale of real property in the Philippines

held as capital asset

Art. 415. The following are immovableproperty:

(1) Land, buildings, roads and constructions

of all kinds adhered to the soil;

(2) Trees, plants, and growing fruits, while

they are attached to the land or form an

integral part of an immovable;

(3) Everything attached to an immovable in

a fixed manner, in such a way that it

cannot be separated therefrom without

breaking the material or deterioration of

the object;

(4) Statues, reliefs, paintings or other

objects for use or ornamentation, placed inbuildings or on lands by the owner of the

immovable in such a manner that it reveals

the intention to attach them permanently

to the tenements;

(5) Machinery, receptacles, instruments or

implements intended by the owner of the

tenement for an industry or works which

may be carried on in a building or on a

piece of land, and which tend directly to

meet the needs of the said industry or

works;

On the gross selling price, or the

current fair market value at the

time of sale, whichever is higher---

final tax of 6%

~@~

(6) Animal houses, pigeon-houses,

beehives, fish ponds or breeding

places of similar nature, in case

their owner has placed them or

preserves them with the intention

to have them permanently attached

to the land, and forming a

permanent part of it; the animals inthese places are included;

(7) Fertilizer actually used on a

piece of land;(8) Mines, quarries, and slag

dumps, while the matter thereof

forms part of the bed, and waters

either running or stagnant;

(9) Docks and structures which,

though floating, are intended by

their nature and object to remain at

a fixed place on a river, lake, or

coast;

(10) Contracts for public works, and

servitudes and other real rights

over immovable property. (334a)

Exemptioncapital gain from the sale or

disposition of a principal residence of a natural

person, which is fully utilized in acquiring or

constructing a new principal residence, provided:

1.

The proceeds of the sale or disposition isutilized within 18 months from the date of

sale or disposition

2. The Commissioner of Internal Revenue is

notified by the taxpayer within 30 days from

the date of sale or disposition

3. Can avail of exemption once every 10 years

4. A deposit is made of the 6% capital gain tax

withheld by the buyer, in cash or managers

check, in interest bearing account with an

AAB, under an Escrow agreement between

the taxpayer and BIR that the same shall be

released to the seller when the proceeds of

the sale shall have been utilized as intended

Disposition of real property to the government:

you have option to be subjected to final tax of 6%

or graduated rate of 5-32%

Non-Resident AlienEngaged in

trade orbusiness in the

Taxable incomefrom within thePhilippines

Uniform rules of 5%-32% *The 180 days for one to be considered to be

engaged in trade or business is counted with

respect to each calendar year (Section 24 and 25)


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Passive income1. Interest

2. Royalties in general

3. Prize exceeding P10,000

4.

Other winnings except PCSO5. Dividends from a domestic corporation,

or from a joint stock company,

insurance or mutual fund company,

and regional operating headquarters of

multinational company, or share in the

distributable net income after tax of a

partnership (except general

professional partnership), joint stock or

joint venture or consortium taxable as

a corporation

Final tax of 20%

6. Royalties from books, literary works

and musical compositionsFinal tax of 10%

7.

Gross income from the Philippines

from cinematographic films and similar

works

Final tax of 25%

Philippines

8. Interest under the expanded foreign

currency deposit system

9. Interest on long-term deposit or

investment in banks (with maturity of

5 years or more)

Exempt

Not engaged intrade orbusiness

Gross income from within the Philippines

Final tax of 25%

They are not allowed any personal exemptions

Special aliens 1. Alien Individual Employed by Regional

or Area Headquarters and RegionalOperating Headquarters of

Multinational Companies.

2. Alien Individual Employed by Offshore

Banking Units.

3. Alien Individual Employed by

Petroleum Service Contractor and

Subcontractor.

Final tax of 15% of such gross

income

On all taxable income5%-32% as

a non-resident alien in the

Philippines

The preferential 15% rate refers to

compensation/wages related to their employment.Other than this compensation or wages, the

applicable rates would be the 5-32%.

There is an option available to a Filipino

occupying the same position as foreigner expat.


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TAX BASE AND TAX RATES: CORPORATIONS

Domestic CorporationsNet income within and without the Philippines

In general Taxable income derived from within andwithout the Philippines

Normal tax of 35%

Beginning 2009, 30%

But beginning with the 4th year of

operations, whichever is higher of

The normal tax of 35% and the

Minimum corporate income tax of

2%

The normal income tax is computed for each of

the first 3 quarters of the year. In an annual

return, the normal tax and the minimum

corporate income tax are computed.

