3rd Meeting Case Digest
TAXREV LOCK
DE LA SALLE CASE BEFORE THE SC (taken from the DE LA SALLE CTA CASE):
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CIR CONTENTION:
First, DLSU's rental income is taxable regardless of how such income is derived, used
or disposed of. DLSU's operations of canteens and bookstores within its campus even
though exclusively serving the university community do not negate income tax
liability.
The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be
harmonized with Section 30 (H) of the Tax Code, which states among others, that the
income of whatever kind and character of [a non-stock and non-profit educational
institution] from any of [its] properties, real or personal, or from any of [its] activities
conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed by this Code.
The Commissioner argues that the CTA En Banc misread and misapplied the case of
Commissioner of Internal Revenue v. YMCA to support its conclusion that revenues
however generated are covered by the constitutional exemption, provided that, the
revenues will be used for educational purposes or will be held in reserve for such
purposes.
On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is
exempt only from property tax but not from income tax on the rentals earned
from property. Thus, DLSU's income from the leases of its real properties is not
exempt from taxation even if the income would be used for educational purposes.
DLSU's Comment:
XXX DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all
assets and revenues (income) of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes are exempt from taxes and
duties. XXX
DLSU thus invokes the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force and
effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the
income of whatever kind and character of a non-stock and non-profit
educational institution from any of its properties, real or personal, or from
any of its activities conducted for profit regardless of the disposition made of
such income, should be declared without force and effect in view of the
constitutionally granted tax exemption on "all revenues and assets of non-stock, non-
profit educational institutions used actually, directly, and exclusively for educational
purposes."
DLSU further submits that it complies with the requirements enunciated in the YMCA
case, that for an exemption to be granted under Article XIV, Section 4 (3) of the
Constitution, the taxpayer must prove that:
(1) it falls under the classification non-stock, non-profit educational
institution; and
(2) the income it seeks to be exempted from taxation is used actually,
directly and exclusively for educational purposes.
Unlike YMCA, which is not an educational institution, DLSU is undisputedly a non-
stock, non-profit educational institution. It had also submitted evidence to prove that
it actually, directly and exclusively used its income for educational purposes.
ISSUE: Whether DLSU' s income and revenues proved to have been used
actually, directly and exclusively for educational purposes are
exempt from duties and taxes.
SC: YES!
The income, revenues and assets of non-stock, non-profit educational institutions
proved to have been used actually, directly and exclusively for educational purposes
are exempt from duties and taxes. XXX
First, the constitutional provision refers to two kinds of educational
institutions:
(1) non-stock, non-profit educational institutions and
(2) proprietary educational institutions.
Second, DLSU falls under the first category. Even the Commissioner admits the status
of DLSU as a non-stock, non-profit educational institution. XXX
Fourth, there is a marked distinction between the treatment of nonstock, non-profit
educational institutions and proprietary educational institutions.
The tax exemption granted to non-stock, non-profit educational institutions
is conditioned only on the actual, direct and exclusive use of their revenues
and assets for educational purposes.
While tax exemptions may also be granted to proprietary educational
institutions, these exemptions may be subject to limitations imposed by
Congress (e.g. NIRC).
The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30
(H) of the Tax Code. The relevant text reads:
The following organizations shall not be taxed under this Title [Tax on
Income] in respect to income received by them as such:
xx xx
(H) A non-stock and non-profit educational institution
xx xx
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.
[underscoring and emphasis supplied]
The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted
to non-stock, non-profit educational institutions such that the revenues and income
they derived from their assets, or from any of their activities conducted for profit, are
taxable even if these revenues and income are used for educational purposes.
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Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-
stock, non-profit educational institutions? NO
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We answer in the negative. XXX
The Court then (in YMCA case) significantly laid down the requisites for availing the
tax exemption under Article XIV, Section 4 (3), namely:
(1) the taxpayer falls under the classification non-stock, non-profit
educational institution; and
(2) the income it seeks to be exempted from taxation is used actually,
directly and exclusively for educational purposes.
We now adopt YMCA as precedent and hold that:
1. The last paragraph of Section 30 of the Tax Code is without force and
effect with respect to non-stock, non-profit educational institutions, provided,
that the non-stock, non-profit educational institutions prove that its assets and
revenues are used actually, directly and exclusively for educational purposes.
2. The tax-exemption constitutionally-granted to non-stock, nonprofit educational
institutions, is not subject to limitations imposed by law (NIRC Sec 30).
XXX Article XIV, Section 4 (3) categorically states that "[a]ll revenues and
assets ... used actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties."
The addition and express use of the word revenues in Article XIV, Section 4 (3) of the
Constitution is not without significance.
We find that the text demonstrates the policy of the 1987 Constitution, discernible
from the records of the 1986 Constitutional Commission79 to provide broader tax
privilege to non-stock, non-profit educational institutions as recognition of their role in
assisting the State provide a public good. The tax exemption was seen as beneficial to
students who may otherwise be charged unreasonable tuition fees if not for the tax
exemption extended to all revenues and assets of non-stock, non-profit educational
institutions.
Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3)
does not require that the revenues and income must have also been sourced from
educational activities or activities related to the purposes of an educational institution.
The phrase all revenues is unqualified by any reference to the source of revenues.
Thus, so long as the revenues and income are used actually, directly and exclusively
for educational purposes, then said revenues and income shall be exempt from taxes
and duties.
DIFFERENCE NG NON-PROFIT NON-STOCK sa PROPRIETARY EDUCATIONAL
INSTITUTION
While a non-stock, non-profit educational institution is classified as a tax-exempt
entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a
proprietary educational institution is covered by Section 27 (Rates of Income Tax on
Domestic Corporations).
To be specific, Section 30 provides that exempt organizations like non-stock, non-
profit educational institutions shall not be taxed on income received by them as such.
Section 27 (B), on the other hand, states that "[p]roprietary educational
institutions ... which are non-profit shall pay a tax of ten percent (10%) on their
taxable income .. . 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 ... [the regular corporate income tax of 30%] shall be
imposed on the entire taxable income ... "
By the Tax Code's clear terms, a proprietary educational institution is entitled only to
the reduced rate of 10% corporate income tax. The reduced rate is applicable only if:
(1) the proprietary educational institution is nonprofit and
(2) its gross income from unrelated trade, business or activity does not
exceed 50% of its total gross income.
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not
apply to non-stock, non-profit educational institutions.
Thus, we declare the last paragraph of Section 30 of the Tax Code without force and
effect for being contrary to the Constitution insofar as it subjects to tax the income
and revenues of non-stock, non-profit educational institutions used actually, directly
and exclusively tor educational purpose. XXX
ICONIC BEVERAGES v CIR
Iconic Beverages domestic corporation primarily engaged in the business of
manufacturing, buying, selling (on wholesale) and dealing in alcoholic and non-
alcoholic beverages and to own, purchase, license and/or acquire such
trademarks and other intellectual property rights necessary for the
furtherance of its business.
Iconic has entered into License Agreements with SMBI (San Miguel Brewery) and MPLI
(My Philippines Lifestyles, Inc.) licensing out its trademarks and intellectual property
rights in furtherance of its business.
Iconic has no other income but that from SMBI and MPLI.
CIR issued FAN to Iconic for deficiency income taxes, among others, with
corresponding penalties, relating to its income derived from SMBI and from MPLI,
which Iconic treated as passive income (royalties) subject to the final withholding tax
of twenty percent (20%) on the gross amount.
CIR: income in the form of royalties received by Iconic from the above
companies should be treated as ordinary business income subject to 30%
corporate income tax
o to be subject to the 20% final withholding tax, the royalties must
be in the nature of passive income.
o Iconic received said payments in active conduct of business
ISSUE: Whether Iconic received royalty income in the active conduct of its business,
thus, the same shall not be considered passive income subject to 20% final
withholding tax
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CTA: YES!
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In the case of Chamber of Real Estate and Builders Associations, Inc. vs. The Hon.
Executive Secretary Alberto Romulo, et al., the Supreme Court explained that the BIR
defines passive income by stating what it is not:
xxx if the income is generated in the active pursuit and performance of
the corporation's primary purposes, the same is not passive income
xxx29 (Emphasis supplied)
XXX
Petitioner (Iconic) contends that engaging in a trade or business presupposes that the
business activities are regular, continuous and considerable. Therefore, isolated or
sporadic transactions do not constitute as the conduct of a trade or business. A casual
business activity does not amount to engaging in trade or business in the Philippines
for income tax purposes. Transactions which are occasional, incidental and casual do
not constitute the doing or engaging in business contemplated by law.
From the above definition given by petitioner, it cannot be said that the act of
licensing out petitioner's IP rights is an incidental transaction considering that its
Audited Financial Statements for the taxable year 2009 clearly show that the main
source of petitioner's income is the royalty payments made by SMBI and
MPLI.
Petitioner likewise contends that even assuming that petitioner's royalty income was
derived in connection with the active conduct of trade or business, Section 27(0)(1)
nag-t-tax ng 20% final tax lang- of the NIRC of 1997 does not distinguish between
royalty earned in pursuit of the corporation's primary purpose and one that is not.
On this matter, let it be noted that the rates of tax provided under Section 27(D) ofthe
NIRC of 1997, as amended, pertains to certain passive income. As previously
mentioned, if the income is generated in the active pursuit and performance of
the corporation's primary purposes, the same is not passive income. In view of
the Supreme Court's pronouncement as regards the definition of passive income, the
determination as to whether the royalty income is passive income is necessary before
the tax rates provided in Section 27(D) of the NIRC of 1997, as amended, may apply
to the said royalty income.
