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PHILIPPINES

Is There Double Taxation in the Philippine Tax System?


Dr Angel Q. Yoingco and M.A. Lourdes B. Recente
national context wherein two or more countries impose taxes on the same taxpayer on the same tax base. The latter is observed in the case when income arising from a foreign investment is subject to tax in the source country and taxed once more upon repatriation in the country of residence of the investor-taxpayer. To mitigate domestic and international double taxation, unilateral, bilateral or multilateral relief measures may be taken. Unilateral relief measures are often found in the tax laws of a specific country. Bilateral or multilateral measures are in the form of tax treaties for the avoidance of double taxation that are aimed to allocate the taxing rights on income arising from international transactions between the countries involved.5 Tax treaties are generally patterned after model tax treaties of the OECD and the UN. Economic double taxation, on the other hand, occurs when more than one person is taxed on the same item of income. An often-cited example is the taxation of corporate income at the level of the corporation and at the level of the shareholder when distributed in the form of dividend. This is essentially founded on the classical corporate tax system wherein the corporation is treated as a distinct and separate entity from the individuals who own the corporation. To relieve economic forms of double taxation, the integrating of the income taxes paid at the corporate and at the personal levels, through various methods, has been adopted in some countries. Integration refers to any plan that taxes corporate income only once, instead of twice, both when earned and when distributed to shareholders.6 One variant which is full integration attributes all incomes of the corporation to the individual owners and collects the income tax due only from the individual owners at relevant rates depending on their total incomes, while a more limited form is confined to the taxation of corporate income that is paid out as dividends to shareholders.7 Literature also terms it the conduit concept or theory where qualifying investment companies are allowed to pass on
1. International Bureau of Fiscal Documentation, International Tax Glossary Second Edition, IBFD Publications, Amsterdam, 1992, p. 80. 2. Patterson & Scholz, Economic Problems of Modern Life, McGraw-Hill Book Company, Inc., United States, fourth ed., 1948, p. 349. 3. IBFD, id. 4. IBFD, loc. cit. 5. IBFD, p. 81. 6. Glenn Hubbard, Integration, corporate tax, in The Encyclopedia of Taxation and Tax Policy, Joseph J. Cordes, Robert D. Ebel and Jane G. Gravelle, editors, The Urban Institute Press, Washington D.C., 1999, p. 197. 7. John R. King, Integration of Personal and Corporate Income Taxes: Advantages and Disadvantages, in Tax Policy Handbook, edited by Parthasarathi Shome, International Monetary Fund, Washington D.C., 1995, pp. 151-152.

Dr Angel Q. Yoingco is the Chairman of the Board of the Public Finance Institute of the Philippines, Dean Emeritus of the Lyceum of the Philippines Graduate School and Trustee, Board of Trustees of the University of the East Foundation for Research and Advanced Studies Inc., Manila. M.A. Lourdes B. Recente is the Director of the Research and Information Office, Department of Finance, Philippines.

1. INTRODUCTION It was one of those taxpayer registration and filing deadlines of the Philippines Bureau of Internal Revenue (BIR) when, at two oclock in the afternoon, someone became frantic about the presence of BIR personnel at his office premises asking him and his co-workers to hastily register as value added tax (VAT) taxpayers. It was the last day of registration for new VAT taxpayers and the person, being a licensed professional insurance broker, was told to register as he would now be covered by the value added tax. Because of the imposition of the VAT on professionals as of January 2003, the issue of double taxation has gained interest and focus. To professionals, their value-added upon which the VAT is levied, is measured by their gross income that is likewise subject to the income tax. Many professionals have questioned the legality and fairness of subjecting their gross incomes to two taxes. Isnt this case of taxing the same income twice excessive and burdensome, and thus, unconstitutional? This paper reviews some writings from the vast economics and public finance literature written on double taxation and Philippine jurisprudence on double taxation cases, and discusses possible or perceived double taxation issues in a Philippine setting. 2. DOUBLE TAXATION DEFINED When the same taxable item is taxed more than once1 by either the same or by different government agencies,2 there is said to be double taxation. As described in literature, double taxation can either present itself in a juridical or an economic form.3 The juridical type of double taxation happens when comparable taxes are imposed by two or more taxing jurisdictions on the same taxpayer in respect of the same taxable income or capital.4 It may be viewed from a domestic context involving two equal and sovereign taxing jurisdictions in one state or from an inter-

