III. GROSS INCOME
33 of the Code; taxable pensions and retirement pay; and
INCLUSIONS in Gross Income
SEC. 32. (A) General Definition. - Except when otherwise provided in this Title,
gross income means all income derived from whatever source, including (but not
limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to
fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a
profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional
partnership.
1. Compensation: Special Problems on In-Kind Compensation
Sec. 2.78.1(A) and (1), Rev. Regs. 2-98 (April 17, 1998)
(A) Compensation Income Defined. In general, the term "compensation" means all
remuneration for services performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded by the Code.
The name by which the remuneration for services is designated is immaterial. Thus,
salaries, wages, emoluments and honoraria, allowances, commissions (e.g.
transportation, representation, entertainment and the like); fees including director's
fees, if the director is, at the same time, an employee of the employer/corporation;
taxable bonuses and fringe benefits except those which are subject to the fringe
benefits tax under Sec.
other income of a similar nature constitute compensation income.
The basis upon which the remuneration is paid is immaterial in determining whether
the remuneration constitutes compensation. Thus, it may be paid on the basis of
piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly
or annually.
Remuneration for services constitutes compensation even if the relationship of
employer and employee does not exist any longer at the time when payment is made
between the person in whose employ the services had been performed and the
individual who performed them.
(1) Compensation paid in kind. Compensation may be paid in money or in some
medium other than money, as for example, stocks, bonds or other forms of property.
If services are paid for in a medium other than money, the fair market value of the
thing taken in payment is the amount to be included as compensation subject to
withholding. If the services are rendered at a stipulated price, in the absence of
evidence to the contrary, such price will be presumed to be the fair market value of
the remuneration received. If a corporation transfers to its employees its own stock
as remuneration for services rendered by the employee, the amount of such
remuneration is the fair market value of the stock at the time the services were
rendered.
CASES:
Henderson vs Collector
Facts: Arthur Henderson is the President of the American Intl. Underwriters for the
Phils. w/c represents a group of American cos. engaged in the business of general
insurance (exc. in life insurance). He receives a basic annual salary of P30,000 and
allowance for house rentals and utilities. Although he and his wife are childless and
are only two in the family, they lived in a large apartment provided for by his
employer. As company president, he and his wife had to entertain and put up
houseguests for the company. The BIR now seeks to collect taxes on the allowances
for rental and utilities expenses.
Held: The exigencies of Henderson's high executive position, not to mention social
standing, demanded and compelled them to live in a more spacious and pretentious
quarters like the ones they had occupied. Because they had to entertain and put up
houseguests, the employer had to grant him allowances for rental and utilities in
addition to his annual basic salary to take care of those expenses for rental and utilities
in excess of their personal needs. Hence, the fact that the taxpayers had to live or did
not have to live in the apartment chosen by the employer is of no moment, for no part
of the allowance redounded to the benefit of the Hendersons. Neither was there an
amount retained by them. Their bills for rental were paid directly by the employer to
the creditor.
CIR v Castaneda
Facts: Efren Castaneda retired from govt service as Revenue Attach in the Philippine
Embassy, London, England. Upon retirement, he received benefits such as the
terminal leave pay. The Commissioner of Internal Revenue withheld P12,557 allegedly
representing that it was tax income.
Castaneda filed for a refund, contending that the cash equivalent of his terminal leave
is exempt from income tax.
The Solicitor General contends that the terminal leave is based from an employer-
employee relationship and that as part of the services rendered by the employee, the
terminal leave pay is part of the gross income of the recipient. CTA ruled in favor of
Castaneda and ordered the refund. CA affirmed decision of CTA. Hence, this petition
for review on certiorari.
Issue: Whether or not terminal leave pay (on occasion of his compulsory retirement)
is subject to income tax.
Held: NO. As explained in Borromeo v CSC, the rationale of the court in holding that
terminal leave pays are subject to income tax is that:
. . commutation of leave credits, more commonly known as terminal leave, is applied
for by an officer or employee who retires, resigns or is separated from the service
through no fault of his own. In the exercise of sound personnel policy, the
Government encourages unused leaves to be accumulated. The Government
recognizes that for most public servants, retirement pay is always less than generous
if not meager and scrimpy. A modest nest egg which the senior citizen may look
forward to is thus avoided. Terminal leave payments are given not only at the same
time but also for the same policy considerations governing retirement benefits.
A terminal leave pay is a retirement benefit which is NOT subject to income tax.
Polo vs CIR
Facts: David G. Nitafan, Wenceslao M. Polo, and Maximo A. Savellano, Jr., petitioners,
vs. Commissioner Of Internal Revenue and The Financial Officer, Supreme Court Of
The Philippines, respondents.
Facts: Petitioners, the duly appointed and qualified Judges presiding over Branches
52, 19 and 53, respectively, of the Regional Trial Court, National Capital Judicial
Region, all with stations in Manila, seek to prohibit and/or perpetually enjoin
respondents, the Commissioner of Internal Revenue and the Financial Officer of the
Supreme Court, from making any deduction of withholding taxes from their salaries.
Issue: Whether or not members of the Judiciary are exempt from income taxes.
Held: Yes. The Court held that the salaries of Justices and Judges are properly subject
to a general income tax law applicable to all income earners and that the payment of
such income tax by Justices and Judges does not fall within the constitutional
protection against decrease of their salaries during their continuance in office and the
ruling that "the imposition of income tax upon the salary of judges is a diminution
thereof, and so violates the Constitution" in Perfecto vs. Meer, as affirmed in Endencia
vs. David must be declared discarded. The framers of the fundamental law, as the
alter ego of the people, have expressed in clear and unmistakable terms the meaning
and import of Section 10, Article VIII, of the 1987 Constitution that they have adopted.
a. Limited Choice and Restricted Property
U.S. v. Drescher
Facts: Drescher was an employee of Bausch and Lomb who was given voluntary
retirement before he reached 65. He was given in recognition of prior services
rendered a non-transferable annuity that would begin to pay when he reached 65 in
1958 )or to his designated beneficiary if he died), for which the company paid a
premium of $5,000 and deducted as compensation to Drescher. The policy had no Under the ESAP, all employees, including executive officers, with at least one year of
cash surrender value. It was only a guaranteed future income stream for himself or service with the Bank will be offered Australian registered shares in ANZ Bank free of
his beneficiary. charge. There are two schemes under the plan: (1) the general scheme and (2) the
incentive scheme. Under both schemes, a trading lock of three years from the date of
Issue: What is the includable income value of the annuity in the present tax year? Is it
award or from the termination of employment from ANZ in case of general scheme
the price of the premium paid by the company ($5,000), or is it zero because the
shall be implemented. During the trading lock, a Trustee will hold the shares on behalf
annuity gives the taxpayer no present income?
of the employees. Dividends accruing to the employees during the trading lock are
Held: YES. Taxable. The present value of an annuity which is non-transferable is equal required to be reinvested in ANZ shares under the compulsory participation
to the cost to the taxpayer of acquiring identical rights. An annuity is deferred requirement of the
compensation.Sec. 22(b) (2) "Annuities, etc; Amounts received (other than amounts
Dividend Reinvestment Plan (DRP). As such, employees cannot receive cash dividends;
paid by reason of the death of the insured and interest payments on such amounts
the cash dividends will be received in the form of additional ANZ shares. The
and other than amounts received as annuities) under a life insurance or endowment
additional shares will be released from restriction at the same time the participant's
contract, but if such amounts(when added to amounts received before the taxable
plan shares are released.
year under such contract) exceed the aggregate premiums or consideration paid
(whether or not paid during the taxable year) then the excess shall be included in gross The main distinction between the two scheme is that in general scheme, shares are
income. not forfeitable under any circumstance whereas in the incentive scheme the shares
and any accumulated DRP shares will be forfeited if the employee resigns or is
The court reasoned that the value lie somewhere between the premium price paid
dismissed before the end of the three year restriction period; that however, if the
and zero. Even though the taxpayer might die before the annuity started paying, he
employee retires or is made
had some present rights to a future income stream, which he could designate to a
beneficiary. redundant, the shares will not be forfeited; that they will be transferred to him
following termination of employment.
Furthermore, the taxpayer could realize present cash payment from a third party who
he could designate as a trustee to hold the future payments in trust for him. However, Issue:
this would probably be worth less than the premium paid by the company based on
1. W/N shares granted under the ANZ ESAP Plan which are subject to disposal
the risk of the taxpayer dying before the annuity began paying, and thus the payments
restriction and forfeiture clause (the latter applies to ESAP shares under incentive
going to the beneficiary. However, the burden of proof was on Drescher to show that
scheme) at the time of grant shall not be taxed until the disposal restriction is lifted.
the present value was less than $5,000.
2. W/N dividends from ANZ ESAP shares which are mandatorily reinvested through
BIR Rul. 9-04 (Sept. 13, 2004) the ANZ Dividend Reinvestment Plan (DRP), with the same disposal restrictions and/or
forfeiture clauses as the original shares, shall not also be taxed until the disposal
Facts: ANZ (Australia and New Zealand) Bank was organized under the laws of restriction is lifted.
Australia; that its shares are listed and traded in the Australian Stock exchange; that
in order to increase employee motivation and to create a stronger link between
increasing shareholder value and its employee reward system ANZ Bank has
established the ANZ Employee Share Acquisition Plan (ESAP) to provide employees
with the opportunity to participate in the growth of the Bank.
Held:
In both instances NOT TAXABLE until disposal restriction of three years is lifted.
1. Section 32(A)(l) of the Tax Code of 1997, provides that the term "gross income"
includes compensation for services in whatever form paid including, but not limited
to, fees, salaries, wages, commissions, and similar items.
On the other hand compensation is defined under Section 2.78. (A) of Revenue
Regulations (RR) No. 2-98 as "all remuneration for services performed by an employee
for his employer under an employer-employee relationship, unless specifically
excluded by the Code". The regulations further provides that compensation may be
paid in money or in some medium other than money, as for example, stocks, bonds
or other forms of property.
The shares granted pursuant to an employer-employee relationship under the ANZ
ESAP Plan which are subject to disposal restriction and forfeiture clause at the time of
grant shall not be taxed until the disposal restriction is lifted, that is, for a period of
three years from the date the shares are awarded or the termination of employment
with ANZ in case of the general scheme and a period of three years from the date the
shares are awarded in the case of the incentive scheme whichever is earlier, as the
same will only be taxable when actually or constructively received. (Section 2.83.6 of
RR 2-98)
Sec. 2.83.6. Applicability of constructive receipt of compensation. The
withholding tax on compensation shall apply to compensation actually or
constructively paid. Compensation is constructively paid within the meaning of these
Regulations when it is credited to the account of or set apart for an employee so that
it may be drawn upon by him at any time although not then actually reduced to
possession. To constitute payment in such a case, the compensation must be credited
or set apart for the employee without any substantial limitation or restriction as to
time or manner of payment or condition upon which payment is to be made, and
must be made available to him so that it may be drawn upon at any time, and its
payments brought within his control and disposition. A book entry, if made, should
indicate an absolute transfer from one account to another. If the income is not
credited, but it is set apart, such income must be unqualifiedly subject to the demand
of the taxpayer. Where a corporation contingently credits its employees with a bonus
stock, which is not available to such employees until some future date, the mere
crediting on the books of the corporation does not constitute payment.
2. With respect to dividends, the same, should be recognized on the date of
declaration, the date on which the payment of dividends is approved. The reason is
that when dividends are declared, the stockholder has already the right thereto so
much so that if the stocks are subsequently sold, the sales price normally includes the
accrued dividends. Once a dividend has been declared, a legal liability binding on the
corporation is created.
However, stock dividends whether of the same class or different are not income. The
reason is that there is no distribution of the assets of the corporation. The stock
dividends create only a change in the composition of the stockholders' equity, that is,
a transfer from retained earnings to capital stock.
b. Forced Consumption: Convenience of the Employer Rule
Sec. 2.78.1(A)(2), Rev. Regs. 2-98 (April 17, 1998)
SECTION 2.78.1. Withholding of Income Tax on Compensation Income.
(A) Compensation Income Defined. In general, the term "compensation" means all
remuneration for services performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded by the Code.
The name by which the remuneration for services is designated is immaterial. Thus,
salaries, wages, emoluments and honoraria, allowances, commissions (e.g.
transportation, representation, entertainment and the like); fees including director's
fees, if the director is, at the same time, an employee of the employer/corporation;
taxable bonuses and fringe benefits except those which are subject to the fringe
benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and
other income of a similar nature constitute compensation income.
The basis upon which the remuneration is paid is immaterial in determining whether
the remuneration constitutes compensation. Thus, it may be paid on the basis of
piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly
or annually.
Remuneration for services constitutes compensation even if the relationship of
employer and employee does not exist any longer at the time when payment is made
between the person in whose employ the services had been performed and the
individual who performed them.
(2) Living quarters or meals. If a person receives a salary as remuneration for
services rendered, and in addition thereto, living quarters or meals are provided, the
value to such person of the quarters and meals so furnished shall be added to then
remuneration paid for the purpose of determining the amount of compensation
subject to withholding.
However, if living quarters or meals are furnished to an employee for the convenience
of the employer, the value thereof need not be included as part of compensation
income.
Sec. 2, Rev. Audit Mem. Order 1-87 (April 23, 1987)
2. Housing and Meals
2.1 If an employee receives a remuneration for services salaries and/or allowances
and in addition thereto living quarters and/or meals, the value to such person of the
quarters and meals so furnished shall be added to the remuneration otherwise paid
for the purpose of determining the amount of compensation subject to withholding
tax.
2.2 The value of lodging furnished to an employee by or on behalf of the employer
shall be excluded from the employee's gross income, if the lodging is furnished in the
business premises of the employer; and the employee is required to accept such
lodging as a condition of his employment.
2.3 The value of meals furnished to an employee by or on behalf of his employer shall
be excluded from the employee's gross income if the meals are furnished on the
business premises of the employer and the meals are furnished for the convenience
of the employer.
Meals furnished without charge to an employee as regarded as furnished for the
convenience of the employer where they are furnished to the employee during his
work day to have the employee available for work during his meal period.
2.4 Business premises of the employer means the place where the employee performs
a significant portion of his duties or where the employer conducts a significant portion
of his business. In case of doubt, the criteria to be used shall be (a) time, more than
50% of the employee's work time or (b) value of business, more than 50% of the
production of the said employee.
2.5 Notwithstanding the provisions of the preceding paragraphs, if an employee is
provided by his employer with company housing or living quarters outside the
business premises, and such employee, because of his position in the employer
company, also uses said house or living quarters for the benefit of the latter, like
entertaining and putting up houseguests and guest of the employer-company, then
fifty percent (50%) of such allowance, rental value, or depreciation if the living
quarters are owned by the employer, shall be added to the compensation paid to such
employee and be subject to the withholding tax on wages. The employer may deduct
the said housing expense as a business expense.
2.6 Privileges such as "courtesy discounts" on purchases of company merchandise of
a value not to exceed 1/2 basic month's salary of an employee or an officer shall not
be added to the remuneration of the employee.
2.7 Entertainment of and gifts to company officers and employees shall not be a
deductible expense except for Christmas and major anniversary celebrations (e.g.
25th year of company's establishment), sports tournament, company picnics not to
exceed one a year provided that the value of the gift when it is not a service award
for length of service shall not exceed in value of month's of the basic salary of the
employee receiving the gift.
Case:
Benaglia v. CIR Convenience of the Employer Rule
Facts: The petitioner (Benaglia) managed hotels in Honolulu. He and his wife occupied
a suite and received meals at and from the hotel, but did not report their value in his
income.
The respondent (Commissioner) added $7,845 each year to petitioners gross income
as compensation from Hawaiian Hotels, Ltd. arguing that the said amount was the fair
market value of rooms and meals furnished by the employer. The Commissioners
position was that the cost of meals and lodging were compensation and should be
included in petitioners taxable income.
Issue: W/N the residence and meals at the hotel were compensation and therefore
part of petitioner's gross income for which he could be taxed.
Ruling: No. The petitioner lived at the hotel solely because he could not otherwise
perform the services required of him. The occupation of the premises was imposed
upon him for the benefit of the employer.
This is not to say, however, that anytime an employee is fed or lodged by the employer
thatit is automatically not taxable income. The court also looked at the intent of the
parties and decided the employer never intended the room and board to form part of
his compensation.
In sum, a taxpayer employee may exclude the value of food and lodging received from
his employer, if he receives it solely for the convenience of his employer and as a
necessary incident of the proper performance of his duty.
Fringe benefits Tax RR 3-98, RR 05-2011, RMC20-2011
SPECIAL TREATMENT OF FRINGE BENEFITS
(A) Imposition of Fringe Benefits Tax A final withholding tax is hereby imposed
on the grossed-up monetary value of fringe benefit furnished, granted or paid by the
employer to the employee, except rank and file employees as defined in these
Regulations, whether such employer is an individual, professional partnership or a
corporation, regardless of whether the corporation is taxable or not, or the
government and its instrumentalities except when: (1) the fringe benefit is required
by the nature of or necessary to the trade, business or profession of the employer; or
(2) when the fringe benefit is for the convenience or advantage of the employer. The
fringe benefit tax shall be imposed at the following rates:
Effective January 1, 1998 - 34%
Effective January 1, 1999 - 33%
Effective January 1, 2000 - 32%
The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on
the employee which shall be withheld and paid by the employer on a calendar
quarterly basis as provided under Sec. 57 (A) (Withholding of Final Tax on certain
Incomes) and Sec. 58 A (Quarterly Returns and Payments of Taxes Withheld) of the
Code.
The grossed-up monetary value of the fringe benefit shall be determined by dividing
the monetary value of the fringe benefit by the following percentages and in
accordance with the following schedule:
Effective January 1, 1998 - 66%
Effective January 1, 1999 - 67%
Effective January 1, 2000 - 68%
The grossed-up monetary value of the fringe benefit represents the whole amount of
income realized by the employee which includes the net amount of money or net
monetary value of property which has been received plus the amount of fringe benefit
tax thereon otherwise due from the employee but paid by the employer for and in
behalf of his employee, pursuant to the provisions of this Section.
Coverage These Regulations shall cover only those fringe benefits given or
furnished to managerial or supervisory employees and not to the rank and file.
The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither
managerial nor supervisory position. The Labor Code of the Philippines, as amended,
defines "managerial employee" as one who is vested with powers or prerogatives to
lay down and execute management policies and/or to hire, transfer, suspend, lay-off,
recall, discharge, assign or discipline employees. "Supervisory employees" are those
who, in the interest of the employer, effectively recommend such managerial actions
if the exercise of such authority is not merely routinary or clerical in nature but
requires the use of independent judgment. cdtai
Moreover, these regulations do not cover those benefits properly forming part of
compensation income subject to withholding tax on compensation in accordance with
Revenue Regulations No. 2-98.
Fringe benefits which have been paid prior to January 1, 1998 shall not be covered by
these Regulations.
Determination of the Amount Subject to the Fringe Benefit Tax In general, the
computation of the fringe benefits tax would entail (a) valuation of the benefit
granted and (b) determination of the proportion or percentage of the benefit which
is subject to the fringe benefit tax. That the Tax Code allows for the cases where only
a portion (i.e. less than 100 per cent) of the fringe benefit is subject to the fringe
benefit tax is clearly stated in Section 33 (a) of R.A. 8424 which stipulates that fringe
benefits which are "required by the nature of, or necessary to the trade, business or
profession of the employer, or when the fringe benefit is for the convenience or
advantage of the employer" are not subject to the fringe benefit tax. Thus, in cases
where the fringe benefits entail joint benefits to the employer and employee, the
portion which shall be subject to the fringe benefits tax and the guidelines for the
valuation of fringe benefits are defined under these rules and regulations.
Unless otherwise provided in these regulations, the valuation of fringe benefits shall
be as follows:
(1) If the fringe benefit is granted in money, or is directly paid for by the employer,
then the value is the amount granted or paid for.
(2) If the fringe benefit is granted or furnished by the employer in property other
than money and ownership is transferred to the employee, then the value of the
fringe benefit shall be equal to the fair market value of the property as determined in
accordance with Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe
Real Property Values).
(3) If the fringe benefit is granted or furnished by the employer in property other
than money but ownership is not transferred to the employee, the value of the fringe
benefit is equal to the depreciation value of the property.
Taxation of fringe benefit received by a non-resident alien individual who is not
engaged in trade or business in the Philippines A fringe benefit tax of twenty-five (6)
percent (25%) shall be imposed on the grossed-up monetary value of the fringe
benefit. The said tax base shall be computed by dividing the monetary value of the
fringe benefit by seventy-five per cent (75%).
Taxation of fringe benefit received by (1) an alien individual employed by regional or
area headquarters of a multinational company or by regional operating headquarters
of a multinational company; (2) an alien individual employed by an offshore banking
unit of a foreign bank established in the Philippines; (3) an alien individual employed
by a foreign service contractor or by a foreign service subcontractor engaged in
petroleum operations in the Philippines; and (4) any of their Filipino individual
employees who are employed and occupying the same position as those occupied or
held by the alien employees. A fringe benefit tax of fifteen per cent (15%) shall be
imposed on the grossed-up monetary value of the fringe benefit. The said tax base
shall be computed by dividing the monetary value of the fringe benefit by eighty-five
per cent (85%).
Taxation of fringe benefit received by employees in special economic zones Fringe
benefits received by employees in special economic zones, including Clark Special
Economic Zone and Subic Special Economic and Free Trade Zone, are also covered by
these regulations and subject to the normal rate of fringe benefit tax or the special
rates of 25% or 15% as provided above.
(B) Definition of Fringe Benefit In general, except as otherwise provided under
these regulations, for purposes of this Section, the term "FRINGE BENEFIT" means any
good, service, or other benefit furnished or granted by an employer in cash or in kind,
in addition to basic salaries, to an individual employee (except rank and file employee
as defined in these regulations) such as, but not limited to the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.
For this purpose, the guidelines for valuation of specific types of fringe benefits and
the determination of the monetary value of the fringe benefits are give below. The
taxable value shall be the grossed-up monetary value of the fringe benefit.
(1) Housing privilege
(a) If the employer leases a residential property for the use of his employee and
the said property is the usual place of residence of the employee, the value of the
benefit shall be the amount of rental paid thereon by the employer, as evidenced by
the lease contract. The monetary value of the fringe benefit shall be fifty per cent
(50%) of the value of the benefit.
(b) If the employer owns a residential property and the same is assigned for the
use of his employee as his usual place of residence, the annual value of the benefit
shall be five per cent (5%) of the market value of the land and improvement, as
declared in the Real Property Tax Declaration Form, or zonal value as determined by
the Commissioner pursuant to Section 6(E) of the Code (Authority of the
Commissioner to Prescribe Real Property Values), whichever is higher. The monetary
value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.
The monetary value of the housing fringe benefit is equivalent to the following:
MV = [5%(FMV or ZONAL VALUE] X 50%
WHERE:
MV = MONETARY VALUE
FMV = FAIR MARKET VALUE
(c) If the employer purchases a residential property on instalment basis and allows
his employee to use the same as his usual place of residence, the annual value of the
benefit shall be five per cent (5%) of the acquisition cost, exclusive of interest. The
monetary value of fringe benefit shall be fifty per cent (50%) of the value of the
benefit.
(d) If the employer purchases a residential property and transfers ownership
thereof in the name of the employee, the value of the benefit shall be the employer's
acquisition cost or zonal value as determined by the Commissioner pursuant to
Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property
Values), whichever is higher. The monetary value of the fringe benefit shall be the
entire value of the benefit.
(e) If the employer purchases a residential property and transfers ownership
thereof to his employee for the latter's residential use, at a price less than the
employer's acquisition cost, the value of the benefit shall be the difference between
the fair market value, as declared in the Real Property Tax Declaration Form, or zonal
value as determined by the Commissioner pursuant to Sec. 6(E) of the Code (Authority
of the Commissioner to Prescribe Real Property Values), whichever is higher, and the
cost to the employee. The monetary value of the fringe benefit shall be the entire
value of the benefit.
(f) Housing privilege of military officials of the Armed Forces of the Philippines
(AFP) consisting of officials of the Philippine Army, Philippine Navy and Philippine Air
Force shall not be treated as taxable fringe benefit in accordance with the existing
doctrine that the State shall provide its soldiers with necessary quarters which are
within or accessible from the military camp so that they can be readily on call to meet
the exigencies of their military service.
(g) A housing unit which is situated inside or adjacent to the premises of a business
or factory shall not be considered as a taxable fringe benefit. A housing unit is
considered adjacent to the premises of the business if it is located within the
maximum of fifty (50) meters from the perimeter of the business premises.
(h) Temporary housing for an employee who stays in a housing unit for three (3)
months or less shall not be considered a taxable fringe benefit.
(2) Expense account
(a) In general, expenses incurred by the employee but which are paid by his employer
shall be treated as taxable fringe benefits, except when the expenditures are duly
receipted for and in the name of the employer and the expenditures do not partake
the nature of a personal expense attributable to the employee.
(b) Expenses paid for by the employee but reimbursed by his employer shall be
treated as taxable benefits except only when the expenditures are duly receipted for
and in the name of the employer and the expenditures do not partake the nature of
a personal expense attributable to the said employee.
(c) Personal expenses of the employee (like purchases of groceries for the personal
consumption of the employee and his family members) paid for or reimbursed by the
employer to the employee shall be treated as taxable fringe benefits of the employee
whether or not the same are duly receipted for in the name of the employer.
(d) Representation and transportation allowances which are fixed in amounts and
are regular received by the employees as part of their monthly compensation income
shall not be treated as taxable fringe benefits but the same shall be considered as
taxable compensation income subject to the tax imposed under Sec. 24 of the Code.
(3) Motor vehicle of any kind
(a) If the employer purchases the motor vehicle in the name of the employee, the
value of the benefit is the acquisition cost thereof. The monetary value of the fringe
benefit shall be the entire value of the benefit, regardless of whether the motor
vehicle is used by the employee partly for his personal purpose and partly for the
benefit of his employer.
(b) If the employer provides the employee with cash for the purchase of a motor
vehicle, the ownership of which is placed in the name of the employee, the value of
the benefits shall be the amount of cash received by the employee. The monetary
value of the fringe benefit shall be the entire value of the benefit regardless of
whether the motor vehicle is used by the employee partly for his personal purpose
and partly for the benefit of his employer, unless the same was subjected to a
withholding tax as compensation income under Revenue Regulations No. 2-98.
(c) If the employer purchases the car on installment basis, the ownership of which
is placed in the name of the employee, the value of the benefit shall be the acquisition
cost exclusive of interest, divided by five (5) years. The monetary value of the fringe
benefit shall be the entire value of the benefit regardless of whether the motor vehicle
is used by the employee partly for his personal purpose and partly for the benefit of
his employer.
(d) If the employer shoulders a portion of the amount of the purchase price of a
motor vehicle the ownership of which is placed in the name of the employee, the
value of the benefit shall be the amount shouldered by the employer. The monetary
value of the fringe benefit shall be the entire value of the benefit regardless of
whether the motor vehicle is used by the employee partly for his personal purpose
and partly for the benefit of his employer.
(e) If the employer owns and maintains a fleet of motor vehicles for the use of the
business and the employees, the value of the benefit shall be the acquisition cost of
all the motor vehicles not normally used for sales, freight, delivery service and other
non-personal used divided by five (5) years. The monetary value of the fringe benefit
shall be fifty per cent (50%) of the value of the benefit.
(f) If the employer leases and maintains a fleet of motor vehicles for the use of
the business and the employees, the value of the benefit shall be the amount of rental
payments for motor vehicles not normally used for sales, freight, delivery, service and
other non-personal use. The monetary value of the fringe benefit shall be fifty per
cent (50%) of the value of the benefit.
(g) The use of aircraft (including helicopters) owned and maintained by the
employer shall be treated as business use and not be subject to the fringe benefits
tax.
(h) The use of yacht whether owned and maintained or leased by the employer
shall be treated as taxable fringe benefit. The value of the benefit shall be measured
based on the depreciation of a yacht at an estimated useful life of 20 years.
(4) Household expenses Expenses of the employee which are borne by the
employer for household personnel, such as salaries of household help, personal driver
of the employee, or other similar personal expenses (like payment for homeowners
association dues, garbage dues, etc.) shall be treated as taxable fringe benefits.
(5) Interest on loan at less than market rate
(a) If the employer lends money to his employee free of interest or at a rate lower
than twelve per cent (12%), such interest foregone by the employer or the difference
of the interest assumed by the employee and the rate of twelve per cent (12%) shall
be treated as a taxable fringe benefit.
(b) The benchmark interest rate of twelve per cent (12%) shall remain in effect
until revised by a subsequent regulation.
(c) This regulation shall apply to installment payments or loans with interest rate
lower than twelve per cent (12%) starting January 1, 1998.
(6) Membership fees, dues, and other expenses borne by the employer for his
employee, in social and athletic clubs or other similar organizations. These
expenditures shall be treated as taxable fringe benefits of the employee in full.
(7) Expenses for foreign travel
(a) Reasonable business expenses which are paid for by the employer for the
foreign travel of his employee for the purpose of attending business meetings or
conventions shall not be treated as taxable fringe benefits. In this instance, inland
travel expenses (such as expenses for food, beverages and local transportation)
except lodging cost in a hotel (or similar establishments) amounting to an average of
US$300.00 or less per day, shall not be subject to a fringe benefit tax. The expenses
should be supported by documents proving the actual occurrences of the meetings or
conventions.
The cost of economy and business class airplane ticket shall not be subject to a fringe
benefit tax. However, 30 percent of the cost of first class airplane ticket shall be
subject to a fringe benefit tax.
(b) In the absence of documentary evidence showing that the employee's travel
abroad was in connection with business meetings or conventions, the entire cost of
the ticket, including cost of hotel accommodations and other expenses incident
thereto shouldered by the employer, shall be treated as taxable fringe benefits. The
business meetings shall be evidenced by official communications from business
associates abroad indicating the purpose of the meetings. Business conventions shall
be evidenced by official invitations/communications from the host organization or
entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be
treated as taxable fringe benefits of the employee.
(c) Travelling expenses which are paid by the employer for the travel of the family
members of the employee shall be treated as taxable fringe benefits of the employee.
(8) Holiday and vacation expenses Holiday and vacation expenses of the
employee borne by his employer shall be treated as taxable fringe benefits.
(9) Educational assistance to the employee or his dependents
(a) The cost of the educational assistance to the employee which are borne by the
employer shall, in general, be treated as taxable fringe benefit. However, a scholarship
grant to the employee by the employer shall not be treated as taxable fringe benefit
if the education or study involved is directly connected with the employer's trade,
business or profession, and there is a written contract between them that the
employee is under obligation to remain in the employ of the employer for period of
time that they have mutually agreed upon. In this case, the expenditure shall be
treated as incurred for the convenience and furtherance of the employer's trade or
business.
(b) The cost of educational assistance extended by an employer to the dependents
of an employee shall be treated as taxable fringe benefits of the employee unless the
assistance was provided through a competitive scheme under the scholarship
program of the company.
(10) Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows The cost of life or health insurance and
other non-life insurance premiums borne by the employer for his employee shall be
treated as taxable fringe benefit, except the following: (a) contributions of the
employer for the benefit of the employee, pursuant to the provisions of existing law,
such as under the Social Security System (SSS), (R.A. No. 8282, as amended) or under
the Government Service Insurance System (GSIS) (R.A. No. 8291), or similar
contributions arising from the provisions of any other existing law; and (b) the cost of
premiums borne by the employer for the group insurance of his employees.
(C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe
benefits tax shall not be imposed on the following fringe benefits:
(1) Fringe benefits which are authorized and exempted from income tax under the
Code or under any special law;
(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file, whether granted under a collective
bargaining agreement or not;
(4) De minimis benefits as defined in these Regulations;
(5) If the grant of fringe benefits to the employee is required by the nature of, or
necessary to the trade, business or profession of the employer; or
(6) If the grant of the fringe benefit is for the convenience of the employer.
The exemption of any fringe benefit from the fringe benefit tax imposed under this
Section shall not be interpreted to mean exemption from any other income tax
imposed under the Code except if the same is likewise expressly exempt from any
other income tax imposed under the Code or under any other existing law. Thus, if
the fringe benefit is exempted from the fringe benefits tax, the same may, however,
still form part of the employee's gross compensation income which is subject to
income tax, hence, likewise subject to a withholding tax on compensation income
payment.
The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall,
in general, be limited to facilities or privileges furnished or offered by an employer to
his employees that are of relatively small value and are offered or furnished by the
employer merely as a means of promoting the health, goodwill, contentment, or
efficiency of his employees such as the following:
(1) Monetized unused vacation leave credits of employees not exceeding ten (10)
days during the year;
(2) Medical cash allowance to dependents of employees not exceeding P750 per
semester or P125 per month;
(3) Rice subsidy of P350 per month granted by an employer to his employees;
(4) Uniforms given to employees by the employer;
(5) Medical benefits given to the employees by the employer;
(6) Laundry allowance of P150 per month;
(7) Employee achievement awards, e.g. for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding one-half () month of the
basic salary of the employee receiving the award under an established written plan
which does not discriminate in favor of highly paid employees; dctai
(8) Christmas and major anniversary celebrations for employees and their guests;
(9) Company picnics and sports tournaments in the Philippines and are participated
exclusively by employees; and
(10) Flowers, fruits, books or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc
(D) Tax Accounting for the Fringe Benefit Furnished to the Employee and the
Fringe Benefit Tax Due Thereon. As a general rule, the amount of taxable fringe
benefit and the fringe benefits tax shall constitute allowable deductions from gross
income of the employer. However, if the basis for computation of the fringe benefits
tax is the depreciation value, the zonal value as determined by the Commissioner
pursuant to Section 6(E) of the Code or the fair market value as determined in the
current real property tax declaration of a certain property, only the actual fringe
benefits tax paid shall constitute a deductible expense for the employer. The value of
the fringe benefit shall not be deductible and shall be presumed to have been tacked
on or actually claimed as depreciation expense by the employer.
Provided, however, that if the aforesaid zonal value or fair market value of the said
property is greater than its cost subject to depreciation, the excess amount shall be
allowed as a deduction from the employer's gross income as fringe benefit expense.
c. De Minimis Benefits
Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 (April 17, 1998)
SECTION 2.78.1. Withholding of Income Tax on Compensation Income.
(A) Compensation Income Defined. In general, the term "compensation" means all
remuneration for services performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded by the Code.
The name by which the remuneration for services is designated is immaterial. Thus,
salaries, wages, emoluments and honoraria, allowances, commissions (e.g.
transportation, representation, entertainment and the like); fees including director's
fees, if the director is, at the same time, an employee of the employer/corporation;
taxable bonuses and fringe benefits except those which are subject to the fringe
benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and
other income of a similar nature constitute compensation income.
The basis upon which the remuneration is paid is immaterial in determining whether
the remuneration constitutes compensation. Thus, it may be paid on the basis of
piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly
or annually.
Remuneration for services constitutes compensation even if the relationship of
employer and employee does not exist any longer at the time when payment is made
between the person in whose employ the services had been performed and the
individual who performed them.
The basis upon which the remuneration is paid is immaterial in determining whether
the remuneration constitutes compensation. Thus, it may be paid on the basis of
piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly
or annually.
(3) Facilities and privileges of a relatively small value. Ordinarily, facilities and
privileges (such as entertainment, medical services, or so called "courtesy" discounts
on purchases), furnished or offered by an employer to his employees generally, are
not considered as compensation subject to withholding if such facilities or privileges
are of relatively small value and are offered or furnished by the employer merely as a
means of promoting the health, goodwill, contentment, or efficiency of his
employees.
Where compensation is paid in property other than money, the employer shall make
necessary arrangements to ensure that the amount of the tax required to be withheld
is available for payment to the Commissioner.
Case:
BIR Rul. 23-02 (June 21, 2002)
De minimis benefits facilities or privileges furnished or offered by an employer to
his employees that are relatively small value and offered or furnished by the employer
merely as a means of promoting the health, goodwill, contentment, or efficiency of
his employees, and as such, they are subject to neither compensation income tax nor
fringe benefits tax. They are, therefore, not subject to withholding tax as well.