Proprietary educational institutions and

non-profit hospitalon all taxable income

from all sources

10% If the unrelated income exceeds 50%, then this

premium wouldn't be applicable

Resident international carrieron gross

Philippine billings

2 !%

Non-resident owner or lessor of vesselgross income from the Philippines

4 !%

Non-resident cinematographic film owner,

lessor or distributorgross income from the

Philippines

25%

Non-resident lessor of aircraft, machinery

and other equipment

7 !% on gross rentals, charges, and

other fees from Philippine sources

Regional operating headquarters of

multinational corporation

10% on taxable income

Specialcorporations

GOCCs (they follow SEC registration

requirements as well)

Same rate as those engaged in

similar business, industry, oractivity

Except the GSIS, SSS, PHIC, and PCSO


21/99



Interests and royaltiesInterest under the expanded foreign


Interest on any currency bank deposit,yield or other monetary benefit from

deposit substitute, trust fund and similar

arrangement, and royalties

Final tax of 7 !%

Final tax of 20%

Depositor bank deposits with another banks

FCDU and it will earn interest income. This is

exempt.

Depositary bank who holds money fromdepositors and invests it to another as foreign

loans or whatnot is subject to 10%

Dividends Dividend from domestic corporation

intercompany dividend

ExemptPassive income

Capital gains On sale of shares of stock of a corporation

not listed and traded through the local

stock exchange held as capital assets

On sale of land and/or building held as

capital asset

On the net capital gain

Not over P100000final tax of 5%

Over P100000final tax of 10%

On the gross selling price or currentfair market value prevailing at the

time of sale, whichever is higher

final tax of 10%

Sale of shares of stock of a domestic corporation

through a local stock exchange or thru initial

public offering pays the stock transaction tax and

other percentage taxes, and having paid this tax,

shall not be subject to the rules on income tax

Resident foreign corporationwithin the PhilippinesIn general 2005-200835%

2008-after30%

Has the option of being taxed with 15% gross

income tax


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Branch profitremittance tax

Any profit remitted by a branch to its head

office

15% which shall be based on the

total profits applied or earmarked

for remittance without any

deduction for the tax component

thereof (except those activitieswhich are registered with the

Philippine Economic Zone

Authority).

The tax shall be collected and paid in the same

manner as provided in Sections 57 and 58 of this

Code: provided, that interests, dividends, rents,

royalties, including remuneration for technical

services, salaries, wages premiums, annuities,emoluments or other fixed or determinable

annual, periodic or casual gains, profits, income

and capital gains received by a foreign

corporation during each taxable year from all

sources within the Philippines shall not be

treated as branch profits unless the same are

effectively connected with the conduct of its trade

or business in the Philippines.

InterestInterest under the expanded foreign


Interest under any current bank deposit,yield or other monetary benefit from

deposit substitute, trust fund and other

similar arrangement, royalties

Final tax of 7 ! %

Final tax of 20%

DividendsDividend from domestic corporation

intercompany dividend

Exempt

Passive income

Capital gainsOn sale of shares of stock of a domestic

corporation not listed and traded through a

local stock exchange, held as capital assets

On net capital gain

Not over P100000final tax of 5%

Over P100000final tax of 10%

Subsidiary v.Branch of

foreigncorporation

SubsidiaryEntity separate and distinct from its

stockholders (separate entity concept)

Tax treatment is that of a domestic

corporation

32% on net income from within and

without

Stockholders are liable only to the extent of their

subscription (parent company is the sole

stockholder)

If subsidiary remits to parent, subject to the 15%

(conditional) linkparent company

Parent may not be held liable for damages filed

against subsidiary


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Branch Merely an extension of the foreign head

office (single entity concept)

Tax treatment is that of a foreigncorporation

32% on net income from within The link is between the head office and home

office

If the branch remits to the head office, it is

subject to the branch profit remittance tax

Home is liable for all liabilities of the branch

Subject to the 10% improperly accumulated

earnings

Home office Parent (NRFC)

BPRT=15% Dividend=15%

Branch Subsidiary

RFC DC

35% TI (within) 35% TI (within/without)