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interest, dividend income and capital gains to shareholders without incurring a tax liability and so as to avoid double taxation.8 A common approach to relieve double taxation of dividend income is the imputation system.9 It allows shareholders to claim a credit for taxes paid by the company against their personal tax liability for dividends received. 3. DOUBLE TAXATION IS NOT FORBIDDEN In Philippine jurisprudence, double taxation has been described as direct duplicate taxation. It exists where the same property is taxed twice when it should be taxed once, or the same person is taxed twice by the same jurisdiction for the same reason. Double taxation is not specifically forbidden in our fundamental law. Several Philippine cases cite that the Philippines has not adopted the injunction against double taxation found in the Constitution of the United States.10 Further, the Court has ruled that there is no double taxation where the state merely imposes a tax on every distinct and separate business in which a taxpayer is engaged. Nonetheless, there are inherent limitations on taxation11 and one of these is that there should be no double taxation. Double taxation, in this context, refers to taxation that is excessive and burdensome. While there is no specific prohibition against double taxation in the fundamental law of the land, the 1986 Philippine constitution requires that the rule of taxation be uniform and equitable to prevent undue discrimination and the imposition of excessive taxes. By implication, double taxation if allowed may violate public policy against excessive taxes.12 Double taxation, it is likewise treatised, also exists where a tax is not generally applicable such that one would be taxed more than another.13 When not generally applied to all subjects, it would be contrary to the constitutional guarantees of uniformity of taxation and equal protection. Double taxation that is generally applied results in an increase in tax, which is legal and permissible. It was likewise argued in literature that if all (property) were equally subjected to two or more taxes, the injustice of double or multiple taxation would not be so pronounced.14 4. TWICE TAXED, TWICE PAINED? In the Philippine tax system, instances abound where the national and local governments apparently tax the same earnings or property more than once. Could these be blatant examples of double taxation that government itself practices and tolerates, maybe for the pressing need to raise tax revenues, or are these instances of double taxation where taxpayers are made to bear the pain of tax twice over? Case No. 1 VAT, professional tax and local business tax An individual who practises his profession is liable to pay VAT15 to the national government, and professional tax16 to the province. Both taxes are imposed on a professional

person for the single reason that he is in the business of exercising his profession. In the case of businesses such as manufacturing, retail and wholesale trading, financial intermediation, agricultural milling, etc., these are subject to VAT at the national level and to the local business tax17 payable at the municipality or city level. Both taxes are levied on the same tax base, which is gross sales or receipts. Like the professionals, these businesses pay a tax to both the national and local governments for the reason that they are conducting a going concern. In these twin examples, the common denominators are: (i) the imposition of a business tax on the same taxable base, (ii) the imposition of a tax for the same reason, and (iii) the imposition by two sovereign levels of government. Is this validly a case of double taxation? Strictly on the basis of definition, there is duplicate taxation of professionals and businesses in these instances. But since both taxes are founded on the basic tax laws,18 there should be nothing illegal about them. Local governments are allowed to levy taxes, fees and charges subject to the limitations set by the Local Government Code (LGC). The imposition of a business tax by the province or the municipality and city on the same tax base, which is gross sales or receipts similar to the business taxes imposed at the national level, is not one of the limitations contained in the LGC. Vesting local governments with adequate taxing powers is along the spirit of local autonomy and fiscal self-reliance. The local tax rates, though, are substantially lower than the national imposition, which should make taxation less harsh and painful to a professional or to a business. Case No. 2 Community tax Another imposition by the municipality and city is based on income and property, tax bases that are already subject to other taxes such as the income tax and VAT at the national level, and the local business tax and real property tax at the sub-national level. This is the community tax imposed on individuals and juridical persons using a rate which has a fixed component and an ad valorem com-

8. www.investorwords.com. 9. King, p. 154. 10. Notes from the cases: Manila Motor Co. Inc. v. Ciudad de Manila, 72 Phil. 336; Victorias Milling Co. Inc. v. Municipality of Victorias, et al., L-21183, 27 Sept. 1968. There are many other cases in Philippine jurisprudence that tackle double taxation, such as Pepsi-Cola Bottling Co. of the Phil. v. City of Butuan, 24 SCRA 787; De Villata v. Stanley, 32 Phil. 35; City of Manila v. Inter-Island Gas Service, 99 Phil. 847; Syjuco v. Municipality of Paranaque, L-11265, 27 Nov. 1959; City of Bacolod v. Gruet, L-18290, 31 Jan. 1963. 11. (i) The tax must be imposed for a public purpose; (ii) it must be limited to persons and property within and subject to its jurisdiction; and (iii) there should be non-delegation of the power to tax. 12. Angel Q. Yoingco and Regina Simona B. de Guzman, Public Finance and the Philippine Constitutions, Claro M. Recto Academy of Advanced Studies, Lyceum of the Philippines, Manila, 1994, pp. 20-21. 13. Romualdez, Yoingco and Casem, Philippine Public Finance, GIC Enterprises and Co. Inc., Manila, 1973, p. 323. 14. Patterson and Scholz, id. 15. A person pays the 10% VAT if his gross annual sales or receipts exceed PHP 550,000. If not, he is liable to a 3% tax on his gross quarterly receipts or sales. 16. An annual tax not to exceed PHP 300 that is paid to the province. 17. The local business tax rates vary by type of taxpayer; it is either a schedule of fixed amounts or ad valorem. 18. The National Internal Revenue Code and the Local Government Code.