Facts: Sodexho Pass International (Sodexho) is a French service company engaged in
operating innovative systems (the issuance of service vouchers) to manage employee
benefits given by private companies, national government agencies, etc. Sodexho
proposes to introduce administration of food and rice subsidy benefits given by
Philippine employers to their employees through the following procedures:
1. Client company transfers to Sodexho the amount allotted for its employees' annual
or monthly meal and food allowance and/or rice subsidy with instructions on the
amount to be allotted per employee in conformity with a de minimis threshold that
would be established;
2. Sodexho issues meal and food vouchers (intended for each employee with the value
allotted for the respective employee's benefit per working day) and delivers the same
to the client company. The face value of the vouchers shall be equivalent to the
amount transferred by the client company to Sodexho;
3. Client company distributes the vouchers to its employees;
4. Employee uses these vouchers for meals and/or food at an accredited
establishment (e.g., restaurant/food outlet) of his choice;
5. Accredited outlet sends back used vouchers to Sodexho for reimbursement;
6. Sodexho reimburses the store/outlet.
Issues: Counsel for Sodexho sought confirmation from the Commissioner of the
following opinions:
1. That meal and food benefits provided by client companies through Sodexho meal
and food vouchers may be considered tax-exempt benefits;
2. That a meal and food allowance of no more than Php100.00 per day is considered
de minimis benefit; and
3. That de minimis rice allowance of Php1,000 per month given to the employees may
be aggregated with the meal allowance through Sodexho meal and food vouchers and
shall still be exempt from both withholding tax on compensation and fringe benefit
tax.
Ruling:
1. The meal and food benefits provided by the client-companies to their employees
through Sodexho meal and food vouchers may be considered tax-exempt benefits.
The meal and food benefits provided to their employees by client companies through
Sodexho meal and food vouchers may be tax-exempt, subject to:
(a) the standards set for de minimis thresholds for fringe benefits. (See Revenue
Regulations No. 3-98, as amended by Revenue Regulations No. 8-2000 and 10-2000
for the list. Not an assigned reading but you may want to check.); and
(b) the conditions set for the benefits to be exempt pursuant to the tests of
convenience of the employer and the promotion of health, goodwill, contentment, or
efficiency of the employees. (See Sec. 2-78.1(A)(2) and (3) of Revenue Regulations No.
2-98, as amended by Revenue Regulations No. 8-2000 and 10-2000. These is an
assigned reading.)
2. The meal and food allowance, although not for overtime work, is considered de
minimis if it does not exceed 25% of the basic minimum wage. Meal and food benefits
not exceeding 25% of the daily minimum wage may be considered de minimis meal
benefit and therefore, tax exempt. The excess over this amount shall be considered
other benefits as contemplated under Section 32(B)(7)(e)(iv) of the Tax Code of 1997.
The excess of the meal and food allowance given over the de minimis ceiling shall still
be exempt provided that it, together with the total amount of other benefits, shall not
exceed Php30,000.
3. The rules and regulations on de minimis benefits do not allow aggregation of the
amounts set for each type of benefit. There can be no aggregation of the values set
for each item of benefit stated in Revenue Regulations Nos. 2-98 and 3-98, as
amended by Revenue Regulations Nos. 8-2000 and 10- 2000. The intent of the
Regulations is to treat each item of de minimis benefits independently of each other.
The Regulations separately provide maximum values for rice allowance and for meal
allowance. Accordingly, there can be no aggregation of de minimis values for rice and
meal and food benefits through Sodexho meal and food vouchers. In order to clearly
conform with prescribed de minimis standards, therefore, separate vouchers should
be used for the rice allowance and the meal and food benefit.
d. Travel and Entertainment
Rudolph v. U.S.
Facts: Facts: Rudolph was an insurance agent employed by Southland Life Insurance
Company, in Dallas. The company sent Rudolph and his wife, with other agents and
their wives, to New York City on a one week trip that was devoted mostly to pleasure.
The district court ruled that the value of the trip (measured by the pro rata cost) must
be included in the Rudolphs income because its purpose was primarily pleasure. The
court of appeals affirmed.
Held: The petition for writ of certiorari is dismissed as improvidently granted. Justice
Harlan writes an opinion defending the result, agreeing that the value of the trip
should be treated as income to the employees and observing that there should be no
deduction under 162(a).
2. Business Income
In the case of manufacturing, merchandising, or mining, gross income means
total sales less cost of goods sold, plus all income from incidental and outside sources.
3. Gains
Gain or loss on sale or exchange of property is recognized if the following conditions
are satisfied:
The property received in exchange is essentially different from the property
disposed, and
The property received has market value. In a sale or exchange of property, real or
personal, a distinction must be made between ordinary and capital assets. Special
rules on gains and losses on sales or exchanges of capital assets do not apply to sales
and exchanges of ordinary assets.
4. Interest
Sec.50, NIRC. In the case of two or more organizations, trades or businesses (whether
or not incorporated and whether or not organized in the Philippines) owned or
controlled directly or indirectly by the same interests, the Commissioner is authorized
to distribute, apportion or allocate gross income or deductions between or among
such organization, trade or business, if he determined that such distribution,
apportionment or allocation is necessary in order to prevent evasion of taxes or
clearly to reflect the income of any such organization, trade or business.
5. Rents
Improvements by lessees. - When buildings are erected or improvements made by a
lessee in pursuance of an agreement with the lessor, and such buildings or
improvements are not subject to removal by the lessee, the lessor may at his option
report the income therefrom upon either of the following bases:
(a) The lessor may report as income at the time when such buildings or improvements
are completed the fair market value of such buildings or improvements subject to the
lease.
(b) The lessor may spread over the life of the lease the estimated depreciated value
of such buildings or improvements at the termination of the lease and report as
income for each of the lease all adequate part thereof.
If for any other reason than a bona fide purchase from the lessee by the lessor the
lease is terminated, so that the lessor comes into possession or control of the property
prior to the time originally fixed for the termination of the lease, the lessor receives
additional income for the year in which the lease is so terminated to the extent that
the value of such buildings or improvements
6. Royalties
The term royalts as used in this Article means any payment of any kind received as
a consideration for he use of, o right to use, any patent, trademark, design or model,
secret formula, or process, or for the use of , industrial, commercial, or scientific
equipment, or for information concerning industrial, commercial, or scientific
experience.
7. Dividends
SEC. 73. Distribution of dividends or Assets by Corporations. -
(A) Definition of Dividends. - The term 'dividends' when used in this Title means any
distribution made by a corporation to its shareholders out of its earnings or profits
and payable to its shareholders, whether in money or in other property. Where a
corporation distributes all of its assets in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder, whether individual or corporate, is a
taxable income or a deductible loss, as the case may be.
(B) Stock Dividend. - 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 that it
represents a distribution of earnings or profits.
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated
Profits. - Any distribution made to the shareholders or members of a corporation shall
be deemed to have been made form the most recently accumulated profits or surplus,
and shall constitute a part of the annual income of the distributee for the year in which
received.
(D) Net Income of a Partnership Deemed Constructively Received by Partners. - The
taxable income declared by a partnership for a taxable year which is subject to tax
under Section 27 (A) of this Code, after deducting the corporate income tax imposed
therein, shall be deemed to have been actually or constructively received by the
partners in the same taxable year and shall be taxed to them in their individual
capacity, whether actually distributed or not.
Revenue Regulation Section 2
Sec. 250, RR2. Dividends. Dividends, for the purpose of the law, comprise any
distribution whether in cash or other property, in the ordinary course of business,
even though extraordinary in amount made by a domestic or resident foreign
corporation, joint-stock company, partnership, joint account, association, or
insurance company to the shareholders or members out of its earnings or profits
accumulated since March 1, 1913.
Although interest on certain Government bonds and other similar obligations is not
taxable when received by a corporation, upon amalgamation with the other funds of
the corporation, such income loses its identity and when distributed to shareholders,
is taxable, the same extent as other dividends.
A taxable distribution made by a corporation to individual stockholders or members
shall be included in the gross income of the distributees when the cash or other
property is unqualifiedly made subject to their demand. Dividends, in cash or other
property received by an individual, are subject to tax in his hands in the same manner
as other income.
Dividends, whether in cash or other property received by a domestic or resident
foreign corporation from a domestic corporation are taxable only to the extent of 25
per cent thereof in accordance with Section 24 of the Code. Dividends received by a
domestic corporation from a foreign corporation, whether resident or non-resident,
are taxable to the extent that they constitute income from sources within the
Philippines, as provided in section 37 (a) (2) (b) of the Code. Dividends paid by the
domestic corporation to a non-resident foreign corporation are taxable in full.
Sec. 251, RR2. Dividends paid in property. - Dividends paid in securities or other
property (other than its own stock), in which the earnings of a corporation have been
invested, are income to the recipients to the amount of the all market value of such
property when receivable by individual stockholders.
When receivable by corporations, the amount of such dividends includible for
purposes of the tax on corporations are specified in section 24 of the Code. (See also
section 250 of these regulations). A dividend paid in stock of another corporation is
not a stock dividend. Even though the stock distributed was acquired through the
transfer by the corporation declaring the dividends of property to the corporation the
stock of which is distributed as a dividend. Where a corporation declares a dividend
payable in a stock of another corporation, setting aside the stock to be so distributed
and notifying the stockholders of its action, the income arising to the recipient of such
stock is its market value at the time the dividend becomes payable. Scrip dividends
are subject to tax in the year in which the warrants are issued.
Sec. 252, RR2. Stock dividends. - A stock dividend which represents the transfer of
surplus to capital account is not subject to income tax. However, a dividend in stock
may constitute taxable income to the recipient thereof notwithstanding the fact that
the officers or director of the corporation (as defined in section 84) choose to call such
distribution as a stock dividend. The distinction between a stock dividend which does
not, and one which does, constitute income taxable to the shareholder is the
distinction between a stock dividend which works no change in the corporate entity,
the same interest In the same corporation being represented after the distribution by
more shares of precisely the same character and a stock dividend where there either
has been a Change of corporate identity or a change in the nature of the shares issued
as dividends whereby the proportional interest of the shareholders after the
distribution is essentially different from his former interest. A stock dividend
constitutes income if it gives the shareholder an interest different from that which his
former stock holdings represented. A stock dividend does not constitute income if the
new shares confer no different rights or interest than did the old - the new certificates
plus the old representing the same proportionate interest in the net asset of the
corporation as did the old.
Sec. 253, RR2. Sale of stock received as dividends. - Stock issued by a corporation, as
a dividend, does not constitute taxable income to a stockholder in such corporation,
but gain may be derived or loss sustained by the stockholder, whether individual or
corporate, from the sale of such stock, which gain or loss will be treated as arising
from the sale or exchange of a capital asset. (See section 34 of the Code.) The amount
of gain derived or loss sustained from the sale of such stock, or from the sale of the
stock with respect to which it is issued, shall be determined in accordance with the
following rules:
(a) Where the stock issued as dividend is as or substantially the same character or
preference as the stock upon which the stock dividend is paid, the cost of each share
(or when acquired prior to March, 1, 1913, the fair market value as of such date) will
be the quotient of the cost (or such fair market value) of the old shares of stock divided
by the total number of the old and new shares.
(b) Where the stock issued as a dividend is in whole or in part of a character or
preference materially different from the stock upon which the stock dividend is paid,
the cost (and when acquired prior to March 1,1913, the fair market value as of such
date) of the old shares of stock shall be divided between such old stock and the new
stock, in proportion, as nearly as may be, to the respective value of each class of stock
old and new at the time the new shares of stock are issued, and the cost (or when
acquired prior to March 1, 1913, the fair market value as of such date) of each share
of stock will be the quotient of the cost (or such fair market value as of March 1, 1913)
of the class to which such share belongs divided by the number of shares in that class.
(c) Where the stock with respect to which a stock dividend is issued was purchased at
different times and at different prices and the identity of the lots cannot be
determined, any sale of the original stock, will be charged to the earliest purchases,
of such stock, and any sale of dividend stock issued with respect to such stock will be
presumed to have been made from the stock issued with respect to the earliest
purchased stock, to the amount of the dividend chargeable to such stock.
(d) Where the stock with respect to which a stock dividend is declared was purchased
at different times and at different prices, and the dividend stock issued with respect
to such stock cannot be identified as having been issued with respect to any particular
lot of such stock, then any sale of such dividend stock will be presumed to have been
made from the stock issued with respect to the earliest purchased stock, to the
amount of the stock dividend chargeable to such stock.
Sec. 254, RR2. Declaration and subsequent redemption of a stock dividend. - A true
stock dividend is not subject to tax on its receipt in the hands of the recipient.
Nevertheless, if a corporation, after the distribution of a stock dividend, proceeds to
cancel or redeem its stock at such time and in such manner as to make the distribution
and cancellation or redemption essentially equivalent to the distribution of a taxable
dividend, the amount received in redemption or cancellation of the stock shall be
treated as a taxable dividend to the extent of the earnings or profits accumulated by
such corporation since March 1, 1913
Sec. 255, RR2. Sources of distribution. For the purpose of income taxation every
distribution made by a corporation is made out of earnings or profits to the extent
thereof and from the most recently accumulated earnings or profits. In determining
the source of a distribution, consideration should be given first, to the earnings or
profits of the taxable year; second, to the earnings or profits, accumulated since
February 28, 1913, only in the case where, and to the extent that, the distribution
made during the taxable year are not regarded as out of the earnings or profits of the
taxable year and all the earnings or profits accumulated since February 28, 1913, have
been distributed; and, fourth, to sources other than earnings or profits only after the
earnings or profits have been distributed.
Sec. 256, RR2. Distribution in liquidation. - In all case's where a corporation (as
defined in section 84) distributes all of its property or assets in complete liquidation
or dissolution, the gain realized from the transaction by the stockholder, whether
individual or corporate, is taxable to the extent recognized in section 34 (b) of the
Code. For this purpose, the term complete liquidation includes anyone of a series
of distributions made by a corporation in complete cancellation or redemption of an
of its stocks in accordance with a bona fide plan of liquidation under which the
transfer of all the assets under liquidation is to be completed within a reasonable time
from the date of the first distribution, usually not to exceed one year from the time
of such first distribution. If the amount zeceived by the stockholder in liquidation is
less than the cost or other basis of the stock, the loss in the transaction is deductible
to the extent allowed in section 34(c) of the Code.
Cases:
Wise vs. Meer
Facts: Wise & Co., Inc. et. al (Plaintiff-appellants) were stockholders of Manila Wine
Merchants, Ltd., a foreign corporation duly authorized to do business in the
Philippines. The Board of Directors of Manila Wine Merchants, Ltd., (HK Co.),
recommended to the stockholders that they adopt resolutions necessary to sell its
business and assets to Manila Wine Merchants, Inc., a Philippine corporation, (PH
Co.), for thes um of P400,000. The HK Co. made a distribution from its earnings for the
year 1937 to its stockholders. As a result of the sale of its business and assets to PH
Co., a surplus was realized and the HK Co. distributed this surplus to the shareholders
(Appellants included).Philippine income tax had been paid by HK Co. on the said
surplus from which the said distributions were made. At a special general meeting of
the shareholders of the HK Co., the stockholders by resolution directed that the
company be voluntarily liquidated and its capital distributed among the stockholders.
The Appellants duly filed Income Tax Returns, on which the defendant, Meer (CIR)
made deficiency assessments. Plantiffs paid under written protest and sought
recovery. CFI ruled in favor of CIR hence the appeal.
Issue(s): 1. Whether the amount received by the petitioners were ordinary dividends
or liquidating dividends.
2. Whether such dividends were taxable or not.
3. Whether or not the profits realized by the non-resident alien individual appellants
constitute Income from the Philippines considering that the sale took place outside
the Philippines.
HELD:
1. The distributions under consideration were not ordinary dividends. Therefore,
they are taxable as liquidating dividends. It was stipulated in the deed of sale that
the sale and transfer of the HK Co. shall take effect on June 1, 1937. Distribution
took place on June 8. They could not consistently deem all the business and assets
 of the corporation sold as of June 1, 1937, and still say that said corporation, as a
going concern, distributed ordinary dividends to them thereafter.
2. Income tax law states that Where a corporation, partnership, association, joint-
account, or insurance company distributes all of its assets in complete liquidation
or dissolution, the gain realized or loss sustained by the stockholder, whether
individual or corporation, is a taxable income or a deductible loss as the case may
be. Appellants received the distributions in question in exchange for the
surrender and relinquishment by them of their stock in the HK Co. which was
dissolved and in process of complete liquidation. That money in the hands of the
corporation formed a part of its income and was properly taxable to it under the
Income Tax Law. When the corporation was dissolved and in process of complete
liquidation and its shareholders surrendered their stock to it and it paid the sums
in question to them in exchange, a transaction took place. The shareholder who
received the consideration for the stock earned that much money as income of his
own, which again was properly taxable to him under the Income Tax Law.
3. This contention is untenable. The HK Co. was at the time of the sale of its business
in the Philippines, and the PH Co. was a domestic corporation domiciled and doing
business also in the Philippines. The HK Co. was incorporated for the purpose of
carrying on in the Philippine Islands the business of wine, beer, and spirit
merchants and the other objects set out in its memorandum of association.
Hence, its earnings, profits, and assets, including those from whose proceeds the
distributions in question were made, the major part of which consisted in the
purchase price of the business, had been earned and acquired in the Philippines.
As such, it is clear that said distributions were income "from Philippine sources.
CIR vs. Manning
Facts: Reese, the majority stockholder of Mantrasco, executed a trust agreement
between him, Mantrasco, Ross, Selph, carrascoso & Janda law firm and the minority
stockholders, Manning, McDonald and Simmons. Said agreement was entered into
because of Reeses desire that Mantrasco and Mantrasocs 2 subsidiaries, Mantrasco
Guam and Port Motors, to continue under the management of Manning, McDonald
and Simmons upon his [Reese] death. When Reese died, Mantrasco paid Reeses
estate the value of his shares. When said purchase price has been fully paid, the
24,700 shares, which were declared as dividends, were proportionately distributed to
Manning, McDonald and Simmons. Because of this, the BIR issued assessments on
Manning, McDonald and Simmons for deficiency income tax for 1958. Manning et al,
opposed this assessment but the BIR still found them liable. Manning et al. appealed
to the CTA, which absolved them from any liability.
Held: The manifest intention of the parties to the trust agreement was, in sum and
substance, to treat the 24,700shares of Reese as absolutely outstanding shares of
Reese's 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 A stock dividend always involves a transfer of surplus (or profit) to capital
stock. A stock dividend is a conversion of surplus or undivided profits into capital
stock, which is distributed to stockholders in lieu of a cash dividend.
CIR vs CA 1999
Facts: Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the
United States, formed the corporation A. Soriano Y Cia, predecessor of ANSCOR
with a 1,000,000.00 capitalization divided into 10,000 common shares at a par value
of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres,
who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of
the 5,000 shares originally issued.
On September 12, 1945, ANSCORs authorized capital stock was increased to
P2,500,000.00 divided into 25,000 common shares with the same par value. Of the
additional 15,000 shares, only 10,000 was issued which were all subscribed by Don
Andres, after the other stockholders waived in favor of the former their pre-emptive
rights to subscribe to the new issues. This increased his subscription to
14,963 common shares. A month later, Don Andres transferred 1,250 shares each to
his two sons, Jose and Andres Jr., as their initial investments in ANSCOR. Both sons
are foreigners.
By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were
made between 1949 and December 20, 1963. On December 30, 1964 Don Andres
died. As of that date, the records revealed that he has a total shareholdings of
185,154 shares. 50,495 of which are original issues and the balance of 134,659
shares as stock dividend declarations. Correspondingly, one-half of that
shareholdings or 92,577 shares were transferred to his wife, Doa Carmen Soriano,
as her conjugal share. The offer half formed part of his estate.
A day after Don Andres died, ANSCOR increased its capital stock to P20M and in
1966 further increased it to P30M. In the same year (December 1966), 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.
On December 28, 1967, 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. By January 2, 1968,
ANSCOR reclassified its existing 300,000 common shares into 150,000 common and
150,000 preferred shares.
In a letter-reply dated February 1968, the IRS opined that the exchange is only a
recapitalization scheme and not tax avoidance. Consequently, on March 31, 1968
Doa Carmen exchanged her whole 138,864 common shares for 138,860 of the
preferred shares. The estate of Don Andres in turn exchanged 11,140 of its common
shares for the remaining 11,140 preferred shares.
In 1973, after examining ANSCORs books of account and record Revenue examiners
issued a report proposing that ANSCOR be assessed for deficiency withholding tax-
at-source, for the year 1968 and the 2nd quarter of 1969 based on the transaction of
exchange and redemption of stocks. BIR made the corresponding assessments.
ANSCORs subsequent protest on the assessments was denied in 1983 by petitioner.
ANSCOR filed a petition for review with the CTA, the Tax Court reversed petitioners
ruling. CA affirmed the ruling of the CTA. Hence this position.
Issue: Whether or not a person assessed for deficiency withholding tax under Sec.
53 and 54 of the Tax Code is being held liable in its capacity as a withholding agent.
Held: An income taxpayer covers all persons who derive taxable income. ANSCOR
was assessed by petitioner for deficiency withholding tax, as such, it is being held
liable in its capacity as a withholding agent and not in its personality as taxpayer. A
withholding agent, A. Soriano Corp. in this case, cannot be deemed a taxpayer for it
to avail of a tax amnesty under a Presidential decree that condones the collection
of all internal revenue taxes including the increments or penalties on account of
non-payment as well as all civil, criminal, or administrative liabilities arising from or
incident to voluntary disclosures under the NIRC of previously untaxed income
and/or wealth realized here or abroad by any taxpayer, natural or juridical. The
Court explains: The withholding agent is not a taxpayer, he is a mere tax collector.
Under the withholding system, however, the agent-payer becomes a payee by
fiction of law. His liability is direct and independent from the taxpayer, because
the income tax is still imposed and due from the latter. The agent is not liable for the
tax as no wealth flowed into him, he earned no income.
BIR RULING 39-02
A distribution in liquidation, without consideration, of the assets of a corporation
consisting of real estate is not subject to DST under Section 196 of the Tax Code of
1997. A corporation that distributes its assets to its shareholders as liquidating
dividends is not deemed to be selling such assets to the latter. However, the notarial
certification on the deeds of assignment is subject to DST of P15.00 under Section
188 of the Tax Code of 1997. (BIR Ruling No. 039-2002 dated November 11, 2002)
8. Annuities
Annuities are exempt. An annuity is a sum of money payable yearly or at other regular
intervals.
9. Prizes and winnings
Prizes and Winnings are generally taxable. Such payments constitute gains derived
from labor. Not taxable if recipient selected without any action on his part to enter
the contest or proceedings; and the recipient is not required to render substantial
future services as a condition for receiving the prize or award. Those granted to
athletes shall be exempt from income tax. Prizes and awards in the nature of gifts are
not taxable.
10. Pensions
Pensions are exempt. A pension is a a gratuity granted (as by a government) as a favor
or reward, or one paid under given conditions to a person following retirement from
service or to surviving dependents.
11. Share in GPPs income
26, NIRC. Tax Liability of Members of General Professional Partnerships. - A general
professional partnership as such shall not be subject to the income tax imposed under
this Chapter. Persons engaging in business as partners in a general professional
partnership shall be liable for income tax only in their separate and individual
capacities. For purposes of computing the distributive share of the partners, the net
income of the partnership shall be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
EXLUSIONS in Gross Income
SEC. 32. (B) - The following items shall not be included in gross income and shall be
exempt from taxation under this title:
(1) Gifts, Bequests and Devises
SEC. 32. (B) (3) - The value of property acquired by gift, bequest, devise, or
descent: Provided, however, That income from such property, as well as gift,
bequest, devise or descent of income from any property, in cases of transfers of
divided interest, shall be included in gross income.
(2) Compensation for Injuries or Sickness
SEC. 32. (B) (4) - amounts received, through Accident or Health Insurance or
under Workmen's Compensation Acts, as compensation for personal injuries or
sickness, plus the amounts of any damages received, whether by suit or
agreement, on account of such injuries or sickness.
(3) Retirement Benefits, Pensions, Gratuities, etc.
SEC. 32. (B) (6)
(a) Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan maintained by
the employer: Provided, That the retiring official or employee has been in the
service of the same employer for at least ten (10) years and is not less than fifty
(50) years of age at the time of his retirement: Provided, further, That the
benefits granted under this subparagraph shall be availed of by an official or
employee only once. For purposes of this Subsection, the term 'reasonable
private benefit plan' means a pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit of some or all of his officials or
employees, wherein contributions are made by such employer for the officials
or employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated, and
wherein its is provided in said plan that at no time shall any part of the corpus
or income of the fund be used for, or be diverted to, any purpose other than for
the exclusive benefit of the said officials and employees.
(b) Any amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee from the
service of the employer because of death sickness or other physical disability or
for any cause beyond the control of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social
security benefits, retirement gratuities, pensions and other similar benefits
received by resident or non-resident citizens of the Philippines or aliens who
come to reside permanently in the Philippines from foreign government
agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the
Philippines under the laws of the United States administered by the United
States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System in
accordance with the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including
retirement gratuity received by government officials and employees.
 SEC. 32. (B) (7) (e) - 13th Month Pay and Other Benefits. - Gross benefits
received by officials and employees of public and private entities: Provided,
however, That the total exclusion under this subparagraph shall not exceed
Thirty thousand pesos (P30,000) which shall cover:
(i) Benefits received by officials and employees of the national and local
government pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851,
as amended by Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential
decree No. 851, as amended by Memorandum Order No. 28, dated August 13,
1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus:
Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be
increased through rules and regulations issued by the Secretary of Finance,
upon recommendation of the Commissioner, after considering among others,
the effect on the same of the inflation rate at the end of the taxable year.
Cases:
CIR vs. CA (1992)
Facts: GCL Retirement Plan is an employees' trust maintained by the employer, GCL
Inc., to provide retirement, pension, disability and death benefits to its employees.
The Plan as submitted was approved and qualified as exempt from income tax by
Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917.In
1984, Respondent GCL made investments and earned therefrom interest income from
which was withheld the fifteen per centum (15%) final withholding tax imposed by
Pres. Decree No. 1959, which took effect on 15 October 1984.
GCL filed with Petitioner a claim for refund in the amounts of P1,312.66 withheld by
Anscor Capital and Investment Corp., and P2,064.15 by Commercial Bank of Manila.
On 12 February 1985, it filed a second claim for refund of the amount of P7,925.00
withheld by Anscor, stating in both letters that it disagreed with the collection of the
15%final withholding tax from the interest income as it is an entity fully exempt from
income tax as provided under Rep. Act No. 4917 in relation to Section 56 (b) of the
Tax Code.
CIR denied the refund, Petitioner elevated the matter to CTA.
CTA - ruled in favor of GCL, holding that employees' trusts are exempt from the
15%final withholding tax on interest income and ordering a refund of the tax withheld.
Issue: Whether GCL is exempted from Income Tax.
Held: GCL Plan was qualified as exempt from income tax by the Commissioner of
Internal Revenue in accordance with Rep. Act No. 4917 approved on 17 June 1967. In
so far as employees' trusts are concerned, the foregoing provision should be taken in
relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act
No.1983.
The tax-exemption privilege of employees' trusts, as distinguished from any other
kind of property held in trust, springs from the foregoing provision. It is unambiguous.
Manifest therefrom is that the tax law has singled out employees' trusts for tax
exemption. Employees' trusts or benefit plans normally provide economic assistance
to employees upon the occurrence of certain contingencies, particularly, old age
retirement, death, sickness, or disability. It provides security against certain hazards
to which members of the Plan may be exposed. It is an independent and additional
source of protection for the working group. What is more, it is established for their
exclusive benefit and for no other purpose.
CIR vs. CA (1991)
Facts: Efren Castaneda retired from government service as Revenue Attach in the
Philippine Embassy in London, England on 10 December 1982 under the provisions of
Section 12 (c) of Commonwealth Act 186, as amended. Upon retirement, he received,
among other benefits, terminal leave pay from which the Commissioner withheld
P12,557.13, allegedly representing income tax thereon. Castaneda claimed for a
refund.
Issue: Whether terminal leave pay is subject to withholding income tax.
Held: Terminal Leave Pay received by a government official or employee is not subject
to withholding income tax. In the exercise of sound personnel policy, the Government
encourages unused leaves to be accumulated. The Government recognizes that
retirement pay for public servants is less than generous, if not inadequate. Terminal
leave payments are given thus not only at the same time but also for the same policy
considerations governing retirement benefits. Not being part of the gross salary or
income of a government official or employee but a retirement benefit, terminal leave
pay is not subject to income tax.
In RE Zialcita AM 90-6-015-SC, October 1990
Facts: On 23 August 1990, a resolution was issued by the Court En Banc stating that
the terminal leave pay of Atty. Zialcita received by virtue of his compulsory retirement
can never be considered a part of his salary subject to the payment of income tax but
falls under the phrase other benefits received by retiring employees and workers,
within the meaning of Section 1 of PD 220 and is thus exempt from the payment of
income tax. That the money value of his accrued leave credits is not part of his salary
is buttessed by Section 3 of PD 985, which it makes it clear that the actual service is
the period of time for which pay has been received, excluding the period covered by
terminal leave. The Commissioner filed a motion for reconsideration.
Issue: Whether terminal leave pay is exempt from tax; as well as other amounts
claimed herein.
Held: Applying Section 12 (c) of Commonwealth Act 186, as incorporated into RA 660,
and Section 28 (c) of the former law, the amount received by Atty. Zialcita as a result
of the conversion of unused leave credits, commonly known as terminal leave, is
applied for by an officer or employee who retires, resigns, or is separated from the
service through no fault of his own. Since the terminal leave is applied for after the
severance of the employment, terminal pay is no longer compensation for services
rendered. It cannot be viewed as salary. Further, the terminal leave pay may also be
considered as a retirement gratuity, which is also another exclusion from gross
income as provided for in Section 28 (b), 7 (f) of the Tax Code. The 23 August
Resolution (AM 90-6-015-SC), however, specifically applies only to employees of the
Judiciary who retire, resign or are separated through no fault of their own. The
resolution cannot be made to apply to other government employees, absent an actual
case or controversy, as that would be in principle an advisory opinion
RA 4917
AN ACT PROVIDING THAT RETIREMENT BENEFITS OF EMPLOYEES OF PRIVATE FIRMS
SHALL NOT BE SUBJECT TO ATTACHMENT, LEVY, EXECUTION, OR ANY TAX
WHATSOEVER.
Section 1. Any provision of law to the contrary notwithstanding, the retirement
benefits received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan maintained by the
employer shall be exempt from all taxes and shall not be liable to attachment,
garnishment, levy or seizure by or under any legal or equitable process whatsoever
except to pay a debt of the official or employee concerned to the private benefit plan
or that arising from liability imposed in a criminal action: Provided, That the retiring
official or employee has been in the service of the same employer for at least ten (10)
years and is not less than fifty years of age at the time of his retirement: Provided,
further, That the benefits granted under this Act shall be availed of by an official or
employee only once: Provided, finally, That in case of separation of an official or
employee from the service of the employer due to death, sickness or other physical
disability or for any cause beyond the control of the said official or employee, any
amount received by him or by his heirs from the employer as a consequence of such
separation shall likewise be exempt as hereinabove provided.
As used in this Act, the term "reasonable private benefit plan" means a pension,
gratuity, stock bonus or profit sharing plan maintained by an employer for the benefit
of some or all of his officials and employees, wherein contributions are made by such
employer or officials and employees, or both, for the purpose of distributing to such
officials and employees the earnings and principal of the fund thus accumulated, and
wherein it is provided in said plan that at no time shall any part of the corpus or
income of the fund be used for, or be diverted to, any purpose other than for the
exclusive benefit of the said officials and employee
RA 7833
AN ACT TO EXCLUDE THE BENEFITS MANDATED PURSUANT TO REPUBLIC ACT NO.
6686 AND PRESIDENTIAL DECREE NO. 851, AS AMENDED, AND OTHER BENEFITS
FROM THE COMPUTATION OF GROSS COMPENSATION INCOME FOR PURPOSES OF
DETERMINING TAXABLE COMPENSATION INCOME, AMENDING FOR THE PURPOSE
SECTION 28(B)(8) OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED
A new sub-paragraph to be known as sub-paragraph (F) is hereby inserted at the
end of Section 28(b)(8) of the National Internal Revenue Code, as amended, which
shall read as follows:
(F) 13th month pay and other benefits.
Revised Regulations 2-95
Implementing Republic Act No. 7833, An Act to Exclude the Benefits Mandated
Pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as Amended, and
other Benefits from the Computation of Gross Compensation Income for the Purposes
of Determining Taxable Compensation Income (January 3, 1995)
Scope. Pursuant to Section 245 and 72 of the NIRC, as amended, in relation to
Section 3 of Republic Act No. 7833, these Regulations are hereby promulgated to
implement the provisions of Section 28 (b) (9) (6) of the NIRC, as amended, excluding
from the computation of gross compensation income, for purposes of determining
taxable compensation income, the 13th month pay and other benefits.
Definition of Terms. For purposes of these Regulations, the following definitions of
words and phrases are hereby adopted:
a) "Exclusions" shall mean the total benefits which are not included in the
computation of gross compensation income for purposes of determining taxable
compensation income and are, therefore, exempt from the withholding tax on wages.
b) "Gross compensation income" means all remunerations for services performed
by an employee for his employer, whether paid in cash or in kind, unless specifically
excluded under Secs. 27 and 28 of the NIRC, as amended.
c) "Other benefits" refer to all benefits other than the 13th month pay, such as,
the annual Christmas bonus given by private offices, 14th month pay, mid-year
productivity incentive bonus, gifts in cash or in kind and other similar benefits received
by an official or employee for one calendar year in an amount not exceeding Twelve
Thousand Pesos (P12,000.00) as maximum limit.
d) "13th month pay" refers to the mandatory one month basic salary of an official
or employee of the National Government, Local Government Units, agencies and
instrumentalities, including government-owned and -controlled corporations, and of
private offices received after the 12th month pay.
Benefits Exempted from Income Tax. For purposes of determining the taxable
compensation income, the following benefits shall be excluded from the gross
compensation income, viz:
a) 13th month pay equivalent to the mandatory 1 mo. basic salary of officials and
employees of the Government (whether national or local), including goccs, and of
private offices received after the 12th month pay beginning CY 1994; and
b) Other benefits, such as, Christmas bonus given by, private offices to their officials
and employees, productivity incentives bonus, loyalty award, gifts in cash or in kind
and other benefits of similar nature actually received by officials and employees of
both Government and private offices in an amount not exceeding P12,000.00 for 1
calendar year.
The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued
beginning January 1, 1994 but shall be limited only to an amount not exceeding
P12,000.00 in the case of the "other benefits" contemplated under paragraph (b)
above, provided, however, that when added to the 13th month pay, the total amount
of tax exempt benefits shall not exceed P30,000.00.
Refund/Credit of Taxes Withheld from employees Separated from Employment.
a) An employee separate from the service of his previous employer but is presently
employed by another employer shall be refunded/credited the taxes withheld on his
exempt 13th month pay and other benefits by his present employer.
b) An employee who has been separated from a previous employer but has no present
employment shall claim his refund of excess tax withheld on his 13th month pay and
other benefits by filing with the BIR a refundable income tax return for CY 1994,
provided that the refundable ITR for 1994 reflects the taxes withheld on his 13th
month pay and other benefits.
Concurrent Multiple Employments. An employee is employed by two or more
employers at the same time during the taxable year shall be refunded/credited the
taxes withheld on his 13th month pay and "other benefits" by his main employer, e.g.,
the employer paying the highest wage/salary. The said main employer shall determine
the maximum allowable 13th month pay and "other benefits" received from both
main and secondary employer/s in annualizing the taxable compensation income at
year-end adjustment. For this purpose, the secondary employer/s shall furnish the
main employer a certification as to the amount of the 13th month pay and other
benefits received by the employee.
