GUIDE NOTES ON INCOME TAX (Part 1) fund of capital in relation to such fund through a period of time
is called an income. Capital is wealth, while income is the
TITLE II TAX ON INCOME
Q: What is income? How is it different from capital?
* In Madrigal v. Rafferty, Madrigal and Paterno were legally
married and their marriage was contracted under the
provisions of law concerning conjugal partnerships. In 1915,
Madrigal filed his income tax return for the previous year.
Later, however, Madrigal contended that his declared income
was in fact the income of the conjugal partnership existing
between himself and his wife. Thus, his declared income was
supposed to be divided into 2 equal parts, i.e., to be
considered the income of Madrigal and of Paterno. The CIR
argued that a distinction must be drawn between the ordinary
form of commercial partnership and the conjugal partnership of
spouses resulting from the relation of marriage. The Supreme
Court agreed with the CIR. Paterno had an inchoate right in
the property of her husband during the life of the conjugal
partnership. She had an interest in the ultimate property rights
and in the ultimate ownership of property acquired as income
after such income had become capital. However, Paternos
right to of the income of the conjugal partnership was not
absolute. The High Court found that Paterno had no estate
and income of her own which could properly be considered for
purposes of income taxation.
The Supreme Court had occasion to differentiate between
income and capital in this manner: Income as contrasted with
capital or property is to be the test. The essential difference
between capital and income is that capital is a fund; income is
a flow. A fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by the
payment of money from it or any other benefit rendered by a
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service of wealth.
[Madrigal v. Rafferty, GR No. L-12287, 7 August 1918.]
** In Conwi v. Court of Tax Appeals, petitioners were Filipino
citizens and employees of Procter & Gamble, Philippine
Manufacturing Corporation. In the years 1970 and 1971,
petitioners were assigned to other subsidiaries of Procter &
Gamble outside of the Philippines, during which time
petitioners were paid USD as compensation for services in
their foreign assignments. Were petitioners liable to pay
income tax on their dollar earnings? The Supreme Court held
in the affirmative. The governing law then was Section 21 of
the old Tax Code, amended up to 4 August 1969, which
imposed a tax upon the taxable net income received during
each taxable year from all sources by a citizen of the
Philippines, whether residing here or abroad. [NOTE: Today,
the 1997 Tax Code treats resident citizens and non-resident
citizens differently.] Petitioners dollar earnings were classified
as income and hence, subject to income tax. The next issue
was the exchange rate to be used to determine the peso
equivalent of the dollar earnings of petitioners for income tax
purposes. The Supreme Court held that the par value of the
peso, not the prevailing free market rate of exchange, should
be the guiding rate used for purposes of computing income
tax.
In this case, income was defined in this sense: it is an amount
of money coming to a person or corporation within a specified
time, whether as payment for services, interest or profit from
investment. Unless otherwise specified, it means cash or its
equivalent. Income can also be thought of as a flow of the
fruits of ones labor.
1
[Conwi v. Court of Tax Appeals, GR Nos. 48532 and 48533,
31 August 1992.]
*** At issue in CIR v. Court of Appeals was the taxability of the
shares of stock in ANSCOR owned by the estate of Don
Andres Soriano as well as Don Andres Sorianos widow, Doa
Carmen Soriano. On various dates, (1) the estate and Doa
Carmen exchanged a portion of their common shares for
preferred shares, and (2) ANSCOR redeemed a portion of the
common shares owned by the estate and Doa Carmen.
ANSCORs business purpose for the redemption of stocks was
to partially retire said stocks as treasury shares in order to
reduce the companys foreign exchange remittances in case
cash dividends were declared. Subsequently, ANSCOR was
issued an assessment for deficiency withholding tax at source
based on the transactions of exchange and redemption of
stocks. Regarding the exchange of stocks, the Supreme Court
found that there was no change in the proportional interest of
the estate and Doa Carmen before and after the exchange.
The exchange transaction did not result into a flow of wealth
and hence, there was no income tax liability.
As regards the redemption of stocks, the issue was,
particularly, whether ANSCORs redemption of stocks from its
stockholder as well as the exchange of common with preferred
shares could be considered as essentially equivalent to the
distribution of taxable dividends, making the proceeds thereof
taxable income. The Supreme Court started by saying that the
stock dividends, strictly speaking, represent capital and do not
constitute income to its recipient. The mere issuance of stock
dividends is not yet subject to income tax. As capital, the stock
dividends postpone the realization of profits. However, a
redemption of the stocks converts into money the stock
dividends which become a realized profit or gain and
consequently, the stockholders separate property. As realized
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income, the proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the existence of any
business purpose for the redemption. Here, the proceeds of
the redemption of the stock dividends were deemed taxable
dividends, i.e., income subject to income tax which was
required to be withheld at source.
The determining factor for the imposition of income tax is
whether any gain or profit was derived from a transaction.
Furthermore, there are 3 elements in the imposition of income
tax, namely: (1) there must be gain or profit; (2) the gain or
profit is realized or received, actually or constructively; and (3)
the gain or profit is not exempted by law or treaty from income
tax. Any business purpose as to why or how the income was
earned by the taxpayer is not a requirement. Income tax is
assessed on income received from any property, activity or
service that produces the income because the Tax Code
stands as an indifferent neutral party on the matter where
income comes from.
[CIR v. Court of Appeals, GR No. 108576, 20 January 1999.]
**** In Chamber of Real Estate and Builders Associations, Inc.
v. Romulo, petitioner was an association of real estate
developers and builders in the country. It assailed the validity
of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of
real properties classified as ordinary assets. On the topic of
MCIT, petitioner argued that MCIT violated the due process
clause because it levied income tax even if there was no
realized gain. In effect, MCIT was a tax on capital. According
to petitioner, income tax could only be imposed on income, not
capital. The Supreme Court took the opportunity to explain the
concept and rationale of MCIT as follows: MCIT on domestic
corporations came about as a result of the perceived
inadequacy of the self-assessment system in capturing the
2
true income of corporations. Congress intended to put a stop
to the practice of corporations which, while having large turn-
overs, report minimal or negative net income resulting in
minimal or zero income taxes year in and year out, through
under-declaration of income or over-deduction of expenses
otherwise called tax shelters. In other words, MCIT serves to
put a cap on such tax shelters.
On petitioners argument that the imposition of MCIT
amounted to deprivation of property without due process of
law, the Supreme Court held that MCIT is imposed on gross
income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods and
other direct expenses from gross sale. Clearly, the capital is
not being taxed. Otherwise stated, MCIT is a tax on income.
Furthermore, MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the
normal income tax is suspiciously low. The MCIT merely
approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporations gross income.
[Chamber of Real Estate and Builders Associations, Inc. v.
Romulo, GR No. 160756, 9 March 2010.]
Q: What is the source of an income?
* In CIR v. British Overseas Airways Corporation, BOAC was a
British Government-owned corporation engaged in the
international airline business. As such, it operated air
transportation service and sold transportation tickets over the
routes of the other airline members. For the years 1959 to
1971, BOAC had no landing rights for traffic purposes in the
Philippines. It did not carry passengers and/or cargo to and
from the Philippines, although from 1959 to 1971, BOAC
maintained a general sales agent in the country which was
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responsible for selling BOAC tickets covering passengers and
cargoes. The CIR issued an assessment against BOAC for
deficiency income taxes for the years 1959 to 1971 for the sale
of tickets in the Philippines for air transportation. Was BOAC a
resident foreign corporation doing business in the Philippines?
The Supreme Court held affirmatively. BOAC, during the
periods covered by the subject assessments, maintained a
general sales agent in the Philippines which performed
activities in the exercise of the functions normally incident to,
and in progressive pursuit of, the purpose and object of its
organization as an international air carrier. BOAC was held to
be engaged in business in the Philippines through its local
agent during the period covered by the assessments.
Did BOACs income from the sale of tickets in the Philippines
come from sources within the Philippines? The source of an
income is the property, activity or service that produced the
income. The Supreme Court stated that in BOACs case, the
sale of tickets in the Philippines was the activity that produced
the income. The tickets exchanged hands here and payment
for fares were also made here in Philippine currency. The situs
of the source of payments is the Philippines. The flow of
wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of
wealth should share the burden of supporting the
government.
[CIR v. British Overseas Airways Corporation, GR Nos. L-
65773-74, 30 April 1987.]
** In CIR v. Baier-Nickel, respondent was a non-resident
German citizen who was employed as a commission agent of
JUBANITEX, which was a domestic corporation. It was agreed
that respondent would receive 10% sales commission on all
sales actually concluded and collected through her efforts. In
3
1995, respondent received a certain sum representing her
sales commission income from which JUBANITEX withheld
the corresponding 10% withholding tax and remitting such
amount to the BIR. Respondent filed a claim for tax refund on
the contention that her sales commission income was not
taxable in the Philippines because the same was a
compensation for her services rendered in Germany and
therefore considered as income from sources outside the
Philippines. Was respondents sales commission income
taxable in the Philippines? The Supreme Court held
affirmatively. Pursuant to Sections 23(D) and 25 of the 1997
Tax Code, non-resident aliens, whether or not engaged in
trade or business, are subject to Philippine income taxation on
their income received from all sources within the Philippines.
What is thus meant by source of income? Source of income
relates to the property, activity or service that produced the
income. The important factor therefore which determines the
source of income of personal services is not the residence of
the payor, or the place where the contract for service is
entered into, or the place of payment, but the place where the
services were actually rendered. Here, the Supreme Court
found that respondent failed to show substantial evidence, or
that relevant evidence that a reasonable mind might accept
as adequate to support the conclusion that it was in Germany
where she performed the income producing service which
gave rise to the reported monthly sales in the months of March
and May to September of 1995. She thus failed to discharge
the burden of proving that her income was from sources
outside the Philippines and exempt from the application of our
income tax law. Hence, the claim for tax refund should be
denied.
[CIR v. Baier-Nickel, GR No. 153793, 29 August 2006.]
Q: Define income tax.
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* Blacks Law Dictionary defines income tax as a tax on the
annual profits arising from property, business pursuits,
professions, trades, or offices. It is a tax on a persons
income, wages, salary, commissions, emoluments, profits, and
the like, or the excess thereof over a certain amount.
** Income tax is a tax on all yearly profits arising from property,
professions, trades or offices, or a tax on a persons income,
emoluments, profits and the like. It is tax on income, whether
net or gross, realized in one taxable year. [27 Am Jur. 308.]
*** At issue in CIR v. Court of Appeals was the taxability of the
shares of stock in ANSCOR owned by the estate of Don
Andres Soriano as well as Don Andres Sorianos widow, Doa
Carmen Soriano. On various dates, (1) the estate and Doa
Carmen exchanged a portion of their common shares for
preferred shares, and (2) ANSCOR redeemed a portion of the
common shares owned by the estate and Doa Carmen.
ANSCORs business purpose for the redemption of stocks was
to partially retire said stocks as treasury shares in order to
reduce the companys foreign exchange remittances in case
cash dividends were declared. Subsequently, ANSCOR was
issued an assessment for deficiency withholding tax at source
based on the transactions of exchange and redemption of
stocks. Regarding the exchange of stocks, the Supreme Court
found that there was no change in the proportional interest of
the estate and Doa Carmen before and after the exchange.
The exchange transaction did not result into a flow of wealth
and hence, there was no income tax liability.
As regards the redemption of stocks, the issue was,
particularly, whether ANSCORs redemption of stocks from its
stockholder as well as the exchange of common with preferred
shares could be considered as essentially equivalent to the
4
distribution of taxable dividends, making the proceeds thereof
taxable income. The Supreme Court started by saying that the
stock dividends, strictly speaking, represent capital and do not
constitute income to its recipient. The mere issuance of stock
dividends is not yet subject to income tax. As capital, the stock
dividends postpone the realization of profits. However, a
redemption of the stocks converts into money the stock
dividends which become a realized profit or gain and
consequently, the stockholders separate property. As realized
income, the proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the existence of any
business purpose for the redemption. Here, the proceeds of
the redemption of the stock dividends were deemed taxable
dividends, i.e., income subject to income tax which was
required to be withheld at source.
The determining factor for the imposition of income tax is
whether any gain or profit was derived from a transaction.
Furthermore, there are 3 elements in the imposition of income
tax, namely: (1) there must be gain or profit; (2) the gain or
profit is realized or received, actually or constructively; and (3)
the gain or profit is not exempted by law or treaty from income
tax. Any business purpose as to why or how the income was
earned by the taxpayer is not a requirement. Income tax is
assessed on income received from any property, activity or
service that produces the income because the Tax Code
stands as an indifferent neutral party on the matter where
income comes from.