Thus, the Court finds petitioner's argument bereft of merit. All the foregoing only
leads the Court to conclude that petitioner's income from licensing out its IP rights is
income generated in active pursuit and performance of petitioner's primary purpose
and thus, is not passive income.
Note: wala ring overhead expenses for buying selling manufacturing alcoholic non-
alcoholic beverages na nilalaban ni Iconic na main business niya- reflected sa
Financial Statements, kaya mas na-emphasize na hindi niya main business yan kundi
yung licensing out nga!
BDO v RP
CODE-NGO requested an approval from the Department of Finance for the issuance
by the Bureau of Treasury of 10-year zero-coupon Treasury Certificates (T-
notes). The T-notes would initially be purchased by a special purpose vehicle on
behalf of CODE-NGO, repackaged and sold at a premium to investors as the PEACe
Bonds.
The BIR, in reply to CODE-NGOs letters, issued BIR Ruling No. 020-2001 on the tax
treatment of the proposed PEACe Bonds, where Commissioner Banez confirmed that
the PEACe Bonds would not be classified as deposit substitutes and would not be
subject to the corresponding withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds must
be obtained from twenty (20) or more individuals or corporate lenders at
any one time. In the light of your representation that the PEACe Bonds will
be issued only to one entity, i.e., Code NGO, the same shall not be
considered as "deposit substitutes" falling within the purview of the above
definition. Hence, the withholding tax on deposit substitutes will not
apply.18 (Emphasis supplied)
Meanwhile, in a memorandum, Former Treasurer Edeza questioned the propriety of
issuing the bonds directly to a special purpose vehicle considering that the latter was
not a Government Securities Eligible Dealer (GSED). He recommended that the
issuance of the Bonds "be done through the ADAPS" and that CODE-NGO "should get
a GSED to bid in its behalf."
Subsequently, in the notice to all GSEDs, the Bureau of Treasury announced that
"P30.0B worth of 10-year Zero[-] Coupon Bonds [would] be auctioned XXX. The
notice stated that the Bonds "shall be issued to not more than 19 buyers/lenders XXX
Lastly, it stated that "the issue being limited to 19 lenders and while taxable shall not
be subject to the 20% final withholding [tax].
On the day of the auction, RCBC which participated on behalf of CODE-NGO was
declared as the winning bidder. Also on the same day, RCBC Capital entered into an
underwriting Agreement with CODE-NGO, whereby RCBC Capital was appointed as the
Issue Manager and Lead Underwriter for the offering of the PEACe Bonds.
RCBC Capital sold the Government Bonds in the secondary market for an issue price
of P11++ billion. A number of banks, including BDO, (petitioners herein) purchased
the PEACe Bonds on different dates.
The CIR later issued BIR Ruling No. 370-2011, declaring that the PEACe Bonds being
deposit substitutes are subject to the 20% final withholding tax. Pursuant to this
ruling, the Secretary of Finance directed the Bureau of Treasury to withhold a 20%
final tax from the face value of the PEACe Bonds upon their payment at maturity.
Hence, this petition before the SC.
ISSUE: Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20%
final withholding tax under the 1997 National Internal Revenue Code.
Related to this question is the interpretation of the phrase "borrowing from
twenty (20) or more individual or corporate lenders at any one time" under
Section 22(Y) of the 1997 National Internal Revenue Code, particularly on
whether the reckoning of the 20 lenders includes trading of the bonds in the
secondary market
SC: DEPENDE RAW
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1997 Tax Code defines:
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(Y) The term deposit substitutes shall mean an alternative form 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. (Emphasis
supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined "public"
to mean "twenty (20) or more individual or corporate lenders at any one time."
Hence, the number of lenders is determinative of whether a debt instrument should
be considered a deposit substitute and consequently subject to the 20% final
withholding tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr
issued the Government Bonds." On the other hand, respondents theorize that the
word "any" "indicates that the period contemplated is the entire term of the bond and
not merely the point of origination or issuance[,]" such that if the debt instruments
"were subsequently sold in secondary markets and so on, in such a way that twenty
(20) or more buyers eventually own the instruments, then it becomes indubitable that
funds would be obtained from the "public" as defined in Section 22(Y) of the
NIRC." Indeed, in the context of the financial market, the words "at any one time"
create an ambiguity. XXX
Meaning of "at any one time"
Thus, from the point of view of the financial market, the phrase "at any one time" for
purposes of determining the "20 or more lenders" would mean every transaction
executed in the primary or secondary market in connection with the purchase or sale
of securities.
For example, where the financial assets involved are government securities like
bonds, the reckoning of "20 or more lenders/investors" is made at any transaction in
connection with the purchase or sale of the Government Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary
market;
2. Sale and distribution by GSEDs to various lenders/investors in the
secondary market;
3. Subsequent sale or trading by a bondholder to another lender/investor in
the secondary market usually through a broker or dealer; or
4. Sale by a financial intermediary-bondholder of its participation interests
in the bonds to individual or corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously obtained
from 20 or more lenders/investors, there is deemed to be a public borrowing and the
bonds at that point in time are deemed deposit substitutes. Consequently, the seller is
required to withhold the 20% final withholding tax on the imputed interest income
from the bonds. XXX
Tax treatment of income
derived from the PEACe Bonds
XXX It may seem that there was only one lender RCBC on behalf of CODE-NGO
to whom the PEACe Bonds were issued at the time of origination. However, a reading
of the underwriting agreement and RCBC term sheet reveals that the settlement dates
for the sale and distribution by RCBC Capital (as underwriter for CODE-NGO) of the
PEACe Bonds to various undisclosed investors at a purchase price of
approximately P11.996 would fall on the same day, October 18, 2001, when the
PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore, the
entire P10.2 billion borrowing received by the Bureau of Treasury in exchange for
the P35 billion worth of PEACe Bonds was sourced directly from the undisclosed
number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe
Bonds all at the time of origination or issuance. At this point, however, we do
not know as to how many investors the PEACe Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more lenders/investors, the
PEACe Bonds are deemed deposit substitutes within the meaning of Section 22(Y) of
the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would have
been obliged to pay the 20% final withholding tax on the interest or discount from the
PEACe Bonds. Further, the obligation to withhold the 20% final tax on the
corresponding interest from the PEACe Bonds would likewise be required of any
lender/investor had the latter turnedaround and sold said PEACe Bonds, whether in
whole or part, simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24223 of the 1997 National Internal Revenue
Code, interest income received by individuals from longterm deposits or investments
with a holding period of not less than five (5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit
substitutes, the proper procedure was for the Bureau of Treasury to pay the face
value of the PEACe Bonds to the bondholders and for the Bureau of Internal Revenue
to collect the unpaid final withholding tax directly from RCBC Capital/CODE-NGO,
orany lender or investor if such be the case, as the withholding agents.
WITH REGARD SA BIR RULINGs
SC: Its interpretation of "at any one time" to mean at the point of origination alone is
unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated XXX that "all
3rd Meeting Case Digest
TAXREV LOCK
treasury bonds . . . regardless of the number of purchasers/lenders at the time of
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origination/issuance are considered deposit substitutes." Being the subject of this
petition, it is, thus, declared void because it completely disregarded the 20 or more
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lender rule added by Congress in the 1997 National Internal Revenue Code.
MARUBENI v CIR
STORY: MARUBENI, Japan Corp, CLAIMS TAX REFUND OR CREDIT
REPRESENTING OVERPAYMENT OF BRANCH PROFIT REMITTANCE TAX DAHIL
RESIDENT CORP DAW SIYA, mali pagka-tax sa kanya. SABI ni SOLGEN, ULUL
NON-RESIDENT CORP KA, MALAKI TALAGA TAX MO!
MARUBENI JAPAN- had equity investments in Atlantic Gulf; Atlantic Gulf declared and
paid cash dividends and remitted it abroad to MARUBENI JAPAN- subject to 10% final
dividend tax (intercorporate final tax) and to 15% branch remittance tax.
MARUBENI JAPAN sought ruling from BIR on whether such remittances or whether the
dividends received by MARUBENI are effectively connected with its conduct or
business in the Philippines as to be considered branch profits subject to the
15% profit remittance tax under the NIRC
BIR Ruling: To be effectively connected it is not necessary that the income be derived
from the actual operation of taxpayer-corporation's trade or business; it is sufficient
that the income arises from the business activity in which the corporation is engaged.
For example, if a resident foreign corporation is engaged in the buying and
selling of machineries in the Philippines and invests in some shares of stock
on which dividends are subsequently received, the dividends thus earned are
not considered 'effectively connected' with its trade or business in this
country.
In the instant case, the dividends received by Marubeni from AG&P are not income
arising from the business activity in which Marubeni is engaged. Accordingly, said
dividends if remitted abroad are not considered branch profits for purposes of the
15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code, as
amended .
So, akala niya lusot na siya, MARUBENI JAPAN CLAIMED FOR REFUND OR ISSUANCE
OF TAX CREDIT!!!
CIR: denied! Although not subject to branch remittance tax (15%) and final
intercorporate tax (10%), MARUBENI, being a non-resident stockholder, nevertheless,
said dividend income (cash dividend) is subject to the 25 % tax pursuant to
Philippines-Japan Tax Treaty.