RMC 36-94
Publishing the full text of Republic Act No. 7833 - an Act excluding the benefits
mandated pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as
amended, and other benefits from the computation of gross compensation income
for purposes of determining taxable compensation income, amending for the purpose
Section 28(b)(8) of the National Internal Revenue Code, asamended. (December 14,
1994)
(4) Income Derived by Foreign Government
SEC. 32. (B) (7) (a) - Income derived from investments in the Philippines in loans,
stocks, bonds or other domestic securities, or from interest on deposits in banks
in the Philippines by (i) foreign governments, (ii) financing institutions owned,
controlled, or enjoying refinancing from foreign governments, and (iii)
international or regional financial institutions established by foreign
governments.
Case
CIR vs. Mitsubishi
Facts: Atlas Consolidated Mining entered into a Loan and Sales Contract with Mitsubishi.
Under the Contract, Mitsubishi would lend Atlas $20M for the installation of a new
concentrator for copper production, and in turn, Atlas would sell to Mitsubishi all the
copper concentrates produced from the machine for the next 15 years.
Thereafter, Mitsubishi applied for a loan with Eximbank of Japan so that it could
comply with its obligations under the contract. Mitsubishi also applied for a loan with
a consortium of Japanese banks. The total amount of both loans was $20M.
Atlas made interest payments in favor of Mitsubishi totaling P13M. The corresponding
15% tax on the interest in the amount of P1.9M was withheld and remitted to the
Government. Subsequently, Mitsubishi and Atlas filed a claim for tax credit,
requesting that the P1.9M be applied against their existing tax liabilities on the ground
that the interest earned by Mitsubishi on the loan was exempt from tax.
Issue: Whether the interest is tax-exempt.
Held: No, the interest is not exempt from tax. The National Internal Revenue Code
provides that income received from loans in the Philippines extended by financing
institutions owned, controlled, or financed by foreign governments are exempt from
tax.
Mitsubishi and Atlas claim that the interest earned from the loan falls under the above
exemption because Mitsubishi was merely acting as an agent of Eximbank, which is a
financing institution owned, controlled, and financed by the Japanese Government.
They allege that Mitsubishi was merely the conduit between Atlas and Eximbank, and
that the ultimate creditor was really Eximbank.
The SC held that Mitsubishi was not a mere agent of Eximbank. It entered into the
agreement with Atlas in its own independent capacity. The transaction between
Mitsubishi and Atlas on the one hand, and between Mitsubishi and Eximbank on the
other, were separate and distinct. No agency relationship was established between
Eximbank and Mitsubishi. Since the transaction was between Mitsubishi and Atlas,
the exemption that would have been applicable to Eximbank, does not apply. The
interest is therefore not exempt from tax.
(5) Gains from Sales of Bonds, Debentures or Other Certificates of
Indebtedness
SEC. 32. (B) (7) (g) - gains realized from the same or exchange or retirement of
bonds, debentures or other certificate of indebtedness with a maturity of more
than five (5) years.
Case DEDUCTIONS in Gross Income
Nippon Life Insurance vs. CIR
Ruling: There is a clear distinction between interest from bonds and gain from the SEC. 34. Deductions from Gross Income. - Except for taxpayers earning
sale of bonds. It is only the gains realized from the sale or exchange or retirement of compensation income arising from personal services rendered under an employer-
bonds, debentures or other certificates of indebtedness with a maturity of more than employee relationship where no deductions shall be allowed under this Section other
five (5) years that is excluded from gross income and thus exempt from income tax than under subsection (M) hereof, in computing taxable income subject to income tax
under Section 32(B)(7)(g) of the Tax Code. Such gains fall within the general category under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be
of gains derived from dealings in property, as distinguished from interest from allowed the following deductions from gross income;
bonds, debentures or other certificates of indebtedness, which falls within the general
category of Interests under Section 32(A) of the Tax Code. A. Expenses
B. Interest
C. Taxes
(6) Miscellaneous Items D. Loses
E. Bad Debts
SEC. 32. (B) (7) (c) - Prizes and Awards. - Prizes and awards made primarily in F. Depreciation
recognition of religious, charitable, scientific, educational, artistic, literary, or civic G. Depletion
achievement but only if: H. Charitable and other Contributions
(i) The recipient was selected without any action on his part to enter the I. Research and Development
contest or proceeding; and J. Pension Trusts
K. Additional Requirements for Deductibility
(ii) The recipient is not required to render substantial future services as a L. Optional Standard Deduction
condition to receiving the prize or award.
SEC. 32. (B) (7) (d) - Prizes and Awards in sports Competition. - All prizes and awards
granted to athletes in local and international sports competitions and tournaments
whether held in the Philippines or abroad and sanctioned by their national sports SEC. 36. Items not Deductible.-
associations.
(A) General Rule. - In computing net income, no deduction shall in any case be allowed
SEC. 32. (B) (7) (f) - GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, in respect to -
Medicare and Pag-ibig contributions, and union dues of individuals.
(1) Personal, living or family expenses;

(2) Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;
This Subsection shall not apply to intangible drilling and development costs incurred
in petroleum operations which are deductible under Subsection (G) (1) of Section 34
of this Code.
(3) Any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried on
by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy.
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or Professional Expenses.-
(a) In General. - There shall be allowed as deduction from gross income all the
ordinary and necessary expenses paid or incurred during the taxable year in carrying
on or which are directly attributable to, the development, management, operation
and/or conduct of the trade, business or exercise of a profession, including:
(i) A reasonable allowance for salaries, wages, and other forms of compensation for
personal services actually rendered, including the grossed-up monetary value of
fringe benefit furnished or granted by the employer to the employee: Provided, That
the final tax imposed under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and abroad, while away from
home in the pursuit of trade, business or profession;
(iii) A reasonable allowance for rentals and/or other payments which are required as
a condition for the continued use or possession, for purposes of the trade, business
or profession, of property to which the taxpayer has not taken or is not taking title or
in which he has no equity other than that of a lessee, user or possessor;
(iv) A reasonable allowance for entertainment, amusement and recreation expenses
during the taxable year, that are directly connected to the development, management
and operation of the trade, business or profession of the taxpayer, or that are directly
related to or in furtherance of the conduct of his or its trade, business or exercise of
a profession not to exceed such ceilings as the Secretary of Finance may, by rules and
regulations prescribe, upon recommendation of the Commissioner, taking into
account the needs as well as the special circumstances, nature and character of the
industry, trade, business, or profession of the taxpayer: Provided, That any expense
incurred for entertainment, amusement or recreation that is contrary to law, morals
public policy or public order shall in no case be allowed as a deduction.
(b) Substantiation Requirements. - No deduction from gross income shall be allowed
under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient
evidence, such as official receipts or other adequate records: (i) the amount of the
expense being deducted, and (ii) the direct connection or relation of the expense
being deducted to the development, management, operation and/or conduct of the
trade, business or profession of the taxpayer.
(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income
shall be allowed under Subsection (A) hereof for any payment made, directly or
indirectly, to an official or employee of the national government, or to an official or
employee of any local government unit, or to an official or employee of a government-
owned or -controlled corporation, or to an official or employee or representative of a
foreign government, or to a private corporation, general professional partnership, or
a similar entity, if the payment constitutes a bribe or kickback.
(2) Expenses Allowable to Private Educational Institutions. - In addition to the
expenses allowable as deductions under this Chapter, a private educational
institution, referred to under Section 27 (B) of this Code, may at its option elect either:
(a) to deduct expenditures otherwise considered as capital outlays of depreciable
assets incurred during the taxable year for the expansion of school facilities or (b) to
deduct allowance for depreciation thereof under Subsection (F) hereof.
Cases:
CIR vs General Foods
Facts: CIR Commissioner, petitioner, assails the resolution of the Court of Appeals
reversing the decision of the Court of Tax Appeals which denied the protest filed by
respondent General Foods (Phils.), Inc., regarding the assessment made against the
latter for deficiency taxes. On June 14, 1985, General Foods, manufacturer of
beverages such as Tang, Calumet and Kool-Aid, filed its ITR for the fiscal year
ending February 28, 1985. In said tax return, it claimed as a deduction for business
expenses, the amount of P9,461,246 for media advertising for Tang.
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction
claimed by respondent corporation. The parties are in agreement that the subject
advertising expense was paid or incurred within the corresponding taxable year and
was incurred in carrying on a trade or business. Hence, it was necessary. However,
their views conflict as to whether or not it was ordinary.
To be deductible, an advertising expense should not only be necessary but also
ordinary. These two requirements must be met. The Commissioner maintains that
the subject advertising expense was not ordinary on the ground that it failed the two
conditions set by U.S. jurisprudence:
a) reasonableness of the amount incurred
b) the amount incurred must not be a capital outlay to create goodwill
for the product and/or private respondents business.
Otherwise, the expense must be considered a capital expenditure to be spread out
over a reasonable time.
Consequently, General Foods was assessed deficiency income taxes in the amount of
P2, 635, 141.42. The latter filed a motion for reconsideration but the same was
denied. On September 1989, General Foods appealed to the CTA but the appeal was
dismissed. 9.
Issue: WON the subject media advertising expense for Tang incurred by respondent
corporation was an ordinary and necessary expense fully deductible under the
National Internal Revenue Code (NIRC).
Held: No, CA committed reversible error when it declared the subject media
advertising expense to be deductible as an ordinary and necessary expense on the
ground that it has not been established that the item being claimed as deduction is
excessive.
DOCTRINE in the case:
1. Deductions for income tax purposes partake of the nature of tax exemptions;
hence, if tax exemptions are strictly construed, then deductions must also be
strictly construed.
2. To be deductible from gross income, the subject advertising expense must comply
with the following requisites:
a. the expense must be ordinary and necessary;
b. it must have been paid or incurred during the taxable year;
c. it must have been paid or incurred in carrying on the trade or business of
the taxpayer;
d. it must be supported by receipts, records or other pertinent papers
3. Advertising is generally of two kinds:
1st kind : Advertising to stimulate the current sale of merchandise or use of service:
except as to the question of the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses.
2nd kind: Advertising designed to stimulate the future sale of merchandise or use of
services: The second type involves expenditures incurred, in whole or in part, to create
or maintain some form of goodwill for the taxpayers trade or business or for the
industry or profession of which the taxpayer is a member. If, however, the
expenditures are for advertising of the second kind, then normally they should be
spread out over a reasonable period of time.
ATLAS CONSOLIDATED MINING VS CIR
Facts: Petitioner Corporation, a VAT-registered taxpayer engaged in mining,
production, and sale of various mineral products, filed claims with the BIR for
refund/credit of input VAT on its purchases of capital goods and on its zero-rated
sales in the taxable quarters of the years 1990 and 1992. BIR did not immediately act
on the matter prompting the petitioner to file a petition for review before the CTA.
The latter denied the claims on the grounds that for zero-rating to apply, 70% of the
company's sales must consists of exports, that the same were not filed within the 2-
year prescriptive period (the claim for 1992 quarterly returns were judicially filed
only on April 20, 1994), and that petitioner failed to submit substantial evidence to
support its claim for refund/credit.
The petitioner, on the other hand, contends that CTA failed to consider the
following: sales to PASAR and PHILPOS within the EPZA as zero-rated export sales;
the 2-year prescriptive period should be counted from the date of filing of the last
adjustment return which was April 15, 1993, and not on every end of the applicable
quarters; and that the certification of the independent CPA attesting to the
correctness of the contents of the summary of suppliers invoices or receipts
examined, evaluated and audited by said CPA should substantiate its claims.
Issue: Did the petitioner corporation sufficiently establish the factual bases for its
applications for refund/credit of input VAT?
Held: No. Although the Court agreed with the petitioner corporation that the two-
year prescriptive period for the filing of claims for refund/credit of input VAT must be
counted from the date of filing of the quarterly VAT return, and that sales to PASAR
and PHILPOS inside the EPZA are taxed as exports because these export processing
zones are to be managed as a separate customs territory from the rest of the
Philippines, and thus, for tax purposes, are effectively considered as foreign territory,
it still denies the claims of petitioner corporation for refund of its input VAT on its
purchases of capital goods and effectively zero-rated sales during the period claimed
for not being established and substantiated by appropriate and sufficient evidence.
Tax refunds are in the nature of tax exemptions. The taxpayer who claims for
exemption must justify his claim by the clearest grant of organic or statute law and
should not be permitted to stand on vague implications.
SEC. 45. Period for which Deductions and Credits Taken.
The deductions provided for in this Title shall be taken for the taxable year in which
"paid or accrued" or "paid or incurred", dependent upon the method of accounting
the basis of which the net income is computed, unless in order to clearly reflect the
income, the deductions should be taken as of a different period.
In the case of the death of a taxpayer, there shall be allowed as deductions for the
taxable period in which falls the date of his death, amounts accrued up to the date of
his death if not otherwise properly allowable in respect of such period or a prior
period. cralaw
Case
CIR v. Isabela Cultural Corp.
Facts: Isabela Cultural Corporation (ICC), a domestic corporation received an
assessment notice for deficiency income tax and expanded withholding tax from BIR.
It arose from the disallowance of ICCs claimed expense for professional and security
services paid by ICC; as well as the alleged understatement of interest income on the
three promissory notes due from Realty Investment Inc. The deficiency expanded
withholding tax was allegedly due to the failure of ICC to withhold 1% e-withholding
tax on its claimed deduction for security services.
ICC sought a reconsideration of the assessments. Having received a final notice of
assessment, it brought the case to CTA, which held that it is unappealable, since the
final notice is not a decision. CTAs ruling was reversed by CA, which was sustained by
SC, and case was remanded to CTA. CTA rendered a decision in favor of ICC. It ruled
that the deductions for professional and security services were properly claimed, it
said that even if services were rendered in 1984 or 1985, the amount is not yet
determined at that time. Hence it is a proper deduction in 1986. It likewise found that
it is the BIR which overstate the interest income, when it applied compounding absent
any stipulation.
Issue: Whether or not the expenses for professional and security services are
deductible.
Held: No. One of the requisites for the deductibility of ordinary and necessary
expenses is that it must have been paid or incurred during the taxable year. This
requisite is dependent on the method of accounting of the taxpayer. In the case at
bar, ICC is using the accrual method of accounting. Hence, under this method, an
expense is recognized when it is incurred. Under a Revenue Audit Memorandum,
when the method of accounting is accrual, expenses not being claimed as deductions
by a taxpayer in the current year when they are incurred cannot be claimed in the
succeeding year.
The accrual of income and expense is permitted when the all-events test has been
met. This test requires: 1) fixing of a right to income or liability to pay; and 2) the
availability of the reasonable accurate determination of such income or liability. The
test does not demand that the amount of income or liability be known absolutely,
only that a taxpayer has at its disposal the information necessary to compute the
amount with reasonable accuracy.
From the nature of the claimed deductions and the span of time during which the firm
was retained, ICC can be expected to have reasonably known the retainer fees
charged by the firm. They cannot give as an excuse the delayed billing, since it could
have inquired into the amount of their obligation and reasonably determine the
amount.
(B) Interest.-
(1) In General. - The amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer's profession, trade or business shall be
allowed as deduction from gross income: Provided, however, that the taxpayer's
otherwise allowable deduction for interest expense shall be reduced by an amount
equal to the following percentages of the interest income subjected to final tax:
Forty-one percent (41%) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999; and
Thirty-eight percent (38%) beginning January 1, 2000;
(2) Exceptions. - No deduction shall be allowed in respect of interest under the
succeeding subparagraphs:
(a) If within the taxable year an individual taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest is paid in advance through discount or
otherwise: Provided, That such interest shall be allowed a a deduction in the year the
indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic
amortizations, the amount of interest which corresponds to the amount of the
principal amortized or paid during the year shall be allowed as deduction in such
taxable year;
(b)If both the taxpayer and the person to whom the payment has been made or is to
be made are persons specified under Section 36 (B); or
(c)If the indebtedness is incurred to finance petroleum exploration.
(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest
incurred to acquire property used in trade business or exercise of a profession may be
allowed as a deduction or treated as a capital expenditure.
Cases:
PAPER INDUSTRIES v CA ( Dec. 1, 1995)
Facts: On various years (1969, 1972 and 1977), Picop obtained loans from foreign
creditors in order to finance the purchase of machinery and equipment needed for its
operations. In its 1977 Income Tax Return, Picop claimed interest payments made in
1977, amounting to P42,840,131.00, on these loans as a deduction from its 1977 gross
income.
The CIR disallowed this deduction upon the ground that, because the loans had been
incurred for the purchase of machinery and equipment, the interest payments on
those loans should have been capitalized instead and claimed as a depreciation
deduction taking into account the adjusted basis of the machinery and equipment
(original acquisition cost plus interest charges) over the useful life of such assets.
 Both the CTA and the Court of Appeals sustained the position of Picop and held
that the interest deduction claimed by Picop was proper and allowable. In the instant
Petition, the CIR insists on its original position.
Issue: Whether Picop is entitled to deductions against income of interest payments
on loans for the purchase of machinery and equipment.
Held: YES. Interest payments on loans incurred by a taxpayer (whether BOI-registered
or not) are allowed by the NIRC as deductions against the taxpayer's gross income.
The basis is 1977 Tax Code Sec. 30 (b). Thus, the general rule is that interest expenses
are deductible against gross income and this certainly includes interest paid under
loans incurred in connection with the carrying on of the business of the taxpayer. In
the instant case, the CIR does not dispute that the interest payments were made by
Picop on loans incurred in connection with the carrying on of the registered
operations of Picop, i.e., the financing of the purchase of machinery and equipment
actually used in the registered operations of Picop. Neither does the CIR deny that
such interest payments were legally due and demandable under the terms of such
loans, and in fact paid by Picop during the tax year 1977.
CIR v VDA DE PRIETO
Facts: On December 4, 1945, the respondent conveyed by way of gifts to her four
children, namely, Antonio, Benito, Carmen and Mauro, all surnamed Prieto, real
property with a total assessed value of P892,497.50. After the filing of the gift tax
returns on or about February 1, 1954, the petitioner Commissioner of Internal
Revenue appraised the real property donated for gift tax purposes at P1,231,268.00,
and assessed the total sum of P117,706.50 as donor's gift tax, interest and
compromises due thereon. Of the total sum of P117,706.50 paid by respondent on
April 29, 1954, the sum of P55,978.65 represents the total interest on account of
delinquency. This sum of P55,978.65 was claimed as deduction, among others, by
respondent in her 1954 income tax return. Petitioner, however, disallowed the claim
and as a consequence of such disallowance assessed respondent for 1954 the total
sum of P21,410.38 as deficiency income tax due on the aforesaid P55,978.65,
including interest up to March 31, 1957, surcharge and compromise for the late
payment.
Under the law, for interest to be deductible, it must be shown that there be an
indebtedness, that there should be interest upon it, and that what is claimed as an
interest deduction should have been paid or accrued within the year. It is here
conceded that the interest paid by respondent was in consequence of the late
payment of her donor's tax, and the same was paid within the year it is sought to be
declared.
To sustain the proposition that the interest payment in question is not deductible for
the purpose of computing respondent's net income, petitioner relies heavily on
section 80 of Revenue Regulation No. 2 (known as Income Tax Regulation)
promulgated by the Department of Finance, which provides that "the word `taxes'
means taxes proper and no deductions should be allowed for amounts representing
interest, surcharge, or penalties incident to delinquency." The court below, however,
held section 80 as inapplicable to the instant case because while it implements
sections 30(c) of the Tax Code governing deduction of taxes, the respondent taxpayer
seeks to come under section 30(b) of the same Code providing for deduction of
interest on indebtedness.
Issue: Whether or not such interest was paid upon an indebtedness within the
contemplation of section 30 (b) (1) of the Tax Code?
Ruling: Yes. According to the Supreme Court, although interest payment for
delinquent taxes is not deductible as tax under Section 30(c) of the Tax Code and
section 80 of the Income Tax Regulations, the taxpayer is not precluded thereby from
claiming said interest payment as deduction under section 30(b) of the same Code.
Revenue Regulation 13-2000
Implements the provisions of Section 34(B) of the Tax Code of 1997 relative to the
requirements for the deductibility of interest expense from the gross income of a
corporation or an individual engaged in trade, business or in the practice of
profession.
In general, subject to certain limitations, the following are the requisites for the
deductibility of interest expense from gross income:
 a) there must be an indebtedness;
b) there should be an interest expense paid or incurred upon such indebtedness;
c) the indebtedness must be that of the taxpayer;
d) the indebtedness must be connected with the taxpayer's trade, business or
exercise of profession;
e) the interest expense must have been paid or incurred during the taxable year;
f) the interest must have been stipulated in writing;
g) the interest must be legally due;
h) the interest payment arrangement must not be between related taxpayers;
i) the interest must not be incurred to finance petroleum operations; and
j) in case of interest incurred to acquire property used in trade, business or
exercise of profession, the same was not treated as a capital expenditure
REVENUE REGULATIONS NO. 6-2000 issued September 25, 2000 prescribes the
regulations to implement the compromise settlement of internal revenue tax
liabilities of taxpayers with outstanding receivable accounts and disputed
assessments. Cases which may be the subject of compromise settlement are the
following: 1) delinquent accounts; 2) cases under administrative protest pending in
the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayers Service
(LTS), Enforcement Service, Excise Taxpayers Service (ETS) and Collection Service; 3)
civil tax cases being disputed before the courts; 4) collection cases filed in courts; and
5) criminal violations, other than those already filed in court, or those involving
criminal tax fraud.
Cases that cannot be compromised are: 1) withholding tax cases; 2) criminal tax fraud
cases; 3) criminal violations already filed in court; and 4) delinquent accounts with
duly approved schedule of instalment payments.
The basis for the acceptance of compromise settlement are: 1) doubtful validity of the
assessment; and 2) financial incapacity. The prescribed minimum rates for the
compromise settlement of tax liabilities, reckoned on a per tax type assessment basis,
are: a) 40% in cases of doubtful validity; b) 10% in cases of financial incapacity; and c)
50% in cases of delinquent accounts and disputed assessments of taxpayers registered
under the LTS and ETS. Applications for the compromise settlement of tax liabilities
will be evaluated and approved/disapproved by the: a) National Evaluation Board (for
basic assessed tax exceeding P 1 Million and for offers less than the prescribed
minimum rates); b) Regional Evaluation Board (for basic assessed tax of P 500,000.00
or less); and 3) Commissioner of Internal Revenue (for basic assessed tax exceeding P
500,000.00 but not over P1 Million).
(C) Taxes.-
(1) In General. - Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business, shall be allowed as deduction, except
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this deduction shall
be allowed in the case of a taxpayer who does not signify in his return his desire to
have to any extent the benefits of paragraph (3) of this subsection (relating to credits
for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited, shall
be included as part of gross income in the year of receipt to the extent of the income
tax benefit of said deduction.
(2) Limitations on Deductions. - In the case of a non-resident alien individual engaged
in trade or business in the Philippines and a resident foreign corporation, the
deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed
only if and to the extent that they are connected with income from sources within the
Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his
return his desire to have the benefits of this paragraph, the tax imposed by this Title
shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and
of a domestic corporation, the amount of income taxes paid or incurred during the
taxable year to any foreign country; and
(b) Partnerships and Estates. - In the case of any such individual who is a member of
a general professional partnership or a beneficiary of an estate or trust, his
proportionate share of such taxes of the general professional partnership or the
estate or trust paid or incurred during the taxable year to a foreign country, if his
distributive share of the income of such partnership or trust is reported for taxation
under this Title.
An alien individual and a foreign corporation shall not be allowed the credits against
the tax for the taxes of foreign countries allowed under this paragraph.
(4) Limitations on Credit. - The amount of the credit taken under this Section shall be
subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country shall
not exceed the same proportion of the tax against which such credit is taken, which
the taxpayer's taxable income from sources within such country under this Title bears
to his entire taxable income for the same taxable year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's taxable income from sources
without the Philippines taxable under this Title bears to his entire taxable income for
the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ
from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in
whole or in part, the taxpayer shall notify the Commissioner; who shall re-determine
the amount of the tax for the year or years affected, and the amount of tax due upon
such redetermination, if any, shall be paid by the taxpayer upon notice and demand
by the Commissioner, or the amount of tax overpaid, if any, shall be credited or
refunded to the taxpayer. In the case of such a tax incurred but not paid, the
Commissioner as a condition precedent to the allowance of this credit may require
the taxpayer to give a bond with sureties satisfactory to and to be approved by the
Commissioner in such sum as he may require, conditioned upon the payment by the
taxpayer of any amount of tax found due upon any such redetermination. The bond
herein prescribed shall contain such further conditions as the Commissioner may
require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this
Section may, at the option of the taxpayer and irrespective of the method of
accounting employed in keeping his books, be taken in the year which the taxes of the
foreign country were incurred, subject, however, to the conditions prescribed in
Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year
in which the taxes of the foreign country accrued, the credits for all subsequent years
shall be taken upon the same basis and no portion of any such taxes shall be allowed
as a deduction in the same or any succeeding year.
(7)Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed
only if the taxpayer establishes to the satisfaction of the Commissioner the following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred to
which is claimed as a credit under said paragraph, such amount to be determined
under rules and regulations prescribed by the Secretary of Finance; and
(c) All other information necessary for the verification and computation of such
credits.
Cases
CIR vs Lednicky
Facts: Spouses are both American citizens residing in the Philippines and have derived
all their income from Philippine sources for taxable years in question.
On March, 1957, filed their ITR for 1956, reporting gross income of P1,017,287.65 and
a net income of P 733,809.44. On March 1959, file an amended claimed deduction of
P 205,939.24 paid in 1956 to the United States government as federal income tax of
1956.
Issue: Whether a citizen of the United States residing in the Philippines, who derives
wholly from sources within the Philippines, may deduct his gross income from the
income taxes he has paid to the United States government for the said taxable year?
Held: An alien resident who derives income wholly from sources within the Philippines
may not deduct from gross income the income taxes he paid to his home country for
the taxable year. The right to deduct foreign income taxes paid given only where
alternative right to tax credit exists.
Section 30 of the NIRC, Gross Income Par. C (3): Credits against tax per taxes of foreign
countries.
If the taxpayer signifies in his return his desire to have the benefits of this paragraph,
the tax imposed by this shall be credited with: Paragraph (B), Alien resident of the
Philippines; and, Paragraph C (4), Limitation on credit.
An alien resident not entitled to tax credit for foreign income taxes paid when his
income is derived wholly from sources within the Philippines.
Double taxation becomes obnoxious only where the taxpayer is taxed twice for the
benefit of the same governmental entity. In the present case, although the taxpayer
would have to pay two taxes on the same income but the Philippine government only
receives the proceeds of one tax, there is no obnoxious double taxation.
(D) Losses.
(i) Casualty Losses
(1) In General. - Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity shall be allowed as
deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss arises
from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement.
The Secretary of Finance, upon recommendation of the Commissioner, is hereby
authorized to promulgate rules and regulations prescribing, among other things, the
time and manner by which the taxpayer shall submit a declaration of loss sustained
from casualty or from robbery, theft or embezzlement during the taxable year:
Provided, however, That the time limit to be so prescribed in the rules and regulations
shall not be less than thirty (30) days nor more than ninety (90) days from the date of
discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if at the time of the
filing of the return, such loss has been claimed as a deduction for estate tax purposes
in the estate tax return.
(2) Proof of Loss. - In the case of a non-resident alien individual or foreign corporation,
the losses deductible shall be those actually sustained during the year incurred in
business, trade or exercise of a profession conducted within the Philippines, when
such losses are not compensated for by insurance or other forms of indemnity. The
secretary of Finance, upon recommendation of the Commissioner, is hereby
authorized to promulgate rules and regulations prescribing, among other things, the
time and manner by which the taxpayer shall submit a declaration of loss sustained
from casualty or from robbery, theft or embezzlement during the taxable year:
Provided, That the time to be so prescribed in the rules and regulations shall not be
less than thirty (30) days nor more than ninety (90) days from the date of discovery of
the casualty or robbery, theft or embezzlement giving rise to the loss; and
(ii) NOLCO
(3) Net Operating Loss Carry-Over. - The net operating loss of the business or
enterprise for any taxable year immediately preceding the current taxable year, which
had not been previously offset as deduction from gross income shall be carried over
as a deduction from gross income for the next three (3) consecutive taxable years
immediately following the year of such loss: Provided, however, That any net loss
incurred in a taxable year during which the taxpayer was exempt from income tax
shall not be allowed as a deduction under this Subsection: Provided, further, That a
net operating loss carry-over shall be allowed only if there has been no substantial
change in the ownership of the business or enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued
shares., if the business is in the name of a corporation, is held by or on behalf of the
same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation,
if the business is in the name of a corporation, is held by or on behalf of the same
persons.
"For purposes of this subsection, the term 'not operating loss' shall mean the excess
of allowable deduction over gross income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss without the
benefit of incentives provided for under Executive Order No. 226, as amended,
otherwise known as the Omnibus Investments Code of 1987, incurred in any of the
first ten (10) years of operation may be carried over as a deduction from taxable
income for the next five (5) years immediately following the year of such loss. The
entire amount of the loss shall be carried over to the first of the five (5) taxable years
following the loss, and any portion of such loss which exceeds, the taxable income of
such first year shall be deducted in like manner form the taxable income of the next
remaining four (4) years.
Revenue Regulation 14-01
Net operating loss - The net operating losses (NOLCO) of Grand Cement
Manufacturing Corporation ("Grand") may still be carried over and claimed as a
deduction from its gross income, pursuant to Section 34(D)(3) of the Tax Code of 1997,
as implemented by Revenue Regulations No. 14-2001. The NOLCO, which Grand seeks
to preserve, have not been previously offset as a deduction from gross income, and
they were incurred in the taxable years during which it was no longer exempt from
Income Tax, particularly the taxable years 1998 and 1999. The transfer of shares by
the previous stockholders of Grand were through straight purchase and sale and not
through merger, consolidation or business combination. As such, the transfer of
shares did not cause a substantial change in ownership as a result of or arising from
merger, consolidation or combination with another person, as defined in subsection
3.8 of Revenue Regulations No. 14-2002.
BIR RULING 30-00
Tax-free merger under certain condition -Pursuant to Section 40(c)(2)of the Tax
Code, no gain or loss shall be recognized by Blue Circle Philippines, Inc. (BCPI), Round
Royal, Inc. (RRI), SM Investment Corporation (SMIC), Sysmart Corporation and CG&E
Holdings on the transfer of their Fortune, Zeus and Iligan shares to Republic, in
exchange for new Republic shares, because they together hold more than 51% of the
total voting stock of Republic after the transfer. The transfer through the facilities of
the PSE by the 6th to the last transferor of their Fortune and Zeus shares to Republic
in exchange for new Republic shares will be subject to the of 1% stock transaction
tax based on the gross selling price or gross value in money of the shares transferred,
while the 6th to the last transferor of the Iligan shares will be subject to capital gains
tax (CGT) at the rate of 5%, of the par value of the shares transferred. The new
Republic shares to be issued, being original issuances, are subject to the DST imposed
under Section 175 of the Tax Code at the rate of P2 on each P200, or fractional part
thereof, of the par value of the new Republic shares issued. The net operating losses
of each of Republic, Fortune, MPCC and Iligan are preserved after the proposed share
swap and may be carried over and claimed as a deduction from the irrespective gross
income, pursuant to Section 34(D)(3) of the Tax Code, because there is no substantial
change in the ownership of either Republic or Fortune or MPCC or Iligan."
(iii) Realized vs. Unrealized Losses
BIR RULING 206-90
This is letter requesting in behalf of Porcelana Mariwasa, Inc. (PMI), a ruling
confirming an opinion that the foreign exchange loss incurred by PMI is a deductible
loss in 1990.
It is represented that PMI is a corporation established and organized under Philippine
laws; that it has existing US dollar loans from Noritake Company, Limited (Noritake)
and Toyota Tsusho Corporation (Toyota) in the aggregate amounts of US
$7,636,679.17 and US $3,054,671.27, respectively, that in 1989, the parties agreed to
convert the said dollar denominated loans into pesos at the exchange rate prevailing
on June 30, 1989; that in December 1989, both agreements were approved by the BIR RULING 144-85
Central Bank subject to the submission of a copy each of the signed agreements
Facts: Request to clarify the deductibility of foreign exchange losses incurred by
incorporating the conversion; thereafter, drafts of the amended agreements were
reason of the devaluation of the peso. The losses arose from matured but
submitted to the Central Bank for pre-approval; that on January 29, 1990, the Central
unremitted principal repayments on loans affected by the debt-restructuring
Bank advised PMI's counsel on their findings and comments on the said drafts which
program in the Philippines.
were considered and incorporated in the final amended agreements; that in June
1990, the parties submitted to the Central Bank the signed agreements; that counsel Issue: Whether or not foreign exchange losses are deductible for income tax
of PMI is of the opinion that in the case of PMI, the resultant loss on conversion of US purposes.
dollar denominated loans to peso is more than a shrinkage in value of money; that
Held: NO. The annual increase in value of an asset is NOT TAXABLE INCOME because
the approval by the Central Bank and the signing by the parties of the agreements
such increase has not yet been realized. The increase in value, i.e., the gain, could
covering the said conversion established the loss, after which, the loss became final
only be taxed when a disposition of the property occurred which was of such a
and irrevocable, so that recoupment is reasonably impossible; and that having been
nature as to constitute a realization of such gain, that is, a severance of the gain
fixed and determinable, the loss is no longer susceptible to change, hence, it could
from the original capital invested in the property. The aforementioned rule also
fairly be stated that such has been sustained in a closed and completed transaction.
applies to losses. The annual decrease in the value of property is not normally
In reply the commissioner informed PMI that the annual increase in value of an asset allowable as a loss. Hence, to be allowable the loss must be realized.
is not taxable income because such increase has not yet been realized. The increase
When foreign currency acquired in connection with a transaction in the regular
in value i.e., the gain, could only be taxed when a disposition of the property occurred
course of business is disposed of, ordinary gain or loss results from the foreign
which was of such a nature as to constitute a realization of such gain, that is, a
exchange fluctuations. THE LOSS IS DEDUCTIBLE ONLY FOR THE YEAR IT IS ACTUALLY
severance of the gain from the original capital invested in the property. The same
SUSTAINED. Thus, there is no taxable event prior to the remittance of the scheduled
conclusion obtains as to losses. The annual decline in the value of property is not
amortization.
normally allowable as a deduction. Hence, to be allowable the loss must be realized.
When foreign currency acquired in connection with a transaction in the regular course
of business is disposed ordinary gain or loss results from the fluctuation. The loss is Accordingly, foreign exchange losses sustained as a result of devaluation of the peso
deductible only for the year it is actually sustained. It is sustained during the year in vis-a-vis the foreign currency e.g., US dollar, but which remittance of scheduled
which the loss occurs as evidenced by the completed transaction and as fixed by amortization consisting of principal and interests payments on a foreign loan has not
identifiable occurring in that year. No taxation event has as yet been consummated actually been made are NOT DEDUCTIBLE from gross income for income tax
prior to the remittance of the scheduled amortization. Accordingly, PMI's request for purposes.
confirmation of opinion was denied considering that foreign exchange losses
NOTE:
sustained as a result of conversion or devaluation of the peso vis-a-vis the foreign
currency or US dollar and vice versa but which remittance of scheduled amortization To sustain a loss means that the loss has occurred as evidenced by a closed and
consisting of principal and interests payment on a foreign loan had not actually been completed transaction and as fixed by identifiable events occurring in that year.
made are not deductible from gross income for income tax purposes. A closed transaction is a taxable event which has been consummated.
(E) Bad Debts. -
(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and
charged off within the taxable year except those not connected with profession, trade
or business and those sustained in a transaction entered into between parties
mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts
previously allowed as deduction in the preceding years shall be included as part of the
gross income in the year of recovery to the extent of the income tax benefit of said
deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are
ascertained to be worthless and charged off within the taxable year and are capital
assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank
or trust company incorporated under the laws of the Philippines a substantial part of
whose business is the receipt of deposits, for the purpose of this Title, be considered
as a loss from the sale or exchange, on the last day of such taxable year, of capital
assets.