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ponent depending on income earned or assessed value of property owned by the taxpayer.19 The community tax has its origin in the Spanish times when a cedula tax was imposed. It was transformed into a residence tax during the Commonwealth period and eventually, became known as the community tax under the Local Government Code of 1991. It has become a permanent feature of the tax system and a revenue-raiser for the local governments. More importantly, though, this tax is also imposed when a document is acknowledged before a notary public, when taking an oath of office upon election or appointment in government, when receiving any licence, certificate or permit from any public authority, when paying a tax or fee, when receiving any money from a public fund, when transacting any other official business, or when receiving any salary or wage from any person or corporation. The community tax has often been attacked as an example of double taxation because it is imposed on income or property value that is also subject to other forms of taxes. But as a minimal imposition of the local governments, it cannot be regarded as burdensome or excessive. Can this double taxation, then, be judged as illegal? It can be argued further that double taxation that is generally applied and results in an increase in taxes is permissible as it does not contradict the constitutional guarantees of uniformity of taxation and equal protection.20 Case No. 3 Income tax and taxes on property such as estate tax, gift tax, capital gains tax and real property tax There are arguments that the taxes imposed on property, for various reasons, result in double taxation. Income that had already been taxed once, under the income tax system, will again be taxed as it will have to pay for the real property tax or the estate tax. The assets belonging to an estate have already been subject to income tax before and therefore, should not be taxed again. In the case of the estate tax, gift tax or capital gains tax, the object of taxation is the incremental value of the property from the time of acquisition to the time of disposition.21 This appreciation in the property value escapes income taxation, until the time when one of these taxes shall apply, that is upon death when the heirs of a property owner inherit and pay an estate tax, or upon disposition of a property either by donation where the donor pays a gift tax or by sale where the seller shells out for the capital gains tax. Thus, these are one-time impositions on income increments that the regular income tax system does not cover. The real property tax, which is also a tax on wealth, differs from the other taxes levied against property because it is recurring and paid on an annual basis.22 It is usually imposed on a fraction of the market value of a real property,23 and this tax base represents rental income or imputed rental income from property that otherwise escapes the personal income tax.24 These taxes add value and meaning to equity and progressiveness of the income tax system but are levied on different representations of income. Where there is a different object of tax, therefore, a double taxation case is unfounded.