[CIR v. Court of Appeals, GR No. 108576, 20 January 1999.]
Q: Does income tax form part of operating expenses?
* Should income tax be included in the computation of
operating expenses of a public utility? This was one of the
questions answered in Republic of the Philippines v. Manila
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Electric Company. In this case, in 1993, Meralco filed with the
ERB an application for the revision of its rate schedules, i.e.,
increase in its distribution charge. Income taxes paid by
Meralco were included as part of its operating expenses for
purposes of rate determination. The ERB argued against
including income taxes paid by Meralco as part of the public
utilitys operating expenses as this should be borne by the
stockholders who are recipients of the income or profits
realized from the operation of their business, and hence
should not be passed on to the consumers. The Supreme
Court acknowledged that the public utility is allowed a return
on capital over and above operating expenses. However, only
such expenses and in such amounts should be allowed for
determination of the rates to be charged by a public utility.
Does income tax form part of Meralcos operating expenses
for purposes of computing a fair return on capital? The
Supreme Court answered negatively. Income tax paid by a
public utility is inconsistent with the nature of operating
expenses. In general, operating expenses are those which are
reasonably incurred in connection with business operations to
yield revenue or income. They are items of expenses which
contribute or are attributable to the production of income or
revenue.
On the other hand, income tax is imposed on an individual or
entity as a form of excise tax or a tax on the privilege of
earning income. In exchange for the protection extended by
the State to the taxpayer, the government collects taxes as a
source of revenue to finance its activities. Clearly, by its
nature, income tax payments of a public utility are not
expenses which contribute to or are incurred in connection
with the production of profit of a public utility. Income tax
should be borne by the taxpayer alone as they are payments
made in exchange for benefits received by the taxpayer from
the State.
5
[Republic of the Philippines v. Manila Electric Company, GR
Nos. 141314 and 141369, 15 November 2002.]
Q: Distinguish between income tax and percentage tax.
* Does the 20% final withholding tax on a banks passive
interest income form part of its taxable gross receipts in
computing the gross receipts tax? This was the issue resolved
in CIR v. Solidbank Corporation. In this case, Solidbank
sought the refund of allegedly overpaid gross receipts tax for
the year 1995. The CIR opposed on the ground that although
the 20% final withholding tax on Solidbanks interest income
was not actually received because it was remitted directly to
the government, the fact that the amount redounded to
Solidbanks benefit made it part of the taxable gross receipts in
computing the 5% gross receipts tax. The Supreme Court
adhered to the CIRs view and ruled that the amount of interest
income withheld in payment of the 20% final withholding tax
formed part of gross receipts in computing for the gross
receipts tax on banks. The High Court said that as a bank,
Solidbank was covered by both gross receipts tax and final
withholding tax. However, the Supreme Court took the
opportunity to differentiate gross receipts tax, which is a
percentage tax, from final withholding tax, which is an income
tax.
A percentage tax is a national tax measured by a certain
percentage of the gross selling price or gross value in money
of goods sold, bartered or imported; or of the gross receipts or
earnings derived by ay person engaged in the sale of services.
It is not subject to withholding. [NOTE: The subject matter of
gross receipts tax is the privilege of engaging in the business
of banking.]
On the other hand, [a]n income tax, on the other hand, is a
national tax imposed on the net or the gross income realized in
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a taxable year. It is subject to withholding. [NOTE: The
subject matter of final withholding tax is the passive income
generated in the form of interest on deposits and yield on
deposit substitutes.]
[CIR v. Solidbank Corporation, GR No. 148191, 25 November
2003.]
Q: What are the kinds of income tax systems?
* The case of Tan v. del Rosario dealt with the constitutionality
of RA No. 7496, also commonly known as the Simplified Net
Income Taxation Scheme (SNIT), amending certain provisions
of the old Tax Code. One argument raised by petitioners was
that the law now taxed single proprietorships and
professionals differently from the manner it imposed tax on
corporations and partnerships. Another argument was that
general professional partnerships should not be treated
differently from ordinary business partnerships. The Supreme
Court held that the classification made between single
proprietorships and professionals on the one hand, and
corporations and partnerships on the other, was valid.
Furthermore, [w]hat may instead be perceived to be apparent
from the amendatory law is the legislative intent to increasingly
shift the income tax system towards the schedular approach in
the income taxation of individual taxpayers and to maintain, by
and large, the present global treatment on taxable
corporations. [NOTE: See footnotes 2 and 3 of the decision.
Schedular approach is defined as a system employed where
the income tax treatment varies and made to depend on the
kind or category of taxable income of the taxpayer. Global
approach, on the other hand, refers to a system where the tax
treatment view indifferently the tax base and generally treats in
common all categories of taxable income of the taxpayer.]
6
On the topic of partnerships, the Supreme Court confirmed
that general professional partnerships and ordinary business
partnerships are treated differently for purposes of income
taxation. In general professional partnerships, 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.
[Tan v. del Rosario, GR Nos. 109289 and 109446, 3 October
1994.]
Q: What are the basic features of our present income tax
system?
* Our present income tax system is global, schedular, and
progressive.
Q: What are the kinds of tax rates?
* Tax rates are either (1) flat or proportional, or (2) graduated.
The latter may further be classified into (a) progressive, or (b)
regressive.
Q: What are the kinds of income according to tax rates?
* Income may either be subject to (1) schedular tax, (2) final
tax, or (3) reduced rate, e.g., minimum corporate income tax.
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** Income subject to schedular tax includes: (a) compensation
income earned by an individual; (b) income from trade or
exercise of profession of an individual; and (c) income earned
by an estate or trust.
*** Income subject to final tax includes: (a) interest, royalties,
prizes, and winnings; (b) cash or property dividends; (c) capital
gains from sale of shares of stock not traded in the stock
exchange; and (d) capital gains from sale of real property.
Q: What law governs Philippine income taxation?
* The basic Philippine income tax law can be found in the 1997
Tax Code, i.e., RA No. 8424, as amended. The latest
amendment to our Philippine income tax law is found in RA
No. 9504 (2008).
** US tax cases have persuasive effect in our jurisdiction
because Philippine income taxation is patterned after its US
counterpart.
CHAPTER I - DEFINITIONS
Sec. 22, Definitions - When used in this Title:
(A) The term 'person' means an individual, a trust, estate
or corporation.
(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 engaging in petroleum, coal,
geothermal and other energy operations pursuant to an
7
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.
(C) The term 'domestic,' when applied to a corporation,
means created or organized in the Philippines or under its
laws.
(D) The term 'foreign,' when applied to a corporation,
means a corporation which is not domestic.
(E) The term 'nonresident citizen' means:
(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 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 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 show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the
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Philippines as the case may be for purpose of this
Section.
(F) The term 'resident alien' means an individual whose
residence is within the Philippines and who is not a
citizen thereof.
(G) The term 'nonresident alien' means an individual
whose residence is not within the Philippines and who is
not a citizen thereof.
(H) The term 'resident foreign corporation' applies to a
foreign corporation engaged in trade or business within
the Philippines.
(I) The term 'nonresident foreign corporation' applies to a
foreign corporation not engaged in trade or business
within the Philippines.
(J) The term 'fiduciary' means a guardian, trustee,
executor, administrator, receiver, conservator or any
person acting in any fiduciary capacity for any person.
(K) The term 'withholding agent' means any person
required to deduct and withhold any tax under the
provisions of Section 57.
(L) The term 'shares of stock' 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
ventures taxable as corporations, associations and
recreation or amusement clubs (such as golf, polo or
similar clubs), and mutual fund certificates.
(M) The term 'shareholder' 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
8
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.
(N) The term 'taxpayer' means any person subject to tax
imposed by this Title.
(O) The terms 'including' and 'includes', 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.
(P) The term 'taxable year' means the calendar year, or the
fiscal year ending during such calendar year, upon the
basis of which the net income is computed 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.
(Q) The term 'fiscal year' means an accounting period of
twelve (12) months ending on the last day of any month
other than December.
(R) The terms 'paid or incurred' and 'paid or accrued' shall
be construed according to the method of accounting
upon the basis of which the net income is computed
under this Title.
(S) The term 'trade or business' includes the performance
of the functions of a public office.
(T) The term 'securities' 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.
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
(U) The term 'dealer in securities' means a merchant of
stocks or securities, whether an individual, partnership or
corporation, with an established place of business,
regularly engaged in the purchase of securities and the
resale thereof to customers; 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.
(V) The term 'bank' 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.
(W) The term 'non-bank financial intermediary' 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.
(X) The term 'quasi-banking activities' 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
similar instruments, 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.
(Y) The term 'deposit substitutes' shall mean an
9
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, or
acceptance 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, shall not be
considered as deposit substitute debt instruments.
(Z) The term 'ordinary income' 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.
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(AA) The term 'rank and file employees' 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.
(BB) The term 'mutual fund company' shall mean an open-
end and close-end investment company as defined under
the Investment Company Act.
(CC) The term 'trade, business or profession' shall not
include performance of services by the taxpayer as an
employee.
(DD) The term 'regional or area headquarters' 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.
(EE) The term 'regional operating headquarters' shall
mean a branch established in the Philippines by
multinational 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 support and maintenance; data
processing and communications; and business
development.
(FF) The term 'long-term deposit or investment
certificates' shall refer to certificate of time deposit or
investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management
accounts and other investments with a maturity period of
10
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 BSP.
(GG) The term statutory minimum wage earner shall
refer to rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of Labor
and Employment Statistics (BLES) of the Department of
Labor and Employment (DOLE). (As amended by RA No.
9504.)
(HH) The term minimum wage earner shall refer to a
worker in the private sector paid the statutory minimum
wage; or to an employee in the public sector with
compensation income of not more than the statutory
minimum wage in the non-agricultural sector where
he/she is assigned. (As amended by RA No. 9504.)
CHAPTER II - GENERAL PRINCIPLES
Sec. 23, General Principles of Income Taxation in the
Philippines. - Except when otherwise provided in this
Code:
23(A) A citizen of the Philippines residing therein is
taxable on all income derived from sources within and
without the Philippines;
Q: How is a resident citizen taxed?
* In Conwi v. Court of Tax Appeals, petitioners were Filipino
citizens and employees of Procter & Gamble, Philippine
Manufacturing Corporation. In the years 1970 and 1971,
petitioners were assigned to other subsidiaries of Procter &
Gamble outside of the Philippines, during which time
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petitioners were paid USD as compensation for services in
their foreign assignments. Were petitioners liable to pay
income tax on their dollar earnings? The Supreme Court held
in the affirmative. The governing law then was Section 21 of
the old Tax Code, amended up to 4 August 1969, which
imposed a tax upon the taxable net income received during
each taxable year from all sources by a citizen of the
Philippines, whether residing here or abroad. [NOTE: Today,
the 1997 Tax Code treats resident citizens and non-resident
citizens differently.] Petitioners dollar earnings were classified
as income and hence, subject to income tax. The next issue
was the exchange rate to be used to determine the peso
equivalent of the dollar earnings of petitioners for income tax
purposes. The Supreme Court held that the par value of the
peso, not the prevailing free market rate of exchange, should
be the guiding rate used for purposes of computing income
tax.
In this case, income was defined in this sense: it is an amount
of money coming to a person or corporation within a specified
time, whether as payment for services, interest or profit from
investment. Unless otherwise specified, it means cash or its
equivalent. Income can also be thought of as a flow of the
fruits of ones labor.
[Conwi v. Court of Tax Appeals, GR Nos. 48532 and 48533,
31 August 1992.]
23(B) A nonresident citizen is taxable only on income
derived from sources within the Philippines;
23(C) 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
11
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;
23(D) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines;
Q: How is a nonresident alien taxed?
* In CIR v. Baier-Nickel, respondent was a non-resident
German citizen who was employed as a commission agent of
JUBANITEX, which was a domestic corporation. It was agreed
that respondent would receive 10% sales commission on all
sales actually concluded and collected through her efforts. In
1995, respondent received a certain sum representing her
sales commission income from which JUBANITEX withheld
the corresponding 10% withholding tax and remitting such
amount to the BIR. Respondent filed a claim for tax refund on
the contention that her sales commission income was not
taxable in the Philippines because the same was a
compensation for her services rendered in Germany and
therefore considered as income from sources outside the
Philippines. Was respondents sales commission income
taxable in the Philippines? The Supreme Court held
affirmatively. Pursuant to Sections 23(D) and 25 of the 1997
Tax Code, non-resident aliens, whether or not engaged in
trade or business, are subject to Philippine income taxation on
their income received from all sources within the Philippines.