REVENUE REGULATIONS NO. 5-99
Issued March 16, 1999 implements Section 34(E) of the Tax Code of 1997 relative to
the requirements for deductibility of bad debts from gross income of a corporation or
an individual engaged in trade or business or a professional engaged in the practice
of his profession. The requisites for valid deduction of bad debts from gross income
are: a) there must be an existing indebtedness due to the taxpayer which must be
valid and legally demandable; b) the same must be connected with the taxpayer's
trade, business or practice of profession; c) the same must not be sustained in a
transaction entered into between related parties enumerated under Section 36(B) of
the Tax Code of 1997; d) the same must be actually charged off the books of accounts
of the taxpayer as of the end of the taxable year; and e) the same must be actually
ascertained to be worthless and uncollectible as of the end of the taxable year. The
recovery of bad debts previously allowed as deduction in the preceding year or years
will be included as part of the taxpayer's gross income in the year of such recovery to
the extent of the income tax benefit of said deduction.
CASES:
PHILIPPINE REFINING CO v CA
Facts: Philippine Refining Corp (PRC) was assessed deficiency tax payments for the
year 1985 in the amount of around 1.8M. This figure was computed based on the
disallowance of the claim of bad debts by PRC. PRC duly protested the assessment
claiming that under the law, bad debts and interest expense are allowable
deductions.
When the BIR subsequently garnished some of PRCs properties, the latter considered
the protest as being denied and filed an appeal to the CTA which set aside the
disallowance of the interest expense and modified the disallowance of the bad debts
by allowing 3 accounts to be claimed as deductions. However, 13 supposed bad
debts were disallowed as the CTA claimed that these were not substantiated and did
not satisfy the jurisprudential requirement of worthlessness of a debt The CA
denied the petition for review.
Issue: Whether or not the CA was correct in disallowing the 13 accounts as bad debts.
Ruling: YES. Both the CTA and CA relied on the case of Collector vs. Goodrich
International, which laid down the requisites for worthlessness of a debt to wit:
In said case, we held that for debts to be considered as "worthless," and thereby
qualify as "bad debts" making them deductible, the taxpayer should show that (1)
there is a valid and subsisting debt. (2) the debt must be actually ascertained to be
worthless and uncollectible during the taxable year; (3) the debt must be charged off
during the taxable year; and (4) the debt must arise from the business or trade of the
taxpayer. Additionally, before a debt can be considered worthless, the taxpayer must
also show that it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that
he exerted diligent efforts to collect the debts, viz.: (1) sending of statement of
accounts; (2) sending of collection letters; (3) giving the account to a lawyer for
collection; and (4) filing a collection case in court.
PRC only used the testimony of its accountant Ms. Masagana in order to prove that
these accounts were bad debts. This was considered by all 3 courts to be self-serving.
The SC said that PRC failed to exercise due diligence in order to ascertain that these
debts were uncollectible. In fact, PRC did not even show the demand letters they
allegedly gave to some of their debtors.
FERNANDEZ HERMANOS v CIR
Facts: Fernandez Hermanos is an investment company. The CIR assessed it for alleged
deficiency income taxes. It claimed as deduction, among others, losses in or bad debts
of Palawan Manganese Mines Inc. which the CIR disallowed and was sustained by the
CTA.
Issue: W/N disallowance is correct .
Held: YES. It was shown that Palawan Manganese Mines sought financial help from
Fernandez to resume its mining operations hence a Memorandum of Agreement
(MOA) was executed where Fernandez would give yearly advances to Palawan. But it
still continued to suffer loses and Fernandez realized it could no longer recover the
advances hence claimed it as worthless. Looking at the MOA, Fernandez did not
expect to be repaid. The consideration for the advances was 15% of the net profits. If
there were no earnings or profits there was no obligation to repay. Voluntary
advances without expectation of repayment do not result in deductible losses.
Fernandez cannot even sue for recovery as the obligation to repay will only arise if
there was net profits. No bad debt could arise where there is no valid and subsisting
debt.
(F) Depreciation
(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear (including reasonable allowance for
obsolescence) of property used in the trade or business. In the case of property held
by one person for life with remainder to another person, the deduction shall be
computed as if the life tenant were the absolute owner of the property and shall be
allowed to the life tenant. In the case of property held in trust, the allowable
deduction shall be apportioned between the income beneficiaries and the trustees in
accordance with the pertinent provisions of the instrument creating the trust, or in
the absence of such provisions, on the basis of the trust income allowable to each.
(2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in
the preceding paragraph shall include, but not limited to, an allowance computed in
accordance with rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, under any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate which would
have been used had the annual allowance been computed under the method
described in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by the Secretary of Finance upon
recommendation of the Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under
rules and regulations prescribed by the Secretary of Finance upon recommendation
of the Commissioner, the taxpayer and the Commissioner have entered into an
agreement in writing specifically dealing with the useful life and rate of depreciation
of any property, the rate so agreed upon shall be binding on both the taxpayer and
the national Government in the absence of facts and circumstances not taken into
consideration during the adoption of such agreement. The responsibility of
establishing the existence of such facts and circumstances shall rest with the party
initiating the modification. Any change in the agreed rate and useful life of the
depreciable property as specified in the agreement shall not be effective for taxable
years prior to the taxable year in which notice in writing by certified mail or registered
mail is served by the party initiating such change to the other party to the agreement:
Provided, however, that where the taxpayer has adopted such useful life and
depreciation rate for any depreciable and claimed the depreciation expenses as
deduction from his gross income, without any written objection on the part of the
Commissioner or his duly authorized representatives, the aforesaid useful life and
depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall
be considered binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An allowance for
depreciation in respect of all properties directly related to production of petroleum
initially placed in service in a taxable year shall be allowed under the straight-line or
declining-balance method of depreciation at the option of the service contractor.
However, if the service contractor initially elects the declining-balance method, it may
at any subsequent date, shift to the straight-line method.
The useful life of properties used in or related to production of petroleum shall be ten
(10) years of such shorter life as may be permitted by the Commissioner.
Properties not used directly in the production of petroleum shall be depreciated
under the straight-line method on the basis of an estimated useful life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an allowance for
depreciation in respect of all properties used in mining operations other than
petroleum operations, shall be computed as follows:
(a) At the normal rate of depreciation if the expected life is ten (10) years or less; or
(b) Depreciated over any number of years between five (5) years and the expected
life if the latter is more than ten (10) years, and the depreciation thereon allowed as
deduction from taxable income: Provided, That the contractor notifies the
Commissioner at the beginning of the depreciation period which depreciation rate
allowed by this Section will be used.
(6) Depreciation Deductible by Non-resident Aliens Engaged in Trade or Business or
Resident Foreign Corporations. - In the case of a non-resident alien individual
engaged in trade or business or resident foreign corporation, a reasonable allowance
for the deterioration of Property arising out of its use or employment or its non-use
in the business trade or profession shall be permitted only when such property is
located in the Philippines.
CASES
BASILAN ESATES vs CIR
Facts: Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the
basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value
of said assets by increasing it to conform with the increase in cost for their
replacement. Accordingly, from 1950 to 1953 it deducted from gross income the value
of depreciation computed on the reappraised value.
CIR disallowed the deductions claimed by petitioner, consequently assessing the
latter of deficiency income taxes.
Issue: Whether or not the depreciation shall be determined on the acquisition cost
rather than the reappraised value of the assets
Held: Yes. The following tax law provision allows a deduction from gross income for
depreciation but limits the recovery to the capital invested in the asset being
depreciated: (1)In general. A reasonable allowance for deterioration of property
arising out of its use or employment in the business or trade, or out of its not being
used: Provided, that when the allowance authorized under this subsection shall equal
the capital invested by the taxpayer . . . no further allowance shall be made. . . .
The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed and
allowed. The reason is that deductions from gross income are privileges, not matters
of right. They are not created by implication but upon clear expression in the law.
LIMPAN INVESTMENT v CIR
Facts: BIR assessed deficiency taxes on Limpan Corp, a company that leases real
property, for under declaring its rental income for years 1956-57 by around P20K and
P81K respectively. Petitioner appeals on the ground that portions of these under
declared rents are yet to be collected by the previous owners and turned over or
received by the corporation. Petitioner cited that some rents were deposited with the
court, such that the corporation does not have actual nor constructive control over
them. The sole witness for the petitioner, Solis (Corporate Secretary-Treasurer)
admitted to some undeclared rents in 1956 and1957, and that some balances were
not collected by the corporation in 1956 because the lessees refused to recognize and
pay rent to the new owners and that the corps president Isabelo Lim collected some
rent and reported it in his personal income statement, but did not turn over the rent
to the corporation. He also cites lack of actual or constructive control over rents
deposited with the court.
ISSUE: WON the BIR was correct in assessing deficiency taxes against Limpan Corp. for
undeclared rental income
HELD: Yes. Petitioner admitted that it indeed had undeclared income (although only
a part and not the full amount assessed by BIR). Thus, it has become incumbent upon
them to prove their excuses by clear and convincing evidence, which it has failed to
do. Issue: When is there constructive receipt of rent? With regard to 1957 rents
deposited with the court, and withdrawn only in 1958, the court viewed the
corporation as having constructively received said rents. The non-collection was the
petitioners fault since it refused to refused to accept the rent, and not due to non-
payment of lessees. Hence, although the corporation did not actually receive the rent,
it is deemed to have constructively received them.
(G) Depletion of Oil and Gas Wells and Mines. -
(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for
depletion or amortization computed in accordance with the cost-depletion method
shall be granted under rules and regulations to be prescribed by the Secretary of
finance, upon recommendation of the Commissioner. Provided, That when the
allowance for depletion shall equal the capital invested no further allowance shall be
granted: Provided, further, That after production in commercial quantities has
commenced, certain intangible exploration and development drilling costs: (a) shall
be deductible in the year incurred if such expenditures are incurred for non-producing
wells and/or mines, or (b) shall be deductible in full in the year paid or incurred or at
the election of the taxpayer, may be capitalized and amortized if such expenditures
incurred are for producing wells and/or mines in the same contract area.
'Intangible costs in petroleum operations' refers to any cost incurred in petroleum
operations which in itself has no salvage value and which is incidental to and
necessary for the drilling of wells and preparation of wells for the production of
petroleum: Provided, That said costs shall not pertain to the acquisition or
improvement of property of a character subject to the allowance for depreciation
except that the allowances for depreciation on such property shall be deductible
under this Subsection.
Any intangible exploration, drilling and development expenses allowed as a deduction
in computing taxable income during the year shall not be taken into consideration in
computing the adjusted cost basis for the purpose of computing allowable cost
depletion.
(2) Election to Deduct Exploration and Development Expenditures. - In computing
taxable income from mining operations, the taxpayer may at his option, deduct
exploration and development expenditures accumulated as cost or adjusted basis for
cost depletion as of date of prospecting, as well as exploration and development
expenditures paid or incurred during the taxable year: Provided, That the amount
deductible for exploration and development expenditures shall not exceed twenty-
five percent (25%) of the net income from mining operations computed without the
benefit of any tax incentives under existing laws. The actual exploration and
development expenditures minus twenty-five percent (25%) of the net income from
mining shall be carried forward to the succeeding years until fully deducted.
The election by the taxpayer to deduct the exploration and development
expenditures is irrevocable and shall be binding in succeeding taxable years.
'Net income from mining operations', as used in this Subsection, shall mean gross
income from operations less 'allowable deductions' which are necessary or related to
mining operations. 'Allowable deductions' shall include mining, milling and marketing
expenses, and depreciation of properties directly used in the mining operations. This
paragraph shall not apply to expenditures for the acquisition or improvement of
property of a character which is subject to the allowance for depreciation.
In no case shall this paragraph apply with respect to amounts paid or incurred for the
exploration and development of oil and gas.
The term 'exploration expenditures' means expenditures paid or incurred for the
purpose of ascertaining the existence, location, extent or quality of any deposit of ore
or other mineral, and paid or incurred before the beginning of the development stage
of the mine or deposit.
The term 'development expenditures' means expenditures paid or incurred during the
development stage of the mine or other natural deposits. The development stage of
a mine or other natural deposit shall begin at the time when deposits of ore or other
minerals are shown to exist in sufficient commercial quantity and quality and shall end
upon commencement of actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien
individual or Foreign Corporation. - In the case of a nonresident alien individual
engaged in trade or business in the Philippines or a resident foreign corporation,
allowance for depletion of oil and gas wells or mines under paragraph (1) of this
Subsection shall be authorized only in respect to oil and gas wells or mines located
within the Philippines.
CASE
CONSOLIDATED MINES v CTA
Facts: On October 3, 2000, the Philippine Council for NGO Certification (PCNC) sent a
request for ruling to the BIR, mainly to seek an opinion if Conservation International
(CI), an international organization, can be granted a donee institution status. Note
that CIs home office and board members are based abroad, hence, PCNCs evaluation
process on governance cannot be fully executed.
Issue: Whether or not international organizations with home offices abroad are
qualified to be granted donee institution status.
Held: NO. Sec. 34(H)(l) of the NIRC specifically mentions "accredited domestic
corporation or associations" and "non-government organizations". On the other
hand, subparagraph (2)(c) of the same Section of the Tax Code defines a "non-
government organization" to mean a non-profit domestic corporation.
In implementing Sec. 34(H) of the NIRC, RR 13-98 was issued and in relation to the
type of entities that may be accredited, which specifically refers to organizations or
associations created or organized under Philippine laws.
Thus, the BIR opined that a non-stock, non-profit corporation or organization must
be created or organized under Philippine Laws and that an NGO must be a non-profit
domestic corporation, this Office is of the opinion that a foreign corporation, like
Conservation International, whether resident or non-resident, cannot be accredited
as donee institution.
(H) Charitable and Other Contributions.
(1) In General. - Contributions or gifts actually paid or made within the taxable year
to, or for the use of the Government of the Philippines or any of its agencies or any
political subdivision thereof exclusively for public purposes, or to accredited domestic
corporation or associations organized and operated exclusively for religious,
charitable, scientific, youth and sports development, cultural or educational purposes
or for the rehabilitation of veterans, or to social welfare institutions, or to non-
government organizations, in accordance with rules and regulations promulgated by
the Secretary of finance, upon recommendation of the Commissioner, no part of the
net income of which inures to the benefit of any private stockholder or individual in
an amount not in excess of ten percent (10%) in the case of an individual, and five
percent (%) in the case of a corporation, of the taxpayer's taxable income derived
from trade, business or profession as computed without the benefit of this and the
following subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the provisions of the
preceding subparagraph, donations to the following institutions or entities shall be
deductible in full;
(a) Donations to the Government. - Donations to the Government of the Philippines
or to any of its agencies or political subdivisions, including fully-owned government
corporations, exclusively to finance, to provide for, or to be used in undertaking
priority activities in education, health, youth and sports development, human
settlements, science and culture, and in economic development according to a
National Priority Plan determined by the National Economic and Development
Authority (NEDA), In consultation with appropriate government agencies, including its
regional development councils and private philantrophic persons and institutions:
Provided, That any donation which is made to the Government or to any of its
agencies or political subdivisions not in accordance with the said annual priority plan
shall be subject to the limitations prescribed in paragraph (1) of this Subsection;
(b) Donations to Certain Foreign Institutions or International Organizations. -
donations to foreign institutions or international organizations which are fully
deductible in pursuance of or in compliance with agreements, treaties, or
commitments entered into by the Government of the Philippines and the foreign
institutions or international organizations or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. - the term
'nongovernment organization' means a non profit domestic corporation:
(1) Organized and operated exclusively for scientific, research, educational, character-
building and youth and sports development, health, social welfare, cultural or
charitable purposes, or a combination thereof, no part of the net income of which
inures to the benefit of any private individual;
(2) Which, not later than the 15th day of the third month after the close of the
accredited nongovernment organizations taxable year in which contributions are
received, makes utilization directly for the active conduct of the activities constituting
the purpose or function for which it is organized and operated, unless an extended
period is granted by the Secretary of Finance in accordance with the rules and
regulations to be promulgated, upon recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on an annual basis, conform
with the rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, but in no case to exceed thirty percent (30%)
of the total expenses; and
(4) The assets of which, in the even of dissolution, would be distributed to another
nonprofit domestic corporation organized for similar purpose or purposes, or to the
state for public purpose, or would be distributed by a court to another organization
to be used in such manner as in the judgment of said court shall best accomplish the
general purpose for which the dissolved organization was organized.
Subject to such terms and conditions as may be prescribed by the Secretary of
Finance, the term 'utilization' means:
(i) Any amount in cash or in kind (including administrative expenses) paid or utilized
to accomplish one or more purposes for which the accredited nongovernment
organization was created or organized.
(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out
one or more purposes for which the accredited nongovernment organization was
created or organized.
An amount set aside for a specific project which comes within one or more purposes
of the accredited nongovernment organization may be treated as a utilization, but
only if at the time such amount is set aside, the accredited nongovernment
organization has established to the satisfaction of the Commissioner that the amount
will be paid for the specific project within a period to be prescribed in rules and
regulations to be promulgated by the Secretary of Finance, upon recommendation of
the Commissioner, but not to exceed five (5) years, and the project is one which can
be better accomplished by setting aside such amount than by immediate payment of
funds.
(3) Valuation. - The amount of any charitable contribution of property other than
money shall be based on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only
if verified under the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
BIR RULING 19-01
ACCREDITATION OF A FOREIGN CORPORATION AS DONEE INSTITUTION - A Foreign
Corporation, whether resident or non-resident, cannot be accredited as donee
institution. As donee corporation, considering the requirements of the Tax Code of
1997 and RR No. 13-98 that a non-stock, non-profit corporation or organization must
be created or organized under Philippine laws, and that an NGO must be a non-
profit domestic corporation, a foreign corporation like Conservation International,
whether resident or non-resident, cannot be accredited as donee institution
(I) Research and Development.
(1) In General. - a taxpayer may treat research or development expenditures which
are paid or incurred by him during the taxable year in connection with his trade,
business or profession as ordinary and necessary expenses which are not chargeable
to capital account. The expenditures so treated shall be allowed as deduction during
the taxable year when paid or incurred.
(2) Amortization of Certain Research and Development Expenditures. - At the
election of the taxpayer and in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
the following research and development expenditures may be treated as deferred
expenses:
(a) Paid or incurred by the taxpayer in connection with his trade, business or
profession;
(b) Not treated as expenses under paragraph 91) hereof; and
(c) Chargeable to capital account but not chargeable to property of a character which
is subject to depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed as deduction
ratably distributed over a period of not less than sixty (60) months as may be elected
by the taxpayer (beginning with the month in which the taxpayer first realizes benefits
from such expenditures).
The election provided by paragraph (2) hereof may be made for any taxable year
beginning after the effectivity of this Code, but only if made not later than the time
prescribed by law for filing the return for such taxable year. The method so elected,
and the period selected by the taxpayer, shall be adhered to in computing taxable
income for the taxable year for which the election is made and for all subsequent
taxable years unless with the approval of the Commissioner, a change to a different
method is authorized with respect to a part or all of such expenditures. The election
shall not apply to any expenditure paid or incurred during any taxable year for which
the taxpayer makes the election.
(3) Limitations on deduction. - This Subsection shall not apply to:
(a) Any expenditure for the acquisition or improvement of land, or for the
improvement of property to be used in connection with research and development of
a character which is subject to depreciation and depletion; and
(b) Any expenditure paid or incurred for the purpose of ascertaining the existence,
location, extent, or quality of any deposit of ore or other mineral, including oil or gas.
CASES
3M PHILIPPINES v CIR
Facts: The petitioner 3M claimed as deductions for income tax purposes business
expenses in the form of royalty payments to its foreign licensor which the
respondent Commissioner disallowed. The petitioner claimed the following
deductions royalties and technical service fees and pre-operational cost of tape
coater. The amount was not allowed as entire deduction. The petitioner argues that
the law applicable to its case is only Section 29(a)(1) of the Tax Code and not Circular
No. 393 of the Central Bank.
Issue: Whether or not the royalty payments are valid deductible expenses.
Held: NO. Although the Tax Code allows payments of royalty to be deducted from
gross income as business expenses, it is CB Circular No. 393 that de ines what royalty
payments are proper. Improper payments of royalty are not deductible as legitimate
business expenses. Section 3-C of CB Circular No. 393 provides for payment of
royalties only on commodities manufactured by the licensee under the royalty
agreement not on the whole sale price of inished products imported by the licensee
from the licensor. CB Circulars, like CB Circular No. 393 dated December 7, 1973,
published in the Of icial Gazette issue of December 17, 1973, 69 OG No. 51, p. 11737
issued by Central Bank in the exercise of its authority under the Central Bank Act, duly
published in the OG, have the force and effect of law and binding on everybody.
(J) Pension Trusts.
An employer establishing or maintaining a pension trust to provide for the payment
of reasonable pensions to his employees shall be allowed as a deduction (in addition
to the contributions to such trust during the taxable year to cover the pension liability
accruing during the year, allowed as a deduction under Subsection (A) (1) of this
Section ) a reasonable amount transferred or paid into such trust during the taxable
year in excess of such contributions, but only if such amount (1)has not theretofore
been allowed as a deduction, and (2) is apportioned in equal parts over a period of
ten (10) consecutive years beginning with the year in which the transfer or payment
is made.
(K) Additional Requirements for Deductibility of Certain Payments.
Any amount paid or payable which is otherwise deductible from, or taken into account
in computing gross income or for which depreciation or amortization may be allowed
under this Section, shall be allowed as a deduction only if it is shown that the tax
required to be deducted and withheld therefrom has been paid to the Bureau of
Internal Revenue in accordance with this Section 58 and 81 of this Code.
(L) Optional Standard Deduction.
In lieu of the deductions allowed under the preceding Subsections, an individual
subject to tax under Section 24, other than a non-resident alien, may elect a standard
deduction in an amount not exceeding ten percent (10%) of his gross income. Unless
the taxpayer signifies in his return his intention to elect the optional standard
deduction, he shall be considered as having availed himself of the deductions allowed
in the preceding Subsections. Such election when made in the return shall be
irrevocable for the taxable year for which the return is made: Provided, That an
individual who is entitled to and claimed for the optional standard deduction shall not
be required to submit with his tax return such financial statements otherwise required
under this Code: Provided, further, That except when the Commissioner otherwise
permits, the said individual shall keep such records pertaining to his gross income
during the taxable year, as may be required by the rules and regulations promulgated
by the Secretary of Finance, upon recommendation of the Commissioner.
(M) Premium Payments on Health and/or Hospitalization Insurance of
an Individual Taxpayer.
The amount of premiums not to exceed Two thousand four hundred pesos (P2,400)
per family or Two hundred pesos (P200) a month paid during the taxable year for
health and/or hospitalization insurance taken by the taxpayer for himself, including
his family, shall be allowed as a deduction from his gross income: Provided, That said
family has a gross income of not more than Two hundred fifty thousand pesos
(P250,000) for the taxable year: Provided, finally, That in the case of married
taxpayers, only the spouse claiming the additional exemption for dependents shall be
entitled to this deduction.
Notwithstanding the provision of the preceding Subsections, The Secretary of Finance,
upon recommendation of the Commissioner, after a public hearing shall have been
held for this purpose, may prescribe by rules and regulations, limitations or ceilings
for any of the itemized deductions under Subsections (A) to (J) of this Section:
Provided, That for purposes of determining such ceilings or limitations, the Secretary
of Finance shall consider the following factors: (1) adequacy of the prescribed limits
on the actual expenditure requirements of each particular industry; and (2)effects of
inflation on expenditure levels: Provided, further, That no ceilings shall further be
imposed on items of expense already subject to ceilings under present law.
 TAXABLE INCOME
SEC. 31 Taxable Income Defined - The term taxable income means the pertinent
items of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or
other special laws.
GENERAL PRINCIPLES OF INCOME TAXATION
SEC. 23. Except when otherwise provided in this Code:(A) A citizen of the Philippines
residing therein is taxable on all income derived from sources within and without the
Philippines; (B) A non-resident citizen is taxable only on income derived from sources
within the Philippines; (C) An individual citizen of the Philippines who is working and
deriving income from abroad as an overseas contract worker is taxable only on income
derived from sources within the Philippines: Provided, That a seaman who is a citizen
of the Philippines and who receives compensation for services rendered abroad as a
member of the complement of a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker;(D) An alien individual, whether a
resident or not of the Philippines, is taxable only on income derived from sources
within the Philippines;(E) A domestic corporation is taxable on all income derived from
sources within and without the Philippines; and (F) A foreign corporation, whether
engaged or not in trade or business in the Philippines, is taxable only on income
derived from sources within the Philippines.
INCOME TAX ON INDIVIDUALS
Definitions
(i) Resident Citizens and Resident Aliens
Section 22 (F) - The term "resident alien" means an individual whose residence
is within the Philippines and who is not a citizen thereof.
CASES:
GARRISON vs. CA
Facts: Petitioners are US Citizens who entered the country through the Philippine
Immigration Act of 1940 and are employed in the US Naval Base in Olongapo City.
They earn no Philippine source income and it is also their intention to return to the
US as soon as their employment has ended.
The BIR sent notices to Petitioners stating that they did not file their Income Tax
Returns (ITR) for 1969. The BIR claimed that they were resident aliens and required
them to file their returns. Under then then Internal Revenue Code resident aliens may
be taxed regardless of whether the gross income was derived from Philippine sources.
Petitioners refused stating that they were not resident aliens but only special
temporary visitors. Hence, they were not required to file ITRs. They also claimed
exemption by virtue of the RP-US Military Bases Agreement.
Under Military Bases Agreement, a national of the United States serving in or
employed in the Philippines in connection with construction, maintenance, operation
or defense of the bases and reside in the Philippines by reason only of such
employment is only liable for tax on Philippine sources of income.
Issue: 1. Whether or not Petitioners can be considered resident aliens.
2. Whether or not Petitioners must still file ITR notwithstanding the exemption.
Held:
1. Yes. Revenue Regulations No. 2 Section 5 provides: An alien actually present in the
Philippines who is not a mere transient or sojourner is a resident of the Philippines for
purposes of income tax. Whether or not an alian is a transient or not is further
determined by his: intentions with regards to the length and nature of his stay. A
mere floating intention indefinite as to time, to return to another country is not
sufficient to constitute him as transient. If he lives in the Philippines and has no
definite intention as to his stay, he is a resident. The Section 5 further provides that
if the alien is in the Philippines for a definite purpose which by its nature may be
promptly accomplished, he is considered a transient. However, if an extended stay is
necessary for him to accomplsh his purpose, he is considered a resident, though it
may be his intention at all times to return to his domicile abroad when the purpose
for which he came has been consummated or abandoned.
2. Yes. Even though the petitioners are exempt from paying taxes from their
employment in the Naval Base, they must nevertheless file an ITR. The Supreme Court
held that the filing of an ITR and the payment of taxes are two distinct obligations.
While income derived from employment connected with the Naval Base is exempt,
income from Philippine Sources is not. The requirement of filing an ITR is so that the
BIR can determine whether or not the US National should be taxed. The duty rests
on the U.S. nationals concerned to invoke and prima facie establish their tax-exempt
status. It cannot simply be presumed that they earned no income from any other
sources than their employment in the American bases and are therefore totally
exempt from income tax.
RAMNANI VS CIR
Facts: Ramnani and his wife Sonya had their main business basedin New York. Ishwar
received US $150,000.00 from his father-in-law in Switzerland. In 1965, Ishwar
Jethmal Ramnani sent the amount of US $150,000.00 to Choithramin two bank drafts
of US$65,000.00 and US$85,000.00 for the purpose of investing the same in real
estate in the Philippines.
Subsequently, spouses Ishwar executed a general power of attorney appointing
Ishwars full blood brothers Choithram and Navalrai as attorneys-in-fact, empowering
them to manage and conduct their business concerns in the Philippines. Choithram,
as attorney-in-fact, entered into two agreements for the purchase of two parcels of
land located in Pasig Rizal from Ortigas & Company, Ltd. Partnership Ortigas Ltd.) with
a total area of approximately 10,048 square meters. Three buildings were constructed
thereon and were leased out by Choithram as attorney-in-fact of spouses Ishwar. Two
of these buildings were later burned. In 1970 Ishwar asked Choithram to account for
the income and expenses relative to these properties during the period 1967 to
1970.Choithram failed and refused to render such accounting which prompted Ishwar
to revoke the general power of attorney. Choithram and Ortigas Ltd. were duly
notified by notice in writing of such revocation. It was also registered with the
Securities and Exchange Commission and published in The Manila Times.
Nevertheless, Choithram as such attorney-in-fact of Ishwar, transferred all rights and
interests of Ishwar spouses in favor of Nirmla Ramnani, the wife of Choitramsson,
Moti. Ortigas also executed the corresponding deeds of sale in favor of Nirmla and the
TCT issued in her favour. Thus, spouses Ishwar filed a complaint in the Court of First
Instance of Rizal against Choithram and spouses Nirmla and Moti and Ortigas Ltd. For
reconveyance of said properties or payment of its value and damages.
Issue: 1. whether or not there was a partnership between the brothers Ishwar and
Choithram.
2. Whether or not Ortigas Ltd. is liable.
Held: 1. Yes, Even without a written agreement, the scenario is clear. Spouses Ishwar
supplied the capital of $150,000.00 for the business. They entrusted the money to
Choithram to invest in a profitable business venture in the Philippines. For this
purpose they appointed Choithram as their attorney-in-fact. Choithram in turn
decided to invest in the real estate business. He bought the two(2) parcels of land in
question from Ortigas as attorney-in-fact of Ishwar- Instead of paying for the lots in
cash, he paid in installments and used the balance of the capital entrusted to him, plus
a loan, to build two buildings. Although the buildings were burned later, Choithram
was able to build two other buildings on the property. He rented them out and
collected the rentals.
2. Yes, because Ortigas had several notices of the revocation despite said notices,
Ortigas nevertheless acceded to the representation of Choithram, as alleged attorney-
in-fact of Ishwar, to assign the rights of petitioner Ishwar to Nirmla. While the primary
blame should be laid at the doorstep of Choithram, Ortigas is not entirely without
fault. It should have required Choithram to secure another power of attorney from
Ishwar. For recklessly believing the pretension of Choithram that his power of
attorney was still good, it must, therefore, share in the latter's liability to Ishwar.
(ii) Non-Resident Citizens
Section 22 (E)
(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner
the fact of his physical presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year.
(4) A citizen who has been previously considered as non-resident citizen and who
arrives in the Philippines at any time during the taxable year to reside permanently in
the Philippines shall likewise be treated as a non-resident citizen for the taxable year
in which he arrives in the Philippines with respect to his income derived from
sources abroad until the date of his arrival in the Philippines.
REVENUE REGULATION 1-79
The term "non-resident citizen" means one who establishes to the satisfaction of the
Commissioner of Internal Revenue the fact of his physical presence abroad with the
definite intention to reside therein and shall include any Filipino who leaves the
country during the taxable year as: (a) Immigrant one who leaves the Philippines to
reside abroad as an immigrant for which a foreign visa as such has been secured.(b)
Permanent employee one who leaves the Philippines to reside abroad for
employment on a more or less permanent basis.(c) Contract worker one who leaves
the Philippines on account of a contract of employment which is renewed from time
to time within or during the taxable year under such circumstances as to require him
to be physically present abroad most of the time during the taxable year. To be
considered physically present abroad most of the time during the taxable year, a
contract worker must have been outside the Philippines for not less than 183 days
during such taxable year.
Any such Filipino shall be considered a non-resident citizen for such taxable year with
respect to the income he derived from foreign sources from the date he actually
departed from the Philippines. A Filipino citizen who has been previously considered
as a non-resident citizen and who arrives in the Philippines at any time during the
taxable year to reside therein permanently shall also be considered a non-resident.
BIR RULING 33-00
INCOME TAX; Overseas Contract Worker - Section 23(C) of the Tax Code of 1997
provides that an individual citizen of the Philippines who is working and deriving
income from abroad as an overseas contract worker is taxable only on income from
sources within the Philippines.
Corollary thereto, Section 22(E)(3) of the same Code provides that a citizen of the
Philippines who works and derives income from abroad and whose employment
thereat requires him to be physically present abroad most of the time during the
taxable year.
Thus, for purposes of exemption from income tax, a citizen must be deriving foreign-
sourced income for being a non-resident citizen or for being an overseas contract
worker (CW).
All employees whose services are rendered abroad for being seconded or assigned
for at least 183 days may fall under the first category and are therefore exempt from
payment of Philippine income tax. The phrase "most of the time" shall mean that the
said citizen shall have stayed abroad for at least 183 days in a taxable year. (Sec. (2)(c),
Revenue Regulations No. 1-79)
The same exemption applies to an overseas contract worker but as such worker, the
time spent abroad is not material for tax exemption purposes. All that is required is
for the worker's employment contract to pass through and be registered with the
Philippine Overseas Employment Agency (POEA). (BIR Ruling No. 033-2000 dated
September 05, 2000)
BIR RULING 517-2011
In this ruling dated December 22, 2011, the Bureau of Internal Revenue (BIR) held that
a local companys employees (they are engineers) assigned to render services abroad
do not qualify as nonresident citizens and will thus be treated as resident citizens.
Accordingly, compensation income from their assignment abroad, where such
engineers are present in the foreign country most of the time during the taxable year
(more than 183 days), are subject to Philippine income tax and consequently to
creditable withholding tax on wages.
The local employer is a domestic corporation that sends its engineers to various
countries for a maximum period of 214 days per calendar year. While working
overseas, these engineers remain on the Philippine payroll. The BIR held that the
engineers cannot qualify because the phrase employment thereat [as used in
paragraph (3) of Section 22(E)] means that the individual must be employed in such
country. For this purpose, it cited the definition of an employee under Section
2.78.3 of RR 2-98, that is, an individual performing services under an employer-
employee relationship.
The basic principle in BIR Ruling No. 517-2011 that an employer who claims
compensation paid to an employee as an expense should withhold the requisite
withholding tax on compensation is sound. Some companies may argue that
perhaps the BIR should also consider diverse arrangements between companies in the
host and home countries, and the assignees. In construing who is the employer in
these secondment arrangements, perhaps the BIR may clarify situations where the
home country entity remains the legal employer in form, but the substance of the
transaction is that the host country entity is the real employer of the individual, as it
has the right to control and direct the individual on the means by which the services
will be performed, the results to be accomplished, and ultimately, is the entity that
receives the benefit of the services.
BIR Ruling No. 517-2011 abandons previous BIR pronouncements on the same issue.
Previously, emphasis was given on the number of days an individual spends within or
without the Philippines and the location where the services are rendered in order to
determine the situs of taxation. This time, it is the entity who holds the employment
contract and pays the payroll costs that were considered material.
This is, of course, something that taxpayers with mobile employees should consider,
particularly if the company had previously been issued a ruling on secondment
arrangements upon which they have adopted tax practices and policies. While
secondment is a welcome career opportunity for most, an employee must also be
responsible for remitting the appropriate tax on his or her income earned from work
performed overseas.
(iii) Non-Resident Aliens Engaged/not Engaged in Trade or Business in the
Philippines
Section 22 (G) - The term "non-resident alien" means an individual whose residence
is not within the Philippines and who is not a citizen thereof.
(iv) Dependent
Section 35 (B) - Additional Exemption for Dependents (as amended by RA 9504).
There shall be allowed an additional exemption of Eight thousand pesos (P8,000) for
each dependent not exceeding four (4).
The additional exemption for dependent shall be claimed by only one of the spouses
in the case of married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only
by the spouse who has custody of the child or children: Provided, That the total
amount of additional exemptions that may be claimed by both shall not exceed the
maximum additional exemptions herein allowed.
For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or
legally adopted child chiefly dependent upon and living with the taxpayer if such
dependent is not more than twenty-one (21) years of age, unmarried and not gainfully
employed or if such dependent, regardless of age, is incapable of self-support because
of mental or physical defect.
RA 9504
Section 4. (B) Additional Exemption for Dependents. - There shall be allowed an
additional exemption of Twenty-five thousand pesos (25,000) for each dependent
not exceeding four (4).
"The additional exemption for dependents shall be claimed by only one of the
spouses in the case of married individuals.