Case No. 4 Income tax and dividend tax The Comprehensive Tax Reform Program in 1997 reintroduced the tax on dividends into the income tax system amidst reservation that there was only one income stream being subjected to both the corporate tax and the tax on dividends. It is recalled that the tax on dividends was previously abolished in 1986 together with the intercorporate dividends tax. During Senate deliberations on the merits of imposing a tax on dividends, the Department of Finance argued on the basis of the following four points:25 the corporation is a distinct entity and enjoys specific privileges such as limited life and liability; a tax on dividends promotes horizontal equity by ensuring that people in the same income bands who are receiving different forms of income are similarly taxed. While wage income was fully taxed, passive income (like dividends) was not; a tax on dividends promotes progressivity of the tax system since dividend income is received by individuals belonging to the two topmost income classes;26 and a tax on dividends ensures that the corporate tax has been fully paid on distributed dividends. The last argument became the turning point of congressional debates on the issue of double taxation of income. While the then statutory corporate tax rate was 35%, the effective rate was a mere 2%-8% because of deductions and other preferential tax treatment. Thus, whether at the corporate level or at the individual shareholder level, corporate income was being taxed at merely 2%-8%.27 The imposition of a tax on dividends became the equalizing measure. It was re-instituted in 1998 and gradually increased from 6% to the present rate of 10% of gross dividends received.
19. For an individual, the tax is equivalent to a fixed amount of PHP 5.00 and an ad valorem amount equivalent to PHP 1.00 for every PHP 1,000 of income earned (salaries, income from the exercise of profession or business income) or of assessed value of property, but is not to exceed PHP 5,000. For a juridical person, the tax is equivalent to PHP 500 plus an additional tax of PHP 2.00 for every PHP 5,000 worth of real property or gross receipts but the total additional tax is not to exceed PHP 10,000. 20. Romualdez, Yoingco, Casem, pp. 322-323. 21. Estate taxes range from 5%-20% while gift taxes range from 2%-15%. Please see Annex 1 for the schedules. The capital gains tax is a final tax of 6% based on the gross selling price or current fair market value, whichever is higher. 22. Steven M. Sheffrin, Property tax, real property, residential, in The Encyclopedia of Taxation and Tax Policy, pp. 293-295. 23. The Local Government Code of 1991 sets the real property tax at a rate not exceeding 1% of assessed value of real property in the case of a province or 2% in the case of a city or a municipality within the Metropolitan Manila Area. Assessed value is equivalent to the fair market value of the real property multiplied by the assessment level. Assessment levels are fixed by local ordinances subject to ceilings set by the Code. They vary as to type of property and actual usage, for example, residential land has an assessment level of 20% and commercial land 50%, while buildings and other structures have varied assessment levels. Please see Annex 2 for more details on the structure of the real property tax. 24. Janet Stotsky and M. Zuhtu Yucelik, Taxation of Land and Property, in Tax Policy Handbook, IMF, p. 181. 25. In a Memorandum dated 26 May 1997, to Senator Juan Ponce Enrile (who was then chair of the Senate Committee on Ways and Means, and was sponsoring the measure on the floor) and signed by Finance Undersecretary Milwida M. Guevara. 26. This is based on findings of the National Statistics Office in its Family Income and Expenditures Survey. 27. The present corporate tax rate is 32% on net taxable income while the dividends tax is a final tax of 10% imposed upon cash or property dividend.

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Since the Philippines does not have full or partial integration of incomes to address the double taxation issue of the corporate income tax, the imposition of a lower tax on dividends (which is 22 percentage points lower than the statutory corporate tax) is the next best thing. Let the double taxation issue hounding the tax on dividends lay to rest. Case No. 5 Income tax and VAT Indeed, apart from the income tax, a VAT is now imposed on the sale of services by persons engaged in the practice of professions like doctors, accountants and lawyers, professional services rendered by general professional partnerships, services rendered by actors, etc., professional athletes, and services rendered by customs, real estate stock, immigration and commercial brokers.28 Since a professionals value-added is being equated with his net income, he claims to being taxed twice, i.e. once by the income tax and then, by the VAT. Does he bear the pain of tax twice? Public finance literature explains that the VAT is a tax on consumption, hence, the incidence of the VAT falls on the final consumer. Not upon the manufacturer, trader or service-provider such as a professional individual. In the VAT chain leading to the final consumer, a VAT taxpayer-professional, say, Mr Accountant, pays an input tax on his purchases of supplies but charges an output tax based on his professional fee to his client or the next person in the chain. The output tax now becomes someone elses input tax. However, if the next person were the final consumer, the VAT that is passed on to him is no longer an input tax but the final VAT burden that the final consumer has to bear. The question that should be posed is whether Mr Accountant actually incurred a VAT liability or not. As seen from this simple illustration, Mr Accountant did not pay a VAT but merely acted as a withholding agent of the final consumer. Mr Accountants input tax is effectively an advance payment for the VAT that is due to the final consumer, and his output tax is effectively the VAT due of his client that he is withholding for the government. While there is no double taxation issue between the income tax and the value added tax as far as Mr Accountant is concerned, the same may not be readily said of Mr Insurance Broker who is now charged a VAT on his gross income in the form of commission fees. Commission fees are generally percentages of the price of the product being sold (e.g. an insurance policy) that are set by the insurance company. Unlike Mr Accountant who prices the professional service he renders and is able to pass on the cost of his service to his client, Mr Insurance Broker receives a fixed fee upon which he incurs a VAT that, on the other hand, he could not pass on to the insurance buyer because the price of the insurance policy is likewise determined by the insurance company. Apparently, he bears the VAT even when he is not the final consumer. But is his service not akin to an employer-employee relationship or is it a form of contractual business undertaking for which a business tax should be made to apply? In the current value-added taxation of professionals, this is seen as one grey area that needs to be resolved. However, on the issue of whether Mr Insurance Broker is doubly taxed, the government can