What is thus meant by source of income? Source of income
relates to the property, activity or service that produced the
income. The important factor therefore which determines the
source of income of personal services is not the residence of
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
the payor, or the place where the contract for service is
entered into, or the place of payment, but the place where the
services were actually rendered. Here, the Supreme Court
found that respondent failed to show substantial evidence, or
that relevant evidence that a reasonable mind might accept
as adequate to support the conclusion that it was in Germany
where she performed the income producing service which
gave rise to the reported monthly sales in the months of March
and May to September of 1995. She thus failed to discharge
the burden of proving that her income was from sources
outside the Philippines and exempt from the application of our
income tax law. Hence, the claim for tax refund should be
denied.
[CIR v. Baier-Nickel, GR No. 153793, 29 August 2006.]
23(E) A domestic corporation is taxable on all income
derived from sources within and without the Philippines;
and
Q: What are considered corporations for income tax
purposes?
* Section 22(B) of the 1997 Tax Code defines corporation in
this wise:
(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 engaging in petroleum, coal,
geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract
12
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.
** In the case of Obillos v. CIR, Jose Obillos, Sr. bequeathed
two lots located in Greenhills, San Juan to his four children
(here, the petitioners) to enable them to build their residences.
After more than a year, petitioners resold the lots to Walled
City Securities Corporation and Canda. Petitioners derived
from the sale a total profit of Php 134,341.88, or Php 33,584
for each of them. Petitioners treated each of their profits as a
capital gain and paid an income tax on thereof. Later, the
CIR issued an assessment against petitioners for deficiency
income tax on the ground that petitioners formed an
unregistered partnership or joint venture. Hence, the CIR
required petitioners to pay corporate income tax on the total
profit, in addition to individual income tax on each of their
shares. The CIR considered the share of the profits of each of
petitioners as a distributive dividend taxable in full (not a mere
capital gain of which is taxable). The Supreme Court
disagreed. The Court held that it was error to consider
petitioners as having formed a partnership. Petitioners were
merely co-owners. To consider them as partners would
obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint
venture by reason of that isolated transaction. Their original
purpose was to divide the lots for residential purposes. If later
on they found it not feasible to build their residences on the
lots because of the high cost of construction, then they had no
choice but to resell the same to dissolve the co-ownership.
The division of the profit was merely incidental to the
dissolution of the co-ownership which was in the nature of
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things a temporary state. It had to be terminated sooner or
later.
[Obillos v. CIR, GR No. L-68118, 29 October 1985.]
*** In Pascual v. CIR, Pascual and Dragon together bought
five parcels of land. In 1968, petitioners sold two parcels of
land to Marenir Development Corporation, while the remaining
three parcels of land were sold to Reyes and Samson in 1970.
Petitioners realized a net profit in the 1968 sale in the amount
of Php 165,224.70, while they realized a net profit of Php
60,000 in the 1970 sale. The corresponding capital gains taxes
were paid by petitioners in 1973 and 1974 by availing of the
tax amnesties granted in said years. Later, an assessment for
deficiency corporate income taxes for the years 1968 and
1970 was issued against petitioners. The CIR contended that
during said years, petitioners as co-owners in the real estate
transactions formed an unregistered partnership or joint
venture taxable as a corporation. The Supreme Court held that
a mere co-ownership existed between petitioners. There was
no adequate basis to support the proposition that petitioners
formed an unregistered partnership. 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. Hence, petitioners
could not have been liable for corporate income taxes.
[Pascual v. CIR, GR No. L-78133, 18 October 1988.]
**** In Afisco Insurance Corporation v. Court of Appeals,
petitioners were 41 non-life insurance corporations in the
Philippines. Upon issuance by them of machinery insurance
policies, petitioners entered into a Quota Share Reinsurance
13
Treaty and a Surplus Reinsurance Treaty with Munchener
Ruchversicherungs-Gesselschaft, a nonresident foreign
insurance corporation. The reinsurance treaties required
petitioners to form a pool. Accordingly, a pool composed of
petitioners was formed. The CIR issued an assessment
against petitioners for deficiency corporate income taxes on
the ground that the pool of machinery insurers was a
partnership taxable as a corporation. Petitioners protested the
assessment and belied the existence of a partnership. The
Supreme Court agreed with the CIR. It held that the following
unmistakably indicated a partnership or an association among
petitioners that was taxable as a corporation:
(1) The pool had a common fund consisting of money and
other valuables that were deposited in the name and
credit of the pool. This common fund paid for the
administration and operation expenses of the pool.
(2) The pool functioned through an executive board, which
resembled the board of directors of a corporation,
composed of one representative for each of petitioners.
(3) Petitioners shared in the profits derived from the
business ceded to the pool.
A partnership is formed when persons contract to devote to a
common purpose either money, property or labor with the
intention of dividing the profits among themselves. On the
other hand, an association implies associates who enter into a
joint enterprise for the transaction of business.
[Afisco Insurance Corporation v. Court of Appeals, GR No.
112675, 25 January 1999.]
23(F) 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.
Q: Give an example of a resident foreign corporation.
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* In CIR v. Tokyo Shipping Co., Ltd., respondent was a foreign
corporation represented in the Philippines by a domestic
corporation. It owned and operated tramper vessel M/V
Gardenia. In December 1980, NASUTRA chartered M/V
Gardenia to load 16,500 metric tons of raw sugar in the
Philippines. In the same month, the domestic corporation paid
the required income and common carriers taxes based on the
expected gross receipts of the vessel. Upon arriving at the
Guimaras Port of Iloilo, however, the vessel found no sugar for
loading. Claiming the prepayment of income and common
carriers taxes as erroneous since no receipt was realized from
the charter agreement, respondent instituted a claim for tax
refund or credit. Was respondent entitled to its claim? The
Supreme Court stated that a resident foreign corporation
engaged in the transport of cargo was liable for taxes
depending on the amount of income it derived from sources
within the Philippines. Before such a tax liability could be
enforced, the taxpayer must be shown to have earned income
sourced from the Philippines. The Supreme Court found that
respondent adduced sufficient evidence to prove that it derived
no receipt from its charter agreement with NASUTRA. The
tramper vessel M/V Gardenia arrived in Iloilo on 10 January
1981 but found no raw sugar to load and returned to Japan
without any cargo laden on board. Thus, respondent was
entitled to its claim for tax refund or credit of prepaid income
and common carriers taxes.
[CIR v. Tokyo Shipping Co., Ltd., GR No. 68252, 26 May
1995.]
Q: Give examples of nonresident foreign corporations.
* In CIR v. British Overseas Airways Corporation, BOAC was a
British Government-owned corporation engaged in the
14
international airline business. As such, it operated air
transportation service and sold transportation tickets over the
routes of the other airline members. For the years 1959 to
1971, BOAC had no landing rights for traffic purposes in the
Philippines. It did not carry passengers and/or cargo to and
from the Philippines, although from 1959 to 1971, BOAC
maintained a general sales agent in the country which was
responsible for selling BOAC tickets covering passengers and
cargoes. The CIR issued an assessment against BOAC for
deficiency income taxes for the years 1959 to 1971 for the sale
of tickets in the Philippines for air transportation. Was BOAC a
resident foreign corporation doing business in the Philippines?
The Supreme Court held affirmatively. BOAC, during the
periods covered by the subject assessments, maintained a
general sales agent in the Philippines which performed
activities in the exercise of the functions normally incident to,
and in progressive pursuit of, the purpose and object of its
organization as an international air carrier. BOAC was held to
be engaged in business in the Philippines through its local
agent during the period covered by the assessments.
There is no specific criterion as to what constitutes doing or
engaging in or transacting business. Each case must be *** In Marubeni Corporation v. CIR, Marubeni Corporation (the
adjudged in the light of its peculiar environmental
circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent,
the performance of acts or works or the exercise of some of
the functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose and object
of the business organization. In order that a foreign
corporation may be regarded as doing business in within a
State, there must be a continuity of conduct and intention to
establish a continuous business, such as the appointment of a
local agent, and not one of a temporary character.
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[CIR v. British Overseas Airways Corporation, GR Nos. L-
65773-74, 30 April 1987.]
** The issue in N.V. Reederij Amsterdam v. CIR was the
income tax liability of a foreign shipping corporation which
called on Philippine ports to load cargoes for foreign
destination on two occasions (in 1963 and 1964), and which
collected freight fees on these transactions. The Supreme
Court classified N.V. Reederij Amsterdam as a foreign
corporation not engaged in trade or business in the
Philippines. It did not have a branch office in the Philippines
and it made only two calls in Philippine ports in different years.
In order that a foreign corporation may be considered
engaged in trade or business, its business transactions must
be continuous. A casual business activity in the Philippines by
a foreign corporation, as in the present case, does not amount
to engaging in trade or business in the Philippines for income
tax purposes.
[N.V. Reederij Amsterdam v. CIR, GR No. L-46029, 23 June
1988.]
Head Office) was a Japanese corporation which established
a branch office (the Branch Office) in the Philippines. The
Head Office made equity investments in Atlantic Gulf and
Pacific Co. of Manila. In 1981, AG&P declared and paid cash
dividends to the Head Office. AG&P directly remitted the cash
dividends to the Head Office, net not only of the 10% final
dividend tax, but also of the withheld 15% profit remittance tax
(based on the remittable amount after deducting the 10% final
dividend tax). Later, the Head Office filed a claim for tax refund
or credit of alleged erroneously paid branch profit remittance
tax on the dividends remitted by AG&P to the Head Office. The
issue in this case revolved around the Head Offices tax
15
liability on its dividend income from Philippine sources. The
Supreme Court deemed it wise to first determine the
classification of the Head Office for income taxation purposes.
The Head Office contended that following the principal-agent
relationship theory, because the Branch Office was a resident
foreign corporation, the Head Office was likewise a resident
foreign corporation. Hence, the Head Office was subject only
to the 10% final dividend tax. Upon the other hand, the CIR
argued that the Head Office was a nonresident foreign
corporation which was neither subject to the 10% final
dividend tax nor the withheld 15% branch profit remittance tax.
Instead, the Head Office was subject to the 35% final
withholding tax on its gross income earned from Philippine
sources. The Supreme Court declared that in this particular
transaction, the Head Office was considered a nonresident
foreign corporation. The general rule is that a foreign
corporation is the same juridical entity as its branch office in
the Philippines. However, when the foreign corporation
transacts business in the Philippines independently of its
branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the
branch. Consequently, the taxpayer is the foreign corporation,
not the branch or the resident foreign corporation. Being a
nonresident foreign corporation with respect to the transaction
in question, generally, the Head Office must be taxed 35% of
its gross income from all sources within the Philippines.
However, based on now Section 28(B)(5)(b) of the 1997 Tax
Code and the relevant provision of the RP-Japan Tax Treaty
(i.e., the tax sparing rule), a discounted rate of 15% was given
to the Head Office on dividends received from AG&P.
[Marubeni Corporation v. CIR, GR No. 76573, 14 September
1989.]
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**** Philippine income taxation recognizes two kinds of foreign
corporations: (1) resident foreign corporation, and (2)
nonresident foreign corporation. What makes a foreign
corporation a resident of the Philippines? In State Investment
House, Inc. v. Citibank, N.A., respondents were foreign banks
with principal offices situated outside of the Philippines. Said
banks were licensed to do business in the country and did so
for many years, through branch offices or agencies. Were
these Philippine branches or units considered residents of the
Philippines pursuant to then prevailing Insolvency Law, or
were they residents of the state under the laws of which they
were respectively incorporated? The Supreme Court
acknowledged that the Insolvency Law itself did not contain a
definition of the term resident. The Court resorted to a
reading of other statutes, albeit of subsequent enactment and
effectivity, from which enlightening notions of the term could
be derived, e.g., then prevailing Tax Code, Offshore Banking
Law, and General Banking Act. Courts have held that a
domestic corporation is regarded as having a residence within
the state at any place where it is engaged in the particulars of
the corporate enterprise, and not only at its chief place or
home office; that a corporation may be domiciled in one state
and resident in another; its legal domicile in the state of its
creation presents no impediment to its residence in a real and
practical sense in the state of its business activities. Here, the
Supreme Court found that the foreign banks were residents of
the Philippines. It was not the grant of license to do business
in the country which made them residents of the Philippines.
The license merely gave them legitimacy to their business in
the Philippines. The necessary element in its signification is
locality of existence.
[NOTE: Residence is the place where a corporation operates
and transacts business, whereas domicile is the state of that
corporations formation or organization.]
16
[State Investment House, Inc. v. Citibank, N.A., GR Nos.
79926-27, 17 October 1991.]