Non-resident foreign corporationsWithin the Philippines

In general Foreign corporation not engaged in trade orbusiness in the Philippines

35%

Non-resident cinematographic film owner,

lessor, or distributor

25% Filipino industry would like to be protected

Non-resident owner or lessor of vessels

chartered by Philippine nationals

4 !%Special non-resident

Non-resident owner or lessor of aircraft,

machineries, and other equipment

7 !%

Interest on foreign loans Final tax of 20%Dividend from domestic corporations Final tax of 15% Conditioned at showing of proof of a tax pairing

provision.Passive incomeOn sale of shares of stock of a domestic

corporation not listed or traded through a

local stock exchange, held as capital assets

On net capital gain

Not over P1000005%

Over P10000010%


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IDENTIFY TAX TREATMENT(INTEREST INCOME EXERCISE)

Metrobank Bank of TokyoMr. Juandela Cruz

Mr.PedroPeduko

Capt.JohnSmith

Mr. MoriTanaka

Mr.ShijeruTakeshi

RBU(Peso)

FCDU(Foreign

Currency)

RBU(Peso)

FCDU OBU

BostonBank

ResidentCitizen

Non-ResidentCitizen

ResidentAlien

Non-Resident

AlienEngaged

Non-Resdient

AlienNot

Engaged

DomesticCorporation

Resident Foreign Corporation

Non-Reside

ntForeig

nCorporation

1

InterestIncome

receivedfrom aPesoSavingsAccountin MetroBank

20% FT 20% FT 20% FT 20% FT 25% FT 20% FT 35% FT

2

InterestIncomereceivedfrom aPesoSavings

Accountin Bankof Tokyo

20% FT 20% FT 20% FT 20% FT 25% FT20%FT

35% FT

3

InterestIncomereceivedfrom aPesoSavings

5 - 32% RTexempt(income

w/o)

exempt(income

w/o)

exempt(income

w/o)

exempt(income

w/o)

35%RT

exempt(income w/o)


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greater than the tax computed under Subsection (A) of this Section for the taxable

year.

Carry Forward of Excess Minimum Tax

!

Any excess of the minimum corporate income tax over the normal tax shallbe carried over and credited against the normal tax for the three

immediately succeeding taxable years. In the year to which carried

forward, the normal tax should be higher than the MCIT.

Relief from the Minimum Corporate Income Tax Under Certain Conditions.

! The Secretary of Finance is hereby authorized to suspend the imposition of

the minimum corporate income tax on any corporation which suffers losses

on account of prolonged labor dispute, or because of force majeure, or

because of legitimate business reverses.

! The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, the necessary rules and regulation

that shall define the terms and conditions under which he may suspend

the imposition of the minimum corporate income tax in a meritorious case.

Gross income

! Shall mean gross sales less sales returns, discounts and allowances and

cost of goods sold.

Cost of goods soldshall include all business expenses directly incurred to produce

the merchandise to bring them to their present location and use.

! For a trading or merchandising concern, "cost of goods sold' shall include

the invoice cost of the goods sold, plus import duties, freight in

transporting the goods to the place where the goods are actually sold

including insurance while the goods are in transit.

! For a manufacturing concern, cost of "goods manufactured and sold" shall

include all costs of production of finished goods, such as raw materialsused, direct labor and manufacturing overhead, freight cost, insurance

premiums and other costs incurred to bring the raw materials to the

factory or warehouse.

! In the case of taxpayers engaged in the sale of service, 'gross income' means

gross receipts less sales returns, allowances, discounts and cost of services.

! Cost of servicesshall mean all direct costs and expenses necessarily

incurred to provide the services required by the customers and clients

including


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o Salaries and employee benefits of personnel, consultants and

specialists directly rendering the service and

o Cost of facilities directly utilized in providing the service such as

depreciation or rental of equipment used and cost of supplies:

Provided, however, That in the case of banks, "cost of services"shall include interest expense.

Residentforeigncorporations

Gross income 2% Under the same conditions

Non-residentforeigncorporations

Exempt

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)Tax base Tax Rate Notes

Improperly accumulated

earnings

10% The improperly accumulated earnings tax imposed in the preceding Section shall

apply to every corporation formed or availed for the purpose of avoiding the incometax 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.

Exceptions

a. Publicly-held corporations;

b. Banks and other nonbank financial intermediaries; and

c. Insurance companies.