HENCE, Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation,
Japan is subject to 25 % tax, and that the taxes withheld of 10 % as intercorporate
dividend tax and 15 % as profit remittance tax totals (sic) 25 %, the amount
refundable offsets the liability, hence, nothing is left to be refunded.
CTA: XXX the dividends in question are income taxable to the Marubeni Corporation of
Tokyo, Japan. The said dividends were distributions made by the Atlantic, Gulf
and Pacific Company of Manila to its shareholder out of its profits on the
investments of the Marubeni Corporation of Japan, a non-resident foreign
corporation. The investments in the Atlantic Gulf & Pacific Company of the Marubeni
Corporation of Japan were directly made by it and the dividends othe investments
were likewise directly remitted to and received by the Marubeni Corporation of Japan.
Petitioner Marubeni Corporation Philippine Branch has no participation or intervention,
directly or indirectly, in the investments and in the receipt of the dividends. And it
appears that the funds invested in the Atlantic Gulf & Pacific Company did not come
out of the funds infused by the Marubeni Corporation of Japan to the Marubeni
Corporation Philippine Branch.
Hence, Petition for Review to SC.
MARUBENI CONTENTION: PRINCIPAL-AGENT THEORY Marubeni and Marubeni
Philippines are one in the same under the NIRC and Corpo Laws as MARUBENI JAPAN
is duly licensed engaged in business in the Phils thru its MARUBENI Phil branch.
Hence, must ONLY be taxed at 10% intercorporate final tax as a RESIDENT
CORPORATION
A single corporate entity cannot be both a resident and a non-resident corporation
depending on the nature of the particular transaction involved. Accordingly, whether
the dividends are paid directly to the head office or coursed through its local branch is
of no moment for after all, the head office and the office branch constitute but one
corporate entity, the Marubeni Corporation
Solicitor General Contention in refute: The general rule that a foreign corporation is
the same juridical entity as its branch office in the Philippines cannot apply here. This
rule is based on the premise that the business of the foreign corporation is conducted
through its branch office, following the principal agent relationship theory. It is
understood that the branch becomes its agent here. So that 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.
So hindi raw daw dapat ma-tax as resident corporation si MARUBENI.
ISSUE 1: WON MARUBENI is a non-resident foreign corporation and shall be taxed as
such
SC: YES! Nag agree SC sa sinabi ng SolGen!
XXX the alleged overpaid taxes were incurred for the remittance of dividend income to
the head office in Japan which is a separate and distinct income taxpayer from the
branch in the Philippines. There can be no other logical conclusion considering the
undisputed fact that the investment (totalling 283.260 shares including that of
nominee) was made for purposes peculiarly germane to the conduct of the corporate
3rd Meeting Case Digest
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affairs of Marubeni Japan, but certainly not of the branch in the Philippines. It is thus
6
clear that petitioner, having made this independent investment attributable only to the
head office, cannot now claim the increments as ordinary consequences of its trade or
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business in the Philippines and avail itself of the lower tax rate of 10 %.
ISSUE 2: TAMA BA NA 25% ang TAX NI MARUBENI AS A NON-RES CORP?
SC: NO! MALI RAW YUNG COMPUTATION NA PA-OFFSET OFFSET LANG!
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a
basic rule in taxation that each tax has a different tax basis. While the tax on
dividends is directly levied on the dividends received, "the tax base upon which the 15
% branch profit remittance tax is imposed is the profit actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under the
Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax
rates fixed therein are the maximum rates as reflected in the phrase "shall not
exceed." This means that any tax imposable by the contracting state concerned
should not exceed the 25 % limitation and that said rate would apply only if the tax
imposed by our laws exceeds the same. In other words, by reason of our bilateral
negotiations with Japan, we have agreed to have our right to tax limited to a certain
extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction in
question, the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in
conjunction with the Philippine-Japan Treaty of 1980. Said section provides:
(b) Tax on foreign corporations. (1) Non-resident corporations
... (iii) On dividends received from a domestic corporation
liable to tax under this Chapter, the tax shall be 15% of the
dividends received, which shall be collected and paid as provided
in Section 53 (d) of this Code, subject to the condition that the
country in which the non-resident foreign corporation is domiciled
shall allow a credit against the tax due from the non-resident
foreign corporation, taxes deemed to have been paid in the
Philippines equivalent to 20 % which represents the difference
between the regular tax (35 %) on corporations and the tax (15
%) on dividends as provided in this Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a non-
resident foreign corporation, as a general rule, is taxed 35 % of its gross income from
all sources within the Philippines. [Section 24 (b) (1)]. KUNG WALANG Treaty ito
mag a apply sana!
However, a discounted rate of 15% is given to petitioner on dividends received from a
domestic corporation (AG&P) on the condition that its domicile state (Japan) extends
in favor of petitioner, a tax credit of not less than 20 % of the dividends received. This
20 % represents the difference between the regular tax of 35 % on non-resident
foreign corporations which petitioner would have ordinarily paid, and the 15 % special
rate on dividends received from a domestic corporation.
XXXX It is readily apparent that the 15 % tax rate imposed on the dividends received
by a foreign non-resident stockholder from a domestic corporation under Section 24
(b) (1) (iii) is easily within the maximum ceiling of 25 % of the gross amount of the
dividends as decreed in the Tax Treaty.
CIR v WANDER PHILS TAX SPARING RULE
Wander Phils - domestic corporation wholly-owned subsidiary of the Glaro S.A. Ltd.
(Glaro for short), a Swiss corporation not engaged in trade or business in the
Philippines.
Wander remitted to Glaro dividends, on which 35% withholding tax was withheld and
paid to the BIR. Wander later filed a claim for refund and/or tax credit, contending
that it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of
the Tax Code.
It is well to note that Switzerland (domicile of Glaro) does not impose any income
tax on dividends received by Swiss corporation from corporations domiciled in foreign
countries.
Due to BIR inaction, Wander filed a petition before the CTA which granted its claim for
refund/tax credit.
Hence, this petition for review on certiorari before the SC.
ISSUE: whether or not private respondent Wander is entitled to the preferential rate
of 15% withholding tax on dividends declared and remitted to Glaro
SC: YES!
Section 24 (b) (1) of the Tax Code, as amended, reads:
1) Non-resident corporation. A foreign corporation not engaged in trade
or business in the Philippines XXX, shall pay a tax equal to 35% of the
gross income XXX ... Provided, still further That on dividends received
from a domestic corporation liable to tax under this Chapter, the tax
shall be 15% of the dividends received, XXX, subject to the condition
that the country in which the non-resident foreign corporation
is domiciled shall allow a credit against the tax due from the
non-resident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on corporations and the tax
(15%) dividends as provided in this section:
XXX In the instant case, Switzerland did not impose any tax on the dividends received
by Glaro. Accordingly, Wander claims that full credit is granted and not merely credit
equivalent to 20%. Petitioner, on the other hand, avers the tax sparing credit is
3rd Meeting Case Digest
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applicable only if the country of the parent corporation allows a foreign tax credit not
7
only for the 15 percentage-point portion actually paid but also for the equivalent
Page
twenty percentage point portion spared, waived or otherwise deemed as if paid in the
Philippines; that private respondent does not cite anywhere a Swiss law to the effect
that in case where a foreign tax, such as the Philippine 35% dividend tax, is spared
waived or otherwise considered as if paid in whole or in part by the foreign country, a
Swiss foreign-tax credit would be allowed for the whole or for the part, as the case
may be, of the foreign tax so spared or waived or considered as if paid by the foreign
country.
While it may be true that claims for refund are construed strictly against the claimant,
nevertheless, the fact that Switzerland did not impose any tax or the dividends
received by Glaro from the Philippines should be considered as a full
satisfaction of the given condition. For, as aptly stated by respondent Court, to
deny private respondent the privilege to withhold only 15% tax provided for under
Presidential Decree No. 369, amending Section 24 (b) (1) of the Tax Code, would run
counter to the very spirit and intent of said law and definitely will adversely affect
foreign corporations" interest here and discourage them from investing capital in our
country. XXX
CIR v PROCTOR & GAMBLE
P&G-Phil. declared dividends payable to its parent company and sole stockholder,
P&G-USA, from which amount of dividends thirty-five percent (35%) withholding tax
at source was deducted.
P&G-Phil. filed with CIR a claim for refund or tax credit claiming that pursuant to
Section 24 (b) (1) of the NIRC, the applicable rate of withholding tax on the dividends
remitted was only (15%) (and not [35%]) of the dividends.
Due to inaction, P&G-Phil. filed a petition for review with CTA which rendered a
decision ordering CIR to refund or grant the tax credit prayed for.
On appeal by CIR, SC Division held that there is nothing in the US Tax Code that
allows a credit against the US tax due from P&G-USA of taxes deemed to have been
paid in the Philippines equivalent to twenty percent (20%) which represents the
difference between the regular tax of thirty-five percent (35%) on corporations and
the tax of fifteen percent (15%) on dividends; and that P&G-Phil. failed to meet
certain conditions necessary in order that "the dividends received by its non-resident
parent company in the US (P&G-USA) may be subject to the preferential tax rate of
15% instead of 35%.
ISSUE: Whether deemed paid tax credits available in the US Tax Code should have
been actually paid before one can avail of the 15% special rate, instead of 35%
regular corporate income tax on dividends remitted to foreign parent company
SC: NO!