CHAPTER III - TAX ON INDIVIDUALS
[NOTE: At present, the graduated individual income tax rates
shall be between 5-32%. [RA No. 9504 (2008).] On the other
hand, the regular corporate income tax rate is 30%. [RA No.
9337 (2005).]
Sec. 24, Income Tax Rates. -
24(A) Rates of Income Tax on Individual Citizen and
Individual Resident Alien of the Philippines. -
24(A)(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for
each taxable year from all sources within and without the
Philippines be every individual citizen of the Philippines
residing therein;
(b) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for
each taxable year from all sources within the Philippines
by an individual citizen of the Philippines who is residing
outside of the Philippines including overseas contract
workers referred to in Subsection(C) of Section 23 hereof;
and
(c) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for
each taxable year from all sources within the Philippines
by an individual alien who is a resident of the Philippines.
24(A)(2) Rates of Tax on Taxable Income of Individuals.
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The tax shall be computed in accordance with and at the
rates established in the following schedule:
Not over P10,000. 5%
Over P10,000 but not over P30,000 P500+10%
of the excess over P10,000
Over P30,000 but not over P70,000P2,500+15%
of the excess over P30,000
Over P70,000 but not over P140,000..P8,500+20%
of the excess over P70,000
Over P140,000 but not over
P250,000P22,500+25% of the excess over
P140,000
Over P250,000 but not over
P500,000P50,000+30% of the excess over
P250,000
Over P500,000 ..P125,000+32%
of the excess over P500,000
For married individuals, the husband and wife, subject to
the provision of Section 51(D) hereof, shall compute
separately their individual income tax based on their
respective total taxable income: Provided, that if any
income cannot be definitely attributed to or identified as
income exclusively earned or realized by either of the
spouses for the purpose of determining their respective
taxable income.
Provided, That minimum wage earners as defined in
Section 22(HH) of this Code shall be exempt from the
payment of income tax on their taxable income: Provided,
further, That the holiday pay, overtime pay, night shift
differential pay and hazard pay received by such
minimum wage earners shall likewise be exempt from
income tax. (As amended by RA No. 9504.)
17
Q: What is the difference in treatment between a co-owner and
a partner?
* In the case of Obillos v. CIR, Jose Obillos, Sr. bequeathed
two lots located in Greenhills, San Juan to his four children
(here, the petitioners) to enable them to build their residences.
After more than a year, petitioners resold the lots to Walled
City Securities Corporation and Canda. Petitioners derived
from the sale a total profit of Php 134,341.88, or Php 33,584
for each of them. Petitioners treated each of their profits as a
capital gain and paid an income tax on thereof. Later, the
CIR issued an assessment against petitioners for deficiency
income tax on the ground that petitioners formed an
unregistered partnership or joint venture. Hence, the CIR
required petitioners to pay corporate income tax on the total
profit, in addition to individual income tax on each of their
shares. The CIR considered the share of the profits of each of
petitioners as a distributive dividend taxable in full (not a mere
capital gain of which is taxable). The Supreme Court
disagreed. The Court held that it was error to consider
petitioners as having formed a partnership. Petitioners were
merely co-owners. To consider them as partners would
obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint
venture by reason of that isolated transaction. Their original
purpose was to divide the lots for residential purposes. If later
on they found it not feasible to build their residences on the
lots because of the high cost of construction, then they had no
choice but to resell the same to dissolve the co-ownership.
The division of the profit was merely incidental to the
dissolution of the co-ownership which was in the nature of
things a temporary state. It had to be terminated sooner or
later.
[Obillos v. CIR, GR No. L-68118, 29 October 1985.]
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
24(B) Rate of Tax on Certain Passive Income. -
24(B)(1) Interests, Royalties, Prizes, and Other Winnings. -
A final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest from any currency
bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar
arrangements; royalties, except on books, as well as
other literary works and musical compositions, which
shall be imposed a final tax of ten percent (10%); prizes
(except prizes amounting to Ten thousand pesos
(P10,000) or less which shall be subject to tax under
Subsection (A) of Section 24; and other winnings (except
Philippine Charity Sweepstakes and Lotto winnings),
derived from sources within the Philippines: Provided,
however, That interest income received by an individual
taxpayer (except a nonresident individual) from a
depository bank under the expanded foreign currency
deposit system shall be subject to a final income tax at
the rate of seven and one-half percent (7 1/2%) of such
interest income: Provided, further, That interest income
from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall
be exempt from the tax imposed under this Subsection:
Provided, finally, That should the holder of the certificate
pre-terminate the deposit or investment before the fifth
(5th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining
maturity thereof:
18
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%
Q: Explain the concept of final withholding tax.
* In China Banking Corporation v. CIR, Chinabank paid a
certain sum as gross receipts tax on its income from interests
on loan, investments, commissions, services, collection
charges, foreign exchange profits and other operating
earnings during the second quarter of 1994. Does the 20%
final withholding tax on a banks passive interest income form
part of its taxable gross receipts in computing the gross
receipts tax? The CIR contended that the term gross receipts
meant the entire income or receipt, without any deduction. The
Supreme Court held that the amount of interest income
withheld in payment of the 20% final withholding tax formed
part of Chinabanks gross receipts in computing the gross
receipts tax on banks. As commonly understood, the term
gross receipts means the entire receipts without any
deduction. Deducting any amount from the gross receipts
changes the result, and the meaning, to net receipts. Any
deduction from gross receipts is inconsistent with a law that
mandates a tax on gross receipts, unless the law itself makes
an exception.
Furthermore: Unless otherwise provided by law, ownership is
essential in determining whether interest income forms part of
taxable gross receipts. Ownership is the circumstance that
makes interest income part of the taxable gross receipts of the
taxpayer. When the taxpayer acquires ownership of money
representing interest, the money constitutes income or receipt
of the taxpayer. Here, the amount constituting the 20% final
withholding tax, being originally owned by Chinabank as part
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
of its interest income, should form part of its taxable gross
receipts subject to gross receipts tax.
[China Banking Corporation v. CIR, GR Nos. 146749, 10 June
2003.]
** Does the 20% final withholding tax on a banks passive
interest income form part of its taxable gross receipts in
computing the gross receipts tax? This was the issue resolved
in CIR v. Solidbank Corporation. In this case, Solidbank
sought the refund of allegedly overpaid gross receipts tax for
the year 1995. The CIR opposed on the ground that although
the 20% final withholding tax on Solidbanks interest income
was not actually received because it was remitted directly to
the government, the fact that the amount redounded to
Solidbanks benefit made it part of the taxable gross receipts in
computing the 5% gross receipts tax. The Supreme Court
adhered to the CIRs view and ruled that the amount of interest
income withheld in payment of the 20% final withholding tax
formed part of gross receipts in computing for the gross
receipts tax on banks. The High Court said that as a bank,
Solidbank was covered by both gross receipts tax and final
withholding tax. However, the Supreme Court took the
opportunity to differentiate gross receipts tax, which is a
percentage tax, from final withholding tax, which is an income
tax.
A percentage tax is a national tax measured by a certain
percentage of the gross selling price or gross value in money
of goods sold, bartered or imported; or of the gross receipts or
earnings derived by ay person engaged in the sale of services.
It is not subject to withholding. [NOTE: The subject matter of
gross receipts tax is the privilege of engaging in the business
of banking.]
On the other han, [a]n income tax, on the other hand, is a
national tax imposed on the net or the gross income realized in
19
a taxable year. It is subject to withholding. [NOTE: The
subject matter of final withholding tax is the passive income
generated in the form of interest on deposits and yield on
deposit substitutes.]
[CIR v. Solidbank Corporation, GR No. 148191, 25 November
2003.]
*** What does the term gross receipts include? CIR v. Bank
of Commerce held that the banks interest income subject to
final tax included those actually, physically, and constructively
received. [The surrounding facts of this case are similar to
those of the immediately preceding case.] Actual receipt of
interest income is not limited to physical receipt. Actual receipt
may either be physical receipt or constructive receipt. When
the depositary bank withholds the final tax to pay the tax
liability of the lending bank, there is prior to the withholding a
constructive receipt by the lending bank of the amount
withheld. From the amount constructively received by the
lending bank, the depositary bank deducts the final withholding
tax and remits it to the government for the account of the
lending bank. Thus, the interest income actually received by
the lending bank, both physically and constructively, is the net
interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and
necessarily implies that the amount of the tax withheld comes
from the income earned by the taxpayer. Since the amount of
the tax withheld constitutes income earned by the taxpayer,
then that amount manifestly forms part of the taxpayers gross
receipt. Because the amount withheld belongs to the taxpayer,
he can transfer its ownership to the government in payment of
his tax liability. The amount withheld indubitabley comes from
income of the taxpayer, and thus forms part of his gross
receipts.
[CIR v. Bank of Commerce, GR No. 149636, 8 June 2005.]
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
**** Are gross receipts the same as gross revenues? In
Ericsson Telecommunications, Inc. v. City of Pasig, the
substantive issue was whether the local business tax imposed
by the City of Pasig should be based on gross receipts or
gross revenues. Respondent assessed deficiency local
business taxes against petitioner based on the latters gross
revenues as reported in its financial statements, arguing that
gross receipts is synonymous with gross earnings/revenue,
which, in turn, included uncollected earnings. Petitioner, in
contrast, contended that only the portion of the revenues
which were actually and constructively received should be
considered in determining its tax base. According to the
Supreme Court, the local business tax should be computed
based on gross receipts. Gross receipts include money or its
equivalent actually or constructively received in consideration
of services rendered or articles sold, exchanged or leased,
whether actual or constructive. On the other hand, gross
revenue covers money or its equivalent actually or
constructively received, including the value of services
rendered or articles sold, exchanged or leased, the
payment of which is yet to be received.
[Ericsson Telecommunications, Inc. v. City of Pasig, GR No.
176667, 22 November 2007.]
24(B)(2) Cash and/or Property Dividends. - A final tax at
the following rates shall be imposed upon the cash and/or
property dividends actually or constructively received by
an individual from a domestic corporation or from a joint
stock company, insurance or mutual fund companies and
regional operating headquarters of multinational
companies, or on the share of an individual in the
distributable net income after tax of a partnership (except
a general professional partnership) of which he is a
20
partner, or on the share of an individual in the net income
after tax of an association, a joint account, or a joint
venture or consortium taxable as a corporation of which
he is a member or co-venturer:
Six percent (6%) beginning January 1, 1998;
Eight percent (8%) beginning January 1, 1999;
Ten percent (10% beginning January 1, 2000.
Provided, however, That the tax on dividends shall apply
only on income earned on or after January 1, 1998.
Income forming part of retained earnings as of December
31, 1997 shall not, even if declared or distributed on or
after January 1, 1998, be subject to this tax.
24(C) Capital Gains from Sale of Shares of Stock not
Traded in the Stock Exchange. - The provisions of Section
39(B) notwithstanding, a final tax at the rates prescribed
below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a
domestic corporation, except shares sold, or disposed of
through the stock exchange.
Not over P100,000.. 5% his intention to avail of the tax exemption herein
On any amount in excess of P100,000 10% mentioned: Provided, still further, That the said tax
24(D) Capital Gains from Sale of Real Property. -
24(D)(1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code,
whichever is higher, is hereby imposed upon capital
gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in
the Philippines, classified as capital assets, including
pacto de retro sales and other forms of conditional sales,
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
by individuals, including estates and trusts: Provided,
That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of
its political subdivisions or agencies or to government-
owned or controlled corporations shall be determined
either under Section 24 (A) or under this Subsection, at
the option of the taxpayer. (2) Exception. - The provisions
of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been
realized from the sale or disposition of their principal
residence by natural persons, the proceeds of which is
fully utilized in acquiring or constructing a new principal
residence within eighteen (18) calendar months from the
date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection:
Provided, That the historical cost or adjusted basis of the
real property sold or disposed shall be carried over to the
new principal residence built or acquired: Provided,
further, That the Commissioner shall have been duly
notified by the taxpayer within thirty (30) days from the
date of sale or disposition through a prescribed return of
exemption can only be availed of once every ten (10)
years: Provided, finally, that if there is no full utilization of
the proceeds of sale or disposition, the portion of the gain
presumed to have been realized from the sale or
disposition shall be subject to capital gains tax. For this
purpose, the gross selling price or fair market value at the
time of sale, whichever is higher, shall be multiplied by a
fraction which the unutilized amount bears to the gross
selling price in order to determine the taxable portion and
the tax prescribed under paragraph (1) of this Subsection
shall be imposed thereon.
21

Q: Explain the relevance of payment of capital gains tax in the
sale of real property.