"In the case of legally separated spouses, additional exemptions may be claimed
only by the spouse who has custody of the child or children:
Provided, that the total amount of additional exemptions that may be claimed by
both shall not exceed the maximum additional exemptions herein allowed.
"For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or
legally adopted child chiefly dependent upon and living with the taxpayer if such
dependent is not more than twenty-one (21) years of age, unmarried and not
gainfully employed or if such dependent, regardless of age, is incapable of self-
support because of mental or physical defect.
(v) Minimum Wage Earner
Section 22 (HH) - The term 'minimum wage earner' shall refer to a worker in the
private sector paid the statutory minimum wage, or to an employee in the public
sector with compensation income of not more than the statutory minimum wage in
the non-agricultural sector where he/she is assigned.
Income Tax on Citizens and Resident Aliens
(vi) Income Tax Rate and Base, In General
Section 24 (A) - Rates of Income Tax on Individual Citizen and Individual Resident
Alien of the Philippines.
(1) An income tax is hereby imposed: (a) On the taxable income defined in Section 31
of this Code, other than income subject to tax under Subsections (B), (C) and (D) of
this Section, derived for each taxable year from all sources within and without the
Philippines be every individual citizen of the Philippines residing therein; (b) On the
taxable income defined in Section 31 of this Code, other than income subject to tax
under Subsections (B), (C) and (D) of this Section, derived for each taxable year from
all sources within the Philippines by an individual citizen of the Philippines who is
residing outside of the Philippines including overseas contract workers referred to in
Subsection(C) of Section 23 hereof; and (c) On the taxable income defined in Section
31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of
this Section, derived for each taxable year from all sources within the Philippines by
an individual alien who is a resident of the Philippines.
SEC. 31. Taxable Income Defined - The term taxable income means the pertinent
items of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or
other special laws.
(vii) Special Exemption of Minimum Wage Earners
RA 9504
1. Exemption of minimum wage earners -The new law exempts minimum wage
earners in the private and public sector from payment of income tax. The exemption
will cover not only the basic pay but also holiday pay, overtime pay, night shift
differential, and hazard pay received by said minimum wage earners.
Prior to enactment of RA 9504, individual employees whose compensation income
does not exceed the statutory minimum wage or five thousand pesos (P5,000) per
month were exempted from withholding tax under Revenue Regulations No. 01-06.
The law grants minimum wage earners full tax exemption by exempting them from
payment of income tax.
(viii) Income Tax Rate and Base on Certain Types of Income
1. Final Income Tax on Interests, Royalties, Prizes, and other Winnings
Section 24 (B1) Rate of Tax on Certain Passive Income (1) Interests, Royalties, Prizes,
and Other Winnings.
A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements; royalties, except
on books, as well as other literary works and musical compositions, which shall be
imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of
Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto
winnings), derived from sources within the Philippines: Provided, however, That
interest income received by an individual taxpayer (except a non-resident individual)
from a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such
interest income: Provided, further, That interest income from long-term deposit or
investment in the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be
exempt from the tax imposed under this Subsection: Provided, finally, That should the
holder of the certificate pre-terminate the deposit or investment before the fifth (5th)
year, a final tax shall be imposed on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of the long-term deposit or
investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%; Three (3) years to less than (4) years -
12%; and Less than three (3) years - 20%
Section 22 (Y)
The term "deposit substitutes" shall mean an alternative from of obtaining funds from
the public (the term 'public' means borrowing from twenty (20) or more individual or
corporate lenders at any one time) other than deposits, through the issuance,
endorsement, 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.
Section 22 (FF)
The term "long-term deposit or investment certificates" shall refer to certificate of
time deposit or investment in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and other investments with a
maturity period of not less than five (5) years, the form of which shall be prescribed
by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by nonbank
financial intermediaries and finance companies) to individuals in denominations of
Ten thousand pesos (P10,000) and other denominations as may be prescribed by the
BS.
Revenue Regulation 10-98
REVENUE REGULATIONS NO. 10-98 issued September 2, 1998 prescribes the
regulations to implement RA No. 8424 relative to the imposition of income taxes on
income derived under the Foreign Currency Deposit and Offshore Banking Systems.
Specifically, interest income which is actually or constructively received by a resident
citizen of the Philippines or by a resident alien individual from a foreign currency bank
deposit will be subject to a final withholding tax of 7.5%. The depository bank will
withhold and remit the tax. If a bank account is jointly in the name of a non-resident
citizen, 50% of the interest income from such bank deposit will be treated as exempt
while the other 50% will be subject to a final withholding tax of 7.5%. The Regulations
will apply on taxable income derived beginning January 1, 1998 pursuant to the
provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only
that portion of interest which was actually or constructively received by a depositor
starting January 1, 1998 is taxable.
2. Final Income Tax on Cash and/ or Property Dividends
3.
Section 24 (B) (2) Cash and/or Property Dividends
A final tax at the following rates shall be imposed upon the cash and/or property
dividends actually or constructively received by an individual from a domestic
corporation or from a joint stock company, insurance or mutual fund companies and
regional operating headquarters of multinational companies, or on the share of an
individual in the distributable net income after tax of a partnership (except a general
professional partnership) of which he is a partner, or on the share of an individual in
the net income after tax of an association, a joint account, or a joint venture or
consortium taxable as a corporation of which he is a member or co-venturer:
Six percent (6%) beginning January 1, 1998;
Eight percent (8%) beginning January 1, 1999; and
Ten percent (10% beginning January 1, 2000
Provided, however, That the tax on dividends shall apply only on income earned on
or after January 1, 1998.
Income forming part of retained earnings as of December 31, 1997 shall not, even if
declared or distributed on or after January 1, 1998, be subject to this tax.
Section 73 Distribution of dividends or Assets by Corporations. -
(A) Definition of Dividends. - The term "dividends" when used in this Title means any
distribution made by a corporation to its shareholders out of its earnings or profits
and payable to its shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete liquidation or
dissolution, the gain realized or loss sustained by the stockholder, whether individual
or corporate, is a taxable income or a deductible loss, as the case may be.
(B) Stock Dividend. - 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 that it represents
a distribution of earnings or profits.
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits.
- Any distribution made to the shareholders or members of a corporation shall be
deemed to have been made form the most recently accumulated profits or surplus,
and shall constitute a part of the annual income of the distributee for the year in which
received.
(D) Net Income of a Partnership Deemed Constructively Received by Partners.- The
taxable income declared by a partnership for a taxable year which is subject to tax
under Section 27 (A) of this Code, after deducting the corporate income tax imposed
therein, shall be deemed to have been actually or constructively received by the
partners in the same taxable year and shall be taxed to them in their individual
capacity, whether actually distributed or not.
3. Capital Gains Tax on Sale of Shares
Section 24 (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange
The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed
below is hereby imposed upon the net capital gains realized during the taxable year
from the sale, barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock exchange
Not over P100,000. 5%
On any amount in excess of P100,000 10%
Section 127 (A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded
Through the Local Stock Exchange.
There shall be levied, assessed and collected on every sale, barter, exchange, or other
disposition of shares of stock listed and traded through the local stock exchange other
than the sale by a dealer in securities, a tax at the rate of one-half of one percent (1/2
of 1%) of the gross selling price or gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed which shall be paid by the seller or
transferor.
Section 22 (L)
The term "shares of stock" shall include shares of stock of a corporation, warrants
and/or options to purchase shares of stock, as well as units of participation in a
partnership (except general professional partnerships), joint stock companies, joint
accounts, joint ventures taxable as corporations, associations and recreation or
amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates.
Section 22 (U)
The term "dealer in securities" means a merchant of stocks or securities, whether an
individual, partnership or corporation, with an established place of business, regularly
engaged in the purchase of securities and the resale thereof to customers; that is, one
who, as a merchant, buys securities and re-sells them to customers with a view to the
gains and profits that may be derived therefrom.
CASE
Benguet Corp vs CIR
Facts: Tax: 10% VAT on selling price of gold pursuant to Sec. 99 of NIRC. Benguet
Corporation is a domestic corporation engaged in the exploration, development and
operation of mineral resources, and the sale or marketing thereof to various entities.
It is a value added tax (VAT) registered enterprise. The transactions in question
occurred during the period between 1988 and1991. Under Sec. 99 of NIRC as
amended by E.O. 273 s. 1987 then in effect, any person who, in the course of trade or
business, sells, barters or exchanges goods, renders services, or engages in similar
transactions and any person who imports goods is liable for output VAT at rates of
either 10% or 0% (zero-rated) depending on the classification of the transaction under
Sec. 100 of the NIRC. In January of 1988, Benguet applied for and was granted by the
BIR a zero-rated status on its sale of gold to Central Bank.
On 28 August 1988, (BIR) VATRuling No. 3788-88 was issued which declared that the
sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant
to Section 100of the Tax Code, as amended by EO 273.
Relying on its zero-rated status and the above issuances, Benguet sold gold to the
Central Bank during the period of 1 August 1989 to 31 July 1991 and entered into
transactions that resulted in input VAT incurred in relation to the subject sales of gold.
It then filed applications for tax refunds/credits corresponding to input VAT. However,
such request was not granted due to BIR VAT Ruling No. 008-92dated 23 January 1992
that was issued subsequent to the consummation of the subject sales of gold to the
Central Bank which provides that sales of gold to the Central Bank shall not be
considered as export sales and thus, shall be subject to 10% VAT. BIR VAT Ruling No.
008-92 withdrew, modified, and superseded all inconsistent BIR issuances. Both
petitioner and Benguet agree that the retroactive application of VATRuling No. 008-
92 is valid only if it would not be prejudicial to the Benguet pursuant Sec. 246 of the
NIRC.
Issue: WON the new BIR ruling which changed the VAT categorization of respondents
transactions with the Central Bank from zero-rated to 10% can beapplied retroactively
to Benguets sale of gold to the Central Bank.
Held: No. At the time when the subject transactions were consummated, the
prevailing BIR regulations relied upon by Benguet ordained that gold sales to the
Central Bank were zero-rated. Benguet should not be faulted for relying on the BIRs
interpretation of the said laws and regulations. While it is true, as CIR alleges, that
government is not estopped from collecting taxes which remain unpaid on account of
the errors or mistakes of its agents and/or officials and there could be no vested right
arising from an erroneous interpretation of law, these principles must give way to
exceptions based on and in keeping with the interest of justice and fair play.
4. Capital Gains Tax on Sales of Realty
Section 24 (D) Capital Gains from Sale of Real Property. - (1) In General. - The
provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains
presumed to have been realized from the sale, exchange, or other disposition of real
property located in the Philippines, classified as capital assets, including pacto de retro
sales and other forms of conditional sales, by individuals, including estates and trusts:
Provided, That the tax liability, if any, on gains from sales or other dispositions of real
property to the government or any of its political subdivisions or agencies or to
government-owned or controlled corporations shall be determined either under
Section 24 (A) or under this Subsection, at the option of the taxpayer.
(2) Exception - The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or
disposition of their principal residence by natural persons, the proceeds of which is
fully utilized in acquiring or constructing a new principal residence within eighteen
(18) calendar months from the date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection: Provided, That the historical cost or
adjusted basis of the real property sold or disposed shall be carried over to the new
principal residence built or acquired: Provided, further, That the Commissioner shall
have been duly notified by the taxpayer within thirty (30) days from the date of sale
or disposition through a prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That the said tax exemption can
only be availed of once every ten (10) years: Provided, finally, that if there is no full
utilization of the proceeds of sale or disposition, the portion of the gain presumed to
have been realized from the sale or disposition shall be subject to capital gains tax.
For this purpose, the gross selling price or fair market value at the time of sale,
whichever is higher, shall be multiplied by a fraction which the unutilized amount
bears to the gross selling price in order to determine the taxable portion and the tax
prescribed under paragraph (1) of this Subsection shall be imposed thereon.
REVENUE REGULATIONS NO. 8-98
Amends pertinent portions of Revenue Regulations Nos. 11-96 and 2-98 relative to
the tax treatment of the sale, transfer or exchange of real property. Specifically, the
Capital Gains Tax (CGT) Return will be filed by the seller within 30 days following each
sale or disposition of real property. Payment of the CGT will be made to an Authorized
Agent Bank (AAB) located within the Revenue District Office (RDO) having jurisdiction
over the place where the property being transferred is located. Creditable withholding
taxes, on the other hand, deducted and withheld by the withholding agent/buyer on
the sale, transfer or exchange or real property classified as ordinary asset will be paid
by the withholding agent/buyer upon filing of the return with the AAB located within
the RDO having jurisdiction over the place where the property being transferred is
located. Payment will have to be done within 10 days following the end of the month
in which the transaction occurred, provided, however, that taxes withheld in
December will be filed on or before January 25 of the following year
Revenue Regulation No. 13-99
Prescribes the regulations for the exemption of a citizen or a resident alien individual
from the payment of the 6% Capital Gains Tax on the sale, exchange or disposition of
his principal residence. In order for a person to be exempted from the payment of
the tax, he should submit, together with the required documents, a Sworn
Declaration of his intent to avail of the tax exemption to the Revenue District Office
having jurisdiction over the location of his principal residence within (30) days from
the date of the sale, exchange or disposition of the principal residence. The proceeds
from the sale, exchange or disposition of the principal residence must be fully
utilized in acquiring or constructing the new principal residence within eighteen (18)
calendar months from the date of the sale, exchange or disposition. In case the
entire proceeds of the sale is not utilized for the purchase or construction of a new
principal residence, the Capital Gains Tax will be computed based on the formula
specified in the Regulations.
If the seller fails to utilize the proceeds of sale or disposition in full or in part within
the 18-month reglementary period, his right of exemption from the Capital Gains
Tax did not arise on the extent of the unutilized amount, in which event, the tax due
thereon will immediately become due and demandable on the 31st day after the
date of the sale, exchange or disposition of the principal residence.
If the individual taxpayer's principal residence is disposed in exchange for a
condominium unit, the disposition of the taxpayer's principal residence will not be
subjected to the Capital Gains Tax herein prescribed, provided that the said
condominium unit received in the exchange will be used by the taxpayer-transferor
as his new principal residence.
REVENUE REGULATIONS NO. 14-2000
Amends Sections 3(2), 3 and 6 of RR No. 13-99 relative to the sale, exchange or
disposition by a natural person of his "principal residence". The residential address
shown in the latest income tax return filed by the vendor/transferor immediately
preceding the date of sale of said real property shall be treated, for purposes of these
Regulations, as a conclusive presumption about his true residential address, the
certification of the Barangay Chairman, or Building Administrator (in case of
condominium unit), to the contrary notwithstanding, in accordance with the doctrine
of admission against interest or the principle of estoppel. The seller/transferor's
compliance with the preliminary conditions for exemption from the 6% capital gains
tax under Sec. 3(1) and (2) of the Regulations will be sufficient basis for the RDO to
approve and issue the Certificate Authorizing Registration (CAR) or Tax Clearance
Certificate (TCC) of the principal residence sold, exchanged or disposed by the
aforesaid taxpayer. Said CAR or TCC shall state that the said sale, exchange or
disposition of the taxpayer's principal residence is exempt from capital gains tax
pursuant to Sec. 24 (D)(2) of the Tax Code, but subject to compliance with the post-
reporting requirements imposed under Sec. 3(3) of the Regulations.
Revenue Regulation No. 4-99
Amends Revenue Memorandum Order No. 6-92 relative to the payment of Capital
Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital
assets initiated by banks, finance and insurance companies. Where the right of
redemption of the mortgagor exists, the certificate of title of the mortgagor will not
be cancelled yet even if the property had already been subjected to foreclosure sale.
Instead, only a brief memorandum will be annotated at the back of the certificate of
title, and the cancellation of the title and the subsequent issuance of a new title in
favor of the purchaser/highest bidder depends on whether the mortgagor will
redeem or not the mortgaged property within one year from the issuance of the
certificate of sale. Thus, no transfer of title to the highest bidder can be effected yet
until and after the lapse of the one-year period from the issuance of the said
certificate of sale. In case the mortgagor exercises his right of redemption within one
year from the issuance of the certificate of sale, no Capital Gains Tax will be imposed
because no capital gains has been derived by the mortgagor and no sale or transfer
of real property was realized. In case of non-redemption, the Capital Gains Tax on
the foreclosure sale shall become due based on the bid price of the highest bidder,
but only upon the expiration of the one-year period of redemption, and will be paid
within thirty (30) days from the expiration of the said one-year redemption period.
The corresponding Documentary Stamp Tax will be levied, collected and paid by the
person making, signing, issuing, accepting or transferring the real property wherever
the document is made, signed, issued, accepted or transferred where the property is
situated in the Philippines.
(ix) Personal and Additional Exemptions
Section 35. (A) as amended for PERSONAL EXEMPTION shall now be FIFTY
THOUSAND PESOS (P50,000.00) for each individual taxpayer. In the case of married
individuals where only one of the spouses is deriving gross income, only such spouse
shall be allowed the personal exemption.
Section 35 (B) ADDITIONAL EXEMPTION of TWENTY-FIVE THOUSAND PESOS (P25,000)
shall also be allowed for each dependent NOT EXCEEDING FOUR (4). The additional
exemption for dependents shall be claimed by only one of the spouses in the case of
married individuals. In the case of legally separated spouses, additional exemptions
may be claimed only by the spouse who has custody of the child or children, provided
that the total amount of additional exemptions that may be claimed by both shall not
exceed the maximum additional exemption herein allowed.
DEPENDENT means a legitimate, illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if such dependent is not more than
twenty one (21) years of age, unmarried and not gainfully employed or if such
dependent, regardless of age, is incapable of self-support because of mental or
physical defect.
(x) Change of Status
Section 35 (C) - If the taxpayer marries or should have additional dependent(s) as
defined above during the taxable year, the taxpayer may claim the corresponding
additional exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of
such year.
If the spouse or any of the dependents dies or if any of such dependents marries,
becomes twenty-one (21) years old or becomes gainfully employed during the taxable
year, the taxpayer may still claim the same exemptions as if the spouse or any of the
dependents died, or as if such dependents married, became twenty-one (21) years
old or became gainfully employed at the close of such year.
(xi) Optional Standard Deduction
Section 34 (L) - In lieu of the allowed itemized deductions of this Code, an individual
subject to tax under Sec. 24, may elect a standard deduction in an amount not
exceeding forty percent (40%) of his gross sales or gross receipts. In the case of
corporation subject to tax under Sections 27.A and 28.A.1, may also elect a standard
deduction in an amount not exceeding forty percent (40%) of its gross income. It is
important to signify in the taxpayers return that he is availing for the OSD, otherwise
he is considered as having availed himself of the allowed itemized deductions, and
such election in the return shall be irrevocable for the taxable year for which the
return is made. Provided, that a taxpayer entitled to and claimed for the OSD shall not
be required to submit with his return such financial statements, otherwise required
by this Code.
(xii) Premium Payments on Health and/or Hospitalization Insurance of an Individual
Taxpayer
Section 34 (M) - The amount of premiums not to exceed Two thousand four hundred
pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the
taxable year for health and/or hospitalization insurance taken by the taxpayer for
himself, including his family, shall be allowed as a deduction from his gross income:
Provided, That said family has a gross income of not more than Two hundred fifty
thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of
married taxpayers, only the spouse claiming the additional exemption for dependents
shall be entitled to this deduction.
Income Tax on Nonresident Aliens Enganged in Trade or Business in the
Philippines
(xiii) Meaning of Engaged in Trade or Business
Section 25.(A) (1). Nonresident Alien Engaged in Trade or Business Within the
Philippines.
In General. - A nonresident alien individual engaged in trade or business in the
Philippines shall be subject to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all sources
within the Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a nonresident alien doing
business in the Philippines', Section 22(G) of this Code notwithstanding.
(xiv) Income Tax Rate and Tax Base, In General
Section 31. (A) (1) Taxable Income Defined. - The term 'taxable income' means the
pertinent items of gross income specified in this Code, less the deductions and/or
personal and additional exemptions, if any, authorized for such types of income by
this Code or other special laws.
(xv) Income Tax Rate and Base on Certain Types of Income
1. Section 25. (A) (2) - Cash and/or Property Dividends from a Domestic
Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or
Regional Operating Headquarter of Multinational Company, or Share in the
Distributable Net Income of a Partnership (Except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a Corporation or
Association, Interests, Royalties, Prizes, and Other Winnings. - Cash and/or
property dividends from a domestic corporation, or from a joint stock company,
or from an insurance or mutual fund company or from a regional operating
headquarter of multinational company, or the share of a nonresident alien
individual in the distributable net income after tax of a partnership (except a
general professional partnership) of which he is a partner, or the share of a
nonresident alien individual in the net income after tax of an association, a joint
account, or a joint venture taxable as a corporation of which he is a member or a
co-venturer; interests; royalties (in any form); and prizes (except prizes amounting
to Ten thousand pesos (P10,000) or less which shall be subject to tax under
Subsection (B)(1) of Section 24); and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings), shall be subject to an income tax of twenty
percent (20%) on the total amount thereof: Provided, however, That royalties on
books as well as other literary works, and royalties on musical compositions shall
be subject to a final tax of ten percent (10%) on the total amount thereof:
Provided, further, That cinematographic films and similar works shall be subject
to the tax provided under Section 28 of this Code: Provided, furthermore, That
interest income from long-term deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed
under this Subsection: Provided, finally, That should the holder of the certificate
pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall
be imposed on the entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%; Three (3) years to less than four (4) years-
12%; and Less than three (3) years - 20%.
2. Section 25. (A) (3) Capital Gains. - Capital gains realized from sale, barter or
exchange of shares of stock in domestic corporations not traded through the local
stock exchange, and real properties shall be subject to the tax prescribed under
Subsections (C) and (D) of Section 24.
(xvi) Personal Exemption Allowable to Nonresident Alien Individual Engaged
In Trade And Business
Sec. 35 (D) - A nonresident alien individual engaged in trade, business or in the
exercise of a profession in the Philippines shall be entitled to a personal exemption in
the amount equal to the exemptions allowed in the income tax law in the country of
which he is a subject or citizen, to citizens of the Philippines not residing in such
country, not to exceed the amount fixed in this Section as exemption for citizens or
residents of the Philippines: Provided, That said nonresident alien should file a true
and accurate return of the total income received by him from all sources in the
Philippines, as required by this Title.
Non-resident Alien Individual Not Engaged in Trade or Business
Sec. 25 (B) - There shall be levied, collected and paid for each taxable year upon the
entire income received from all sources within the Philippines by every non-resident
alien individual not engaged in trade or business within the Philippines as interest,
cash and/or property dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or determinable annual or
periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-
five percent (25%) of such income. Capital gains realized by a non-resident alien
individual not engaged in trade or business in the Philippines from the sale of shares
of stock in any domestic corporation and real property shall be subject to the income
tax prescribed under Subsections (C) and (D) of Section 24.
Special Aliens
Sec. 25 (C) Alien Individual Employed by Regional or Area Headquarters and
Regional Operating Headquarters of Multinational Companies. - There shall be
levied, collected and paid for each taxable year upon the gross income received by
every alien individual employed by regional or area headquarters and regional
operating headquarters established in the Philippines by multinational companies as
salaries, wages, annuities, compensation, remuneration and other emoluments, such
as honoraria and allowances, from such regional or area headquarters and regional
operating headquarters, a tax equal to fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment shall apply to Filipinos employed and
occupying the same position as those of aliens employed by these multinational
companies. For purposes of this Chapter, the term 'multinational company' means a
foreign firm or entity engaged in international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific Region and other foreign markets.
Sec. 25 (D) Alien Individual Employed by Offshore Banking Units. - There shall be
levied, collected and paid for each taxable year upon the gross income received by
every alien individual employed by offshore banking units established in the
Philippines as salaries, wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, from such offshore banking units, a
tax equal to fifteen percent (15%) of such gross income: Provided, however, That the
same tax treatment shall apply to Filipinos employed and occupying the same position
as those of aliens employed by these offshore banking units.
Sec. 25 (E) Alien Individual Employed by Petroleum Service Contractor and
Subcontractor. - An alien individual who is a permanent resident of a foreign country
but who is employed and assigned in the Philippines by a foreign service contractor
or by a foreign service subcontractor engaged in petroleum operations in the
Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages,
annuities, compensation, remuneration and other emoluments, such as honoraria
and allowances, received from such contractor or subcontractor: Provided, however,
That the same tax treatment shall apply to a Filipino employed and occupying the
same position as an alien employed by petroleum service contractor and
subcontractor.
Case
Commissioner v. Wodehouse
Facts: Respondent, a nonresident alien not engaged in trade or business within the
United States and not having an office or place of business therein, received in 1938
and 1941 from magazine and book publishers in the United States lump sum
payments, in advance and in full, for the American serial and book rights to certain
literary works of which he was the author and which were ready to be copyrighted.
Held: 1. Under the Revenue Act of 1938 and the Internal Revenue Code as amended,
the sums so received were includible in "gross income from sources within the United
States," as "rentals or royalties for the use of or for the privilege of using in the United
States . . . copyrights . . . and other like property," and were thus taxable to
respondent.
To have exempted nonresident aliens from these readily collectible taxes derived
from sources within the United States would have discriminated in their favor against
resident citizens of the United States who would be required to pay their regular
income tax on such income, if treated as royalties within the meaning of the gross
income provisions, or at least to pay a tax upon them as capital gains, if treated as
income from sales of capital within the meaning of the capital gains provisions. No
such purpose to discriminate can be implied.
2. The fact that the amounts received for the use of or for the privilege of using the
copyrights were lump sum payments, in advance and in full did not exempt such
income from taxation.
Once it has been determined that the receipts of the respondent would have been
required to be included in his gross income for federal income tax purposes if they
had been received in annual payments or from time to time during the life of the
respective copyrights, it is clear that the receipt of those same sums by him in single
lump sums as payments in full, in advance, for the same rights to be enjoyed
throughout the entire life of the respective copyrights cannot, solely by reason of the
consolidation of the payment into one sum, render it tax exempt.
 INCOME TAX ON DOMESTIC CORPORATIONS
Definition of Domestic Corporation
Sec. 22 (B) The term "corporation" shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), association, or insurance companies, but does not include general
professional partnerships and a joint venture or consortium formed for the purpose
of undertaking construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating consortium agreement under a
service contract with the Government "General professional partnerships" are
partnerships formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade or
business
Sec. 22 (C) The term "domestic", when applied to a corporation, means created or
organized in the Philippines or under its laws
CASE
AFISCO Insurance Corp. v. CA
Facts: The petitioners are 41 local non-life insurance corporations. Upon their
issuance of Erection, Machinery Breakdown, Boiler Explosion and Contractors All
Risk insurance policies, the petitioners entered into a Quota Share Reinsurance
Treaty and a Surplus Reinsurance Treaty with the foreign insurance corporation,
Munchener Ruckversicherungs-Gesselschaft (Munich). The reinsurance treaties
required petitioners to form a pool which was created on the same day.
Subsequently, the pool of insurers submitted a financial statement and filed an
Information Return of Organization Exempt from Income Tax for the year ending
in 1975, on the basis of which, it was assessed by the Commissioner of Internal
Revenue a deficiency in corporate taxes in the amount of P1,843,273.60, and
withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid
to Munich and to the petitioners, respectively. The petitioners filed a protest which
the Commissioner of Internal Revenue denied. The Court of Tax Appeals affirmed
this decision. Concurrently, the CA ruled that the pool of insurers was considered as
a partnership taxable as a corporation, and that the latters collection of premiums
on behalf of its members was taxable income.
Issue: Whether or not the pool is a partnership whose dividends are subject to tax.
Held: The SC sustained the ruling of the Court of Appeals that the pool is taxable as a
corporation. Section 24 of the NIRC, provides: SEC. 24. Rate of tax on corporations. --
(a) Tax on domestic corporations. -- A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by every corporation
organized n, or existing under the laws of the Philippines, no matter how created or
organized, but not including duly registered general co-partnership (compaias
colectivas), general professional partnerships, private educational institutions, and
building and loan associations xxx.
The following unmistakably indicates a partnership or an association covered by
Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool. This common fund pays for the
administration and operation expenses of the pool.
(2) The pool functions through an executive board, which resembles the board of
directors of a corporation, composed of one representative for each of the ceding
companies.
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the
business of the insurance companies and Munich, because without it they would not
have received their premiums. The insurance companies share in the business ceded
to the pool and in the expenses according to a Rules of Distribution annexed to the
Pool Agreement. Profit motive or business is, therefore, the primordial reason for
the pools formation. As aptly found by the CTA: The fact that the pool does not
retain any profit or income does not obliterate an antecedent fact that of the pool
being used in the transaction of business for profit.
Pascual v. CIR
Facts: Mariano Pascual and Renato Dragon bought two parcels of land from Santiago
Bernardino, et al. On June 22, 1965. On May 22, 1966, Pascual and Dragon bought
another three parcels of land from Juan Roque. The Bernardino properties were sold
in 1968 to Marenir Development Corporation, for a net profit of P165,224.70. The
Roque properties were sold to Erlinda Reyes and Maria Samson in 1970 for a net
profit of P60,000.00. Pascual and Dragon paid the capital gains taxes in 1973 and
1974, availing ofthe tax amnesties granted in those years.
However, in March 31, 1979, the Acting Commissioner wrote to Pascual and Dragon,
demanding the amount of P107,101.70 representing their deficiency income taxes
for the years 1968 and 1970.Pascual and Dragon contested this assessment,
contending that they availed of the tax amnesties of1973 and 1974 and should no
longer have to pay their deficiency income taxes. The Commissioner replied saying
that because they derived profits from the sale of properties that they co-owned,
their co-ownership was actually an unregistered partnership taxable for corporate
income tax separate and distinct from that of the partners under 20[b], NIRC and
the profit that this corporation obtained was subject to taxes prescribed under 24,
NIRC. Although they did pay taxes in 1973 and 1974, what was paid was the tax due
on their personal income from the transaction, and not the tax due on the income
derived from their de facto partnership. Pascual and Dragon filed a Petition for
Review with the CTA, which affirmed the decision of the CIR. The CTA based its
ruling on Evangelista vs. Commissioner of Internal Revenue (102 Phil. 140
[1957]),where an unregistered partnership was formed and was subjected to
corporate income tax distinct from that imposed on the partners. Pascual and
Dragon elevated the case to the Supreme Court, contending that there was
insufficient evidence to show that they had in fact created an unregistered
partnership.
Issue: Whether the unregistered partnership created by Pascual and Dragon such
that its could be subject to corporate income tax distinct from the income tax of the
partner.
Held: The Supreme Court found in favor of Pascual and Dragon, saying that the case
of Evangelista, used by the CTA in resolving the issue, differed significantly from the
case at bar. In Evangelista, the Supreme Court found that there was a clear intention
to invest money and to create profit from a series of real estate transactions. In the
case at bar, the purchase and sale of land were found to be isolated incidents that
did not show the character of habituality peculiar to business transactions for the
purpose of gain. The sharing of returns does not in itself establish a partnership
whether or not the persons sharing have a joint or common right or interest in the
property. The Court cited Justice Bautistas concurring opinion in Evangelista, which
noted that the mere fact of sharing of profits from a transaction involving land held
in co-ownership does not a partnership make. An isolated transaction where two or
more persons contribute funds to buy certain real estate for profit in the absence of
any other circumstances showing a contrary intention cannot be considered a
partnership.
Obillos v. CIR
Facts: On March 2, 1973, Jose Obillos, Sr. completed payments on two lots of
significant size in Greenhills. The next day, he transferred his rights to his four
children, to enable them to build their residences. The lots were sold for
P178,708.12 on March 13. The Torrens titles issued showed the Obillios siblings as
co-owners of the properties. After having held the properties for almost a year, the
siblings sold the properties to Walled City Securities and Olga Cruz Canda for
P313,050.00, with each sibling earning a total profit ofP33,584.00. They treated the
profit as a capital gain and paid income tax amounting to half of their profits. One
day before the expiration of the five-year prescriptive period, the Commissioner of
Interna Revenue required the Obillos siblings to pay corporate income tax on the
total profit in addition to individual income tax on their shares. He also assessed for
fraud surcharge and accumulated interest. He also considered each share of the
profits a distributive dividend and required that it be taxed in full. Thus, the Obillos
siblings were charged taxes and penalties worth P121,781.86 on their profit
ofP134,336.00, in addition to the capital gains already paid by them. The case was
elevated to the CTA, which affirmed the decision of the CIR.
Issue: Whether there is an unregistered partnership between the Obillos siblings
such that the income they derived from the sale of the land could be held subject to
corporate income tax distinct from the income tax of the partners.
Held: The Supreme Court held in favor of the Obillos siblings. To hold the co-
ownership as an unregistered partnership would result in oppressive taxation,
confirming the overturned dictum that the power to tax is the power to destroy.
There is also no de facto partnership between the siblings. The Court found Obilloss
testimony persuasive in finding that the siblings were merely co-owners. To hold
them as co-owners would obliterate the distinction between a co-ownership and a
partnership. Just because the siblings shared profits on an isolated transaction does
not make them partners. The division of the profit was merely incidental to the
dissolution of the co-ownership. Their original purpose was to divide the lots for
residential purposes. Art. 1769(3) of the Civil Code provides that the sharing of gross
returns does not o itself establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any property from which the
returns are derived. There must be an unmistakable intention to form a partnership
or joint venture.The Court distinguished this from the Oa case, supra, where the
heirs of an estate after partition used the inheritance and the incomes derived as a
common fund to produce profits for themselves. In that case the Court found there
actually was an unregistered partnership that was liable for corporate income tax.
The Court noted that what should have been investigated was whether or not the
transfer from the senior Obillos was in fact a donation and whether the
corresponding donors tax had been paid. However, the Court noted that the same
may have already prescribed.
Ona v. CIR
Facts: Julia Buales passed away on March 23, 1944, leaving behind her husband,
Lorenzo Oa, and their five children. In her intestate proceedings, Lorenzo was
appointed administrator of her estate. On April 1949, he submitted the project of
partition, but because three of the children were still minors at the time of approval
of the partition, Lorenzo filed a petition to be appointed as guardian of the minors.
The project of partition shows that the heirs have undivided interest in ten parcels
of land, six houses, and an amount collected from the War Damage Commission.
This amount was used to rehabilitate the properties owned by them. Although the
partition was approved, no actual partition was made. Instead, the properties
remained under the management of Lorenzo who used the properties in business by
leasing or selling them and investing the income earned in real properties. The
incomes were recorded in books of account kept by Lorenzo, with the corresponding
shares of each child for the year known. However, the children did not actually
receive their shares in the profits, which were kept by Lorenzo as he reinvested
them.On the basis of these facts the Commissioner decided that the Oas were in an
unregistered partnership and therefore subject to corporate income tax.
Issue: Are the Oas liable for corporate income tax?
Held: Yes, but only from 1955, when the CIR assessed them as a de facto
partnership, and not from the moment of the creation of the de facto partnership
itself. The moment the Oas allowed not only the incomes from their respective
shares but even the inherited properties themselves to be used by Lorenzo as a
common fun in undertaking several transactions or in business, with the intention of
deriving profit to be shared by them proportionally, such act was tantamount to
actually contributing incomes to a common fund and thus formed an unregistered
partnership within the purview of the provisions of the Tax Code. From the moment
of partition, heirs are entitled to their respective definite shares of the estate and
the incomes thereof, for each of them to manage and dispose of as exclusively his
own without the intervention of the other heirs, and he becomes liable individually
for all taxes in connection therewith. If after partition, he allows his share to be held
in common with his co-heirs under a single management to be used with the intent
of making profit thereby in proportion to his share, there can be no doubt that, even
if no document or instrument were executed for the purpose, for tax purposes at
least, an unregistered partnership is formed. For purposes of the tax on
corporations, our NIRC includes these partnerships, with the exception only of duly
registered general co-partnerships within the purview of the term corporation.
BIR Rul. No. 317-92
Ayala Land, Inc.(ALI) & Appleyard Properties, Inc (API) entered into a Memorandum of
Agreement(MOA) for the construction of the 6750 Bldg.. Pursuant to the MOA, they will
contribute equal amounts to the construction costs & ALI will own 60% of the building while
API will own 40%, while there is separate ownership, they will share common area
expenses, real estate taxes, etc in the same proportion. ALI & API now propose to enter into
another agreement, a Joint Venture Agreement (JVA). Under the JVA, both ALI & API will
contribute money as additional working capital & ALI will be appointed as manager & will be
responsible for leasing the floors. The MOA has not by itself created a taxable joint venture.