Evidence of purpose to avoid incomec tax

(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company

or investment company shall be prima facie evidence of a purpose to avoid the tax

upon its shareholders or members.

(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of acorporation are permitted to accumulate beyond the reasonable needs of the

business shall be determinative of the purpose to avoid the tax upon its

shareholders or members unless the corporation, by the clear preponderance of

evidence, shall prove to the contrary.

Improperly Accumulated Taxable Income means taxable income adjusted by:

(1) Income exempt from tax;

(2) Income excluded from gross income;


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(3) Income subject to final tax; and

(4) The amount of net operating loss carry-over deducted;

And reduced by the sum of:

(1) Dividends actually or constructively paid; and(2) Income tax paid for the taxable year.

Provided, however, That for corporations using the calendar year basis, the

accumulated earnings under tax shall not apply on improperly accumulated income

as of December 31, 1997. In the case of corporations adopting the fiscal year

accounting period, the improperly accumulated income not subject to this tax, shall

be reckoned, as of the end of the month comprising the twelve (12)-month period of

fiscal year 1997-1998.

Taxable income for the year

Add: income exempt from taxes

Exclusions

Income subject to final taxNOLCO (net operating loss carry-over)

Deduct: income tax for the year

Dividends paid

Reserves

Inappropriate accumulated earnings

Pxxx

xxx

xxxxxx

Pxxx

xxx

xxx

P xxx

xxx

xxx

Pxxx

RESIDENT FOREIGN CORPORATIONS

NV REEDERIT AMSTERDAM V. COMMISSIONER162 SCRA 487

FACTS:

HELD:

BRANCH PROFIT REMITTANCE TAX

MARUBENI CORPORATION V. COMMISSIONER177 SCRA 500

FACTS:

HELD:

BANK OF AMERICA NT AND SA V. CA AND CIR


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234 SCRA 302

FACTS:

HELD:

COMPANIA GENERAL DE TABACOS V. CTACTA 4451, AUGUST 23, 1993

FACTS:

HELD:

NON-RESIDENT FOREIGN CORPORATION

COMMISSIONER V. PROCTER AND GAMBLE160 SCRA 560, 204 SCRA 377

FACTS:

HELD:

COMMISSIONER V. WANDER PHILS.160 SCRA 573

FACTS:

HELD:

MARUBENI CORPORATION V. COMMISSIONER177 SCRA 500

FACTS:

HELD:

IMPROPERLY ACCUMULATED EARNINGS TAX

MANILA WINE MERCHANTS V. CIR127 SCRA 483

FACTS:

HELD:

CIR V. TUASON JR.173 SCRA 397FACTS:

HELD:

CYANAMID V. CA322 SCRA 639

FACTS:

HELD:

CHAPTER 4

INCOME

TAXABLE INCOME! The pertinent items of gross income specified in this Code, less

the deductions and/or personal and additional exemptions, if

any, authorized for such types of income by this Code or other

special laws.

! Section 36-38, Regulations 2


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o The retiring official or employees must be in the service

of the employer for at least 10 years and isnt less than

50 years of age at the time of retirement

o The retiring official or employee shouldn't have

previously availed of the privilege under the retirement

benefit plan of another employer

Fixed or Variable Transportation, Representation, and otherAllowances

! In general, is subject to withholding, provided however, that

representation and transportation allowance granted to public

officers and employees under the General Appropriations Act

and the Personal Economic Relief Allowance which essentially

constitute reimbursement for expenses incurred in the

performance of government personnels official duties shall not

be subject to income tax and consequently to withholding tax

o Provided further that Additional Compensation

Allowance given to government personnel shall not besubject to withholding tax pending its formal

integration into the basic pay

o Consequently, and effective for the taxable year 2000,

ACA shall be classified as part of the other benefits

under the Tax Code which are excluded from gross

compensation income provided the total amount of such

benefits doesn't exceed P30000

! Any amount paid specifically either as advances or

reimbursements for traveling, representation, and other bona

fide ordinary and necessary expenses incurred or reasonably

expected to be incurred by the employee in the performance of

his duties are not compensations subject to withholding, if the

following conditions are meto It is for ordinary and necessary traveling and

representation and entertainment expenses paid or

incurred by the employee in the pursuit of the trade,

business, or profession

o The employee is required to account/liquidate for the

foregoing expenses in

income tax reviewer

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