* In the case of Chua v. Court of Appeals, the Supreme Court
classified the agreement between Valdes-Choy as the seller
and Chua as the buyer as a contract to sell (not a contract of
sale) over a property situated in San Lorenzo Village, Makati
City. Ownership over the subject property was retained by
Valdes-Choy and was not to pass to Chua until full payment of
the purchase price. On the topic of payment of capital gains
tax, the High Court had this to say: The buyer has more
interest in having the capital gains tax paid immediately since
this is a pre-requisite to the issuance of a new Torrens title in
his name. Nevertheless, as far as the government is
concerned, the capital gains tax remains a liability of the seller
since it is a tax on the sellers gain from the sale of the real
estate. Payment of the capital gains tax, however, is not a pre-
requisite to the transfer of ownership to the buyer. The transfer
of ownership takes effect upon the signing and notarization of
the deed of absolute sale.
[Chua v. Court of Appeals, GR No. 119255, 9 April 2003.]
** In Torcuator v. Bernabe, the Supreme Court likewise
characterized as a contract to sell the agreement between the
Bernabe Spouses (seller) and the Torcuator Spouses (buyer)
over a vacant lot in Ayala Alabang Village. The Court cited the
following reasons: (1) the agreement imposed upon the
Torcuator Spouses the obligation to fully pay the agreed
purchase price for the property; (2) the parties clearly intended
the construction of a residential house on the property as
another suspensive condition which had to be fulfilled; and (3)
there was neither actual nor constructive delivery of the
property to the Torcuator Spouses. The Supreme Court further
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
ruled that the issue of whether the agreement violated the law
as it deprived the government of capital gains tax is wholly
irrelevant. Capital gains taxes, after all, are only imposed on
gains presumed to have been realized from sales, exchanges
or dispositions of property. Having declared that the contract to
sell in this case was aborted by [the Torcuator Spouses]
failure to comply with the twin suspensive conditions of full
payment and construction of a residence, the obligation to pay
taxes never arose.
[Torcuator v. Bernabe, GR No. 134219, 8 June 2005.]
Sec. 25, Tax on Nonresident Alien Individual. -
25(A) Nonresident Alien Engaged in trade or Business
Within the Philippines. -
25(A)(1) In General. - A nonresident alien individual
engaged in trade or business in the Philippines shall be
subject to an income tax in the same manner as an
individual citizen and a resident alien individual, on
taxable income received from all sources within the
Philippines. A nonresident alien individual who shall
come to the Philippines and stay therein for an aggregate
period of more than one hundred eighty (180) days during
any calendar year shall be deemed a 'nonresident alien
doing business in the Philippines'. Section 22 (G) of this
Code notwithstanding.
25(A)(2) Cash and/or Property Dividends from a Domestic
Corporation or Joint Stock Company, or Insurance or
Mutual Fund Company or Regional Operating
Headquarter or Multinational Company, or Share in the
Distributable Net Income of a Partnership (Except a
General Professional Partnership), Joint Account, Joint
Venture Taxable as a Corporation or Association.,
Interests, Royalties, Prizes, and Other Winnings. - Cash
and/or property dividends from a domestic corporation,
22
or from a joint stock company, or from an insurance or
mutual fund company or from a regional operating
headquarter of multinational company, or the share of a
nonresident alien individual in the distributable net
income after tax of a partnership (except a general
professional partnership) of which he is a partner, or the
share of a nonresident alien individual in the net income
after tax of an association, a joint account, or a joint
venture taxable as a corporation of which he is a member
or a co-venturer; interests; royalties (in any form); and
prizes (except prizes amounting to Ten thousand pesos
(P10,000) or less which shall be subject to tax under
Subsection (B)(1) of Section 24) and other winnings
(except Philippine Charity Sweepstakes and Lotto
winnings); shall be subject to an income tax of twenty
percent (20%) on the total amount thereof: Provided,
however, that royalties on books as well as other literary
works, and royalties on musical compositions shall be
subject to a final tax of ten percent (10%) on the total
amount thereof: Provided, further, That cinematographic
films and similar works shall be subject to the tax
provided under Section 28 of this Code: Provided,
furthermore, That interest income from long-term deposit
or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced
by certificates in such form prescribed by the Bangko
Sentral ng Pilipinas (BSP) shall be exempt from the tax
imposed under this Subsection: Provided, finally, that
should the holder of the certificate pre-terminate the
deposit or investment before the fifth (5th) year, a final tax
shall be imposed on the entire income and shall be
deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
25(A)(3) Capital Gains. - Capital gains realized from sale,
barter or exchange of shares of stock in domestic
corporations not traded through the local stock
exchange, and real properties shall be subject to the tax
prescribed under Subsections (C) and (D) of Section 24.
25(B) Nonresident Alien Individual Not Engaged in Trade
or Business Within the Philippines. - There shall be
levied, collected and paid for each taxable year upon the
entire income received from all sources within the
Philippines by every nonresident alien individual not
engaged in trade or business within the Philippines as
interest, cash and/or property dividends, rents, salaries,
wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or determinable
annual or periodic or casual gains, profits, and income,
and capital gains, a tax equal to twenty-five percent (25%)
of such income. Capital gains realized by a nonresident
alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock in any
domestic corporation and real property shall be subject to
the income tax prescribed under Subsections (C) and (D)
of Section 24.
25(C) Alien Individual Employed by Regional or Area
Headquarters and Regional Operating Headquarters of
Multinational Companies. - There shall be levied,
collected and paid for each taxable year upon the gross
income received by every alien individual employed by
regional or area headquarters and regional operating
headquarters established in the Philippines by
multinational companies as salaries, wages, annuities,
23
compensation, remuneration and other emoluments, such
as honoraria and allowances, from such regional or area
headquarters and regional operating headquarters, a tax
equal to fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment shall
apply to Filipinos employed and occupying the same
position as those of aliens employed by these
multinational companies. For purposes of this Chapter,
the term 'multinational company' means a foreign firm or
entity engaged in international trade with affiliates or
subsidiaries or branch offices in the Asia-Pacific Region
and other foreign markets.
25(D) Alien Individual Employed by Offshore Banking
Units. - There shall be levied, collected and paid for each
taxable year upon the gross income received by every
alien individual employed by offshore banking units
established in the Philippines as salaries, wages,
annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, from
such off-shore banking units, a tax equal to fifteen
percent (15%) of such gross income: Provided, however,
That the same tax treatment shall apply to Filipinos
employed and occupying the same positions as those of
aliens employed by these offshore banking units.
25(E) Alien Individual Employed by Petroleum Service
Contractor and Subcontractor. - An Alien individual who
is a permanent resident of a foreign country but who is
employed and assigned in the Philippines by a foreign
service contractor or by a foreign service subcontractor
engaged in petroleum operations in the Philippines shall
be liable to a tax of fifteen percent (15%) of the salaries,
wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, received
from such contractor or subcontractor: Provided,
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
however, That the same tax treatment shall apply to a
Filipino employed and occupying the same position as an
alien employed by petroleum service contractor and
subcontractor.
Any income earned from all other sources within the
Philippines by the alien employees referred to under
Subsections (C), (D) and (E) hereof shall be subject to the
pertinent income tax, as the case may be, imposed under
this Code.
Sec. 26, Tax Liability of Members of General Professional
Partnerships. - A general professional partnership as
such shall not be subject to the income tax imposed
under this Chapter. Persons engaging in business as
partners in a general professional partnership shall be
liable for income tax only in their separate and individual
capacities.
For purposes of computing the distributive share of the
partners, the net income of the partnership shall be
computed in the same manner as a corporation.
Each partner shall report as gross income his distributive
share, actually or constructively received, in the net
income of the partnership.
Q: How are partners of a general professional partnership
taxed?
* The case of Tan v. del Rosario dealt with the constitutionality
of RA No. 7496, also commonly known as the Simplified Net
Income Taxation Scheme (SNIT), amending certain provisions
of the old Tax Code. One argument raised by petitioners was
that the law now taxed single proprietorships and
professionals differently from the manner it imposed tax on
corporations and partnerships. Another argument was that
24
general professional partnerships should not be treated
differently from ordinary business partnerships. The Supreme
Court held that the classification made between single
proprietorships and professionals on the one hand, and
corporations and partnerships on the other, was valid.
Furthermore, [w]hat may instead be perceived to be apparent
from the amendatory law is the legislative intent to increasingly
shift the income tax system towards the schedular approach in
the income taxation of individual taxpayers and to maintain, by
and large, the present global treatment on taxable
corporations. [NOTE: See footnotes 2 and 3 of the decision.
Schedular approach is defined as a system employed where
the income tax treatment varies and made to depend on the
kind or category of taxable income of the taxpayer. Global
approach, on the other hand, refers to a system where the tax
treatment view indifferently the tax base and generally treats in
common all categories of taxable income of the taxpayer.]
On the topic of partnerships, the Supreme Court confirmed
that general professional partnerships and ordinary business
partnerships are treated differently for purposes of income
taxation. In general professional partnerships, 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.
[Tan v. del Rosario, GR Nos. 109289 and 109446, 3 October
1994.]
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
CHAPTER IV - TAX ON CORPORATIONS
Q: Is passive income considered in the computation of taxable
income?
* A corporate income tax liability has two components: (1) the
general rate of 30%, and (2) the specific final rates for certain
passive income. Our Tax Code imposes final taxes on certain
passive income (withheld at source) as follows:
(a) 20% on the interests on currency bank deposits, other
monetary benefits from deposit substitutes, trust funds
and similar arrangements, and royalties derived from
sources within the Philippines;
(b) 5% / 10% on the net capital gains realized from the
sale of shares of stock in a domestic corporation not
traded in the stock exchange;
(c) 10% on income derived by a depositary bank under the
expanded foreign currency deposit system; and
(d) 6% on the gain presumed to be realized on the sale or
disposition of lands and buildings treated as capital
assets.
In CIR v. Philippine Airlines, Inc., in dispute was PALs
franchise which contained the following provisos: (1) as
consideration for the franchise, PAL is liable to pay either (a)
its basic corporate income tax based on its net taxable income
in accordance with the Tax Code, or (b) a franchise tax of 2%
based on its gross revenues, whichever is lower; and (2) the
tax paid shall be in lieu of all other taxes imposed by all
government entities in the country.
One of the questions answered in the case was whether
gross income included those items constituting passive
income. Gross income means income derived from whatever
source, including compensation for services, the conduct of
25
trade or business or the exercise of a profession, dealings in
property, interests, rents, royalties, dividends, annuities, prizes
and winnings, pensions, and a partners distributive share in
the net income of a general professional partnership. The
Supreme Court held that: The definition of gross income is
broad enough to include all passive incomes subject to
specific rates or final taxes. However, since these passive
incomes are already subject to different rates and taxed finally
at source, they are no longer included in the computation of
gross income, which determines taxable income.
[CIR v. Philippine Airlines, Inc., GR No. 160528, 9 October
2006.]
[NOTE: At present, the graduated individual income tax rates
shall be between 5-32%. [RA No. 9504 (2008).] On the other
hand, the regular corporate income tax rate is 30%. [RA No.
9337 (2005).]
Sec. 27, Rates of Income tax on Domestic Corporations. -
27(A) In General. - Except as otherwise provided in this
Code, an income tax of thirty-five percent (35%) is hereby
imposed upon the taxable income derived during each
taxable year from all sources within and without the
Philippines by every corporation, as defined in Section
22(B) of this Code and taxable under this Title as a
corporation, organized in, or existing under the laws of
the Philippines: Provided, That effective January 1, 2009,
the rate of income tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year
accounting period, the taxable income shall be computed
without regard to the specific date when specific sales,
purchases and other transactions occur. Their income
and expenses for the fiscal year shall be deemed to have
been earned and spent equally for each month of the
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
period.
The corporate income tax rate shall be applied on the
amount computed by multiplying the number of months
covered by the new rate within the fiscal year by the
taxable income of the corporation for the period, divided
by twelve.
Provided, further, That the President, upon the
recommendation of the Secretary of Finance, may
effective January 1, 2000, allow corporations the option to
be taxed at fifteen percent (15%) of gross income as
defined herein, after the following conditions have been
satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross
National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection
to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public
Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be
available only to firms whose ratio of cost of sales to
gross sales or receipts from all sources does not exceed
fifty-five percent (55%).
The election of the gross income tax option by the
corporation shall be irrevocable for three (3) consecutive
taxable years during which the corporation is qualified
under the scheme.
For purposes of this Section, the term 'gross income'
derived from business shall be equivalent to gross sales
less sales returns, discounts and allowances and cost of
goods sold. "Cost of goods sold' shall include all
business expenses directly incurred to produce the
merchandise to bring them to their present location and
use.