argue that the true income tax base is not the brokers gross income but rather a net value after deducting whatever expenses he has incurred in the ordinary course of his trade or business. Hence, the two taxes being imposed on different tax bases cannot be attacked as a case of double taxation. 5. CONCLUSION Beyond what literature has set forth and what jurisprudence has so far ruled, real-life tax situations exist where Juan dela Cruz points an accusing finger at government for doubly taxing him and making his life miserable. The issue of double taxation is quite complex but interesting, and deserves careful and objective study as well as extensive public discussion. It also pays well for government to clarify double taxation issues by way of regulation and public information. But while this paper highlights double taxation concerns of the ordinary taxpayer, attention should likewise be given to the opposite side of the spectrum where entities escape, or manage to escape, taxation because of lax or unclear interpretation of law. For instance, religious, charitable and educational organizations established and operating exclusively as such and not for profit, are exempt from taxation. This is a constitutional mandate that is mirrored in specific provisions of the Internal Revenue Code. The Tax Code, however, clarifies that income of any of these organizations from any of their properties or from any of their activities conducted for profit shall be subject to tax. How this provision is actually implemented by government should also be examined, as there apparently exist some organizations that earn income and profits from investments in real estate, manufacturing, finance and merchandising. These incomes are said to escape taxation as they hide under the cloak of the constitutional exemption. Where there is inequity in double or triple taxation of income, there is also unfairness when income remains untaxed. ANNEX 1 1. Rates of estate tax
Value of net estate (PHP) up to 200,000 200,000 500,000 500,000 2,000,000 2,000,000 5,000,000 5,000,000 10,000,000 over 10,000,000 Tax payable (PHP) exempt 5% 8% + 15,000 11% + 135,000 15% + 465,000 20% + 1,215,000

To determine the net estate, certain deductions are allowed from the value of the gross estate such as: (i) expenses, losses, indebtedness and taxes; (ii) an amount equivalent to the current fair market value of the decedents family home up to PHP 1 million; (iii) a standard deduction equivalent to PHP 1 million; and (iv) medical expenses
28. BIR Revenue Regulations 1-2003, 3-2003 and 11-2003 .

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incurred by the decedent within one year prior to his death, substantiated but up to PHP 500,000 only, among others. 2. Gift tax or donors tax
Value of net gift (PHP) up to 100,000 100,000 200,000 200,000 500,000 500,000 1,000,000 1,000,000 3,000,000 3,000,000 5,000,000 5,000,000 10,000,000 over 10,000,000 Tax payable (PHP) exempt 2% 4% + 2,000 6% + 14,000 8% + 44,000 10% + 204,000 12% + 404,000 15% + 1,004,000

(b) On buildings and other structures: Residential


Fair market value (PHP) up to 175,000 175,000 300,000 300,000 500,000 500,000 750,000 750,000 1,000,000 1,000,000 2,000,000 2,000,000 5,000,000 5,000,000 10,000,000 over 10,000,000 Assessment levels (%) 0 10 20 25 30 35 40 50 60

Agricultural
Fair market value (PHP) Assessment levels (%) 25 30 35 40 45 50 up to 300,000 300,000 500,000 500,000 750,000 750,000 1,000,000 1,000,000 2,000,000 over 2,000,000

ANNEX 2 Real property tax 1. The real property tax (RPT) is an ad valorem tax that is levied annually by a province or city or a municipality within the Metropolitan Manila area on real property such as land, building, machinery and other improvement. 2. Rate of tax: not exceeding 1% of the assessed value of real property in the case of a province and not exceeding 2% in the case of a city or a municipality within the Metropolitan Manila area. The assessed value or the tax base is computed as the fair market value of the real property multiplied by the assessment level. 3. The following are exemptions from the RPT: (a) real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person; (b) charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes; (c) all machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; (d) all real property owned by duly registered cooperatives; and (e) machinery and equipment used for pollution control and environmental protection. 4. Assessment levels, set by local ordinances, shall not exceed the following levels: (a) On lands:
% residential agricultural commercial industrial mineral timberland 20 40 50 50 50 20

Commercial/Industrial
Fair market value (PHP) up to 300,000 300,000 500,000 500,000 750,000 750,000 1,000,000 1,000,000 2,000,000 2,000,000 5,000,000 5,000,000 10,000,000 over 10,000,000 Assessment levels (%) 30 35 40 50 60 70 75 80

Timberland
Fair market value (PHP) up to 300,000 300,000 500,000 500,000 750,000 750,000 1,000,000 1,000,000 2,000,000 over 2,000,000 Assessment levels (%) 45 50 55 60 65 70

(c) On machineries
Class agricultural residential commercial industrial Assessment levels (%) 40 50 80 80

(d) On special classes: the assessment levels for all lands, buildings, machineries and other improvements
Actual use cultural scientific hospital local water districts government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power Assessment levels (%) 15 15 15 10

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