XXX in the instant case, the reduced fifteen percent (15%) dividend tax rate is
applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in
the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that
such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach
an amount equivalent to twenty (20) percentage points which represents the
difference between the regular thirty-five percent (35%) dividend tax rate and the
preferred fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US
must give a "deemed paid" tax credit for the dividend tax (20 percentage points)
waived by the Philippines in making applicable the preferred divided tax rate of fifteen
percent (15%). In other words, 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-USA a "deemed paid" tax credit in an amount
equivalent to the twenty (20) percentage points waived by the Philippines.
XXX
Close examination of XXX the US Tax Code shows the following:
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the
amount of the dividend tax actually paid (i.e., withheld) from the dividend
remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed
paid' tax credit for a proportionate part of the corporate income tax actually
paid to the Philippines by P&G-Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine
corporate income tax although that tax was actually paid by its Philippine subsidiary,
P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic
reality, since the Philippine corporate income tax was in fact paid and deducted from
revenues earned in the Philippines, thus reducing the amount remittable as dividends
to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as
if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of
carrying on business operations in the Philippines through the medium of P&G-Phil.
and here earning profits. What is, under US law, deemed paid by P&G- USA are not
"phantom taxes" but instead Philippine corporate income taxes actually paid here by
P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax
actually withheld, and (ii) the tax credit for the Philippine corporate income tax
actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or
applicable against the US corporate income tax of P&G-USA. These tax credits are
allowed because of the US congressional desire to avoid or reduce double taxation of
the same income stream. XXX
The Second Division of the Court, in holding that the applicable dividend tax rate in
the instant case was the regular thirty-five percent (35%) rate rather than the
reduced rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its
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parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid"
8
tax credit in the amount required by Section 24 (b) (1), NIRC.
Page
XXX [However] Section 24 (b) (1), NIRC, does not in fact require that the "deemed
paid" tax credit shall have actually been granted before the applicable dividend tax
rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted
several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar,
that the USA "shall allow a credit against the tax due from [P&G-USA for] taxes
deemed to have been paid in the Philippines . . ." There is neither statutory provision
nor revenue regulation issued by the Secretary of Finance requiring the actual grant
of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA
before the preferential fifteen percent (15%) dividend rate becomes applicable.
Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax
credit; it is a provision which specifies when a particular (reduced) tax rate is legally
applicable.
XXX the position originally taken by the Second Division results in a severe practical
problem of administrative circularity. The Second Division in effect held that the
reduced dividend tax rate is not applicable until the US tax credit for "deemed paid"
taxes is actually given in the required minimum amount by the US Internal Revenue
Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US
tax authorities unless dividends have actually been remitted to the US, which means
that the Philippine dividend tax, at the rate here applicable, was actually imposed and
collected. It is this practical or operating circularity that is in fact avoided by our BIR
when it issues rulings that the tax laws of particular foreign jurisdictions (e.g.,
Republic of Vanuatu Hongkong, Denmark, etc.) comply with the requirements set out
in Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate.
Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the
reduced dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as a
condition for the applicability,as a matter of law, of a particular tax rate. Upon the
other hand, upon the determination or recognition of the applicability of the reduced
tax rate, there is nothing to prevent the BIR from issuing implementing regulations
that would require P&G Phil., or any Philippine corporation similarly situated, to certify
to the BIR the amount of the "deemed paid" tax credit actually subsequently granted
by the US tax authorities to P&G-USA or a US parent corporation for the taxable year
involved. Since the US tax laws can and do change, such implementing regulations
could also provide that failure of P&G-Phil. to submit such certification within a certain
period of time, would result in the imposition of a deficiency assessment for the
twenty (20) percentage points differential. XXX
We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax
credit which it seeks. XXX
NOTE: ang legal na pagsagot sa tanong ay sagutin kung mag-aapply ba ang 15%.
Kung ang US mag=-Tax Credit, go push ang 15%. dito concerned ang court. Yung
tanong naman kung nabigyan ba actually ng tax credit, administrative na raw yan,
avenue na ng BIR at hindi nay an ang pinag uusapan sa kasong ito.
SMI-ED v CIR
SMI-ED Phils- PEZA-registered corporation authorized "to engage in the business of
manufacturing ultra high-density microprocessor unit package.
SMI-ED Philippines constructed buildings and purchased machineries and equipment,
after its registration. However, it failed to commence operations. Factory temporarily
closed, buildings/machineries sold and it was later dissolved.
For the year 2000, SMI-Ed subjected its entire gross sales of its properties to 5% final
tax on PEZA registered corporations and paid taxes therefrom. However, it later filed
with the BIR a claim for refund alleging that the amount was erroneously paid.
Due to BIR inaction, SMI-ED filed a petition for review before the CTA Division which
denied the same.
CTA Division: fiscal incentives given to PEZA-registered enterprises may be availed
only by PEZA-registered enterprises that had already commenced operations. Since
SMI-Ed had not commenced operations, it was not entitled to the incentives of
either the income tax holiday or the 5% preferential tax rate.
CTA Division, instead, subjected the sale of SMI-Eds assets to 6% capital
gains tax under Section 27(D)(5) and ordered the same to pay deficiency taxes
On appeal, CTA En Banc likewise dismissed SMI-ED petition. Hence, this petition for
review before the SC.
SMI-ED CONTENTION: CTA En Banc erroneously subjected its sale of machineries to
6% capital gains tax. Section 27(D)(5) of the National Internal Revenue Code of 1997
is clear that the 6% capital gains tax on domestic corporations applies only on the
sale of lands and buildings and not to machineries and equipment.
ISSUE: Whether SMI-ED sale of machineries and equipment is subject to 6% capital
gains tax
SC: NO!
XXX For petitioners properties to be subjected to capital gains tax, the properties
must form part of petitioners capital assets.
XXX The properties involved in this case include petitioners buildings, equipment, and
machineries. They are not among the exclusions enumerated in Section 39(A)(1) of
the National Internal Revenue Code of 1997. None of the properties were used in
petitioners trade or ordinary course of business because petitioner never commenced
operations. They were not part of the inventory. None of them were stocks in trade.
Based on the definition of capital assets under Section 39 of the National Internal
Revenue Code of 1997, they are capital assets.
3rd Meeting Case Digest
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9
Respondent (BIR) insists that since petitioners machineries and equipment are
Page
classified as capital assets, their sales should be subject to capital gains tax.
Respondent is mistaken.
XXX Capital gains of individuals and corporations from the sale of real properties are
taxed differently. Individuals are taxed on capital gains from sale of all real properties
located in the Philippines and classified as capital assets. XXX
For corporations, the National Internal Revenue Code of 1997 treats the sale of land
and buildings, and the sale of machineries and equipment, differently.
Domestic corporations are imposed a 6% capital gains tax only on the
presumed gain realized from the sale of lands and/or buildings. The National
Internal Revenue Code of 1997 does not impose the 6% capital gains tax on the
gains realized from the sale of machineries and equipment. Section 27(D)(5) of the
National Internal Revenue Code of 1997 provides:
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 XXX
Therefore, only the presumed gain from the sale of petitioners land and/or building
may be subjected to the 6% capital gains tax. The income from the sale of petitioners
machineries and equipment is subject to the provisions on normal corporate income
tax. XXX
NOTE: ending kelangan malaman total ng capital gains tax at normal corporate
income tax based sa sale ng properties ni SMI-ED SAKA i-m-minus sa total na binayad
ni SMI-ED para malaman kung entitled nga ba sa refund. Kaso sa case, nag-declare
rin ng losses si SMI-ED, so ruling ng court, walang kelangang bayarang income tax si
SMI-ED, refund granted!
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION (CREMA) v
ROMULO
CREMA- association of real estate developers and builders in the Philippines.
CREMA assails the validity of the imposition of minimum corporate income tax (MCIT)
on corporations. Section 27(E) of the Tax Code provides for MCIT on domestic
corporations and is implemented by RR 9-98. CREMA argues that the MCIT violates
the due process clause because it levies income tax even if there is no realized gain.
Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is
assessed an MCIT of 2% of its gross income when such MCIT is greater than the
normal corporate income tax imposed under Section 27(A). If the regular income tax
is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the
MCIT over the normal tax shall be carried forward and credited against the normal
income tax for the three immediately succeeding taxable years.
ISSUE: whether or not the imposition of the MCIT on domestic corporations is
unconstitutional
SC: NO!
MCIT IS NOT
VIOLATIVE OF DUE
PROCESS
Petitioner (CREMA) claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and confiscatory which
amounts to deprivation of property without due process of law. It explains that gross
income as defined under said provision only considers the cost of goods sold and
other direct expenses; other major expenditures, such as administrative and interest
expenses which are equally necessary to produce gross income, were not taken into
account. Thus, pegging the tax base of the MCIT to a corporations gross income is
tantamount to a confiscation of capital because gross income, unlike net income, is
not realized gain.
We disagree.
XXX Petitioner is correct in saying that income is distinct from capital. Income means
all the wealth which flows into the taxpayer other than a mere return on capital.
Capital is a fund or property existing at one distinct point in time while income
denotes a flow of wealth during a definite period of time. Income is gain derived and
severed from capital. For income to be taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
Taxation.
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital
is not income. In other words, it is income, not capital, which is subject to income tax.
However, the MCIT is not a tax on capital.
The 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 sales. Clearly, the capital is not being taxed.
Furthermore, the 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.
Besides, there is no legal objection to a broader tax base or taxable income by
eliminating all deductible items and at the same time reducing the applicable tax rate.