26
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 materials used,
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 and discounts. (As amended by RA No. 9337.)
27(B) Proprietary Educational Institutions and Hospitals. -
Proprietary educational institutions and hospitals which
are nonprofit shall pay a tax of ten percent (10%) on their
taxable income except those covered by Subsection (D)
hereof: Provided, that if the gross income from unrelated
trade, business or other activity exceeds fifty percent
(50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the
tax prescribed in Subsection (A) hereof shall be imposed
on the entire taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or other
activity' means any trade, business or other activity, the
conduct of which is not substantially related to the
exercise or performance by such educational institution
or hospital of its primary purpose or function. A
'Proprietary educational institution' is any private school
maintained and administered by private individuals or
groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with existing
laws and regulations.
27(C) Government-owned or Controlled-Corporations,
Agencies or Instrumentalities. - The provisions of existing
special or general laws to the contrary notwithstanding,
all corporations, agencies, or instrumentalities owned or
controlled by the Government, except the Government
Service Insurance System (GSIS), the Social Security
System (SSS), the Philippine Health Insurance
Corporation (PHIC), the local water districts (LWD) and
the Philippine Charity Sweepstakes Office (PCSO), shall
pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or
associations engaged in s similar business, industry, or
activity. (As amended by RA No. 10026.)
Q: What are government owned or controlled corporations
(GOCCs)? What are government instrumentalities?
* The case of Manila International Airport Authority v. City of
Pasay dealt with the issue of whether the NAIA Pasay
properties of MIAA were exempt from real property tax under
the 1991 LGC. However, the decision is relevant for purposes
of differentiating between a government owned or controlled
corporation and a government instrumentality. According to
the Supreme Court, a government owned or controlled
corporation must be organized as a stock or non-stock
corporation. MIAA was not a stock corporation because it did
not have stockholders. MIAA was not a non-stock corporation
since it did not have members. The High Court classified MIAA
as a government instrumentality vested with corporate powers
27
to perform efficiently its governmental functions. When the
law vests in a government instrumentality corporate powers,
the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-
stock corporation, it remains a government instrumentality
exercising not only governmental but also corporate powers.
Thus, MIAA exercises the governmental powers of eminent
domain, police authority and the levying of fees and charges.
At the same time, MIAA exercises all the powers of a
corporation under the Corporation Code, insofar as these
powers are not inconsistent with the provisions of this
Executive Order.
[Manila International Airport Authority v. City of Pasay, GR No.
163072, 2 April 2009.]
27(D) Rates of Tax on Certain Passive Incomes. -
27(D)(1) Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes and from Trust
Funds and Similar Arrangements, and Royalties. - A final
tax at the rate of twenty percent (20%) is hereby imposed
upon the amount of interest on currency bank deposit
and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements received by domestic corporations, and
royalties, derived from sources within the Philippines:
Provided, however, That interest income derived by a
domestic corporation from a depository bank under the
expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-
half percent (7 1/2%) of such interest income.
27(D)(2) Capital Gains from the Sale of Shares of Stock
Not Traded in the Stock Exchange. - A final tax at the
rates prescribed below shall be imposed on net capital
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
gains realized during the taxable year from the sale,
exchange or other disposition of shares of stock in a
domestic corporation except shares sold or disposed of
through the stock exchange:
Not over P100,000. 5%
Amount in excess of P100,000.. 10%
Q: How is capital gains tax computed in sales of shares of
stock?
* In Compagnie Financiere Sucres et Denress v. CIR,
petitioner was a nonresident foreign corporation which sold its
shareholding in the Makati Shangri-La Hotel to Kerry Holdings,
Ltd. Petitioner alleged that the transfer of deposits on stock
subscriptions was not a sale/assignment of shares of stock
subject to documentary stamp tax and capital gains tax. The
Supreme Court disagreed. In the Capital Gains Tax Return on
Stock Transaction, which petitioner filed with the Bureau of
Internal Revenue, the acquisition cost of the shares it sold,
including the stock subscription is Php 69,143,630.28. The
transfer price to Kerry Holdings, Ltd. is Php 70,332,869.92.
Obviously, petitioner has a net gain in the amount of Php
1,189,239.64. As the CTA aptly ruled, a tax on the profit of
sale on net capital gain is the very essence of the net capital
gains tax law. To hold otherwise will ineluctably deprive the
government of its due and unduly set free from tax liability
persons who profited from said transactions.
[Compagnie Financiere Sucres et Denrees v. CIR, GR No.
133834, 28 August 2006.]
27(D)(3) Tax on Income Derived under the Expanded
Foreign Currency Deposit System. - Income derived by a
depository bank under the expanded foreign currency
deposit system from foreign currency transactions with
28
nonresidents, offshore banking units in the Philippines,
local commercial banks, including branches of foreign
banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign currency
depository system units and other depository banks
under the expanded foreign currency deposit system
shall be exempt from all taxes, except net income from
such transactions as may be specified by the Secretary of
Finance, upon recommendation by the Monetary Board to
be subject to the regular income tax payable by banks;
Provided, however, That interest income from foreign
currency loans granted by such depository banks under
said expanded foreign system to residents other than
offshore banking units in the Philippines or other
depository banks under the expanded system, shall be
subject to a final income tax at the rate of ten percent
(10%).
Any income of nonresidents, whether individuals or
corporations, from transactions with depository banks
under the expanded system shall be exempt from income
tax. (As amended by RA No. 9294.)
27(D)(4) Intercorporate Dividends. - Dividends received by
a domestic corporation from another domestic
corporation shall not be subject to tax.
27(D)(5) Capital Gains Realized from the Sale, Exchange
or Disposition of Lands and/or Buildings. - A final tax of
six percent (6%) is hereby imposed on the gain presumed
to have been realized on the sale, exchange or disposition
of lands and/or buildings which are not actually used in
the business of a corporation and are treated as capital
assets, based on the gross selling price of fair market
value as determined in accordance with Section 6(E) of
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this Code, whichever is higher, of such lands and/or
buildings.
Q: How is capital gains tax computed in sales of real property?
* In Vive Eagle Land, Inc. v. Court of Appeals, the Flores
Spouses were owners of two parcels of land situated in
Cubao, Quezon City. In April 1988, the Flores Spouses sold
the parcels of land to Tatic Square International Corporation
(the First Sale). A few days later, TATIC sold the properties
to Vive Eagle Land, Inc. (the Second Sale). In November
1988, VELI sold one of the parcels of land to Genuino Ice Co.,
Inc. (the Third Sale). GICI demanded that VELI pay to the
BIR the capital gains tax amounting to Php 285,000. VELI
rejected GICIs demand. Hence, GICI filed a complaint against
VELI for specific performance and damages. GICI alleged
among others that VELI failed to pay the capital gains tax and
other assessments due to effectuate the transfer of the titles of
the property to and in GICIs name. VELI argued that it was
exempt from payment of capital gains tax, and that the Flores
Spouses were liable for the payment of such tax. The
Supreme Court pointed out that the Third Sale occurred in
November 1988. At that time, it was the 1977 Tax Code, as
amended, which was in effect. Under the old Tax Code, VELI,
being a corporation, was not obliged to pay capital gains tax.
[Only individual taxpayers were then required to pay capital
gains tax on sale of real property.] However, petitioner VELI,
as seller, should have included in its ordinary income tax
return, whatever gain or loss it incurred with respect to the sale
of the property in dispute, pursuant to Section 24(a) of the
1977 NIRC, as amended.
[Vive Eagle Land, Inc. v. Court of Appeals, GR No. 150308, 26
November 2004.]
29

27(E) Minimum Corporate Income Tax on Domestic
Corporations. -
27(E)(1) Imposition of Tax. - A minimum corporate income
tax of two percent (2%) of the gross income as of the end
of the taxable year, as defined herein, is hereby imposed
on a corporation taxable under this Title, beginning on the
fourth taxable year immediately following the year in
which such corporation commenced its business
operations, when the minimum income tax is greater than
the tax computed under Subsection (A) of this Section for
the taxable year.
27(E)(2) Carry Forward of Excess Minimum Tax. - Any
excess of the minimum corporate income tax over the
normal income tax as computed under Subsection (A) of
this Section shall be carried forward and credited against
the normal income tax for the three (3) immediately
succeeding taxable years.
27(E)(3) 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.
27(E)(4) Gross Income Defined. - For purposes of
applying the minimum corporate income tax provided
under Subsection (E) hereof, the term 'gross income' shall
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold'
shall 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 materials used,
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
services' shall mean all direct costs and expenses
necessarily incurred to provide the services required by
the customers and clients including (A) salaries and
employee benefits of personnel, consultants and
specialists directly rendering the service and (B) 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.
Q: What is the minimum corporate income tax?
* In Chamber of Real Estate and Builders Associations, Inc. v.
Romulo, petitioner was an association of real estate
developers and builders in the country. It assailed the validity
30
of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of
real properties classified as ordinary assets. On the topic of
MCIT, petitioner argued that MCIT violated the due process
clause because it levied income tax even if there was no
realized gain. In effect, MCIT was a tax on capital. According
to petitioner, income tax could only be imposed on income, not
capital. The Supreme Court took the opportunity to explain the
concept and rationale of MCIT as follows: MCIT on domestic
corporations came about as a result of the perceived
inadequacy of the self-assessment system in capturing the
true income of corporations. Congress intended to put a stop
to the practice of corporations which, while having large turn-
overs, report minimal or negative net income resulting in
minimal or zero income taxes year in and year out, through
under-declaration of income or over-deduction of expenses
otherwise called tax shelters. In other words, MCIT serves to
put a cap on such tax shelters.
On petitioners argument that the imposition of MCIT
amounted to deprivation of property without due process of
law, the Supreme Court held that MCIT is imposed on gross
income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods and
other direct expenses from gross sale. Clearly, the capital is
not being taxed. Otherwise stated, MCIT is a tax on income.
Furthermore, MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the
normal income tax is suspiciously low. The MCIT merely
approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporations gross income.
[Chamber of Real Estate and Builders Associations, Inc. v.
Romulo, GR No. 160756, 9 March 2010.]
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
Sec. 28, Rates of Income Tax on Foreign Corporations. -
28(A) Tax on Resident Foreign Corporations. -
28(A)(1) In General. - Except as otherwise provided in this
Code, a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an
income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from
all sources within the Philippines: Provided, That effective
January 1, 2009, the rate of income tax shall be thirty
percent (30%).
In the case of corporations adopting the fiscal-year
accounting period, the taxable income shall be computed
without regard to the specific date when sales, purchases
and other transactions occur. Their income and expenses
for the fiscal year shall be deemed to have been earned
and spent equally for each month of the period.
The corporate income tax rate shall be applied on the
amount computed by multiplying the number of months
covered by the new rate within the fiscal year by the
taxable income of the corporation for the period, divided
by twelve.
Provided, however, That a resident foreign corporation
shall be granted the option to be taxed at fifteen percent
(15%) on gross income under the same conditions, as
provided in Section 27 (A). (As amended by RA No. 9337.)
28(A)(2) Minimum Corporate Income Tax on Resident
Foreign Corporations. - A minimum corporate income tax
of two percent (2%) of gross income, as prescribed under
Section 27 (E) of this Code, shall be imposed, under the
same conditions, on a resident foreign corporation
taxable under paragraph (1) of this Subsection.
31
28(A)(3) International Carrier. - An international carrier
doing business in the Philippines shall pay a tax of two
and one-half percent (2 1/2%) on its 'Gross Philippine
Billings' as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings'
refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged
and/or indorsed to another international airline form part
of the Gross Philippine Billings if the passenger boards a
plane in a port or point in the Philippines: Provided,
further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place
at any port outside the Philippines on another airline, only
the aliquot portion of the cost of the ticket corresponding
to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine
Billings.
(b) International Shipping. - 'Gross Philippine Billings'
means gross revenue whether for passenger, cargo or
mail originating from the Philippines up to final
destination, regardless of the place of sale or payments of
the passage or freight documents.
Q: Explain the concept of gross Philippine billings.
* In CIR v. British Overseas Airways Corporation, BOAC was a
British Government-owned corporation engaged in the
international airline business. As such, it operated air
transportation service and sold transportation tickets over the
routes of the other airline members. For the years 1959 to
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
1971, BOAC had no landing rights for traffic purposes in the
Philippines. It did not carry passengers and/or cargo to and
from the Philippines, although from 1959 to 1971, BOAC
maintained a general sales agent in the country which was
responsible for selling BOAC tickets covering passengers and
cargoes. The CIR issued an assessment against BOAC for
deficiency income taxes for the years 1959 to 1971 for the sale
of tickets in the Philippines for air transportation. Was BOAC a
resident foreign corporation doing business in the Philippines?