However, the joint venture to be subsequently entered into by & between ALI & API will
create a joint venture subject to taxes thereof, for each of them to manage & dispose of as
exclusively his own w/o intervention of the heirs, & accordingly, he becomes liable
individually for all taxes in connection therewith. If after such partition, he allows his share
to be held in common with his co-heirs under a single management to be used with the
intent of making profit thereby in proportion to his share, there can be no doubt that even if
no document or instrument were executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed. For purposes of tax on corporations, the NIRC, includes
partnerships-with the exception of only duly registered gen. co-partnershipswithin the
purview of the term corporation.
thereof: Provided, that if the gross income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the entire taxable income.
For purposes of this Subsection, the term 'unrelated trade, business or other activity'
means any trade, business or other activity, the conduct of which is not substantially
related to the exercise or performance by such educational institution or hospital of
its primary purpose or function.
A "Proprietary educational institution" is any private school maintained and
administered by private individuals or groups with an issued permit to operate from
the Department of Education, Culture and Sports (DECS), or the Commission on
Higher Education (CHED), or the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance with existing laws and
regulations.
DOF Order 137-87 Sections 1 to 4

Tax payer Tax Base Rate

Income Tax Rate and Tax Base, In General Propriety educational Taxable income from all 10%
Sec. 27 (A), Tax Code provides that the income tax rate on domestic corporations institution and non-profit sources
shall be 32% of taxable income from all sources. hospital
Resident international Gross Philippine Billings 2 1/2%
Sec. 31 Taxable Income Defined - The term taxable income means the pertinent carrier
items of gross income specified in this Code, less the deductions and/or personal Non-resident owner or Gross rentals, leases, and 4 1/2%
and additional exemptions, if any, authorized for such types of income by this Code lessor of vessel charter fees from the
or other special laws. Philippines
Non-resident Gross income from the 25%
cinematographic film Philippines
Proprietary Educational Institutions and Hospitals owner, lessor or
Sec. 27 (B) Proprietary Educational Institutions and Hospitals. - Proprietary distributor
educational institutions and hospitals which are nonprofit shall pay a tax of ten
percent (10%) on their taxable income except those covered by Subsection (D)
 Non-resident lessor of
aircraft, machinery and
other equipment
Regional operating
headquarters of
multinational
GOCCs (except: GSIS, SSS,
PHIC,PCSO and PAGCOR)
Gross rentals, charter 7 1/2% Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the
and other fees from Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and
Philippine sources Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income
Philippines taxable 10% as are imposed by this Section upon corporations or associations engaged in s similar
income business, industry, or activity.
N/A The same as other
Passive Income
corporations engaged in
Sec. 27 (D) Rates of Tax on Certain Passive Incomes. -
similar activities

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Notes
Substitutes and from Trust Funds and Similar Arrangements, and Royalties - A final
There is no minimum corporate income tax for special corporations
tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
All revenues of non-stock, non-profit educational institutions used actually,
interest on currency bank deposit and yield or any other monetary benefit from
directly and exclusively for educational purposes shall be exempt from taxes
deposit substitutes and from trust funds and similar arrangements received by
If the gross income of a proprietary educational institution or hospital from
domestic corporations, and royalties, derived from sources within the Philippines:
unrelated trade, business or other activity exceeds 50% of the total gross income
Provided, however, That interest income derived by a domestic corporation from a
derived from all sources, such educational institution or hospital shall be taxed as an
depository bank under the expanded foreign currency deposit system shall be
ordinary corporation
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of
Non-resident owners of vessels are treated as special corporations only from
such interest income.
charters or leases of the vessels to Filipino citizens or corporations approved by the
Maritime Industry Authority
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. -
A final tax at the rates prescribed below shall be imposed on net capital gains
DOF Order 149-95 (Nov. 24, 1995)
realized during the taxable year from the sale, exchange or other disposition of
Non-stock, nonprofit educational institutions are exempt from taxes on all their
shares of stock in a domestic corporation except shares sold or disposed of through
revenues and assets used actually, directly, and exclusively for educational purposes.
the stock exchange:
They shall, however be subject to internal revenue taxes on income from trade,
Not over P100,000. 5%
business or other activity the conduct of which is not related to the exercise or
Amount in excess of P100,000. 10%
performance by such educational institution of its educational purpose or function.
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. -
GOCCs Income derived by a depository bank under the expanded foreign currency deposit
Sec. 27 (C) Government-owned or Controlled-Corporations, Agencies or system from foreign currency transactions with local commercial banks, including
Instrumentalities - The provisions of existing special or general laws to the contrary branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas
notwithstanding, all corporations, agencies, or instrumentalities owned or controlled (BSP) to transact business with foreign currency depository system units and other
by the Government, except the Government Service Insurance System (GSIS), the depository banks under the expanded foreign currency deposit system, including
interest income from foreign currency loans granted by such depository banks under
said expanded foreign currency deposit system to residents, shall be subject to a
final income tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions
with depository banks under the expanded system shall be exempt from income tax.
(4) Intercorporate Dividends. - Dividends received by a domestic corporation from
another domestic corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to
have been realized on the sale, exchange or disposition of lands and/or buildings
which are not actually used in the business of a corporation and are treated as
capital assets, based on the gross selling price of fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or
buildings.
(xvii) Interest, Deposit Substitutes, Royalties
Sec. 22 (Y) - The term "deposit substitutes" shall mean an alternative from of
obtaining funds from the public (the term 'public' means borrowing from twenty
(20) or more individual or corporate lenders at any one time) other than deposits,
through the issuance, endorsement, 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.
BIR Rul. 57-00
FINAL TAX; ROYALTIES - As expressly denoted in the caption of Sec. 27(D)(1) of the
Tax Code of 1997, to be subject to 20% final withholding tax, the royalties must be in
the nature of passive income. Since the income derived by MKI-Phils from the
distribution of the Licensed Computer Systems to Philippine banks and the
performance of support services is income generated in the active pursuit and
performance of its primary purpose, this Office is of the opinion that the same is
clearly NOT passive income subject to the 20% final tax. Such being the case, the
payments received by MKI-Hills from the active conduct of trade or business is
considered ordinary business income subject to the 33% (for
1999) regular corporate income tax
(xviii) Sale of Shares
5%/10% final tax on net capital gains from the sale, exchange, or other
disposition of shares of stock in a domestic corporation except shares of
stock sold through the stock exchange P1-P100K 5%
Any amount over 100K 10% (the 10% is imposed only on the amount over
100K)
Rev. Regs. 2-82 Sections 1 to 6 and 8
Imposition of the Tax.
(a) Sales of shares of stock listed and traded through a local stock exchange. A tax of
1/4 of 1% shall be imposed on the gross selling price of the shares of stock sold,
exchanged or transferred through the facilities of a stock exchange registered with
the Securities and Exchange Commission.
(b) Shares of stock not traded through a local stock exchange. Net capital gains
derived during the taxable year from sales, exchanges, transfers or similar
transaction shall be taxed as follows:
Not over P100,000 10%
Over P100,000 20%
Determination of Tax Base. In determining the tax base, the following rules shall
apply:
(a) Determination of selling price. The selling price of the shares of stocks shall be
the fair market value of the shares of stocks transferred or exchanged and not the
fair market value of the property received in exchange. If the total consideration of
the sale or disposition consists partly in cash or money and partly in kind, the selling
price shall be the fair market value of the shares disposed.
1. In the case of shares traded through the stock exchange, "fair market value"
shall consist of the actual selling price as shown in the sales confirmation issued
by the member of the stock exchange through whom the sale was effected.
2. In the case of shares not traded through the stock exchange, but listed in one or
more stock exchanges, the highest closing price on the day when the shares are
sold, transferred or exchanged, shall be the "fair market value." When no sale is
made in any stock exchange, the highest closing price on the day nearest to the
day of sale, transfer or exchange of the shares shall be the fair market value.
3. In the case of sale, transfer or exchange of shares not listed in the stock
exchange, the following rules shall be observed:
In general, the unlisted shares shall be valued at their book value nearest the
valuation date. The book value of these unlisted shares of stock shall be
prima facie considered as their fair market value.
(ii)In case the shares are valued on a basis lower than their book values, a
justification for the deviation from the book value, together with the
evidences in support thereof, should be submitted. The following factors are
considered relevant in the valuation of shares of stock of closed
corporations.
(b) Determination of cost. The cost basis for determining the capital gains or losses
shall be the basis as determined in accordance with the provisions of 35 of the
National Internal Revenue Code, as amended, and its implementing regulations
applied in the following manner:
(i) If the stocks can be identified, then the cost shall be the actual
purchase price plus all costsof acquisition such as commission,
documentary tax, transfer fees, etc.
(ii) If the stocks cannot be properly identified, then the cost to be
assigned shall be computedon the basis of the first-in, first-out (FIFO)
method. However
(iii) If books of accounts are maintained by the seller where every
transaction of a particular stocks are recorded, then the moving
average method shall be applied rather than the first-in, first-out,
(FIFO) method.
(iv) In all cases, stock dividend received must be assigned a corresponding
cost by allocating the original cost of acquisition to the total number
of shares composed of the original hare holdings plus the number of
shares of stocks received as stock dividend.
(c) In determining the deductibility of capital losses, the following rules shall apply:
1. The provisions of 33 of the National Internal Revenue Code, as
amended, and its implementing regulations on the non-deductibility of
losses on wash sales.
2. The net capital losses sustained during the taxable year shall be allowed
as a capital loss deductible in the same taxable year only.
3. The entire amount of capital gains and capital loss shall be considered
without taking intoaccount the period or duration during which the
stocks were held by the seller up todisposition for purposes of computing
net capital gains.
(d) Installment sales of shares of stock not listed and traded through any local
stock exchange. In cases of gains arising from installment sales of shares of stocks,
the provisions of Sec. 43 of the National Internal Revenue Code, as amended, and its
implementing regulations shall apply.
FCDU
10% final tax on income earned by foreign currency deposit units of banks
from foreign currency transactions such as USD loans.
Revenue Regulation. 10-98
Final Tax on Sales, Exchanges or Transfers of Real Properties Classified as Capital
Assets. The rate of six percent (6%) shall be imposed on capital gains presumed to
have been realized by the seller from the sale, exchange or other disposition of real
properties located in the Philippines, classified as capital assets, including pacto de
retro sales and other forms of conditional sales based on the gross selling price or
fair market value as determined in accordance with 6(E) of the Code(i.e., the
authority of the Commissioner to prescribe the real property values), whichever is
higher.
In case of disposition of real property made by individuals to the government or to
any of its political subdivisions or agencies or to government-owned or -controlled-
corporations, the tax to be imposed shall be determined either under the normal
income tax rate imposed in 24(A) or under a final capital gains tax of six percent
(6%) imposed under 24(D)(1), both of the Tax Code of 1997, at the option of the
taxpayer.
Sec 3. Time and Place of Payment of Capital Gains Tax. Within thirty (30) days
following each sale or disposition, the Capital Gains Tax Return shall be filed by the
seller and payment made to an Authorized Agent Bank (AAB) located within the
Revenue District Office (RDO) having jurisdiction over the place where the property
being transferred is located.
Sec 4. Creditable Withholding Tax on the Sale, Transfer or Exchange of Real
Property Classified as Ordinary Asset. A creditable withholding tax based on the
gross selling price/total amount of consideration or the fair market value
determined in accordance with 6(E) of the Code, whichever is higher, paid to the
seller/owner for the sale, transfer or exchange of real property, other than capital
asset, shall be imposed upon the withholding agent/buyer, in accordance with the
following schedule:
A. Upon the following values of real property, where the seller/transferor is
habitually engaged inthe real estate business as per proof of registration with the
HLURB or HUDCC:
With a selling price of Five hundred thousand pesos (P500,000.00) or less 1.5%
With a selling price of more than Five hundred thousand pesos (P500,000.00) 3.0%
but not more than Two million pesos (P2,000,000.00)
With a selling price of more than Two million pesos (P2,000,000.00) 5.0%
B. Where the seller/transferor is not habitually engaged in the real estate business
7.5%
C. Where the seller/transferor is exempt from creditable withholding tax in
accordance with 2.57.5 of Revenue Regulations No. 2-98 Exempt
Time and Place of Payment of Creditable Withholding Tax. Creditable withholding
taxes deducted and withheld by the withholding agent/buyer on the sale, transfer or
exchange of real property classified as ordinary asset, shall be paid by the
withholding agent/buyer upon filing of thereturn with the Authorized Agent Bank
(AAB) located within the Revenue District Office (RDO) having jurisdiction over the
place where the property being transferred is located within ten (10) days following
the end of the month in which the transaction occurred. Provided, however, that
taxes withheld in December shall be filed on or before January 25 of the following
year.
Tax Clearance Certificate. Upon presentation of the Capital Gains Tax Return or
Creditable Withholding Tax Return with a bank validation evidencing full payment of
the capital gains tax or the creditable withholding tax due on the sale, transfer,
barter, exchange or other disposition of real property classified as capital or ordinary
asset, as the case may be, the Revenue District Officer(RDO) of the revenue district
where the property being transferred is located shall issue the corresponding Tax
Clearance (TCL) or Certificate Authorizing Registration (CAR) for the registration of
the real property in favor of the transferee.
(xx) Intercorporate Dividends (case of CIR vs MANNING)
(xxi) Sale of Realty
Revenue Regulation 8-98 Sections . 1 to 3
Tax rate is now 6% based on the gross selling price or current fair market value,
whichever ishigher. However, if the sale is made to the government or any of its
subdivisions or to any GOCC, itmay be taxed as part of the taxpayers income ( as set
forth in the fist paragraph of this part), at theoption of the taxpayer. (RR 8-98)
EXCEPTION: If the sale is of the taxpayers principal residence of a natural person and
the proceeds are used to purchase a new home, it shall be exempt provided:
A return is filed with the Bureau within 30 days from the sale stating the
intention to avail ofthe exemption
Proceeds are used within 18 months from sale to purchase a new residence
The historical costs of the residence sold is carried over to the new home
Exemption can only be availed of once every 10 years
If proceeds are not fully utilized, portion of the gain is taxable using this
formula: Taxablegain= gsp or fmv (whichever is higher) x unutilized
portion/gsp
Revenue Regulation 4-99
Further Amending Revenue Memorandum Order No. 29-86 dated September 3,
1986, as Amended by Revenue Memorandum Order No. 16-88 dated April 18, 1988,
Relative to the Payment of Capital Gains Tax and Documentary Stamp Tax on Extra-
Judicial Foreclosure Sale of Capital Assets Initiated by Banks, Finance and Insurance
Companies Foreclosure of Mortgage Provision Under Presidential Decree No. 1529,
Otherwise Known as "Property Registration Decree". Section 63 of P.D. No. 1529,
otherwise known as the "Property Registration Decree" provides as follows:
Foreclosure of Mortgage
(a) If the mortgage was foreclosed judicially, a certified copy of the final order of the
court confirming the sale shall be registered with the Register of Deeds. If no right of
redemption exists, the certificate of title of the mortgagor shall be cancelled, and a
new certificate issued in the name of the purchaser.
Where the right of redemption exists, the certificate of title of the mortgagor SHALL
NOT BECANCELLED
, but the certificate of sale and the order confirming the sale shall be registered by a
BRIEF MORANDUM
There of made by the Register of Deeds upon the certificate of title. In the event the
property is redeemed, the certificate or deed of redemption shall be filed with the
Register of Deeds, and a brief memorandum thereof shall be made by the Register
of Deeds on the certificate of title of the mortgagor.
If the property is not redeemed, the final deed of sale executed by the sheriff in
favor of the purchaser at a foreclosure sale shall be registered with the Register of
Deeds; whereupon the title of the mortgagor shall be cancelled, and a new
certificate issued in the name of the purchaser.(b) If the mortgage was foreclosed
extrajudicially, a certificate of sale executed by the officer who conducted the sale
shall be filed with the Register of Deeds who shall make a brief memorandum
thereof on the certificate of title. In the event of redemption by the mortgagor, the
same rule provided for in the second paragraph of this section shall apply. In case of
non-redemption, the purchaser at foreclosure sale shall file with the Register of
Deeds, either a final deed of sale executed by the person authorized by virtue of the
power of attorney embodied in the deed of mortgage, or his sworn statement
attesting to the fact of non-redemption; whereupon, the Register of Deeds shall
issue a new certificate in favor of the purchaser after the owner's duplicate of the
certificate has been previously delivered and cancelled. It is clear from the above
provision of the "Property Registration Decree" that where the right of redemption
of the mortgagor exists, the certificate of title of the mortgagor shall not be
cancelled yet even if the property had already been subjected to foreclosure sale,
BUT INSTEAD only a brief memorandum shall be annotated at the back of the
certificate of title, and the cancellation of the title and the subsequent issuance of a
new title in favor of the purchaser/highest bidder depends on whether the
mortgagor shall redeem or not the mortgaged property within one year from the
issuance of the certificate of sale. Thus, no transfer of title to the highest bidder can
be effected yet until and after the lapse of the one-year period from the issuance of
the said certificate of sale.
Capital Gains Tax. (1) In case the mortgagor exercises his right of redemption
within one year from the issuance of the certificate of sale, no capital gains tax shall
be imposed because no capital gains has been derived by the mortgagor and no sale
or transfer of real property was realized. A certification to that effector the deed of
redemption shall be filed with the Revenue District Office having jurisdiction over
the place where the property is located which certification or deed shall likewise be
filed with the Register of Deeds and a brief memorandum thereof shall be made by
the Register of Deeds on the Certificate of Title of the mortgagor.(2) In case of non-
redemption, the capital gains tax on the foreclosure sale imposed under
Secs.24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based on the
bid price of the highest bidder but only upon the expiration of the one-year period
of redemption provided for under Sec.6 of Act No. 3135, as amended by Act No.
4118, and shall be paid within thirty (30) days from the expiration of the said one-
year redemption period.
Documentary Stamp Tax. (1) In case the mortgagor exercises his right of
redemption, the transaction shall only be subject to the P15.00 documentary stamp
tax imposed under Sec. 188 of the Tax Code of 1997 because no land or realty was
sold or transferred for a consideration.(2) In case of non-redemption, the
corresponding documentary stamp tax shall be levied, collected and paid by the
person making, signing, issuing, accepting, or transferring the real property
wherever the document is made, signed, issued, accepted or transferred where the
property is situated in the Philippines; Provided, That whenever one party to the
taxable document enjoys exemption from the tax, the other party thereto who is not
exempt shall be the one directly liable for the tax. The tax return prescribed under
the Code shall be filed within ten (10) days after the close of the month following
the lapse of the one-year redemption period, and the tax due under Sec. 196 of the
Tax Code of 1997 shall be paid based on the bid price at the same time the aforesaid
return is filed.
Tax Clearance Certificate/Certificate Authorizing Registration. In case of non-
redemption, a tax clearance certificate (TCC) or Certificate Authorizing Registration
(CAR) in favor of the purchaser/highest bidder shall only be issued upon
presentation of the capital gains and documentary stamp taxes returns duly
validated by an authorized agent bank (AAB) evidencing full payment of the capital
gains and documentary stamp taxes due imposed under Secs. 3 and 4 of these
Regulations on the sale of the property classified as capital asset. The AAB must be
located at the Revenue District Office having jurisdiction over the place where the
property is located.
Minimum Corporate Income Tax (MCIT)
Sec. 27 (E) Minimum Corporate Income Tax on Domestic Corporations. -
(1) Imposition of Tax - A minimum corporate income tax of two percent (2%0 of the
gross income as of the end of the taxable year, as defined herein, is hereby imposed
on a corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its business
operations, when the minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate
income tax over the normal income tax as computed under Subsection (A) of this
Section shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. -
The Secretary of Finance is hereby authorized to suspend the imposition of the
minimum corporate income tax on any corporation which suffers losses on account
of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation
of the Commissioner, the necessary rules and regulation that shall define the terms
and conditions under which he may suspend the imposition of the minimum
corporate income tax in a meritorious case.
(4) Gross Income Defined - For purposes of applying the minimum corporate income
tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross
sales less sales returns, discounts and allowances and cost of goods sold" Cost of
goods sold' shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
For a trading or merchandising concern, "cost of goods sold' shall include the invoice
cost of the goods sold, plus import duties, freight in transporting the goods to the
place where the goods are actually sold including insurance while the goods are in
transit.
For a manufacturing concern, cost of "goods manufactured and sold" shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred
to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances, discounts and cost of services" Cost of
services" shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries and employee
benefits of personnel, consultants and specialists directly rendering the service and
(B) cost of facilities directly utilized in providing the service such as depreciation or
rental of equipment used and cost of supplies: Provided, however, That in the case
of banks, "cost of services" shall include interest expense.
Rev. Regs. 9-98 except Sec. 2.28(E)(7) Accounting Treatment
Imposition of the tax A minimum corporate income tax of 2% of the gross income
as of the end of the taxable year is hereby imposed upon any domestic corporation
beginning the 4th taxable year immediately following the taxable year in which such
corporation commenced its business operations. The MCIT shall be imposed
whenever such corporation has zero or negative taxable income or whenever the
amount of minimum corporate income tax is greater than the normal income tax
due from such corporation.
Carry forward of excess minimum corporate income tax Any excess of the
minimum corporate income tax over the normal income tax as computed shall be
carried against the normal income tax for the 3 immediately succeeding years.
Relief from the MCIT The Secretary of Finance, upon recommendation of the
Commissioner, may suspend imposition of the MCIT upon submission of proof by
the applicant-corporation, duly verified by the Commissioners authorized
representative, that the corporation sustained substantial losses on account of a
prolonged labor dispute or because of force majeure or because of legitimate
business reverses.
The MCIT on Resident Foreign Corporations the MCIT shall only apply to resident
foreign corporations which are subject to normal income tax. Accordingly, the MCIT
shall not apply to the following resident foreign corporations:
1. international carrier
2. offshore banking units
3. regional operating headquarters
4. firms that are taxed under special income tax regime (such as those
enterprises registered with PEZA and enterprises registered pursuant to the
Bases Conversion and Development Act
CASE
The Manila Banking Corp. v. CIR (Aug. 28, 2006)
Facts: Manila bank was incorporated in 1961 and since had engaged in the
commercial banking business until it was ordered closed by the BSP in 1987 due to
insolvency. On June 23, 1999, the BSP authorized it to operate as a Thrift bank. The
following years, specifically on April 7, 2000, it filed its annual corporate income tax
return and paid P33, 816,164.00 as MCIT for taxable year 1999. It filed a claim for
refund maintaining the position that since it CTA denied the claim for refund (which
was affirmed by the CA) on the ground that petitioner is not a new corporation
hence not entitled to the grace period of four years.
Issue: What is the reckoning date for the MCIT in so far as thrift banks are
concerned?
Held: Under the law (R.A. 8424), MCIT is imposed beginning on the fourth year
following the commencement of business operations. Revenue Regulations No. 9-98
provides that For purpose of the MCIT, the taxable year in which business
operations commenced shall be the year in which the domestic corporation
registered with the BIR. Petitioner registered as a commercial bank with the BIR in
1961 and again registered on January 21, 1999 as a thrift bank. However, with
respect to thrift banks, the date of commencement of business operations 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 (RR No. 4-95implementing R.A. No. 7906). The SC ruled
that what applied to petitioner is RR No. 4-95 and not RR No.9-98. It is, therefore,
entitled to a grace period of four years counted from June 23, 1999 when it was
authorized by the BSP to operate as a thrift bank (it having been registered with SEC
at an earlier date).Consequently, it should only pay it MCIT after four (4) years from
1999.
INCOME TAX ON RESIDENT FOREIGN CORPORATIONS
Sec. 22(B) The term "corporation" shall include partnerships, no matter how created
or organized, joint-stock companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating consortium agreement under a
service contract with the Government "General professional partnerships" are
partnerships formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade or
business.
Sec. 22 (C) The term "domestic", when applied to a corporation, means created or
organized in the Philippines or under its laws
Sec. 22 (D) The term "foreign", when applied to a corporation, means a corporation
which is not domestic
Sec. 22 (H) The term "resident foreign corporation" applies to a foreign corporation
engaged in trade or business within the Philippines.
Sec. 3(d), Rep. Act No. 7042 (Foreign Investments Act of 1991), as
implemented by Sec. 1(f), FIA 91 IRR
The praise "doing business" shall include soliciting orders, service contracts, opening
offices, whether called "liaison" offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business,
firm, entity or corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or of the purpose
and object of the business organization: Provided, however, That the phrase "doing
business: shall not be deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own name and
for its own account;
Income Tax Rate and Tax Base, In General
Sec. 28(A)(1) In General. - Except as otherwise provided in this Code, a corporation
organized, authorized, or existing under the laws of any foreign country, engaged in
trade or business within the Philippines, shall be subject to an income tax equivalent
to thirty-five percent (35%) of the taxable income derived in the preceding taxable
year from all sources within the Philippines: Provided, That effective January 1,
1998, the rate of income tax shall be thirty-four percent (34%); effective January 1,
1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and
thereafter, the rate shall be thirty-two percent (32%).
Sec. 31. Taxable Income Defined - The term taxable income means the pertinent
items of gross income specified in this Code, less the deductions and/or personal
and additional exemptions, if any, authorized for such types of income by this Code
or other special laws.
Special Resident Foreign Corporations
International Carriers
Sec. 28(A)(3) International Carrier. - An international carrier doing business in the
Philippines shall pay a tax of two and one-half percent (2 1/2%) on its "Gross
Philippine Billings" as defined hereunder: (a) International Air Carrier. - "Gross
Philippine Billings" refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to another international airline form part of
the Gross Philippine Billings if the passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which originates from the Philippines,
but transshipment of passenger takes place at any port outside the Philippines on
another airline, only the aliquot portion of the cost of the ticket corresponding to
the leg flown from the Philippines to the point of transshipment shall form part of
Gross Philippine Billings.
CASE
CIR v. British Overseas Airways Corp
Facts: British Overseas Airways Corporation (BOAC) is a 100% British Government-
owned corporation organized and existing under the laws of the UK. It is engaged in
the international airline business. BOAC does not have lading rights for traffic
purposes in nine-month period partly in 1961 and 1962,when it was granted a
temporary landing permit by the Civil Aeronautics Board.
Although it did not carry passengers and cargo to and from the Philippine, it
maintained a general sales agent in the Philippines Warner Barnes and Company,
Ltd and later Qantas Airways which was responsible for selling BOAC tickets
covering passengers and cargoes.
First Case: The CIR assessed BOAC the amount of approx P2.4M for 1959-1963.
BOAC protested. In1970, after investigation BOAC was assessed approx P858K for
the years 1959-967. BOAC paid thenew assessment under protest. BOAC filed a
claim for refund. The claim was denied by the CIR.BOAC a petition for review with
the Tax Court.
Second Case: BOAC was also assessed for the years 1968/69-1970-71 the amount of
P549K. BOAC requested that the assessment be countermanded and set aside. The
cases were tried jointly. The Tax Court reversed the ruling of the CIR. The Tax Court
contends that the sale of BOAC tickets by Warner Barnes and Company. Ltd. and
later by Qantas do not constitute BOAC income from Philippine sources. The CTA
said that the income from transportation is income from services and the place
where the service is rendered determines the source. Since the services were never
done in the Philippines, BOAC had no income derived from Philippine sources.
1st Issue: Is BOAC a resident foreign corporation, being a foreign corporation not
having any office or place of business?
Held: BOAC is a resident foreign corporation. The term doing business implies a
continuity of commercial dealings and contemplates the performance of works or
the exercise of some function normally incident to and in progressive prosecution of
commercial gain for the purpose and object of the business organization. During the
periods covered by the assessments, BOAC maintained a general sales agent and the
regular sale of tickets is the lifeblood of an airline business and BOAC as a resident
foreign corporation engaged in business is subject to tax upon its total net income
received in the preceding taxable year.
2nd Issue: Is the revenue derived by BOAC from sales of tickets in the Philippines,
while having no landing rights, constitute income from Philippine sources?
Held: Gross income includes gains, profits and income derived from salaries, wages,
compensation, trades, business...or through transactions of any business carried on
for gain or profit and income derived from any source whatever. This definition is
broad and comprehensive enough to include proceeds from sales of transport
documents. BOAC says that income derived from transportation is income for
services and the place where service is rendered determines the source and since
the service did not occur within the Philippines, it cannot be subject to income tax.
The test of taxability is the source of income and the source of the income is that
activity which produced the income. In BOACs case, the sale of the tickets within
the Philippines is the activity that produces the income. The situs of the source of
payments is the Philippines. The word source means origin and the origin of the
income here is the Philippines
3rd Issue: Is BOAC liable to Philippine income tax at the rate of 35% of its gross
income received from all sources within the Philippines?
Held: As of 24 November 1972 with PD No.69, international carriers are taxed 2 %
on their gross Philippine billings. Gross Philippine billings includes gross revenue
realized from uplifts anywhere in the world by any international carrier doing
business in the Philippines of passage documents sold therein, whether for
passenger, excess baggage or mail, provided the cargo or mail originates from the
Philippines. The tax on gross billings is an income tax not an excise or privilege tax.
Decision of the CTA was SET ASIDE. BOAC was ordered to pay deficiency taxes and
the claim for refund is denied.
Dissent of Justice Feliciano
Income can either come from (1) labor (source is place where the labor s done)
and/or (2) capital(source is the place where capital is employed) and/or (3) sale of
capital assets (source is place where the sale is made).What source rule of income is
applicable in the case at bar? Is it (a) rule applicable to contracts of service; or (2)
rule applicable to sales of personal property? He also made distinctions as to sources
wholly derived from within the Philippines, sources totally derived from without the
Philippines and sources derived partly within and partly without the Philippines. In
relation to the case at bar, Justice Felicano says that you can either consider the case
as a contract of service (properly denominated as a contract of carriage) or as a sale
of a ticket or personal property. Justice Feliciano says BOACs business should be
more appropriately characterized as a contract of service rather than an activity or
use or sale of property. He says that since it is service, and the service was totally
outside the Philippines, it cannot be taxed. He votes to affirm the decision of the
CTA.
Rev. Regs. 15-2002 Secs. 1 to 5 only
Section 2. Definition of Terms. For purposes of these Regulations, the following
terms shall be construed as follows:
(a) International air carrier shall refer to a foreign airline corporation doing
business in the Philippines having been granted landing rights in any Philippine port
to perform international air transportation services/activities or flight operations
anywhere in the world.
(b)Off-line carrier shall refer to an international air carrier having no flight
operations to and from the Philippines.
(c) On-line carrier shall refer to an international air carrier having or maintaining
flight operations to and from the Philippines.
(d) Off-line flights shall refer to flight operations carried out or maintained by an
international air carrier between ports or points outside the territorial jurisdiction of
the Philippines, without touching a port or point situated in the Philippines, except
when in distress or due to force majeure.
(e) On-line flights shall refer to flight operations carried out or maintained by an
international air carrier between ports or points in the territorial jurisdiction of the
Philippines and any port or point outside the Philippines.
(f) Chartered flight shall refer to flight operation which includes operations
between ports or points situated in the Philippines and ports and points outside the
Philippines, which includes block charter, placed under the custody and control of a
charterer by a contract/charter for rent or hire relating to a particular airplane.
(g) "Originating from the Philippines" - shall include the following:
1) Where passengers, their excess baggage, cargo and/or mail originally
commence their flight from any Philippine port to any other port or point
outside the Philippines;
(2)Chartered flights of passengers, their excess baggage, cargo and/or mail
originally commencing their flights from any foreign port and whose stay in
the Philippines is for more than forty-eight (48) hours prior to embarkation
save in cases where the flight of the airplane belonging to the same airline
company failed to depart within forty-eight (48) hours by reason of force
majeure;
(3) Chartered flights of passengers, their excess baggage, cargo and/or mail
originally commencing their flights from any Philippine port to any foreign
port; and
(4) Where a passenger, his excess baggage, cargo and/or mail originally
commencing his flight from a foreign port alights or is discharged in any
Philippine port and thereafter boards or is loaded on another aircraft, owned
by the same airline company, the flight from the Philippines to any foreign
port shall not be considered originating from the Philippines, unless the time
intervening between arrival and departure of said passenger, his excess
baggage, cargo and/or mail from the Philippines exceeds forty-eight (48)
hours, except, however, when the failure to depart within forty-eight (48)
hours is due to reasons beyond his control, such as, when the only next
available flight leaves beyond forty-eight (48) hours or by force majeure.
Provided, however, that if the second aircraft belongs to a different airline
company, the flight from the Philippines to any foreign port shall be
considered originating from the Philippines regardless of the intervening
period between the arrival and departure from the Philippines by said
passenger, his excess baggage, cargo and/or mail.
(h) " Continuous and Uninterrupted Flight" shall refer to a flight in the carrier of
the same airline company from the moment a passenger, excess baggage, cargo,
and/or mail is lifted from the Philippines up to the point of final destination of the
passenger, excess baggage, cargo and/or mail. The flight is not considered
continuous and uninterrupted if transshipment of passenger, excess baggage, cargo
and/or mail takes place at any port outside the Philippines on another aircraft
belonging to a different airline company.
(i) "Place of Final Destination" shall refer to the place of final disembarkation
designated or agreed upon by the parties in a contract of air transportation where
the passengers, their excess baggage, cargo and/or mail are to be transported and
unloaded by the contracting airline company.
(j) "Transient Passengers" shall refer to a passenger who originated from outside
of the Philippines towards a final destination also outside of the Philippines but
stops in the Philippines for a period of less than forty eight (48) hours, or even more
than forty-eight (48)hours, if the delay is due to force majeure or reasons beyond his
control, wherein in both cases the passenger boarded an airplane of the same airline
company bound to the place of final destination.
Non-revenue passengers" shall refer to the non-revenue passengers as defined
under Resolution No. 788 of the International Air Transport Association regarding
Free and Reduced Fare or Rate Transportation and any other Free/Reduced Rate
Mileage Programs Administered by individual International Air Carriers.
Adult passenger - shall refer to a passenger who has attained his twelfth birthday.
Children shall refer to passengers who have attained their second but not their
twelfth birthday.
Infant - shall refer to a passenger who has not attained his second birthday.
(k) Baggage - shall refer to such articles, effects and other personal property of a
passenger as are necessary or appropriate for wear, use, comfort or convenience in
connection with his trip.
Excess baggage shall refer to that part of the baggage which is in excess of that
baggagewhich may be carried free of charge.
(l) Refund shall refer to the repayment to the purchaser of all or a portion of the
fare, rate orcharge for unused carriage or service.
Section 3. Foreign Airline Companies without Flights Starting From or Passing
Through any Point in the Philippines. - An off-line airline having a branch office or a
sales agent in the Philippines which sells passage documents for compensation or
commission to cover off-line flights of its principal or head office, or for other airlines
covering flights originating from Philippine ports or off-line flights, is not considered
engaged in business as an international air carrier in the Philippines and is,
therefore, not subject to Gross Philippine Billings Tax provided for in Section 28
(A)(3)(a) of the Code nor to the three percent (3%) common carriers tax under
Section 118(A) of the same Code. This provision is without prejudice to classifying
such taxpayer under a different category pursuant to a separate provision of the
same Code.
Section 4. Tax Imposed on International Air Carrier with Flights Originating from
Philippine Ports. An international air carrier having flights originating from any
port or point in the Philippines, as clarified in Sec. 2(g) and (h) hereof, irrespective of
the place where passage documents are sold o issued, is subject to the Gross
Philippine Billings Tax of 2% imposed under Section 28(A)(3)(a) of the Code unless
subject to a different tax rate under the applicable tax treaty to which the
Philippines is a signatory.
Section 5. Determination of Gross Philippine Billings.
(a) In computing for Gross Philippine Billings, there shall be included the total
amount of gross revenue derived from passage of persons, excess baggage, cargo
and/or mail, originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of the
passage documents.