Statutes taxing the gross "receipts," "earnings," or
"income" of particular corporations are found in many
jurisdictions. Tax thereon is generally held to be within the power
3rd Meeting Case Digest
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of a state to impose; or constitutional, unless it interferes with
10
interstate commerce or violates the requirement as to uniformity
of taxation.
Page
XXX Absent any other valid objection, the assignment of gross income, instead of net
income, as the tax base of the MCIT, taken with the reduction of the tax rate from
32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative
experiences of its members nor does it present empirical data to show that the
implementation of the MCIT resulted in the confiscation of their property. In sum,
petitioner failed to support, by any factual or legal basis, its allegation that the MCIT
is arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional
simply because of its yokes. Taxation is necessarily burdensome because, by its
nature, it adversely affects property rights. The party alleging the laws
unconstitutionality has the burden to demonstrate the supposed violations in
understandable terms.
RR 9-98 MERELY
CLARIFIES
SECTION 27(E) OF RA
8424
Petitioner alleges that RR 9-98 is a deprivation of property without due process of law
because the MCIT is being imposed and collected even when there is actually a loss,
or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. xxx The MCIT shall be imposed
whenever such corporation has zero or negative taxable
income or whenever the amount of [MCIT] is greater than the
normal income tax due from such corporation. (Emphasis
supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such corporation has
zero or negative taxable income, merely defines the coverage of Section 27(E). This
means that even if a corporation incurs a net loss in its business operations or reports
zero income after deducting its expenses, it is still subject to an MCIT of 2% of its
gross income. This is consistent with the law which imposes the MCIT on gross income
notwithstanding the amount of the net income. But the law also states that the MCIT
is to be paid only if it is greater than the normal net income. Obviously, it may well be
the case that the MCIT would be less than the net income of the corporation which
posts a zero or negative taxable income.
MANILA BANKING v CIR
Manila Banking had been engaged in commercial banking industry until it was
prohibited by the Monetary Board of BSP from engaging in business by reason of
insolvency. Thus, it ceased operations and its assets and liabilities were put under
receivership.
12 years after Manila Banking has stopped its business operations, the BSP
authorized it to operate as a thrift bank. Manila Banking sought BIR Ruling on
whether it is covered by the 4-year grace period for the imposition of MCIT reckoned
from the year it resumed operations. BIR issued ruling confirming Manila Bankings
entitlement to the said period.
we find merit in your position that for having just come out of receivership
proceedings, which not only resulted in substantial losses but actually brought about
a complete cessation of all businesses, TMBC (Manila Banking) may be qualified to
ask for suspension of the MCIT.
Manila Banking filed its annual corporate income tax return for the year 1999 (year it
resumed) and paid the corresponding MCIT thereon. However, it later filed a claim for
refund of an amount erroneously paid on the basis of the above ruling.
Due to BIR inaction, Manila Banking filed a petition for review before the CTA which
denied its claim for refund ruling that the payment of MCIT was only proper since it is
not a new corporation. It continued to be the same corporation registered with the
SEC and the BIR since 1961, thus, not entitled to the 4-yr grace period.
it must be emphasized that when herein petitioner was placed under receivership,
there was merely an interruption of its business operations. However, its corporate
existence was never affected. The general rule is that the appointment of the receiver
does not terminate the charter or work a dissolution of the corporation, even though
the receivership is a permanent one. XXX
On appeal, CA affirmed the CTA decision. Hence, this petition before the SC.
MANILA BANKING CONTENTION: CA erred in ruling that Manila Banking is not entitled
to the grace period
BIR CONTENTION: Manila Banking must pay MCIT beginning January 1, 1998
Under RR No. 9-98, implementing the Tax Code on MCIT, XXX For
purposes of the MCIT, the taxable year in which business
operations commenced shall be the year in which the
domestic corporation registered with the Bureau of
Internal Revenue (BIR).
Firms which were registered with BIR in 1994 and earlier years
shall be covered by the MCIT beginning January 1, 1998.
ISSUE: Whether Manila Banking is entitled to a refund of its minimum corporate
income tax paid to the BIR for taxable year 1999
SC: YES!
The intent of Congress relative to the minimum corporate income tax is to
grant a four (4)-year suspension of tax payment to newly formed
corporations. Corporations still starting their business operations have to
stabilize their venture in order to obtain a stronghold in the industry. It does
not come as a surprise then when many companies reported losses in their
initial years of operations. XXX
Significantly, on February 23, 1995, Congress enacted R.A. No. 7906, otherwise
known as the Thrift Banks Act of 1995. On June 15, 1999, the BIR issued Revenue
Regulation No. 4-95 implementing certain provisions of the said R.A. No.
7906. Section 6 provides:
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TAXREV LOCK
Sec. 6. Period of exemption. All thrift banks XXX shall
11
be exempt from the payment of all taxes, fees, and charges of
whatever nature and description, except the corporate income
tax XXX for a period of five (5) years from the date of
Page
commencement of operations; XXX
For purposes of these regulations, date of
commencement of operations shall be understood to mean the
date when the thrift bank was registered with the Securities and
Exchange Commission or the date when the Certificate of
Authority to Operate was issued by the Monetary Board of
the Bangko Sentral ng Pilipinas, whichever comes later.
It is clear from the above-quoted provision of Revenue Regulations No. 4-95 that the
date of commencement of operations of a thrift bank is the date it was registered with
the SEC or the date when the Certificate of Authority to Operate was issued to it by
the Monetary Board of the BSP, whichever comes later.
Let it be stressed that Revenue Regulations No. 9-98, implementing R.A.
No. 8424 imposing the minimum corporate income tax on corporations,
provides that for purposes of this tax, the date when business operations
commence is the year in which the domestic corporation registered with the
BIR. However, under Revenue Regulations No. 4-95, the date of
commencement of operations of thrift banks, such as herein petitioner, is
the date the particular thrift bank was registered with the SEC or the date
when the Certificate of Authority to Operate was issued to it by the
Monetary Board of the BSP, whichever comes later.
Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98,
applies to petitioner, being a thrift bank. It is, therefore, entitled to a grace period of
four (4) years counted from June 23, 1999 when it was authorized by the BSP to
operate as a thrift bank. Consequently, it should only pay its minimum corporate
income tax after four (4) years from 1999.
CYANAMID PHILS v CA
Cyanamid Phils domestic corporation wholly owned subsidiary of American
Cyanamid Co., engaged in the manufacture of pharmaceutical products and
chemicals, a wholesaler of imported finished goods, and an importer/indentor
CIR sent a letter of assessment to Cyanamid Phils. and demanded the payment of
deficiency income tax, including 25% surtax for the undue accumulation of earnings.
Cyanamid Phils. claimed that the surtax was improper because the said profits
(dividends not declared for the year 1981) were retained to increase Cyanamid Phils
working capital and that it would be used for reasonable business needs of the
company.
Since CIR refused to cancel the assessment, Cyanamid appealed to the CTA which
denied the formers petition.
CTA: there was no need for petitioner to set aside a portion of its retained earnings
as working capital reserve as it claims since it had considerable liquid funds (based on
based on the 2.21:1 ratio of current assets to current liabilities).
We further reject petitioners argument that "the accumulated earnings tax does
not apply to a publicly-held corporation" citing American jurisprudence to support its
position. The reference finds no application in the case at bar because under Section
25 of the NIRC XXX, the exceptions to the accumulated earnings tax are expressly
enumerated, to wit: Bank, non-bank financial intermediaries, corporations organized
primarily, and authorized by the Central Bank of the Philippines to hold shares of
stock of banks, insurance companies, or personal holding companies, whether
domestic or foreign. The law on the matter is clear and specific. Hence, there is no
need to resort to applicable cases decided by the American Federal Courts for
guidance and enlightenment as to whether the provision of Section 25 of the NIRC
should apply to petitioner.
On appeal, CA affirmed CTA decision and likewise dismissed the petition. Hence, this
petition before the SC.
CYANAMID CONTENTION: respondent court erred in concluding it needs not infuse
additional working capital reserve because it had considerable liquid funds based on
the 2.21:1 ratio of current assets to current liabilities. Petitioner relies on the so-
called "Bardahl" formula, which allowed retention, as working capital reserve,
sufficient amounts of liquid assets to carry the company through one operating cycle.
ISSUE: whether Cyanamid Phils. is liable for the accumulated earnings tax
SC: YES!
In order to determine whether profits are accumulated for the reasonable needs of
the business to avoid the surtax upon shareholders, it must be shown that the
controlling intention of the taxpayer is manifested at the time of accumulation, not
intentions declared subsequently, which are mere afterthoughts. Furthermore, the
accumulated profits must be used within a reasonable time after the close of
the taxable year. In the instant case, petitioner did not establish, by clear and
convincing evidence that such accumulation of profit was for the immediate needs of
the business.
In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, [29] we ruled:
"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. (Mertens, Law of Federal
Income Taxation, Vol. 7, Chapter 39, p. 103).[30]
In the present case, the Tax Court opted to determine the working capital sufficiency
by using the ratio between current assets to current liabilities. The working capital
needs of a business depend upon the nature of the business, its credit policies, the
amount of inventories, the rate of turnover, the amount of accounts receivable, the
3rd Meeting Case Digest
TAXREV LOCK
collection rate, the availability of credit to the business, and similar factors. Petitioner,
12
by adhering to the "Bardahl" formula, failed to impress the tax court with the required
definiteness envisioned by the statute. We agree with the tax court that the burden of
proof to establish that the profits accumulated were not beyond the reasonable needs
Page
of the company, remained on the taxpayer. This Court will not set aside lightly the
conclusion reached by the Court of Tax Appeals which, by the very nature of its
function, is dedicated exclusively to the consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority.[31] Unless rebutted, all presumptions generally are
indulged in favor of the correctness of the CIRs assessment against the taxpayer. With
petitioners failure to prove the CIR incorrect, clearly and conclusively, this Court is
constrained to uphold the correctness of tax courts ruling as affirmed by the Court of
Appeals.