The Supreme Court held affirmatively. BOAC, during the
periods covered by the subject assessments, maintained a
general sales agent in the Philippines which performed
activities in the exercise of the functions normally incident to,
and in progressive pursuit of, the purpose and object of its
organization as an international air carrier. BOAC was held to
be engaged in business in the Philippines through its local
agent during the period covered by the assessments.
Did BOACs income from the sale of tickets in the Philippines
come from sources within the Philippines? The source of an
income is the property, activity or service that produced the
income. The Supreme Court stated that in BOACs case, the
sale of tickets in the Philippines was the activity that produced
the income. The tickets exchanged hands here and payment
for fares were also made here in Philippine currency. The situs
of the source of payments is the Philippines. The flow of
wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of
wealth should share the burden of supporting the
government.
Additionally, the Supreme Court differentiated between gross
Philippine billings tax and common carriers tax. Gross
Philippine billings tax is an income tax, i.e., a direct tax on the
income of persons and other entities of whatever kind and in
32
whatever form derived from any source. On the other hand,
common carriers tax is an excise tax, that is, a tax on the
activity of transporting, conveying or removing passengers and
cargo from one place to another.
[CIR v. British Overseas Airways Corporation, GR Nos. L-
65773-74, 30 April 1987.]
28(A)(4) Offshore Banking Units. - The provisions of any
law to the contrary notwithstanding, income derived by
offshore banking units authorized by the Bangko Sentral
ng Pilipinas (BSP), from foreign currency transactions
with nonresidents, other offshore banking units, local
commercial banks, including branches of foreign banks
that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with offshore banking units
shall be exempt from all taxes except net income from
such transactions as may be specified by the Secretary of
Finance, upon recommendation of the Monetary Board,
which shall be subject to the regular income tax payable
by banks; Provided, however, That any interest income
derived from foreign currency loans granted to residents,
other than offshore banking units or local commercial
banks, including local branches of foreign banks that may
be authorized by the BSP to transact business with
offshore banking units, shall be subject only to a final tax
at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or
corporations, from transactions with said offshore
banking units shall be exempt from income tax. (As
amended by RA No. 9294.)
28(A)(5) Tax on Branch Profits Remittances. - Any profit
remitted by a branch to its head office shall be subject to
a tax of fifteen (15%) which shall be based on the total
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profits applied or earmarked for remittance without any
deduction for the tax component thereof (except those
activities which 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.
Q: What is the branch profit remittance tax?
* In CIR v. Burroughs Limited, on 14 March 1979, respondent
paid the 15% branch profit remittance tax based on the
amount of its profits before tax. Subsequently and relying on
the BIR Ruling dated 21 January 1980, respondent filed a
claim for tax refund or credit of allegedly overpaid branch profit
remittance tax. Pursuant to the 1980 BIR Ruling, branch profit
remittance tax should be based on the profit actually remitted
abroad and not on the total branch profits out of which the
remittance was to be made. The CIR argued that respondent
was no longer entitled to a refund because RMC No. 8-82
dated 17 March 1982 had revoked and/or repealed the 1980
BIR Ruling, to wit: Considering that the 15% branch profit
remittance tax is imposed and collected at source, necessarily
the tax base should be the amount actually applied for by the
branch with the Central Bank of the Philippines as profit to be
remitted abroad. The Supreme Court cited Section 327 (now
33
Section 246 of the 1997 Tax Code) in holding that RMC No. 8-
82 could not be given retroactive effect. The prejudice that
would result to [respondent] by a retroactive application of
[RMC No. 8-82] is beyond question for it would be deprived of
the substantial amount of P172,058.90.
[CIR v. Burroughs Limited, GR No. L-66653, 19 June 1986.]
** In Marubeni Corporation v. CIR, Marubeni Corporation (the
Head Office) was a Japanese corporation which established
a branch office (the Branch Office) in the Philippines. The
Head Office made equity investments in Atlantic Gulf and
Pacific Co. of Manila. In 1981, AG&P declared and paid cash
dividends to the Head Office. AG&P directly remitted the cash
dividends to the Head Office, net not only of the 10% final
dividend tax, but also of the withheld 15% profit remittance tax
(based on the remittable amount after deducting the 10% final
dividend tax). Later, the Head Office filed a claim for tax refund
or credit of alleged erroneously paid branch profit remittance
tax on the dividends remitted by AG&P to the Head Office. The
issue in this case revolved around the Head Offices tax
liability on its dividend income from Philippine sources. The
Supreme Court deemed it wise to first determine the
classification of the Head Office for income taxation purposes.
The Head Office contended that following the principal-agent
relationship theory, because the Branch Office was a resident
foreign corporation, the Head Office was likewise a resident
foreign corporation. Hence, the Head Office was subject only
to the 10% final dividend tax. Upon the other hand, the CIR
argued that the Head Office was a nonresident foreign
corporation which was neither subject to the 10% final
dividend tax nor the withheld 15% branch profit remittance tax.
Instead, the Head Office was subject to the 35% final
withholding tax on its gross income earned from Philippine
sources. The Supreme Court declared that in this particular
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
transaction, the Head Office was considered a nonresident
foreign corporation. The general rule is that a foreign
corporation is the same juridical entity as its branch office in
the Philippines. However, when the foreign corporation
transacts business in the Philippines independently of its
branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the
branch. Consequently, the taxpayer is the foreign corporation,
not the branch or the resident foreign corporation. Being a
nonresident foreign corporation with respect to the transaction
in question, generally, the Head Office must be taxed 35% of
its gross income from all sources within the Philippines.
However, based on now Section 28(B)(5)(b) of the 1997 Tax
Code and the relevant provision of the RP-Japan Tax Treaty
(i.e., the tax sparing rule), a discounted rate of 15% was given
to the Head Office on dividends received from AG&P.
[Marubeni Corporation v. CIR, GR No. 76573, 14 September
1989.]
*** In Bank of America NT & SA v. Court of Appeals, petitioner
was a foreign corporation duly licensed to engage in business
in the Philippines with a branch office in Makati. In 1982, it
paid the 15% branch profit remittance tax on profits from its
regular banking unit operations and foreign currency deposit
unit operations. The tax was based on net profits after income
tax without deducting the amount corresponding to the 15%
tax. Later, petitioner filed a claim for tax refund or credit on the
ground that the 15% tax should have been computed on the
basis of profits actually remitted, and not on the amount before
profit remittance tax. The Supreme Court held that the law was
clear. The 15% branch profit remittance tax was based on the
profits actually remitted. The remittance tax was conceived in
an attempt to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local branch offices
34
and organizing, on the other hand, subsidiary domestic
corporations where at least a majority of all the latters shares
of stocks are owned by such foreign corporations. xxx In order
to avert what would otherwise appear to be an unequal tax
treatment on such subsidiaries vis--vis local branch offices, a
20%, later reduced to 15%, profit remittance tax was imposed
on local branches on their remittances of profits abroad. But
this is where the tax pari passu ends between domestic
branches and subsidiaries of foreign corporations.
[Bank of America NT & SA v. Court of Appeals, GR Nos.
103092 and 103106, 21 July 1994.]
28(A)(6) Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies. -
(a) Regional or area headquarters as defined in Section
22(DD) shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section
22(EE) shall pay a tax of ten percent (10%) of their taxable
income.
28(A)(7) Tax on Certain Incomes Received by a Resident
Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary
Benefit from Deposit Substitutes, Trust Funds and Similar
Arrangements and Royalties. - Interest from any currency
bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar
arrangements and royalties derived from sources within
the Philippines shall be subject to a final income tax at
the rate of twenty percent (20%) of such interest:
Provided, however, That interest income derived by a
resident foreign corporation from a depository bank
under the expanded foreign currency deposit system
shall be subject to a final income tax at the rate of seven
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
and one-half percent (7 1/2%) of such interest income.
(b) Income Derived under the Expanded Foreign Currency
Deposit System. - Income derived by a depository bank
under the expanded foreign currency deposit system
from foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local
commercial banks including branches of foreign banks
that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency deposit
system units and other depository banks under the
expanded foreign currency deposit system shall be
exempt from all taxes, except net income from such
transactions as may be specified by the Secretary of
Finance, upon recommendation by the Monetary Board to
be subject to the regular income tax payable by banks;
Provided, however, That interest income from foreign
currency loans granted by such depository banks under
said expanded system to residents other than depositary
banks under the expanded system shall be subject to a
final income tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or
corporations, from transactions with depository banks
under the expanded system shall be exempt from income
tax. (As amended by RA No. 9294.)
(c) Capital Gains from Sale of Shares of Stock Not Traded
in the Stock Exchange. - A final tax at the rates prescribed
below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a
domestic corporation except shares sold or disposed of
through the stock exchange:
Not over P100,000 5% On any
amount in excess of P100,000. 10%
(d) Intercorporate Dividends. - Dividends received by a
35
resident foreign corporation from a domestic corporation
liable to tax under this Code shall not be subject to tax
under this Title.
28(B) Tax on Nonresident Foreign Corporation. -
28(B)(1) In General. - Except as otherwise provided in this
Code, a foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to thirty-
five percent (35%) of the gross income received during
each taxable year from all sources within the Philippines,
such as interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums), annuities,
emoluments or other fixed or determinable annual,
periodic or casual gains, profits and income, and capital
gains, except capital gains subject to tax under
subparagraphs (c) and (d): Provided, That effective
January 1, 2009, the rate of income tax shall be thirty
percent (30%). (As amended by RA No. 9337.)
28(B)(2) Nonresident Cinematographic Film Owner,
Lessor or Distributor. - A cinematographic film owner,
lessor, or distributor shall pay a tax of twenty-five percent
(25%) of its gross income from all sources within the
Philippines.
28(B)(3) Nonresident Owner or Lessor of Vessels
Chartered by Philippine Nationals. - A nonresident owner
or lessor of vessels shall be subject to a tax of four and
one-half percent (4 1/2%) of gross rentals, lease or charter
fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Industry
Authority.
28(B)(4) Nonresident Owner or Lessor of Aircraft,
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Machineries and Other Equipment. - Rentals, charters and
other fees derived by a nonresident lessor of aircraft,
machineries and other equipment shall be subject to a tax
of seven and one-half percent (7 1/2%) of gross rentals or
fees.
28(B)(5) Tax on Certain Incomes Received by a
Nonresident Foreign Corporation. -
(a) Interest on Foreign Loans. - A final withholding tax at
the rate of twenty percent (20%) is hereby imposed on the
amount of interest on foreign loans contracted on or after
August 1, 1986;
(b) Intercorporate Dividends. - A final withholding tax at
the rate of fifteen percent (15%) is hereby imposed on the
amount of cash and/or property dividends received from a
domestic corporation, which shall be collected and paid
as provided in Section 57 (A) of this Code, subject to the
condition that the country in which the nonresident
foreign corporation is domiciled, shall allow a credit
against the tax due from the nonresident foreign
corporation taxes deemed to have been paid in the
Philippines equivalent to twenty percent (20%), which
represents the difference between the regular income tax
of thirty-five percent (35%) and the fifteen percent (15%)
tax on dividends as provided in this subparagraph:
Provided, That effective January 1, 2009, the credit
against the tax due shall be equivalent to fifteen percent
(15%), which represents the difference between the
regular income tax of thirty percent (30%) and the fifteen
percent (15%) tax on dividends. (As amended by RA No.
9337.)
Q: Explain the tax sparing rule.
36
* In CIR v. Wander Philippines, Inc., respondent was a
domestic corporation that was a wholly owned subsidiary of a
Swiss corporation not engaged in trade or business in the
Philippines. In July 1975 and July 1976, respondent remitted
to the Swiss corporation dividends in various sums on which
35% withholding tax was withheld and paid to the BIR. Later,
respondent filed a claim for tax refund or credit contending that
it was liable only to pay 15% withholding tax in accordance
with Section 24(b)(1) of the old Tax Code [now Section
28(B)(5)(b) of the 1997 Tax Code, or the tax sparing rule].
Was respondent entitled to the preferential rate of 15%
withholding tax on dividends declared and remitted to the
Swiss corporation? Particularly, did Switzerland allow as tax
credit the deemed paid Philippine tax on such dividends?