The gross revenue for passengers whose tickets are sold in the Philippines shall be
the actual amount derived for transportation services, for a first class, business class
or economy class passage, as the case may be, on its continuous and uninterrupted
flight from any port or point in the Philippines to its final destination in any port or
point of a foreign country, as reflected in the remittance area of the tax coupon
forming an integral part of the plane ticket. For this purpose, the Gross Philippine
Billings shall be determined by computing the monthly average net fare of all the tax
coupons of plane tickets issued for the month per point of final destination, per class
of passage (i.e., first class, business class, or economy class) and per classification of
passenger (i.e., adult, child or infant), and multiplied by the corresponding total
number of passengers flown for the month as declared in the flight manifest. For
tickets sold outside the Philippines, the gross revenue for passengers for first class,
business class or economy class passage, as the case may be, on a continuous and
uninterrupted flight from any port or point in the Philippines to final destination in
any port or point of a foreign country shall be determined using the locally available
net fares applicable to such flight taking into consideration the seasonal fare rate
established at the time of the flight, the class of passage (whether first class,
business class, economy class or non-revenue), the classification of passenger
(whether adult, child or infant), the date of embarkation, and the place of final
destination. Correspondingly, the Gross Philippine Billing for tickets sold outside the
Philippines shall be determined in the manner as provided in the preceding
paragraph. Passage documents revalidated, exchanged and/or endorsed to another
on-line international airline shall be included in the taxable base of the carrying
airline and shall be subject to Gross Philippine Billings tax if the passenger is
lifted/boarded on an aircraft from any port or point in the Philippines towards a
foreign destination. The gross revenue on excess baggage which originated from any
port or point in the Philippines and destined to any part of a foreign country shall be
computed based on the actual revenue derived as appearing on the official receipt
or any similar document for the said transaction.
The gross revenue for freight or cargo and mail shall be determined based on the
revenue realized from the carriage thereof. The amount realized for freight or cargo
shall be based on the amount appearing on the airway bill after deducting therefrom
the amount of discounts granted which shall be validated using the monthly cargo
sales reports generated by the IATA Cargo Accounts Settlement System (IATA CASS)
for airway bills issued through their cargo agents or the monthly reports prepared by
the airline themselves or by their general sales agents for direct issues made. The
amount realized for mails shall, on the other hand, be determined based on the
amount as reflected in the cargo manifest of the carrier. Provided, however, that in
the case of the passenger's passage documents or flights from any port or point in
the Philippines and back, that portion of revenue pertaining to the return trip to the
Philippines shall not be included as part of Gross Philippine Billings. In cases where
a flight is interrupted by force majeure resulting in the transshipment of the
passengers, their excess baggage, freight, cargo and/or mail to another airplane
operated by another airline company and transshipment takes place in another
country, the Gross Philippine Billings shall be determined based on that portion of
flight from the Philippines up to the point of said transshipment.
(b) Non-revenue passengers shall not be given value for purposes of computing the
taxable base subject to tax. Refunded tickets shall likewise not be included in the
computation of Gross Philippine Billings.
(c) In the case of a flight that originates from the Philippines but transshipment of
passenger, excess baggage, cargo and/or mail takes place elsewhere in another
aircraft belonging to a different airline company, the Gross Philippine Billings shall be
that portion of the revenue corresponding to the leg flown from any point in the
Philippines to the point of transshipment.
(d) In computing the taxable amount, the foreign exchange conversion rate to be
used shall be the average monthly Airline Rate as provided in the Bank Settlement
Plan (BSP) Monthly sales report or the Bankers Association of the Philippines (BAP)
rate, whichever is higher. The average monthly BAP rate shall be computed by
adding all the different BAP rates during the month and dividing the same by the
number of days during the month.
OBUs/FCDUs
Sec. 28(A) (4) Offshore Banking Units - The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units,
including any interest income derived from foreign currency loans granted to
residents, shall be subject to a final income tax at the rate of ten percent (10%) of
such income.
Rev. Regs. 10-76
SECTION 1. Scope. Pursuant to Section 338 of the National Internal Revenue
Code, as amended, the following regulations are hereby promulgated to govern the
manner of taxation of offshore banks and the expanded Foreign Currency Deposit
Units of depository banks established under Presidential Decrees No. 1034 and
1035, respectively. These regulations shall be known as Revenue Regulations No. 10-
76.SECTION
Section 2.Definition of Terms. a. "Offshore Banking" shall refer to the conduct of
banking transactions in foreign currencies involving the receipt of funds principally
from external sources and the utilization of such funds as provided in Presidential
Decree No. 1034.
b. "Offshore Banking Unit" hereinafter referred to as OBU, shall mean a branch,
subsidiary or affiliate of a foreign banking corporation which is duly authorized by
the Central Bank of the Philippines, as a separate accounting unit, to transact
offshore banking business in the Philippines in accordance with the provisions of
P.D. 1034 as implemented by Central Bank Circular No. 546.
c. "Deposits" shall mean funds in foreign currencies which are accepted and held by
an off-shore banking unit in the regular course of business, with the obligation to
return an equivalent amount to the owner thereof, with or without interest.
d. "Resident" shall mean (1) an individual citizen of the Philippines residing
therein; or (2)an individual who is not a citizen of the Philippines but is permanently
residing therein; or (3)a corporation or other juridical person organized under the
laws of the Philippines.(4)a branch, subsidiary, affiliate, extension office or any other
unit of corporations or juridical persons organized under the laws of any foreign
country operating in the Philippines.
e. "Non-resident" shall mean an individual, corporation or other juridical person no
tincluded in the above definition of "residents".
f. "Foreign Currency Deposit Unit" (FCDU) shall mean an accounting unit or
department in a local bank or in an existing local branch of foreign banks, which is
authorized by the Central Bank of the Philippines to operate under the expanded
foreign currency deposit system, in accordance with the provisions of P.D. 1035, as
implemented by Central Bank Circular No. 547. The FCDU authority shall be
distinguished from the authority to accept foreign currency deposits under R.A. No.
6426, as implemented byCentral Bank Circular No. 343.
g. "Gross offshore income" shall mean all income arising from transactions allowed
by the Central Bank of the Philippines conducted by and between 1) in the case of
an offshore banking unit with another offshore banking unit or with an expanded
Foreign Currency Deposit unit or with a non-resident;2)in the case of an expanded
Foreign Currency Deposit Unit with another expanded Foreign Currency Deposit Unit
or with an Offshore Banking Unit or with a non-resident.
h. "Gross onshore income" shall mean gross interest income arising from foreign
currency loans and advances to and/or investments with residents made by
Offshore Banking Units or expanded Foreign Currency Deposit Units. Such gross
interest income shall include all fees, commissions and other charges which are
integral parts of the income from the above transactions.
SECTION 3.Rates of income tax to be imposed. The rates or income tax to be
imposed, which shall be in lieu of all other taxes such as, but not limited to privilege
tax, gross receipts tax, documentary and science stamp tax and profit remittance
tax, are as followers:(a)On offshore income, there shall be imposed an income tax of
five percent (5%) based on net offshore income as computed in Section 4. Income
realized by offshore banking units on transactions with local commercial banks
including branches of foreign banks that may be authorized by the Central Bank of
the Philippines to transact business with offshore banking units shall likewise be
subject to the same tax, except net income from such transactions as may be
specified by the Secretary of Finance, upon recommendation of the Monetary
Board, to be subject to the usual income tax payable by banks.(b)In the case of gross
onshore income as defined in Section 2(h) above, the tax shall be ten percent (10%)
thereof and shall be a final tax.(c)Income not covered by paragraphs (a) and (b)
above shall be subject to the usual corporate taxes imposed by the National Internal
Revenue Code, as amended.
SECTION 4. Manner of computation of net income. (a)Net offshore income for
purposes of Section 3, paragraph (a) above, shall be the amount remaining after
deducting from the gross offshore income during the taxable year the following
items:1)the proportion of total interest expenses for the same period based on the
ratio of offshore interest income which bears to the total gross interest
income;2)the proportion of general administrative expenses based on the ratio of
net offshore income which bears to the total net income after deducting only
interest expenses mentioned in sub-paragraph (1) above.3)Likewise, there shall be
allowed a reasonable amount of head office expenses in accordance with the ratio
specified in sub-paragraph (2) above.(b)In the case of onshore income, the gross
interest income without the benefit of any deduction corresponding to the allocable
onshore income, shall be the amount upon which the ten percent (10%) withholding
income tax shall be computed.
SECTION 5.Manner of filing returns and payment of taxes. Within sixty (60) days
after the end of each of the first three quarters of the calendar or fiscal year.(a)for
offshore income and other income mentioned In Section 3(c) a return of net
taxable offshore income shall be filed with, and the tax due thereon paid, to the
Commissioner of Internal Revenue, Revenue Regional Director, Revenue District
Officer or the Collection Agent of the City or Municipality where the corporation's
principal office is located and where its books of accounts and other data from
which the return is prepared are kept, by every offshore banking units and expanded
Foreign Currency Deposit Units, regardless of whether there is tax due or not. For
these purposes, B.I.R. Form No. 17.02-Q shall be used and the appropriate rates, as
enumerated in Section 3 above, shall be applied accordingly.(b)for onshore income
in the case of onshore income realized by an offshore banking unit or by an
expanded Foreign Currency Deposit Unit, the income need not be included in the
quarterly income tax return to be filed as required above as the payor-borrower
under Section 53, in relation to Section 54, of the National Internal Revenue Code, is
constituted as the withholding agent charged with the obligation of deducting,
withholding and remitting to the Commissioner of Internal Revenue the income tax
due thereon within the period prescribed by law with the appropriate return in
accordance with existing revenue and Central Bank regulations. A copy of the
quarterly return filed, together with the copy of the official receipt denoting
payments thereon, shall be furnished direct to the offshore banking unit or foreign
currency deposit unit concerned, which shall in turn submit to the Bureau of Internal
Revenue said documents accompanied by statement showing a list of all its
domestic borrowers, amount borrowed and interest income thereon. The statement
with its attachments, shall be filed together with the quarterly return required
above. A final consolidated return or an adjustment return on B.I.R. Form 1702
covering the total taxable onshore and offshore income for the preceding calendar
or fiscal year shall be filed on or before the 15th day of the fourth month following
the close of the calendar or fiscal year. The return shall include all the items of gross
income and deductions for the whole taxable year. The tax shown on the final or
adjustment return, after deducting there from the quarterly income taxes paid and
withheld during the preceding three quarters of the same taxable year, shall either
be paid upon filing, or refunded as the case may be.
SECTION 6.Statement to be attached to the return. There shall be attached to
the final consolidated return or adjustment return of the taxpayer for such taxable
year a sworn statement, a specimen form of which is hereto attached, by a
responsible officer setting forth in summarized form the pertinent information
required by these regulations with respect to the computation of the net offshore
income, gross onshore income and taxes paid or withheld.
SECTION 7.Records to be kept. Every offshore banking unit, as well as expanded
Foreign Currency Deposit Unit, which is duly authorized by the Central Bank of the
Philippines to transact offshore banking business in the Philippines shall maintain
books of account which shall be kept in the place of its principal place of business for
inspection. In addition, all the supporting data which were used in compiling the
summary statement required to be attached to the income tax returns to be filed as
prescribed under Section 6hereof must likewise be made readily available at its
principal place of business.
SECTION 8.Income of non-resident. Any income of non-residents from
transactions with either an offshore banking unit or with an expanded Foreign
Currency Deposit Unit shall be exempt from any and all taxes.
SECTION 9.Income of foreign personnel. There shall be levied, collected and paid
for each taxable year upon the gross income received by every alien individual
employed by offshore banking units in the Philippines as salaries, wages, annuities,
compensations, remunerations and emoluments from such
offshore banking units a tax equal to fifteen (15%) percent of such gross income.
Therefore said tax shall be deducted and withheld at source in the same manner and
condition as that provided under Supplement "A" Withholding on Wages of
Commonwealth Act No. 466, as amended.
SECTION 10.Privileges of the offshore banking units. The offshore banking units
shall be exempt from all forms of local licenses, fees, dues, imposts or any other
local taxes or burdens. The license fee paid by offshore banking units shall be
allowed as a deduction in accordance with Section 4 of these regulations.
SECTION 11.Registration. Offshore a Banking Units and expanded Foreign
Currency Deposit Units shall, upon receipt of advice from the Central Bank, register
with the Bureau of Internal Revenue its business name for the purpose of a.
registering its trade name; b. registering as an employer pursuant to the provision of
R. A. 466; c.registering its name for the purpose of securing its taxpayer account
number
Rev. Regs. 14-77
SECTION 1. Section 2(h) is hereby amended to read as follows: "SEC. 2(h).Gross
onshore income shall mean gross interest income arising from foreign currency
loans and advances to and/or investments with residents made by offshore banking
units or expanded foreign currency deposit units. In the case of foreign currency
loan transactions, such gross interest income shall refer only to the stipulated
interest and shall not include any and all fees, commissions and other charges which
are integral parts of the income from the above transactions."
SECTION 2. Section 3(b) is hereby amended to read as follows:" SEC. 3(b).In the case
of gross onshore income as defined in Section 2(h) above, the tax shall be ten
percent (10%) thereof and shall be a final tax. Any and all fees, commissions and
other charges which are integral parts of the charges imposed on foreign currency
loan transactions are exempt from the tax herein imposed."
SECTION 3. Section 5(b) is hereby amended to read as follows:" SEC. 5(b).For
onshore income In the case of onshore income realized by an offshore banking
unit or by an expanded Foreign Currency Deposit Unit, the income need not be
included in the quarterly income tax return to be filed as required above as the
payor-borrower under Section 53, in relation to Section 54, of the National Internal
Revenue Code, is constituted as the withholding agent charged with the obligation
of deducting, withholding and remitting to the Commissioner of Internal Revenue
the income tax due thereon within the period prescribed by law with the
appropriate return in accordance with existing revenue and Central Bank
regulations. Regardless, therefore, of whether the accounting method of an OBU-
creditor in cash or accrual basis, the withholding tax will be withheld and remitted
only after the due date of payment of the interest incurred by an onshore borrower.
Rev. Regs. 10-98 - except Sec. 2.58
Prescribes the regulations to implement RA No. 8424 relative to the imposition of
income taxes on income derived under the Foreign Currency Deposit and Offshore
Banking Systems. Specifically, interest income which is actually or constructively
received by a resident citizen of the Philippines or by a resident alien individual from
a foreign currency bank deposit will be subject to a final withholding tax of 7.5%. The
depository bank will withhold and remit the tax. If a bank account is jointly in the
name of a non-resident citizen, 50% of the interest income from such bank deposit
will be treated as exempt while the other 50% will be subject to a final withholding
tax of 7.5%. The Regulations will apply on taxable income derived beginning January
1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which
were made in 1997, only that portion of interest which was actually or constructively
received by a depositor starting January 1, 1998 is taxable.
RHQs and ROHQs
Sec. 22 (DD) The term "regional or area headquarters" shall mean a branch
established in the Philippines by multinational companies and which headquarters
do not earn or derive income from the Philippines and which act as supervisory,
communications and coordinating center for their affiliates, subsidiaries, or
branches in the Asia-Pacific Region and other foreign markets.
Sec. 22 (EE) The term "regional operating headquarters" shall mean a branch
established in the Philippines by multinational companies which are engaged in any
of the following services: general administration and planning; business planning
and coordination; sourcing and procurement of raw materials and components;
corporate finance advisory services; marketing control and sales promotion; training
and personnel management; logistic services; research and development services
and product development; technical support and maintenance; data processing and
communications; and business development.
Sec. 28(A)(6) - Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies. - (a) Regional or area headquarters as
defined in Section 22(DD) shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of
ten percent (10%) of their taxable income.
Branch Profit Remittance Tax
Sec. 28(A)(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch
to its head office shall be subject to a tax of fifteen (15%) which shall be based on
the total profits applied or earmarked for remittance without any deduction for the
tax component thereof (except those activities which are registered with the
Philippine Economic Zone Authority).
The tax shall be collected and paid in the same manner as provided in Sections 57
and 58 of this Code: provided, that interests, dividends, rents, royalties, including
remuneration for technical services, salaries, wages premiums, annuities,
emoluments or other fixed or determinable annual, periodic or casual gains, profits,
income and capital gains received by a foreign corporation during each taxable year
from all sources within the Philippines shall not be treated as branch profits unless
the same are effectively connected with the conduct of its trade or business in the
Philippines.
CASE
Bank of America NT & SA v. CA
Facts: Bank of America is a foreign corporation licensed to engage in business in the
Philippines. On July 20, 1982, it paid 15% branch profit remittance tax worth
P7,538,460.72 on profit from its regular banking unit operations and P44,790.25 on
profit from its foreign currency deposit unit operations or a total of
P7,984,250.97.The tax base was based on net profits after income tax without
deducting the amount corresponding to the 15% tax. Bank of America filed a claim
with the BIR of that portion of the payment which corresponds to the15% branch
profit remittance tax, on the ground that the tax should have been computed on the
basis of profits actually remitted, which is P45,244,088.85, and not on the amount
before profit remittance tax, which is P53,228,339.82. Subsequently, without
awaiting respondents decision, Bank of America filed a petition for review with the
CTA for recovery of the amount of P1,041,424.03. The court ruled in favor of the
bank.
Issue: Whether or not the branch profit remittance tax paid or withheld should be
deducted from the tax base?
Held: In the 15% remittance tax, the law specifies its own tax base to be on the
profit remitted abroad . The tax is imposed on the amount sent abroad, and the
law calls for nothing further. The taxpayer is a single entity and it should be
understandable if it is the local branch of the corporation, using its own local funds,
which remits the tax to the Philippine Government. The remittance tax was
conceived in an attempt to equalize the income tax burden on foreign corporations
maintaining, on the one hand, local branch offices and organizing, on the other
hand, subsidiary domestic corporations where at least a majority of all the latters
shares of stock are owned by such foreign corporations. Prior to the amendatory
provisions of the Revenue Code, local branches were made to pay only the usual
corporate income tax of 25%-35% on net income applicable to resident foreign
corporation. While Philippine subsidiaries of foreign corporations subject to the
same rate of 25%-35% on their net income, dividend payments, however, were
additionally subjected to a 15% withholding tax. In order to avert what would
otherwise appear to be an unequal tax treatment on such subsidiaries vis--vis local
branch offices, a 20%, later reduced to 15%, profit remittance tax was imposed on
local branches on their remittances of profits abroad. But this is where the tax pari-
passu ends between domestic branches and subsidiaries of foreign corporations.
Compania General de Tabacos de Filipinas v. CIR, CTA Case No. 4451
The use of the word remitted may well be understood as referring to that part of the
said totalbranch profits which would be sent to the head office as distinguished from
the total profits of thebranch (not all of which need be sent or would be ordered
remitted abroad). If the legislatureindeed had wanted to mitigate the harshness of
successive taxation, it would have been simpler to just lower the rates without in
effect requiring the relatively novel and complicated way ofcomputing the tax, as
envisioned by Compania General de Tabacos. The same result would havebeen
achieved.
RMC 55-80
For the information and guidance of all concerned, Section 24(b) (2) (b) of the Tax
Code, as amended by P.D. No. 1705, is quoted as follows:
"(b)Tax on branch profits remittances. Any profit remitted abroad by a branch
office to its mother company shall besubject to a tax of fifteen (15%) per cent
(Except those registered with the Export Processing Zone Authority): Provided, that,
anyprofit remitted by a branch office to its mother company authorized to engage in
petroleum operations in the Philippines shall besubject to tax at seven and one-half
(7.5%) per cent; And provided, further that fixed or determinable annual periodical
gains, profits, and income or certain gains described in Section 24(b) (1) or 53(b)(2)
of this code shall not be considered as branch profits unless the same are effectively
connected with the conduct of a trade or business in the Philippines by foreign
corporation."
FEATURES OF THE AMENDMENT
Two (2) amendments to Sec. 24(b) (2) (b) of the 1977 Tax Code on branch profit
remittances have been effected by P.D. No.1705. They are:
1.Reduction of the tax rate on the profits remitted by a branch office to its mother
company authorized to engage in petroleum operations. The tax on profits
remitted by a branch office to its mother company authorized to engaged in
petroleum operations in the Philippines has been reduced to 7.5%.
2.Imposition of a branch profits tax on income effectively connected with business.
Fixed or determinable annual periodical gains, profits, and income on certain
gains described in Section 24 (b)(1) or 53(b) (2) of the 1977 Tax Code, (i.e. income
earned from Philippine sources by non-resident foreign corporations) are generally
not considered branch profits subject to the 15% remittance tax unless the same are
effectively connected with the conduct of a trade or business in the Philippines
bythe foreign corporation.
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.
On the other hand, if a resident foreign corporation with a branch office in the
Philippines engaged in the canning business allows its trade name or brand to be
used and royalties are received by its parent company, such royalties which
constitute passive income, are effectively connected with its trade or business and
should be subject to tax, if remitted abroad.
MCIT (Minimum Corporate Income Tax
Section 28. (A) (2) Tax on Resident Foreign Corporations.
Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum
corporate income tax of two percent (2%) of gross income, as prescribed under
Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident
foreign corporation taxable under paragraph (1) of this Subsection.
Tax on Certain Incomes of Resident Foreign Corporations
Sec. 28 (A) (7) Tax on Certain Incomes Received by a Resident Foreign Corporation.
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any
currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements and royalties derived from
sources within the Philippines shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided, however, That interest income
derived by a resident foreign corporation from a depository bank under the expanded
foreign currency deposit system shall be subject to a final income tax at the rate of
seven and one-half percent (7 1/2%) of such interest income.
(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income
derived by a depository bank under the expanded foreign currency deposit system
from foreign currency transactions with local commercial banks including branches of
foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with foreign currency deposit system units, including interest
income from foreign currency loans granted by such depository banks under said
expanded foreign currency deposit system to residents, shall be subject to a final
income tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions
with depository banks under the expanded system shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A
final tax at the rates prescribed below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other disposition
of shares of stock in a domestic corporation except shares sold or disposed of through
the stock exchange:
Not over P100,0005%
On any amount in excess of P100,000 10%
(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation
from a domestic corporation liable to tax under this Code shall not be subject to tax
under this Title.
INCOME TAX ON NON-RESIDENT FOREIGN CORPORATIONS
Sec. 28 (B) (1) - In General. - Except as otherwise provided in this Code, a foreign
corporation not engaged in trade or business in the Philippines shall pay a tax equal
to thirty-five percent (35%) of the gross income received during each taxable year
from all sources within the Philippines, such as interests, dividends, rents, royalties,
salaries, premiums (except reinsurance premiums), annuities, emoluments or other
fixed or determinable annual, periodic or casual gains, profits and income, and capital
gains, except capital gains subject to tax under subparagraphs (C) and (d): Provided,
That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
Case:
Marubeni Corp. v. CIR
Facts: Petitioner Marubeni s a foreign corporation duly organized under the existing
laws of Japan and duly licensed to engage in business under Philippine laws. Marubeni
of Japan has equity investments in Atlantic Gulf & Pacific Co. of Manila. AG&P declared
and directly remitted the cash dividends to Marubenis head office in Tokyo net of the
final dividend tax and withholding profit remittance tax.
Thereafter, Marubeni, through SGV, sought a ruling from the BIR on whether or not
the dividends it received from AG&P are effectively connected with its business in the
Philippines as to be considered branch profits subject to profit remittance tax.
The Acting Commissioner ruled that the dividends received by Marubeni are not
income from the business activity in which it is engaged. Thus, the dividend if remitted
abroad is not considered branch profits subject to profit remittance tax. Pursuant to
such ruling, petitioner filed a claim for refund for the profit tax remittance erroneously
paid on the dividends remitted by AG& P. Respondent Commissioner denied the
claim. It ruled that since Marubeni is a non-resident corporationnot engaged in trade
or business in the Philippines it shall be subject to tax on income earned from
Philippine sources at the rate of 35% of its gross income. On the other hand, Marubeni
contends that, following the principal-agent relationship theory, Marubeni Japan is a
resident foreign corporation subject only to final tax on dividends received from a
domestic corporation.
Issue: Whether or not Marubeni Japan is a resident foreign corporation?
Held: No. The general rule is a foreign corporation is the same juridical entity as its
branch office in the Philippines. The 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.
However, when the foreign corporation transacts business in the Philippines
independently of its branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the branch. Consequently,
the taxpayer is the foreign corporation, not the branch or the resident foreign
corporation. Thus, the alleged overpaid taxes were incurred for the remittance of
dividend income to the head office in Japan which is considered as a separate and
distinct income taxpayer from the branch in the Philippines.
N.V. Reederij Amsterdam and Royal Interocean Lines v. CIR
Facts: From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to
October 28, 1964, MY "Amstelkroon, " both of which are vessels of petitioner N.B.
Reederij "AMSTERDAM,"called on Philippine ports to load cargoes for foreign
destination.The freight fees for these transactions were paid abroad in the amount of
US $98,175.00 in 1963 and US $137,193.00 in 1964. In these two instances, petitioner
Royal Interocean Lines acted as husbanding agent for a fee or commission on said
vessels. No income tax appears to have been paid by petitioner N.V. Reederij
"AMSTERDAM" on the freight receipts. Respondent Commissioner of Internal
Revenue, through his examiners, filed the corresponding income tax returns for and
in behalf of the former under Section 15 of the National Internal Revenue Code.
On June 30, 1967, respondent Commissioner assessed said petitioner in the amounts
of PI93,973.20 and P262,904.94 as deficiency income tax for 1963 and 1964,
respectively, as "a nonresidentforeign corporation not engaged in trade or business
in the Philippines under Section 24 (b) (1) of the Tax Code
Petitioner Royal Interocean Lines filed an income tax return of the aforementioned
vessels computed at the exchange rate of P2.00 to USSl.00 1 and paid the tax thereon
in the amount of Pl,835.52 and P9,448.94, respectively, pursuant to Section 24(b) (2)
in relation to Section 37 (B) (e) of the National Internal Revenue Code and Section 163
of Revenue Regulations NO.2.Royal Interocean Lines as the husbanding agent of
petitioner N.V. Reederij "AMSTERDAM" filed a written protest against the above
mentioned assessment . The respondent Court of Tax Appeals praying for the
cancellation of the subject assessment. After due hearing, the respondent court, on
December 1, 1976,rendered a decision modifying said assessments by eliminating the
50% fraud compromise penalties imposed upon petitioners. Petitioners filed a motion
for reconsideration of said decision but this was denied by the respondent court.
Issue: Whether N.V. Reederij "Amsterdam" not having any office or place of business
in the philippines, whose vessels called on the Philippine ports for the purpose of
loading cargoes only twice-one in 1963 and another in 1964 - should be taxed as a
foreign corporation not engaged in trade or business in the Philippines under section
24(b) (1) of the tax code or should be taxed as a foreign corporation engaged in trade
or business in the Philippines under section 24(b) (2) in relation to section 37 (e) of
the same code.
Held: The petition is devoid of merit. Petitioner N.V. Reederij "AMSTERDAM" is a
foreign corporation not authorized or licensed to do business in the Philippines. It
does not have a branch office in the Philippines and it made only two calls in Philippine
ports, one in 1963 and the other in 1964. In order that a foreign corporation may be
considered engaged in trade or business, its business transactions must be
continuous. A casual business activity in the Philippines by a foreign corporation, as in
the present case, does not amount to engaging in trade or business in the Philippines
for income tax purposes. Foreign Corporation doing business in the Philippines is
taxable on income solely from sources within the Philippines, it is permitted to
deductions from gross income but only to the extent connected with income earned
in the Philippines. (Sees. 24(b) (2) and 37, Tax Code.) On the other hand, foreign
corporations not doing business in the Philippines are taxable on income from all
sources within the Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities Compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical or casual gains, profits and income and capital
gains" The tax is 30% (now 35%) of such gross income. (Sec. 24 (b) (1), Tax Code.) As
stated above Amsterdam is therefore taxable.
Special Non-Resident Foreign Corporations
(i) Non-Resident Cinematographic Film Owner, Lessor or Distributor
Sec. 28(B)(2) - A cinematographic film owner, lessor, or distributor shall pay a tax of
twenty-five percent (25%) of its gross income from all sources within the Philippines.
(ii) Non-Resident Owner or Lessor of Vessels Chartered by Philippine Nationals
Sec. 28(B)(3) - A non-resident owner or lessor of vessels shall be subject to a tax of
four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases
or charters to Filipino citizens or corporations, as approved by the Maritime Industry
Authority.
(iii) Non-Resident Owner or Lessor of Aircraft, Machinery and Other Equipment
Sec. 28(B)(4) - Rentals, charters and other fees derived by a nonresident lessor of
aircraft, machineries and other equipment shall be subject to a tax of seven and one-
half percent (7 1/2%) of gross rentals or fees.
Tax on Certain Incomes of Non-resident Foreign Corporations
Sec. 28(B)(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation.
(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent
(20%) is hereby imposed on the amount of interest on foreign loans contracted on or
after August 1, 1986;
(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent
(15%) is hereby imposed on the amount of cash and/or property dividends received
from a domestic corporation, which shall be collected and paid as provided in Section
57 (A) of this Code, subject to the condition that the country in which the nonresident
foreign corporation is domiciled, shall allow a credit against the tax due from the
nonresident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998,
eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which
represents the difference between the regular income tax of thirty-five percent (35%)
in 1997, thirty-four percent (34%) in 1998, and thirty-three percent (33%) in 1999, and
thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax
on dividends as provided in this subparagraph;
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A
final tax at the rates prescribed below is hereby imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other disposition
of shares of stock in a domestic corporation, except shares sold, or disposed of
through the stock exchange:
Not over P100,0005% ; On any amount in excess of P100,000.10%

Case:
BIR Ruling 8-00
SGS Philippines paid a dividend of 4M to its parent company in Switzerland. 33% was
withheld and paid to the BIR. SGS Phils is entitled to a refund since it should only have
paid 15%. This is so because the NIRC provides that the final withholding tax on
dividends paid to nonresident foreign corporations shall only be 15% provided the
20& portion to be exempted in the Philippines will likewise be exempted by the
country where the nonresident foreign corporation is domiciled.
Switzerland imposes no tax at all on dividends received by Swiss companies from
foreign companies the requirement is more than satisfied.
Dividends Paid to Swiss Shareholder. A ruling is requested to the effect that the
dividend paid by S Company, a domestic corporation, to its parent company, T
Corporation, which is based in Switzerland, is subject to tax at the rate of 15% instead
of 33% (which is reduced to 32% effective January 1, 2000). The BIR ruled that the
dividends are subject to a 15% final withholding tax. Under Section 28(B)(5)(b) of the
NIRC, dividends paid to a nonresident foreign corporation are subject to a 33% final
withholding tax (in 1999, but reduced to 32% effective January 1, 2000). However, the
rate may be reduced to 15% if the country in which the nonresident foreign
corporation is domiciled allows a deemed-paid tax credit to the nonresident foreign
corporation in an amount that is equivalent to at least the 18% (now 17%) difference
between the 33% (now 32%) and the 15% rates. In the case of Commissioner of
Internal Revenue vs. Wander Philippines, Inc., (G.R. No. L-68375 dated April 15, 1998),
the Supreme Court ruled that since the Swiss Government does not impose any tax
on dividends received by the Swiss parent corporation from its Philippine company,
the condition for the imposition of the lower 15% rate is satisfied. (BIR Ruling No. 008-
2000 dated January 5, 2000)
ITAD Ruling 102-02 (May 28, 2002)
Energizer Philippines, in paying royalties to Eveready USA should pay a 15% tax on the
grossa mount such royalties. The applicable tax rate in the RP-US Tax Treaty is 20%.
However, the same treaty contains a most-favored nation clause, wherein the
applicable rate will be the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances to a resident of a third
state. The third state in this case is the Netherlands. The RP-Netherlands Tax Treaty
provides that the tax on such royalties is 15% of the gross amount.
Based on an analysis of the RP-US and RP-Netherlands Tax Treaties, the tax imposed
on royalties derived by a resident of the United States from sources within the
Philippines shall be the lowest rate of Philippine tax that may be imposed on royalties
of the same kind paid under similar circumstanes to a resident of a third State.
In this connection, it must be noted that the royalties arising from the Philippines and
paid to a resident of the Netherlands may also be taxed in the Philippines but the tax
so charged shall not exceed 15 percent of the gross amount of royalties in areas other
than royalties paid by in enterprise registered in preferred areas of activities in the
Philippines.
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
Sec. 29 Imposition of Improperly Accumulated Earnings Tax. -
(A) In General. - In addition to other taxes imposed by this Title, there is hereby
imposed for each taxable year on the improperly accumulated taxable income of each
corporation described in Subsection B hereof, an improperly accumulated earnings
tax equal to ten percent (10%) of the improperly accumulated taxable income.
(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -
(1) In General. - The improperly accumulated earnings tax imposed in the preceding
Section shall apply to every corporation formed or availed for the purpose of avoiding
the income tax with respect to its shareholders or the shareholders of any other
corporation, by permitting earnings and profits to accumulate instead of being divided
or distributed.
(2) Exceptions. - The improperly accumulated earnings tax as provided for under this
Section shall not apply to:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.
(C) Evidence of Purpose to Avoid Income Tax. -
(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company
or investment company shall be prima facie evidence of a purpose to avoid the tax
upon its shareholders or members.
(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the
business shall be determinative of the purpose to avoid the tax upon its shareholders
or members unless the corporation, by the clear preponderance of evidence, shall
prove to the contrary.
(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term
'improperly accumulated taxable income' means taxable income' adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
Provided, however, that for corporations using the calendar year basis, the
accumulated earnings under tax shall not apply on improperly accumulated income
as of December 31, 1997. In the case of corporations adopting the fiscal year
accounting period, the improperly accumulated income not subject to this tax, shall
be reckoned, as of the end of the month comprising the twelve (12)-month period of
fiscal year 1997-1998.
(E) Reasonable Needs of the Business. - For purposes of this Section, the term
'reasonable needs of the business' includes the reasonably anticipated needs of the
business.
Cases:
The Manila Wine Merchants v. CIR
Facts: Manila Wine Merchants organized in 1937 was engaged in the importation and
sale of whiskey, wines, liquor and distilled spirits. Its original paid up capital was Php
500,000. At one point, they reduced to their capital to Php 250,000 with the approval
of the SEC but this reduction was never implemented.
When the business began to flourish, they increased their capital to 1 Million Pesos,
again with the approval of SEC in 1958. Wine Merchants invested in several companies
including Acme Commercial, Co., Union Insurance of Canton and bought shares in
Wack Wack Golf and Country Club. Wine Merchants also acquired USA Treasury Bills
valued at around 347,000 Pesos. The CIR examined the books of Manila Wine
Merchants and found that it had unreasonably accumulated a surplus of Php 428,000
from 1947-1957 in excess of the reasonable needs of business subject to the surtax of
2% imposed by Section 25 of the Tax Code then demanded payment of the IAET. Wine
Merchants appealed to the CTA. For the CTA, the purchase of shares in Wack Wack,
Union Insurance and Acme Commercial were harmless and not subject to 25% surtax.
However, the purchase of the Treasury Bills was in no way related to the business of
importing and selling wines and ordered Manila Wine Merchants to pay IAET on the
Treasury Bills. Manila Wine Merchants appealed to the CTA.
Issue: Whether or not Manila Wine Merchants unreasonably accumulated earnings in
excess of the reasonable needs of business, thus making it liable to surtax under the
Tax Code?
Held: Sec. 29 (A) - Imposition of Improperly Accumulated Earnings Tax (A) In General.
- In addition to other taxes imposed by this Title, there is hereby imposed for each
taxable year on the improperly accumulated taxable income of each corporation
described in Subsection B hereof, an improperly accumulated earnings tax equal to
ten percent (10%) of the improperly accumulated taxable income. Tax on improper
accumulation of surplus is essentially a penalty tax.The provision discouraged tax
avoidance through corporate surplus accumulation. When corporations do not
declare dividends, income taxes are not paid on the undeclared dividends received by
the shareholders. The tax on improper accumulation of surplus is essentially a penalty
tax designed to compel corporations to distribute earnings so that the said earnings
by shareholders could, in turn, be taxed.