NOTE: In rel don sa American Jurisprudence na ininvoke ni Cyanamid, wala raw yang
relevance dahil naka-enumerate sa Tax Code natin kung sinu-sino lang ang exempt sa
accumulated earnings tax. Nag-focus ako sa Immediacy Test dahil yan yung
nakalagay sa syllabus.
CIR v FILINVEST
Filinvest Development Corp (FDC) is a holding company which owns 80% of the
outstanding shares of respondent Filinvest Alabang, Inc. (FAI) and 67.42% of the
outstanding shares of Filinvest Land, Inc. (FLI).
FDC and FAI entered into a Deed of Exchange with FLI whereby FDC and FAI
transferred to FLI parcels of land in exchange for shares of stock of FLI.
Apart from the above, FDC also extended advances (interest-free loans) in favor of its
affiliates and likewise entered into a Shareholders Agreement with Reco Herrera PTE
Ltd. (RHPL) for the formation of a Singapore-based joint venture company called
Filinvest Asia Corporation (FAC).
FDC then received from the BIR a Formal Notice of Demand to pay deficiency income
and documentary stamp taxes, plus interests and compromise penalties. The
foregoing deficiency taxes were assessed on the taxable gain supposedly realized by
FDC from the Deed of Exchange it executed with FAI and FLI, on the dilution resulting
from the Shareholders Agreement FDC executed with RHPL as well as the arms-length
interest rate and documentary stamp taxes imposable on the advances FDC extended
to its affiliates.
Both FDC and FAI filed their respective requests for reconsideration/protest, on the
ground that the deficiency income and documentary stamp taxes assessed by the BIR
were bereft of factual and legal basis.
Due to BIR inaction, FDC and FAI filed a petition for review before the CTA.
FDC and FAI CONTENTION (among others): that correlative to the CIR's lack of
authority to impute theoretical interests on the cash advances FDC extended in favor
of its affiliates, the rule is settled that interests cannot be demanded in the absence of
a stipulation to the effect
CIR CONTENTION (among others): Likewise calling attention to the fact that the cash
advances FDC extended to its affiliates were interest free despite the interest bearing
loans it obtained from banking institutions, the CIR invoked Section 43 of the old
NIRC which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c),
gave him "the power to allocate, distribute or apportion income or deductions
between or among such organizations, trades or business in order to prevent evasion
of taxes."
CTA: rendered the Decision which, with the exception of the deficiency income tax on
the interest income (alleged undeclared income) FDC supposedly realized from the
advances it extended in favor of its affiliates, cancelled the rest of deficiency income
and documentary stamp taxes assessed against FDC and FAI
FDC then filed a petition for review before the CA which granted the same and
annulled/cancelled the deficiency assessment arising from advances FDC extended to
its affiliates. Hence, this petition before the SC.
CIR CONTENTION: CA erred in reversing the CTAs finding that theoretical interests
can be imputed on the advances FDC extended to its affiliates in 1996 and 1997
considering that, for said purpose, FDC resorted to interest-bearing fund borrowings
from commercial banks. Since considerable interest expenses were deducted by FDC
when said funds were borrowed, the CIR theorizes that interest income should
likewise be declared when the same funds were sourced for the advances FDC
extended to its affiliates.
ISSUE: WHETHER THE COURT OF APPEALS ERRED IN REVERSING THE
DECISION OF THE COURT OF TAX APPEALS AND IN HOLDING THAT THE
ADVANCES EXTENDED BY RESPONDENT TO ITS AFFILIATES ARE NOT
SUBJECT TO INCOME TAX
SC: NO!
XXX we find that the CIR's powers of distribution, apportionment or allocation of gross
income and deductions XXX does not include the power to impute "theoretical
interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of
the 1993 NIRC, after all, the term gross income is understood to mean all income
from whatever source derived, including, but not limited to the following items:
compensation for services, including fees, commissions, and similar items; gross
income derived from business; gains derived from dealings in property; interest;
rents; royalties; dividends; annuities; prizes and winnings; pensions; and partners
distributive share of the gross income of general professional partnership. While it has
been held that the phrase "from whatever source derived" indicates a legislative policy
to include all income not expressly exempted within the class of taxable income under
our laws, the term "income" has been variously interpreted to mean "cash received or
its equivalent", "the amount of money coming to a person within a specific time" or
"something distinct from principal or capital." Otherwise stated, there must be proof
of the actual or, at the very least, probable receipt or realization by the controlled
taxpayer of the item of gross income sought to be distributed, apportioned or
allocated by the CIR.
Our circumspect perusal of the record yielded no evidence of actual or possible
showing that the advances FDC extended to its affiliates had resulted to the interests
subsequently assessed by the CIR. For all its harping upon the supposed fact that FDC
had resorted to borrowings from commercial banks, the CIR had adduced no concrete
3rd Meeting Case Digest
TAXREV LOCK
proof that said funds were, indeed, the source of the advances the former provided its
13
affiliates. While admitting that FDC obtained interest-bearing loans from commercial
banks, Susan Macabelda - FDC's Funds Management Department Manager who was
the sole witness presented before the CTA - clarified that the subject advances were
Page
sourced from the corporation's rights offering in 1995 as well as the sale of its
investment in Bonifacio Land in 1997. More significantly, said witness testified that
said advances: (a) were extended to give FLI, FAI, DSCC and FCI financial assistance
for their operational and capital expenditures; and, (b) were all temporarily in nature
since they were repaid within the duration of one week to three months and were
evidenced by mere journal entries, cash vouchers and instructional letters.
Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion
that FDC had deducted substantial interest expense from its gross income, there
would still be no factual basis for the imputation of theoretical interests on the subject
advances and assess deficiency income taxes thereon. More so, when it is borne in
mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest
shall be due unless it has been expressly stipulated in writing. XXX
PETITION BEREFT OF MERIT!
CIR v MANNING CORPO CASE!!!
In 1952 the Manila Trading and Supply Co. (MANTRASCO) had an ACS of P2,500,000
divided into 25,000 common shares;
24,700 of these were owned by Julius S. Reese, and the rest,
at 100 shares each, by John L. Manning, W.D. McDonald and E.E. Simmons
(respondents Manning et. al)
Later, in view of Reeses desire that upon his death MANTRASCO and its two
subsidiaries, MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue
under the management of Manning et. al., a trust agreement, with Reese as the
OWNER, MANTRASCO as the COMPANY, Manning et al as MANAGERS and a law firm
as the TRUSTEES, was executed. The trust agreement provides, among others, that
all shares of stock in the hands of Reese and Manning et. al. shall be deposited to the
TRUSTEES.
Upon the death of Reese and the receipt by the TRUSTEES of the initial payment from
MANTRASCO purchasing the OWNERS SHARES, the TRUSTEES shall cause the
OWNERS SHARES to be transferred into the name of MANTRASCO and such company
shall thereupon transfer such shares into the name of the TRUSTEES and the
TRUSTEES shall hold such shares until payment for all such shares shall have been
made by the company as provided in this agreement.
Reese later died. After MANTRASCO made a partial payment of Reeses shares, the
certificate for the 24,700 shares in Reeses name was cancelled and a new certificate
was issued in the name of MANTRASCO. On the same date, and in the meantime that
Reeses interest had not been fully paid, the new certificate was endorsed to the law
firm of Ross, Selph, Carrascoso and Janda, as trustees for and in behalf of
MANTRASCO.
In a special meeting of MANTRASCO stockholders, a resolution was passed: that the
24,700 shares in the Treasury be reverted back to the capital account of the company
as a stock dividend to be distributed to shareholders of record at the close of
business
Later, the entire purchase price of Reeses interest in MANTRASCO was finally paid in
full by the company and the trust agreement was subsequently terminated and the
trustees delivered to MANTRASCO all the shares which they were holding in trust.
BIR then examined MANTRASCOs books and found that the 24,700 shares declared
as dividends had been proportionately distributed to the Manning et. al. and that
Manning et. al. failed to declare the said stock dividends as part of their taxable
income. BIR concluded that the distribution of Reeses shares as stock dividends was
in effect a distribution of the "asset or property of the corporation as may be
gleaned from the payment of cash for the redemption of said stock and distributing
the same as stock dividend.
The CIR then issued notices of assessment for deficiency income taxes to Manning et.
al. which the latter challenged. Failing such, Manning et. al. appealed to the CTA
which absolved the respondents from any liability for receiving the questioned stock
dividends on the ground that their respective one-third interest in MANTRASCO
remained the same before and after the declaration of stock dividends and
only the number of shares held by each of them had changed.
Hence, this petition before the SC.
CIR CONTENTION: XXX the Commissioner maintains that the full value (P7,973,660)
of the shares redeemed from Reese by MANTRASCO which were subsequently
distributed to the respondents as stock dividends in 1958 should be taxed as income
of the respondents for that year, the said distribution being in effect a distribution of
cash. The respondents interests in MANTRASCO, he further argues, were only .4%
prior to the declaration of the stock dividends in 1958, but rose to 33 1/3% each after
the said declaration.