[Otherwise stated, did Switzerland grant to the Swiss
corporation a tax credit against the tax due it equivalent to
20%, or the difference between the regular 35% rate and the
preferential 15% rate?] The Supreme Court noted that during
the period in question, Switzerland did not impose any income
tax on dividends received by a Swiss corporation from
corporations domiciled in foreign countries. To the Courts
mind, the fact that Switzerland did not impose any tax or the
dividends received by [the Swiss corporation] from the
Philippines should be considered as a full satisfaction of the
given condition. Hence, the dividends should be subject to the
preferential rate of 15% withholding tax.
[CIR v. Wander Philippines, Inc., GR No. L-68375, 15 April
1988.]
** In Marubeni Corporation v. CIR, Marubeni Corporation (the
Head Office) was a Japanese corporation which established
a branch office (the Branch Office) in the Philippines. The
Head Office made equity investments in Atlantic Gulf and
Pacific Co. of Manila. In 1981, AG&P declared and paid cash
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
dividends to the Head Office. AG&P directly remitted the cash
dividends to the Head Office, net not only of the 10% final
dividend tax, but also of the withheld 15% profit remittance tax
(based on the remittable amount after deducting the 10% final
dividend tax). Later, the Head Office filed a claim for tax refund
or credit of alleged erroneously paid branch profit remittance
tax on the dividends remitted by AG&P to the Head Office. The
issue in this case revolved around the Head Offices tax
liability on its dividend income from Philippine sources. The
Supreme Court deemed it wise to first determine the
classification of the Head Office for income taxation purposes.
The Head Office contended that following the principal-agent
relationship theory, because the Branch Office was a resident
foreign corporation, the Head Office was likewise a resident
foreign corporation. Hence, the Head Office was subject only
to the 10% final dividend tax. Upon the other hand, the CIR
argued that the Head Office was a nonresident foreign
corporation which was neither subject to the 10% final
dividend tax nor the withheld 15% branch profit remittance tax.
Instead, the Head Office was subject to the 35% final
withholding tax on its gross income earned from Philippine
sources. The Supreme Court declared that in this particular
transaction, the Head Office was considered a nonresident
foreign corporation. The general rule is that a foreign
corporation is the same juridical entity as its branch office in
the Philippines. However, when the foreign corporation
transacts business in the Philippines independently of its
branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the
branch. Consequently, the taxpayer is the foreign corporation,
not the branch or the resident foreign corporation. Being a
nonresident foreign corporation with respect to the transaction
in question, generally, the Head Office must be taxed 35% of
its gross income from all sources within the Philippines.
37
However, based on now Section 28(B)(5)(b) of the 1997 Tax
Code and the relevant provision of the RP-Japan Tax Treaty
(i.e., the tax sparing rule), a discounted rate of 15% was given
to the Head Office on dividends received from AG&P.
[Marubeni Corporation v. CIR, GR No. 76573, 14 September
1989.]
*** In CIR v. Procter & Gamble Philippine Manufacturing
Corporation, for the years 1974 and 1975, P&G Phils. declared
dividends payable to its parent company and sole stockholder,
P&G U.S., from which dividends 35% withholding tax at source
was deducted. Thereafter, P&G Phils. filed a claim for tax
refund or credit claiming that the applicable rate of withholding
tax on the dividends remitted was only 15%, and not 35%. The
Supreme Court stated that our NIRC does not require that the
US tax law deem the parent-corporation to have paid the
twenty (20) percentage points of dividend tax waived by the
Philippines. The NIRC only requires that the US shall allow
[P&G US] a deemed paid tax credit in an amount equivalent
to twenty (20) percentage points waived by the Philippines.
Did the US law comply with the above requirement? The
Supreme Court ruled positively. Thus, the dividends should be
subject to the preferential rate of 15% withholding tax.
[CIR v. Procter & Gamble Philippine Manufacturing
Corporation, GR No. 66838, 2 December 1991.]
(c) Capital Gains from Sale of Shares of Stock not Traded
in the Stock Exchange. - A final tax at the rates prescribed
below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a
domestic corporation, except shares sold, or disposed of
through the stock exchange:
Not over P100,000.. 5% On any upon its shareholders or members unless the
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amount in excess of P100,000 10%
Sec. 29, Imposition of Improperly Accumulated Earnings
Tax. -
29(A) In General. - In addition to other taxes imposed by
this Title, there is hereby imposed for each taxable year
on the improperly accumulated taxable income of each
corporation described in Subsection B hereof, an
improperly accumulated earnings tax equal to ten percent
(10%) of the improperly accumulated taxable income.
29(B) Tax on Corporations Subject to Improperly
Accumulated Earnings Tax. -
(1) In General. - The improperly accumulated earnings tax
imposed in the preceding Section shall apply to every
corporation formed or availed for the purpose of avoiding
the income tax with respect to its shareholders or the
shareholders of any other corporation, by permitting
earnings and profits to accumulate instead of being
divided or distributed.
(2) Exceptions. - The improperly accumulated earnings
tax as provided for under this Section shall not apply to:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.
29(C) Evidence of Purpose to Avoid Income 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 a corporation are permitted to
accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax
38
corporation, by the clear preponderance of evidence,
shall prove to the contrary.
29(D) Improperly Accumulated Taxable Income. - For
purposes of this Section, the term 'improperly
accumulated taxable income' means taxable income'
adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
(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.
29(E) Reasonable Needs of the Business. - For purposes
of this Section, the term 'reasonable needs of the
business' includes the reasonably anticipated needs of
the business.
Q: What is the improperly accumulated earnings tax?
* In Basilan Estates, Inc. v. CIR, petitioner was a domestic
corporation engaged in the coconut industry. In February
1959, the CIR issued an assessment against petitioner for
deficiency income tax and a 25% surtax on unreasonably
accumulated profits as of 1953. The following year, petitioner
filed with the Court of Tax Appeals a petition for review
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contesting the CIRs assessment alleging: (1) prescription of
the period for assessment and collection; (2) error in
disallowing claimed depreciation, traveling and miscellaneous
expenses; and (3) error in finding the existence of
unreasonably accumulated profits an the imposition of a 25%
surtax thereon. On the topic of unreasonably accumulated
profits, the Supreme Court said that: In order to determine
whether profits were accumulated for the reasonable needs of
the business or to avoid the surtax upon shareholders, the
controlling intention of the taxpayer is that which is manifested
at the time of the accumulation, not subsequently declared
intentions which are merely the products of afterthought.
Moreover: In determining whether accumulations of earnings
or profits in a particular year are within the reasonable needs
of a corporation, it is necessary to take into account prior
accumulations, since accumulations prior to the year involved
may have been sufficient to cover the business needs and
additional accumulations during the year involved would not
reasonably be necessary. Applying the foregoing standards,
the High Court found that petitioner made unreasonable
accumulation of surplus beyond the needs of the business.
[Basilan Estates, Inc. v. CIR, GR No. L-22492, 5 September
1967.]
** In Manila Wine Merchants, Inc. v. CIR, petitioner questioned
the Court of Tax Appeals decision ordering it to pay the CIR a
25% surtax plus interest which represented the additional tax
due for improperly accumulated profits or surplus in the
taxable year 1957. One basis in assessing petitioner for the
25% surtax was its substantial investment of surplus or profits
in unrelated business, i.e., purchase of U.S.A. Treasury
Bonds. According to the Supreme Court, to avoid the
imposition of the 25% surtax, petitioner should prove that the
purchase of the U.S.A. Treasury Bonds in 1951 was an
39
investment within the reasonable needs of the company. To
determine the reasonable needs of the business in order to
justify an accumulation of earnings, the Courts of the United
States have invented the so-called Immediacy Test which
construed the words reasonable needs of the business to
mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and
profits, the accumulation was not for the reasonable needs of
the business, and the penalty tax would apply. American
cases likewise hold that investment of the earnings and profits
of the corporation in stock or securities of an unrelated
business usually indicates an accumulation beyond the
reasonable needs of the business. Here, the Supreme Court
held that the purchase of the U.S.A. Treasury Bonds was in no
way related to petitioners business of importing and selling
wines, whisky, liquors and distilled spirits. It was thus
construed to be an investment beyond the reasonable needs
of petitioners business.
[Manila Wine Merchants, Inc. v. CIR, GR No. L-26145, 20
February 1984.]
*** In CIR v. Antonio Tuason, Inc., respondent questioned the
CIRs assessment for a 25% surtax on unreasonable
accumulation of surplus for the years 1975 to 1978.
Respondent argued that the accumulation of surplus profits
during the years in question was solely for the purpose of
expanding its business operations as real estate broker.
Unfortunately, as the Supreme Court held, respondent failed to
overcome the presumption of correctness of the CIRs
assessment. The touchstone of liability is the purpose behind
the accumulation of the income and not the consequences of
the accumulation. Thus, if the failure to pay dividends were for
the purpose of using the undistributed earnings and profits for
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the reasonable needs of the business, that purpose would not
fall within the interdiction of the statute.
[CIR v. Antonio Tuason, Inc., GR No. 85749, 15 May 1989.]
**** In Cyanamid Philippines, Inc. v. Court of Appeals,
petitioner was a domestic corporation that was a wholly owned
subsidiary of an American company. Petitioner was engaged
in the manufacture of pharmaceutical products and chemicals,
a wholesaler of imported finished goods, and an
importer/indentor. In February 1985, the CIR issued an
assessment against petitioner for deficiency income tax,
deficiency percentage tax, and a 25% surtax. Petitioner
argued, among others, that the surtax for undue accumulation
of earnings did not apply to it because petitioner was a wholly
owned subsidiary of a publicly owned company. [NOTE: Under
the 1997 Tax Code, the improperly accumulated earnings tax
does not apply to publicly held corporations, banks and other
nonbank financial intermediaries, and insurance companies.
However, the present case was decided under the 1977 Tax
Code. Under the old code, only the following were exempted
from the improperly accumulated earnings tax: banks,
nonbank financial intermediaries, corporation organized
primarily and authorized by the Central Bank of the Philippines
to hold shares of stocks of banks, and insurance companies.]
Under the 1977 Tax Code, as amended, therefore, petitioner
did not fall among those exempt from the imposition of
improperly accumulated earnings tax. The Supreme Court
likewise had occasion to discuss the rationale behind the
imposition of the surtax, to wit: The provision discouraged tax
avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not
paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to
40
distribute earnings so that the said earnings by shareholders
could, in turn, be taxed.
[Cyanamid Philippines, Inc. v. Court of Appeals, GR No.
108067, 20 January 2000.]
Sec. 30, Exemptions from Tax on Corporations. - The
following organizations shall not be taxed under this Title
in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not
organized principally for profit;
(B) Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without
capital stock organized and operated for mutual purposes
and without profit;
(C) A beneficiary society, order or association, operating
fort he exclusive benefit of the members such as a
fraternal organization operating under the lodge system,
or mutual aid association or a nonstock corporation
organized by employees providing for the payment of life,
sickness, accident, or other benefits exclusively to the
members of such society, order, or association, or
nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively
for the benefit of its members;
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong
to or inures to the benefit of any member, organizer,
officer or any specific person;
(F) Business league chamber of commerce, or board of
trade, not organized for profit and no part of the net
income of which inures to the benefit of any private stock-
holder, or individual;
TAX 1 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2014-2015
(G) Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a
purely local character, the income of which consists
solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses;
and
(K) Farmers', fruit growers', or like association organized
and operated as a sales agent for the purpose of
marketing the products of its members and turning back
to them the proceeds of sales, less the necessary selling
expenses on the basis of the quantity of produce finished
by them;
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
Q: What is the tax consequence of real property owned by
exempt corporations?
* The Young Mens Christian Association of the Philippines,
Inc. was a non-stock, non-profit institution which conducted
various programs and activities beneficial to the public,
pursuant to its religious, educational and charitable objectives.
In 1980, YMCA earned income from leasing out a portion of its
premises to small shop owners and from parking fees
41
collected from non-members. In CIR v. Court of Appeals,
YMCA contested the CIRs assessment issued against it for
deficiency income tax on the foregoing income. The Supreme
Court held that while YMCA was an organization which should
not be taxed in respect of income received by it as such,
YMCAs rental income from its real estate was subject to
income tax. The last paragraph of now Section 30 of the 1997
Tax Code provides that income from the property of covered
organizations is taxable. The rental income is taxable
regardless of whence such income is derived and how it is
used or disposed of. Where the law does not distinguish,
neither should we.
[CIR v. Court of Appeals, GR No. 124043, 14 October 1998.]

** Under the 1987 Constitution and the 1991 LGC, charitable

institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational
purposes shall be exempt from real property tax. However,
pursuant to the 1997 Tax Code, income from real property of
such organizations shall be subject to income tax.

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