ISSUE: Whether or not Manning et. al. are liable for deficiency income tax arising
from the alleged stock dividends distributed to them by MANTRASCO
SC: YES!
XXX it is the assumption of both parties that the 24,700 shares declared as stock
dividends were treasury shares. We are however convinced, after a careful study of
the trust agreement, that the said shares were not, XXX treasury shares. The reasons
are quite plain.
Although authorities may differ on the exact legal and accounting status of so-called
"treasury shares," 1 they are more or less in agreement that treasury shares are
stocks issued and fully paid for and re-acquired by the corporation either by purchase,
donation, forfeiture or other means. 2 Treasury shares are therefore issued shares,
but being in the treasury they do not have the status of outstanding shares. 3
Consequently, although a treasury share, not having been retired by the corporation
re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the
corporation as a treasury share, participates neither in dividends, because dividends
3rd Meeting Case Digest
TAXREV LOCK
cannot be declared by the corporation to itself, 4 nor in the meetings of the
14
corporation as voting stock, for otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to perpetuate their
control of the corporation, 5 though it still represents a paid-for interest in the
Page
property of the corporation. XXX
The manifest intention of the parties to the trust agreement was, in sum and
substance, to treat the 24,700 shares of Reese as absolutely outstanding shares of
Reeses estate until they were fully paid. Such being the true nature of the 24,700
shares, their declaration as treasury stock dividend in 1958 was a complete nullity
and plainly violative of public policy. A stock dividend, being one payable in capital
stock, cannot be declared out of outstanding corporate stock, but only from retained
earnings XXX
The declaration by the respondents and Reeses trustees of MANTRASCOs alleged
treasury stock dividends in favor of the former, brings, however, into clear focus the
ultimate purpose which the parties to the trust instrument aimed to realize: to make
the respondents the sole owners of Reeses interest in MANTRASCO by utilizing the
periodic earnings of that company and its subsidiaries to directly subsidize their
purchase of the said interests, and by making it appear outwardly, through the formal
declaration of non-existent stock dividends in the treasury, that they have not
received any income from those firms when, in fact, by that declaration they secured
to themselves the means to turn around as full owners of Reeses shares. In other
words, the respondents, using the trust instrument as a convenient technical device,
bestowed unto themselves the full worth and value of Reeses corporate holdings with
the use of the very earnings of the companies. Such package device, obviously not
designed to carry out the usual stock dividend purpose of corporate expansion
reinvestment, e.g. the acquisition of additional facilities and other capital budget
items, but exclusively for expanding the capital base of the respondents in
MANTRASCO, cannot be allowed to deflect the respondents responsibilities toward our
income tax laws. The conclusion is thus ineluctable that whenever the companies
involved herein parted with a portion of their earnings "to buy" the corporate holdings
of Reese, they were in ultimate effect and result making a distribution of such
earnings to the respondents. All these amounts are consequently subject to income
tax as being, in truth and in fact, a flow of cash benefits to the respondents. XXX
CTA DECISION ABSOLVING MANNING ET. AL. SET ASIDE!
CIR v CA
Don Andres Soriano citizen and resident of the US; founder/owner of A. Soriano Y
Cia (now, ANSCOR)
On December 30, 1964, Don Andres died. As of that date, the records revealed that
he has a total shareholdings (in ANSCOR) of 185,154 shares.
One-half of that shareholdings or 92,577 shares were transferred to his wife, Doa
Carmen Soriano, as her conjugal share. The other half formed part of his estate.
Later as ANSCORs ACS increased, stock dividends worth 46,290 and 46,287 shares
were respectively received by the Don Andres estate and Doa Carmen from ANSCOR.
Hence, increasing their accumulated shareholdings to 138,867 and 138,864 common
shares each.
Doa Carmen requested a ruling from the United States Internal Revenue Service
(IRS), inquiring if an exchange of common with preferred shares may be
considered as a tax avoidance scheme under Section 367 of the 1954 U.S.
Revenue Act. The IRS opined that the exchange is only a recapitalization scheme and
not tax avoidance.
Later, ANSCOR reclassified its existing 300,000 common shares into 150,000
common and 150,000 preferred shares. Consequently, Doa Carmen exchanged
her whole 138,864 common shares for 138,860 of the newly reclassified preferred
shares. The estate of Don Andres in turn, exchanged 11,140 of its common shares,
for the remaining 11,140 preferred shares, thus reducing its (the estate) common
shares to 127,727.
Pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the
Don Andres' estate. The Board then further increased ANSCOR's capital stock to P75M
divided into 150,000 preferred shares and 600,000 common shares. About a year
later, ANSCOR again redeemed 80,000 common shares from the Don Andres'
estate, further reducing the latter's common shareholdings to 19,727. As stated in the
Board Resolutions, ANSCOR's business purpose for both redemptions of stocks is to
partially retire said stocks as treasury shares in order to reduce the company's foreign
exchange remittances in case cash dividends are declared.
After examination of books of account and records, Revenue examiners assessed
ANSCOR for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of
the 1939 Revenue Code, XXX based on the transactions of exchange 31 and
redemption of stocks.
ANSCOR's subsequent protest on the assessments was denied by CIR. ANSCOR then
filed a petition for review before CTA assailing the tax assessments on the
redemptions and exchange of stocks. CTA reversed CIR ruling. Hence, this petition
before the SC.
The bone of contention is the interpretation and application of Section 83(b) of the
1939 Revenue Act which provides:
(b) Stock dividends A stock dividend representing the transfer of surplus to capital
account shall not be subject to tax. However, if a corporation cancels or redeems
stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stock shall be considered
as taxable income to the extent it represents a distribution of earnings or profits
3rd Meeting Case Digest
TAXREV LOCK
accumulated after March first, nineteen hundred and thirteen.
15
ISSUE: whether ANSCOR's redemption of stocks from its stockholder as well as the
exchange of common with preferred shares can be considered as "essentially
Page
equivalent to the distribution of taxable dividend" making the proceeds thereof
taxable under the provisions of the above-quoted law
SC:
REDEMPTION AND CANCELLATION YES!
For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there
is redemption or cancellation; (b) the transaction involves stock dividends and (c) the
"time and manner" of the transaction makes it "essentially equivalent to a distribution
of taxable dividends." Of these, the most important is the third.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the
stock 89 in exchange for property, whether or not the acquired stock is cancelled,
retired or held in the treasury. 90 Essentially, the corporation gets back some of its
stock, distributes cash or property to the shareholder in payment for the stock, and
continues in business as before. The redemption of stock dividends previously issued
is used as a veil for the constructive distribution of cash dividends. In the instant
case, there is no dispute that ANSCOR redeemed shares of stocks from a stockholder
(Don Andres) twice (28,000 and 80,000 common shares). But where did the shares
redeemed come from? If its source is the original capital subscriptions upon
establishment of the corporation or from initial capital investment in an existing
enterprise, its redemption to the concurrent value of acquisition may not invite the
application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere
return of capital. On the contrary, if the redeemed shares are from stock dividend
declarations other than as initial capital investment, the proceeds of the redemption is
additional wealth, for it is not merely a return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed
as taxable dividends. Here, it is undisputed that at the time of the last redemption,
the original common shares owned by the estate were only 25,247.5 91 This means
that from the total of 108,000 shares redeemed from the estate, the balance of
82,752.5 (108,000 less 25,247.5) must have come from stock dividends. Besides, in
the absence of evidence to the contrary, the Tax Code presumes that every
distribution of corporate property, in whole or in part, is made out of corporate
profits 92such as stock dividends. The capital cannot be distributed in the form of
redemption of stock dividends without violating the trust fund doctrine wherein the
capital stock, property and other assets of the corporation are regarded as equity in
trust for the payment of the corporate creditors. 93 Once capital, it is always
capital. 94 That doctrine was intended for the protection of corporate creditors. 95
With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to
3 years earlier. The time alone that lapsed from the issuance to the redemption is not
a sufficient indicator to determine taxability. It is a must to consider the factual
circumstances as to the manner of both the issuance and the redemption. The "time"
element is a factor to show a device to evade tax and the scheme of cancelling or
redeeming the same shares is a method usually adopted to accomplish the end
sought. 96 Was this transaction used as a "continuing plan," "device" or "artifice" to
evade payment of tax? It is necessary to determine the "net effect" of the transaction
between the shareholder-income taxpayer and the acquiring (redeeming)
corporation. 97 The "net effect" test is not evidence or testimony to be considered; it is
rather an inference to be drawn or a conclusion to be reached. 98 It is also important
to know whether the issuance of stock dividends was dictated by legitimate business
reasons, the presence of which might negate a tax evasion plan. 99
The issuance of stock dividends and its subsequent redemption must be separate,
distinct, and not related, for the redemption to be considered a legitimate tax
scheme. 100 Redemption cannot be used as a cloak to distribute corporate
earnings. 101 Otherwise, the apparent intention to avoid tax becomes doubtful as the
intention to evade becomes manifest. It has been ruled that:
[A]n operation with no business or corporate purpose is a mere
devise which put on the form of a corporate reorganization as a
disguise for concealing its real character, and the sole object and
accomplishment of which was the consummation of a
preconceived plan, not to reorganize a business or any part of a
business, but to transfer a parcel of corporate shares to a
stockholder. 102
Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may
not be applicable if the redeemed shares were issued with bona fide business
purpose, 103 which is judged after each and every step of the transaction have been
considered and the whole transaction does not amount to a tax evasion scheme.
ANSCOR invoked two reasons to justify the redemptions (1) the alleged
"filipinization" program and (2) the reduction of foreign exchange remittances in case
cash dividends are declared. The Court is not concerned with the wisdom of these
purposes but on their relevance to the whole transaction which can be inferred from
the outcome thereof. Again, it is the "net effect rather than the motives and plans of
the taxpayer or his corporation" 104 that is the fundamental guide in administering
Sec. 83(b). This tax provision is aimed at the result. 105 It also applies even if at the
time of the issuance of the stock dividend, there was no intention to redeem it as a
means of distributing profit or avoiding tax on dividends. 106 The existence of
legitimate business purposes in support of the redemption of stock dividends is
immaterial in income taxation. It has no relevance in determining "dividend
equivalence". 107 Such purposes may be material only upon the issuance of the stock
dividends. The test of taxability under the exempting clause, when it provides "such
time and manner" as would make the redemption "essentially equivalent to the
distribution of a taxable dividend", is whether the redemption resulted into a flow of
wealth. If no wealth is realized from the redemption, there may not be a dividend
equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deemed
"realize" until the fruit has fallen or been plucked from the tree.
3rd Meeting Case Digest
TAXREV LOCK
The three elements in the imposition of income tax are: (1) there must be gain or and
16
profit, (2) that the gain or profit is realized or received, actually or
constructively, 108 and (3) it 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
Page
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 of where income comes
from. 109
As stated above, the test of taxability under the exempting clause of Section 83(b) is,
whether income was realized through the redemption of stock dividends. The
redemption converts into money the stock dividends which become a realized profit or
gain and consequently, the stockholder's separate property. 110 Profits derived from
the capital invested cannot escape income tax. As realized income, the proceeds of
the redeemed stock dividends can be reached by income taxation regardless of the
existence of any business purpose for the redemption. Otherwise, to rule that the said
proceeds are exempt from income tax when the redemption is supported by
legitimate business reasons would defeat the very purpose of imposing tax on income.
Such argument would open the door for income earners not to pay tax so long as the
person from whom the income was derived has legitimate business reasons. In other
words, the payment of tax under the exempting clause of Section 83(b) would be
made to depend not on the income of the taxpayer, but on the business purposes of a
third party (the corporation herein) from whom the income was earned. This is
absurd, illogical and impractical considering that the Bureau of Internal Revenue (BIR)
would be pestered with instances in determining the legitimacy of business reasons
that every income earner may interposed. It is not administratively feasible and
cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that "the
redeemed shares are the equivalent of dividend only if the shares were not issued for
genuine business purposes", 111 or the "redeemed shares have been issued by a
corporation bona fide" 112 bears no relevance in determining the non-taxability of the
proceeds of redemption ANSCOR, relying heavily and applying said cases, argued that
so long as the redemption is supported by valid corporate purposes the proceeds are
not subject to tax. 113 The adoption by the courts below 114 of such argument is
misleading if not misplaced. A review of the cited American cases shows that the
presence or absence of "genuine business purposes" may be material with respect to
the issuance or declaration of stock dividends but not on its subsequent redemption.
The issuance and the redemption of stocks are two different transactions. Although
the existence of legitimate corporate purposes may justify a corporation's acquisition
of its own shares under Section 41 of the Corporation Code, 115such purposes cannot
excuse the stockholder from the effects of taxation arising from the redemption. If the
issuance of stock dividends is part of a tax evasion plan and thus, without legitimate
business reasons, the redemption becomes suspicious which exempting clause. The
substance of the whole transaction, not its form, usually controls the tax
consequences. 116
The two purposes invoked by ANSCOR, under the facts of this case are no excuse for
its tax liability. First, the alleged "filipinization" plan cannot be considered legitimate
as it was not implemented until the BIR started making assessments on the proceeds
of the redemption. Such corporate plan was not stated in nor supported by any Board
Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being a
separate entity, the corporation can act only through its Board of Directors. 117 The
Board Resolutions authorizing the redemptions state only one purpose reduction of
foreign exchange remittances in case cash dividends are declared. Not even this
purpose can be given credence. Records show that despite the existence of enormous
corporate profits no cash dividend was ever declared by ANSCOR from 1945 until the
BIR started making assessments in the early 1970's. Although a corporation under
certain exceptions, has the prerogative when to issue dividends, yet when no cash
dividends was issued for about three decades, this circumstance negates the
legitimacy of ANSCOR's alleged purposes. Moreover, to issue stock dividends is to
increase the shareholdings of ANSCOR's foreign stockholders contrary to its
"filipinization" plan. This would also increase rather than reduce their need for foreign
exchange remittances in case of cash dividend declaration, considering that ANSCOR
is a family corporation where the majority shares at the time of redemptions were
held by Don Andres' foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same
cannot be a valid excuse for the imposition of tax. Otherwise, the taxpayer's liability
to pay income tax would be made to depend upon a third person who did not earn the
income being taxed. Furthermore, even if the said purposes support the redemption
and justify the issuance of stock dividends, the same has no bearing whatsoever on
the imposition of the tax herein assessed because the proceeds of the redemption are
deemed taxable dividends since it was shown that income was generated therefrom.
Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the
redeemed stock dividends would be to impose on such stock an undisclosed lien and
would be extremely unfair to intervening purchase, i.e. those who buys the stock
dividends after their issuance. 118 Such argument, however, bears no relevance in this
case as no intervening buyer is involved. And even if there is an intervening buyer, it
is necessary to look into the factual milieu of the case if income was realized from the
transaction. Again, we reiterate that the dividend equivalence test depends on such
"time and manner" of the transaction and its net effect. The undisclosed lien 119 may
be unfair to a subsequent stock buyer who has no capital interest in the company. But
the unfairness may not be true to an original subscriber like Don Andres, who holds
stock dividends as gains from his investments. The subsequent buyer who buys stock
dividends is investing capital. It just so happen that what he bought is stock
dividends. The effect of its (stock dividends) redemption from that subsequent buyer
is merely to return his capital subscription, which is income if redeemed from the
original subscriber.
After considering the manner and the circumstances by which the issuance and
redemption of stock dividends were made, there is no other conclusion but that the
proceeds thereof are essentially considered equivalent to a distribution of taxable
dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income"
subject to tax under Section 22 in relation to Section 21 120 of the 1939 Code.
Moreover, under Section 29(a) of said Code, dividends are included in "gross income".
As income, it is subject to income tax which is required to be withheld at source. The
1997 Tax Code may have altered the situation but it does not change this disposition.
3rd Meeting Case Digest
TAXREV LOCK
issue of taxable dividend may arise only once a subscriber disposes of his

17
EXCHANGE OF COMMON WITH PREFERRED SHARES- NO! entire interest and not when there is still maintenance of proprietary
interest.

Page
Exchange is an act of taking or giving one thing for another involving 122 reciprocal
transfer and is generally considered as a taxable transaction. The exchange of
common stocks with preferred stocks, or preferred for common or a combination of
either for both, may not produce a recognized gain or loss, so long as the provisions WISE v MEER
of Section 83(b) is not applicable. This is true in a trade between two (2) persons as
well as a trade between a stockholder and a corporation. In general, this trade must Complaint- recovery of certain amounts paid under protest against CIR
be parts of merger, transfer to controlled corporation, corporate acquisitions or
corporate reorganizations. No taxable gain or loss may be recognized on exchange of Manila Wine Merchants, Ltd
property, stock or securities related to reorganizations. 124 a Hongkong corporation
was in liquidation beginning June 1, 1937
all dividends declared and paid thereafter were distributions of all its assets in
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares complete liquidation
into common and preferred, and that parts of the common shares of the Don Andres
estate and all of Doa Carmen's shares were exchanged for the whole 150.000
preferred shares. Thereafter, both the Don Andres estate and Doa Carmen remained
as corporate subscribers except that their subscriptions now include preferred shares.
There was no change in their proportional interest after the exchange. There was no
cash flow. Both stocks had the same par value. Under the facts herein, any difference
in their market value would be immaterial at the time of exchange because no income
is yet realized it was a mere corporate paper transaction. It would have been
different, if the exchange transaction resulted into a flow of wealth, in which case
income tax may be imposed. 125

Reclassification of shares does not always bring any substantial alteration in the
subscriber's proportional interest. But the exchange is different there would be a
shifting of the balance of stock features, like priority in dividend declarations or
absence of voting rights. Yet neither the reclassification nor exchange per se, yields
realize income for tax purposes. A common stock represents the residual ownership
interest in the corporation. It is a basic class of stock ordinarily and usually issued
without extraordinary rights or privileges and entitles the shareholder to a pro
rata division of profits. 126 Preferred stocks are those which entitle the shareholder to
some priority on dividends and asset distribution.

Both shares are part of the corporation's capital stock. Both stockholders are no
different from ordinary investors who take on the same investment risks. Preferred
and common shareholders participate in the same venture, willing to share in the
profits and losses of the enterprise. 128 Moreover, under the doctrine of equality of
shares all stocks issued by the corporation are presumed equal with the same
privileges and liabilities, provided that the Articles of Incorporation is silent on such
differences.

In this case, the exchange of shares, without more, produces no realized

income to the subscriber. There is only a modification of the subscriber's
rights and privileges which is not a flow of wealth for tax purposes. The