Immediacy Test may be used to determine the reasonable needs of the business.
To determine the reasonable needs of the business in order to justify an
accumulation of earnings, the Courts of the United States had developed the
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. Touchstone of liability is the purpose behind the accumulation of the
income and not the consequences of the accumulation.
A prerequisite to the imposition of the tax has been that the corporation be formed
or availed of for the purpose of avoiding the income tax (or surtax) on its shareholders,
or on the shareholders of any other corporation by permitting the earnings and profits
of the corporation to accumulate instead of dividing them among or distributing them
to the shareholders. If the earnings and profits were distributed, the shareholders
would be required to pay an income tax thereon whereas, if the distribution were not
made to them, they would incur no tax in respect to the undistributed earnings and
profits of the corporation. The touchstone of liability is the purpose behind the
accumulation of the income and not the consequences of the accumulation. Thus, if
the failure to pay dividends is due to some other cause, such as the use of
undistributed earnings and profits for the reasonable needs of the business, such
purpose does not fall within the interdiction of the statute.
CIR v. Tuason
Facts: On February 27, 1981, the petitioner, Commissioner of Internal Revenue,
assessed Antonio Tuason, Inc.:
Deficiency income tax for the years 1975,1976 and 1978 (P37,491.83)
Deficiency corporate quarterly income tax for the first quarter of 1975 (P161.49)
25% surtax on unreasonable accumulation of surplus for the years 1975-1978
(P1,151,146.98)
Antonio Tuason, Inc. did not object to the first and second items and, therefore, paid
the amounts demanded. However, it protested the assessment on a 25% surtax on
the third item on the ground that the accumulation of surplus profits during the years
in question was solely for the purpose of expanding its business operations as real
estate broker. The request for reinvestigation was granted on condition that a waiver
of the statute of limitations should be filed by Antonio Tuason, Inc. The CIR replied
that there was no need of a waiver of the statute of limitations because the right of
the Government to assess said tax does not prescribe.
No investigation was conducted nor a decision rendered on Antonio Tuason Inc.'s
protest. Meantime, the Revenue Commissioner issued warrants of distraint and levy
to enforce collection of the total amount originally assessed including the amounts
already paid. Antonio Tuason, Inc. filed a petition for review in the Court of Tax
Appeals with a request that pending determination of the case on the merits, an order
be issued restraining the Commissioner and/or his representatives from enforcing the
warrants of distraint and levy. Since the right asserted by the Commissioner to collect
the taxes involved herein by the summary methods of distraint and levy was not clear,
and it was shown that portions of the tax liabilities involved in the assessment had
already been paid, a writ of injunction was issued by the Tax Court on November 26,
1984, ordering the Commissioner to refrain from enforcing said warrants of distraint
and levy. It did not require the petitioner to file a bond.
Issues:
1. Is Antonio Tuason, Inc. a holding company and/or investment company?
2. Did Antonio Tuason, Inc. accumulate surplus for the years 1975 to 1978?
3. Is Antonio Tuason, Inc. liable for the 25% surtax on undue accumulation of surplus
for the years 1975 to 1978?
Section 25 of the Tax Code at the time the surtax was assessed, provided:
SEC. 25. Additional tax on corporation improperly accumulating profits or surplus.
(a) Imposition of tax.-If any corporation, except banks, insurance companies, or personal
holding companies, whether domestic or foreign, is formed or availed of for the purpose
of preventing the imposition of the tax upon its shareholders or members or the
shareholders or members of another corporation, through the medium of permitting its
gains and profits to accumulate instead of being divided or distributed, there is levied and
assessed against such corporation, for each taxable year, a tax equal to twenty-five per
centum of the undistributed portion of its accumulated profits or surplus which shall be in
addition to the tax imposed by section twenty-four, and shall be computed, collected and
paid in the same manner and subject to the same provisions of law, including penalties,
as that tax.
(b) Prima facie evidence.-The fact that any corporation is a mare holding company shall
be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
Similar presumption will lie in the case of an investment company where at any time
during the taxable year more than fifty per centum in value of its outstanding stock is
owned, directly or indirectly, by one person.
(c) Evidence determinative of purpose.-The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon its shareholders or members
unless the corporation, by clear preponderance of evidence, shall prove the contrary.
Held: The Court of Tax Appeals conceded that the Revenue Commissioner's
determination that
Antonio Tuason, Inc. was a mere holding or investment company, was "presumptively
correct", for the corporation did not involve itself in the development of subdivisions
but merely subdivided its own lots and sold them for bigger profits. It derived its
income mostly from interest, dividends and rental realized from the sale of realty.
Another circumstance supporting that presumption is that 99.99% in value of the
outstanding stock of Antonio Tuason, Inc., is owned by Antonio Tuason himself. The
Commissioner "conclusively presumed" that when the corporation accumulated
(instead of distributing to the shareholders) a surplus of over P3 million from its
earnings in 1975 to 1978, the purpose was to avoid the imposition of the progressive
income tax on its shareholders. That Antonio Tuason, Inc. accumulated surplus profits
amounting to P3,263,305.88 for 1975 up to 1978 is not disputed. However, Antonio
Tuason Inc. vehemently denies that its purpose was to evade payment of the
progressive income tax on such dividends by its stockholders. According to Antonio
Tuason, Inc., surplus profits were set aside by the company to build up sufficient
capital for its expansion program which included the construction in 1979-1981 of an
apartment building, and the purchase in 1980 of a condominium unit which was
intended for resale or lease.
However, while these investments were actually made, the Commissioner points out
that the corporation did not use up its surplus profits. Its allegation that P1,525,672.74
was spent for the construction of an apartment building in 1979 and P1,752,332.87
for the purchase of a condominium unit in Urdaneta Village in 1980 was refuted by
the Declaration of Real Property on the apartment building which shows that its
market value is only P429,890.00, and the Tax Declaration on the condominium unit
which reflects a market value of P293,830.00 only. The enormous discrepancy
between the alleged investment cost and the declared market value of these pieces
of real estate was not denied nor explained by the private respondent.
Since the company as of the time of the assessment in 1981, had invested in its
business operations only P773,720 out of its accumulated surplus profits of
P3,263,305.88 for 1975-1978, its remaining accumulated surplus profits of
P2,489,585.88 are subject to the 25% surtax. "The touchstone of liability is the
purpose behind the accumulation of the income and not the consequences of the
accumulation. Thus, if the failure to pay dividends were for the purpose of using the
undistributed earnings and profits for the reasonable needs of the business, that
purpose would not fall within the interdiction of the statute (Mertens Law of Federal
Income Taxation, Vol. 7, Chapter 39, p. 45 cited in Manila Wine Merchants, Inc. vs.
Commissioner of Internal Revenue, 127 SCRA 483, 493).
It is plain to see that the company's failure to distribute dividends to its stockholders
in 1975-1978 was for reasons other than the reasonable needs of the business,
thereby falling within the interdiction of Section 25 of the Tax Code of 1977.
Cyanamid Philippines, Inc. v. CA
Facts: Cyanamid Philippines is a wholly owned subsidiary of American Cyanamid Co.,
based in Maine, USA. It is engaged in the manufacture of pharmaceutical products
and chemicals, a wholesaler of imported finished goods, and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to Cyanamid and demanded
the payment of deficiency income tax. Cyanamid protested the assessments
particularly the 25% Surtax Assessment. Cyanamid claimed that the surtax for the
undue accumulation of earnings was not proper because the said profits were
retained to increase Cyanamids working capital and it would be used for reasonable
business needs of the company. Cyanamid contended that it availed of the tax
amnesty under Executive Order no. 41, hence enjoyed amnesty from civil and criminal
prosecution granted by law.
Held: The provision imposing additional tax on corporation improperly accumulating
profits or surplus (Sec. 25 NIRC) discouraged tax avoidance through corporate surplus
accumulation. When corporations do not declare dividends, income taxes are not paid
on the undeclared dividends received by the shareholders. The tax on the improper
accumulation of surplus is essentially a penalty tax designed to compel corporations
to distribute earnings so that the said earnings by shareholders could, in turn, be
taxed.
If the CIR determined that the corporation avoided the tax on shareholders by
permitting earnings or profits to accumulate, and the taxpayer contested such a
determination, the burden of proving the determination wrong, together with the
corresponding burden of first going forward with evidence, is on the taxpayer. This
applies even if the corporation is not a mere holding or investment company and does
not have an unreasonable accumulation of earnings or profits.
Revenue Regulations 2-01
There is imposed a tax equal to 10% of the improperly accumulated taxable income
of corporations formed or availed of for the purpose of avoiding the income tax with
respect to its shareholders by permitting the earnings and profits of the corporation
to accumulate instead of dividing them among or distributing them to the
shareholders. The rationale is that if the earnings and profits were distributed, the
shareholders would then be liable to income tax thereon, whereas if the distribution
were not made to them, they would incur no tax in respect to the undistributed
earnings and profits of the corporation.
Thus, a tax is being imposed in the nature of a penalty to the corporation for the
improper accumulation of its earnings, and as a form of deterrent to the avoidance of
tax upon shareholders who are supposed to pay dividend tax on earnings distributed
to them by the corporation.
The touchstone of the liability is the purpose behind the accumulation of the income
and not the consequences of the accumulation. Thus, if the failure to pay dividends is
due to some other causes, such as the use of undistributed earnings and profits for
the reasonable needs of the business, such purpose would not generally make the
accumulated or undistributed earnings subject to the tax.
However, if there is a determination that a corporation has accumulated income
beyond the reasonable needs of the business, the 10% improperly accumulated
earnings tax shall be imposed.
BIR Ruling 25-02
This ruling amends RR 5-99 relative to the requirements for deductibility of bad debts
from the gross income of a corporation, including banks and insurance companies, or
an individual, estate, and trust that is engaged in trade or business or a professional
engaged in the practice of his profession.
The requisites for valid deduction of bad debts from gross income are:
There must be an existing indebtedness due to the taxpayer which must be
valid and legally demandable;
 The indebtedness must be connected with the taxpayers trade, business, or
practice of profession;
The indebtedness must not be sustained in a transaction entered into between
related parties enumerated under 36(B) of the National Internal Revenue
Code of 1997;
The indebtedness must be actually charged off the books of accounts of the
taxpayer as of the end of the taxable year; and
The indebtedness must be actually ascertained to be worthless and
uncollectible as of the end of the taxable year.
Before a taxpayer may charge off and deduct a debt, he must ascertain and be able
to demonstrate with reasonable degree of certainty the uncollectability of the debt.
The Commissioner of Internal Revenue will consider all pertinent evidence securing
the debt and financial condition of the debtor in determining whether a debt is
worthless, or the assigning of the case for collection to an independent collection
lawyer who is not under the employ of the taxpayer and who shall issue a statement
under oath who shall issue a statement under oath showing the propriety of the
deductions made for the alleged bad debts.
In no case may a receivable from an insurance or surety company be written off from
the taxpayers books and claimed as bad debts deduction unless such company has
been declared closed to insolvency or for any such similar reason by the Insurance
Commissioner.
TAX-EXEMPT CORPORATIONS
Section 30. Exemptions from Tax on Corporations.
The following organizations shall not be taxed under this Title in respect to income
received by them as such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual purposes
and without profit;
(C) A beneficiary society, order or association, operating fort he exclusive benefit of
the members such as a fraternal organization operating under the lodge system, or
mutual aid association or a nonstock corporation organized by employees providing
for the payment of life, sickness, accident, or other benefits exclusively to the
members of such society, order, or association, or nonstock corporation or their
dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its
members;
(E) Nonstock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation
of veterans, no part of its net income or asset shall belong to or inures to the benefit
of any member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit
and no part of the net income of which inures to the benefit of any private stock-
holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like organization
of a purely local character, the income of which consists solely of assessments, dues,
and fees collected from members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent
for the purpose of marketing the products of its members and turning back to them
the proceeds of sales, less the necessary selling expenses on the basis of the quantity
of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code.
Cases:
CIR v. G. Sinco Educational Corp
Facts: V.G. Sinco Educational Corporation is a non-profit institution and since its
organization it has never distributed any dividend or profit to its stockholders. Only
part of its income went to the payment of its teachers or professors and to the other
expenses of the colleges incident to an educational institution but none of the income
has never been channeled to the benefit of any individual stockholders.
Held: Whatever payment is made to those who work for a school or college as a
remuneration for their services is not considered as distribution of profit as would
make the school one conducted for profit. In the case of Mayor and Common Council
of Borough of Princeton vs. State Board of Taxes & Assessments, et al., 115 Atl., 342,
wherein the principal officer of the school was formerly its owner and principal and
as principal given a salary for his services, the court held that that school is not
conducted for profit merely because moderate salaries were paid to the principal and
to the teachers.
Executive Order 226
Art. 39. Incentives to Registered Enterprises. - All registered enterprises shall be
granted the following incentives to the extent engaged in a preferred area of
investment;
(a) Income Tax Holiday.
(1) For six (6) years from commercial operation for pioneer firms and four (4) years
for nonpioneer firms, new registered firms shall be fully exempt from income taxes
levied by the National Government. Subject to such guidelines as may be prescribed
by the Board, the income tax exemption will be extended for another year in each of
the following cases:
i. the project meets the prescribed ratio of capital equipment to number of workers
set by the Board;
ii. Utilization of indigenous raw materials at rates set by the Board;
iii. the net foreign exchange savings or earnings amount to at least US$500,000.00
annually during the first three (3) years of operation. The preceding paragraph
notwithstanding, no registered pioneer firm may avail of this incentive for a period
exceeding eight (8) years.
(2) For a period of three (3) years from commercial operation, registered expanding
firms shall be entitled to an exemption from income taxes levied by the National
Government proportionate to their expansion under such terms and conditions as the
Board may determine; Provided, however, That during the period within which this
incentive is availed of by the expanding firm it shall not be entitled to additional
deduction for incremental labor expense.
(3) The provision of Article 7 (14) notwithstanding, registered firms shall not be
entitled to any extension of this incentive.
(b) Additional Deduction for Labor Expense. - For the first five (5) years from
registration, a registered enterprise shall be allowed an additional deduction from the
taxable income of fifty percent (50%) of the wages corresponding to the increment in
the number of direct labor for skilled and unskilled workers if the project meets the
prescribed ratio of capital equipment to number of workers set by the Board:
Provided, That this additional deduction shall be doubled if the activity is located in
less developed areas as defined in Art. 40.
(c) Tax and Duty Exemption on Imported Capital Equipment. - Within five (5) years
from the effectivity of this Code, importations of machinery and equipment and
accompanying spare parts of new and expanding registered enterprise shall be
exempt to the extent of one hundred percent (100%) of the customs duties and
national internal revenue tax payable thereon: Provided, That the importation of
machinery and equipment and accompanying spare parts shall comply with the
following conditions:
(1) They are not manufactured domestically in sufficient quantity, of comparable
quality and at reasonable prices;
(2) They are reasonably needed and will be used exclusively by the registered
enterprise in the manufacture of its products, unless prior approval of the Board is
secured for the part-time utilization of said equipment in a non-registered activity to
maximize usage thereof or the proportionate taxes and duties are paid on the specific
equipment and machinery being permanently used for non-registered activities; and
(3) The approval of the Board was obtained by the registered enterprise for the
importation of such machinery, equipment and spare parts. In granting the approval
of the importations under this paragraph, the Board may require international
canvassing but if the total cost of the capital equipment or industrial plant exceeds
US$5,000,000, the Board shall apply or adopt the provisions of Presidential Decree
Numbered 1764 on International Competitive Bidding. If the registered enterprise
sells, transfers or disposes of these machinery, equipment and spare parts without
prior approval of the Board within five (5) years from date of acquisition, the
registered enterprise and the vendee, transferee, or assignee shall be solidarily liable
to pay twice the amount of the tax exemption given it.
The Board shall allow and approve the sale, transfer or disposition of the said items
within the said period of five (5) years if made:
(aa) to another registered enterprise or registered domestic producer enjoying similar
incentives;
(bb) for reasons of proven technical obsolescence; or
(cc) for purposes of replacement to improve and/or expand the operations of the
registered enterprise.
(d) Tax Credit on Domestic Capital Equipment. - A tax credit equivalent to one
hundred percent (100%) of the value of the national internal revenue taxes and
customs duties that would have been waived on the machinery, equipment and spare
parts, had these items been imported shall be given to the new and expanding
registered enterprise which purchases machinery, equipment and spare parts from a
domestic manufacturer: Provided, That (1) That the said equipment, machinery and
spare parts are reasonably needed and will be used exclusively by the registered
enterprise in the manufacture of its products, unless prior approval of the Board is
secured for the part-time utilization of said equipment in a non-registered activity to
maximize usage thereof; (2) that the equipment would have qualified for tax and duty-
free importation under paragraph (c) hereof; (3) that the approval of the Board was
obtained by the registered enterprise; and (4) that the purchase is made within five
(5) years from the date of effectivity of the Code. If the registered enterprise sells,
transfers or disposes of these machinery, equipment and spare parts, the provisions
in the preceding paragraph for such disposition shall apply.
(e) Exemption from Contractor's Tax. - The registered enterprise shall be exempt from
the payment of contractor's tax, whether national or local.
(f) Simplification of Customs Procedure. - Customs procedures for the importation of
equipment, spare parts, raw materials and supplies, and exports of processed
products by registered enterprises shall be simplified by the Bureau of Customs.
Republic Act 7916
SEC. 23. Fiscal Incentives. Business establishments operating within the ECOZONES
shall be entitled to the fiscal incentives as provided for under Presidential Decree No.
66, the law creating the Export Processing Zone Authority, or those provided under
Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment
Code of 1987. Furthermore, tax credits for exporters using local materials as Inputs
shall enjoy the same benefits provided for in the Export Development Act of 1994.
SEC. 24. Exemption from National and Local Taxes.- Except for real property taxes on
land owned by developers, no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of
the gross income earned by all business enterprises within the ECOZONE shall be paid
and remitted as follows: a. Three percent (3%) to the National Government; b. Two
percent (2%) which shall be directly remitted by the business establishments to the
treasurers office of the municipality or city where the enterprise is located.
SEC. 25. Applicable National and Local Taxes. All persons and services
establishments in the ECOZONE shall be subject to national and local taxes under the
National Internal Revenue Code and the Local Government Code.
SEC. 26. Domestic Sales. Goods manufactured by an ECOZONE enterprise shall be
made available for Immediate retail sales in the domestic market, subject to payment
of corresponding taxes on the raw materials and other regulations that may be
adopted by the Board of the PEZA. However, in order to protect the domestic industry,
there shall be a negative list of Industries that will be drawn up by the PEZA.
Enterprises engaged in the industries included in the negative list shall not be allowed
to sell their products locally. Said negative list shall be regularly updated by the PEZA.
The PEZA, in coordination with the Department of Trade and Industry and the Bureau
of Customs, shall jointly issue the necessary implementing rules and guidelines for the
effective Implementation of this section.
CASE
CIR v. CA, CTA and Young Mens Christian Association
Facts: Young Mens Christian Association of the Philippines, Inc. (YMCA), a non-stock,
non-profit institution, which conducts various programs and activities that are
beneficial to the public pursuant to its religious, educational, and charitable
objectives, is contesting the tax assessment made upon it by the Commissioner of
Internal Revenue, citing Article VI, Section 28, paragraph 3 of the 1987 Constitution.
Issues: W/N YMCA is exempt from the payment of taxes.
Ruling: NO. What is exempted by Article VI, Section 28, paragraph 3 of the 1987
Constitution is not the institution itself; the exemption pertains only to property taxes.
Moreover, Section 27 of the National Internal Revenue Code expressly disallows the
exemption claimed by YMCA, as it mandates that the income of exempt organizations
from any of their properties, real or personal, be subject to the tax imposed by the
same Code. Thus, YMCA is exempt from the payment of property tax, but not income
tax on the rentals from its property. The bare allegation alone that it is a non-stock,
non-profit educational institution is insufficient to justify its exemption from the
payment of income tax.
FRINGE BENEFITS TAX (FBT)
Section 33. Special Treatment of Fringe Benefit.-
(A) Imposition of Tax. - A final tax of thirty-four percent (34%) effective January 1,
1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent
(32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up
monetary value of fringe benefit furnished or granted to the employee (except rank
and file employees as defined herein) by the employer, whether an individual or a
corporation (unless the fringe benefit is required by the nature of, or necessary to the
trade, business or profession of the employer, or when the fringe benefit is for the
convenience or advantage of the employer). The tax herein imposed is payable by the
employer which tax shall be paid in the same manner as provided for under Section
57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be
determined by dividing the actual monetary value of the fringe benefit by sixty-six
percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January
1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter:
Provided, however, That fringe benefit furnished to employees and taxable under
Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates
imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit
shall be determined by dividing the actual monetary value of the fringe benefit by the
difference between one hundred percent (100%) and the applicable rates of income
tax under Subsections (B), (C), (D), and (E) of Section 25.
(B) Fringe Benefit defined. - For purposes of this Section, the term 'fringe benefit'
means any good, service or other benefit furnished or granted in cash or in kind by an
employer to an individual employee (except rank and file employees as defined
herein) such as, but not limited to, the following:
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and others;
5. Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
6. Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows.
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under
this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the Commissioner.
Revenue Regulations 3-98
The BIR exempts de minimis benfits pursuant to RR 3-98 as amended. De minimis
benefits includes contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plan, or certain benefits given to
rank and file, whether granted under a collective bargaining agreement or not.
Revenue Regulations 10-00
The BIR sets a limit on the value of tax-exempt de minimis benefits. Under Rr 8-00, as
amended by RR 10-00, the BIR considers the following as de minimis benefits:
10 days monetized unused vacation leave credits.
Medical cash allowance to dependents of employees not exceeding P750 per
semester or P150 per month;
Rice subsidy of P1,000 or one sack of rice per month
Uniforms and clothing allowance not exceeding P3,000 per year
Medical benefits not exceeding P10,000
Laundry allowance of P300 per month
Employee achievement awards in the form of tangible personal property other
than cash or gift certificate, with an annual monetary value not exceeding P10,000
received by the employee under an established written plan
Flowers, fruits, books or similar items given to employees under special
circumstances.
Daily meal allowance for overtime work not exceeding 25% of the basic wage
CAPITAL GAINS AND LOSSES
Section 39. Capital Gains and Losses.
(A) Definitions. - As used in this Title
(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year, or property
held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business, or property used in the trade or business, of a character which is subject
to the allowance for depreciation provided in Subsection (F) of Section 34; or real
property used in trade or business of the taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from
sales or exchanges of capital assets over the losses from such sales or exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from
sales or exchanges of capital assets over the gains from such sales or exchanges.
(B) Percentage Taken into Account. - In the case of a taxpayer, other than a
corporation, only the following percentages of the gain or loss recognized upon the
sale or exchange of a capital asset shall be taken into account in computing net capital
gain, net capital loss, and net income:
(1)One hundred percent (100%) if the capital asset has been held for not more than
twelve (12) months; and
(2)Fifty percent (50%) if the capital asset has been held for more than twelve (12)
months;
(C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets
shall be allowed only to the extent of the gains from such sales or exchanges. If a bank
or trust company incorporated under the laws of the Philippines, a substantial part of
whose business is the receipt of deposits, sells any bond, debenture, note, or
certificate or other evidence of indebtedness issued by any corporation (including one
issued by a government or political subdivision thereof), with interest coupons or in
registered form, any loss resulting from such sale shall not be subject to the foregoing
limitation and shall not be included in determining the applicability of such limitation
to other losses.
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, sustains
in any taxable year a net capital loss, such loss (in an amount not in excess of the net
income for such year) shall be treated in the succeeding taxable year as a loss from
the sale or exchange of a capital asset held for not more than twelve (12) months.
(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the
holder upon the retirement of bonds, debentures, notes or certificates or other
evidences of indebtedness issued by any corporation (including those issued by a
government or political subdivision thereof) with interest coupons or in registered
form, shall be considered as amounts received in exchange therefor.
(F) Gains or losses from Short Sales, Etc. - For purposes of this Title -
(1) Gains or losses from short sales of property shall be considered as gains or losses
from sales or exchanges of capital assets; and
(2) Gains or losses attributable to the failure to exercise privileges or options to buy
or sell property shall be considered as capital gains or losses.
Revenue Regulation 2
SECTION 132. Definition of "capital assets." The law provides that the term
"capital assets" shall be held to mean property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the
taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or property held
by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business, or property, used in the trade or business, of a character which is subject to
the allowance for depreciation provided in subsection (f) of Section 30 of the Code.
The term "capital asset" includes all classes of property not specifically excluded by
Section 30(a).
The exclusion from the term "capital assets" of property used in the trade or business
of a taxpayer of a character which is subject to the allowance for depreciation
provided in Section 30(f) of the Code is limited to property used by the taxpayer in the
trade or business at the time of the sale or exchange. It has no application to gains or
losses arising from the sale of real property used in the trade or business to the extent
that such gain or loss is allocable to the land, as distinguished from depreciable
improvements upon the land. To such gain or loss allocable to the land, the limitations
of Section 34(b) and (c) apply (such limitation may be inapplicable to a dealer in real
estate, but, if so, it is because he holds the land primarily for sale to customers in the
ordinary course of his trade or business, not because land is subject to a depreciation
allowance). Gains or losses from the sale or exchange of property used in the trade or
business of the taxpayer of a character which is subject to the allowance for
depreciation provided in Section 30(f) of the Code, will not be subject to the
percentage provisions of Section 34(b) and losses from such transactions will not be
subject to the limitation of losses provided in Section 30(c). (Real property used in
taxpayer's trade or business is no longer capital asset per Am. R.A. 82.)
Cases:
Calasanz v. CIR
Facts: Petitioner inherited agricultural land. Wanting to liquidate the same, she
developed the area into a subdivision, divided the same into lots, made improvements
such as roads, gutters, drainage, and lighting, and subsequently sold individual lots to
the public for profit. CIR claims that petitioner is a real-estate dealer and thus required
to pay real estate tax as well as a deficiency income tax on profits derived from sale
of lots based on rates of ordinary income. Argument of petitioner: inherited land is
capital asset. Inheritance had to be improved in order to be liquidated in the only
possible and advantageous way. It would be difficult to sell the entire estate and thus
has to be subdivided. Counter argument of respondent: petitioner involved in a series
of real-estate transactions for profit thus can be considered doing business owing
to continuity and frequency of said transactions. Thus, converting the investment
property to a business property.
Issue: WON petitioner is a real-estate dealer; WON the gains realized from the sale of
the lots are taxable in full as ordinary income or capital gains taxable at capital gain
rates?
Held: Real-estate dealer. Tax as ordinary income. See Sec. 39(a)(1) of the NIRC.
Statutory definition is negative in nature. If the asset is not among the exceptions, it
is a capital asset. Conversely, assets falling within the exceptions are ordinary assets.
And necessarily, any gain resulting from the sale or exchange of an asset is a capital
gain or an ordinary gain depending on the kind of asset involved in the transaction.
Though the Tuasan case offered guidelines in determining whether property was sold
in the regular course of business or whether it was sold as a capital asset, there is no
rigid rule and each must, in the last analysis, rest upon its own peculiar facts and
circumstances. In this case: (1) Business element of development very apparent, land
originally devoted to rice/fruit trees. (2) Existence of contracts receivables
installment basis of payments suggesting the number, continuity and frequency of the
sales. (3) Another factor: lots were advertised for sale to the public, commission sales
paid out. Petitioners defense of sale for the purpose of liquidation rebutted. US
jurisprudence has rejected the liquidation test in determining whether or not a tax
payer is carrying on a trade or business. The liquidation sale may be conducted in the
most advantageous manner to the seller and he will not lose the benefits of the capital
gain provision of the statute unless he enters the real estate business and carries on
the sale in the manner in which such a business is ordinarily conducted. In that event,
the liquidation constitutes a business and a sale in the ordinary course of such a
business and the preferred tax status is lot. Property initially classified as a capital
asset may thereafter be treated as an ordinary asset if a combination of the factors
indubitably tend to show that the activity was in furtherance of or in the course of the
taxpayers trade or business. Thus, a sale of inherited real property usually gives
capital gain or loss even though the property has to be subdivided or improved or
both to make it saleable. However, if the inherited property is substantially improved
or very actively sold or both it may be treated as held primarily for sale to customers
in the ordinary course of the heirs business.
BIR Rul. 27-02
WITHHOLDING TAX on sale of real property - The nature of the real property being
sold should be determined first. If the real property is a land or building not actually
used in the business of the seller-corporation and is treated as a capital asset, then a
final tax of 6% shall be imposed on the gain presumed to have been realized on its
sale, exchange or disposition based on whichever is higher of the gross selling price or
fair market value (FMV) of such land or building. This rule applies whether or not the
seller-corporation is engaged in real estate business.
On the other hand, if the real property being sold is an ordinary asset, then the
withholding tax rates imposed under Section 2.57.2 of Revenue Regulations (RR) No.
2-98 shall apply. The rate of withholding tax will depend on, first, whether the seller
is exempt or taxable; second, whether the seller is habitually engaged in real estate
business or not; and third, the gross selling price, as defined in the said RR, if the seller
is habitually engaged in real estate business.
Based on the foregoing, and on the assumption and not exempt, the tax implication
of the following sales transactions are as follows:
1. Where the seller is a corporation duly registered with the HLURB as habitually
engaged in the real estate business, a creditable withholding tax based on the gross
selling price/total amount of consideration or FMV, whichever is higher, paid to the
seller/owner for the sale, transfer or exchange of real property, other than capital
asset, shall be deducted by the withholding agent/buyer, in accordance with the
following schedule:
a. Seller or transferor is exempt from creditable withholding tax in accordance with
Section 2.57.5 of RR No. 2-98
Exempt
b. Seller or transferor is habitually engaged in the real estate business and the selling
price is:
i. P500,000 or less 1.5%
ii. More than P500,000 but not more than P2,000,000 3%
iii. More than P2,000,000 5%
2. The above tax treatment shall likewise apply in cases where the seller-corporation
is habitually engaged in the real estate business, even if the buying corporation is not
engaged in the real estate business.
3. If the property is an ordinary asset and the seller is not habitually engaged in the
real estate business, the rate of creditable withholding tax is 6% of the gross selling
price as provided in Section 3(J) of RR No. 6-2001. On the other hand, if the property
is not actually used in the business of the seller-corporation, and is treated as a capital
asset, a final tax of 6% shall be imposed on the gain presumed to have been realized
on its sale, exchange or disposition of such land or building pursuant to Section
27(D)(5) of the Tax Code.
4. Where the seller-corporation habitually engaged in the real estate business sells
real property held as ordinary asset to an individual not engaged in trade or business,
the following rules shall apply:
a. that the seller in each case is taxable
If the sale is on installment plan (i.e., payments in the year of sale do not exceed 25%
of the selling price), no withholding tax is required to be made on the periodic
installment payments. In such a case, the applicable rate of tax based on the gross
selling price or FMV of the property, whichever is higher, shall be withheld on the last
installment or installments to be paid to the seller until the tax is fully paid.
b. If, on the other hand, the sale is on a cash basis or is a deferred payment sale
not on the installment plan (i.e. payments in the year of sale exceed 25% of the selling
price or FMV of the property, whichever is higher), the applicable withholding tax rate
shall be withheld on the first installment.
However, if the buyer is engaged in trade or business, whether a corporation or
otherwise, the following rules shall apply:
a. If the sale is on installment plan, the tax shall be deducted and withheld by the
buyer on every installment.
b. If, on the other hand, the sale is on a cash basis or is a deferred payment sale
not on the installment plan, the buyer shall withhold the tax based on the gross
selling price or FMV of the property, whichever is higher, on the first installment.
For purposes of applying the foregoing rules, gross selling price shall mean the
consideration stated in the sales document or the FMV determined in accordance
with Section 6 (E) of the Tax Code of 1997, whichever is higher.
Registration with HLURB or HUDCC shall be sufficient for a seller/transferor to be
considered as habitually engaged in real estate business. If the seller/transferor is not
registered with the HLURB or HUDCC, he/it may prove that he/it is engaged in the real
estate business by offering other satisfactory evidence (e.g. consummation during the
preceding year at least 6 taxable real estate transactions regardless of amount). (BIR
Ruling No. 027-2002 dated July 3, 2002)
Ordinary income
Sec. 22(Z) - The term 'ordinary income' includes any gain from the sale or exchange of
property which is not a capital asset or property described in Section 39(A)(1). Any
gain from the sale or exchange of property which is treated or considered, under other
provisions of this Title, as 'ordinary income' shall be treated as gain from the sale or
exchange of property which is not a capital asset as defined in Section 39(A)(1). The
term 'ordinary loss' includes any loss from the sale or exchange of property which is
not a capital asset. Any loss from the sale or exchange of property which is treated or
considered, under other provisions of this Title, as 'ordinary loss' shall be treated as
loss from the sale or exchange of property which is not a capital asset.
Case:
Tuason v. Lingad
Facts: In his 1957 tax return the petitioner as before treated his income from the sale
of the small lots (P119,072.18) as capital gains and included only thereof as taxable
income. In this return, the petitioner deducted the real estate dealer's tax he paid for
1957. It was explained, however, that the payment of the dealer's tax was on account
of rentals received from the mentioned 28 lots and other properties of the petitioner.
On the basis of the 1957 opinion of the Collector of Internal Revenue, the revenue
examiner approved the petitioner's treatment of his income from the sale of the lots
in question. In a memorandum dated July 16, 1962 to the Commissioner of Internal
Revenue, the chief of the BIR Assessment Department advanced the same opinion,
which was concurred in by the Commissioner of 20 Internal Revenue. On January 9,
1963, however, the Commissioner reversed himself and considered the petitioner's
profits from the sales of the mentioned lots as ordinary gains.
Issue: Whether the properties in question which the petitioner had inherited and
subsequently sold in small lots to other persons should be regarded as capital assets?
Held: NO. As thus defined by law, the term "capital assets" includes all the properties
of a taxpayer whether or not connected with his trade or business, except: (1) stock
in trade or other property included in the taxpayer's inventory; (2) property primarily
for sale to customers in the ordinary course of his trade or business; (3) property used
in the trade or business of the taxpayer and subject to depreciation allowance; and
(4) real property used in trade or business. If the taxpayer sells or exchanges any of
the properties above enumerated, any gain or loss relative thereto is an ordinary gain
or an ordinary loss; the gain or loss from the sale or exchange of all other properties
of the taxpayer is a capital gain or a capital loss. The sales concluded on installment
basis of the subdivided lots comprising Lot 29 do not deserve a different
characterization for tax purposes. The following circumstances in combination show
unequivocally that the petitioner was, at the time material to this case, engaged in
the real estate business: (1) the parcels of land involved have in totality a substantially
large area, nearly seven (7) hectares, big enough to be transformed into a subdivision,
and in the case at bar, the said properties are located in the heart of Metropolitan
Manila; (2) they were subdivided into small lots and then sold on installment basis
(this manner of selling residential lots is one of the basic earmarks of a real estate
business); (3) comparatively valuable improvements were introduced in the
subdivided lots for the unmistakable purpose of not simply liquidating the estate but
of making the lots more saleable to the general public; (4) the employment of J.
Antonio Araneta, the petitioner's attorney-in-fact, for the purpose of developing,
managing, administering and selling the lots in question indicates the existence of
owner-realty broker relationship; (5) the sales were made with frequency and
continuity, and from these the petitioner consequently received substantial income
periodically; (6) the annual sales volume of the petitioner from the said lots was
considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in
1957; and (7) the petitioner, by his own tax returns, was not a person who can be
indubitably adjudged as a stranger to the real estate business. Under the
circumstances, this Court finds no error in the holding below that the income of the
petitioner from the sales of the lots in question should be considered as ordinary
income.
CASE
China Banking Corporation vs. Court of Appeals
Facts: Chinabank (CBC) paid as gross receipts tax on its passive investment incomes
during the second quarter of 1994. In 1996, the CTA ruled in Asian Bank vs. CIR that
the 20% final withholding tax (FWT) on a banks passive interest income does not form
part of its taxable gross receipts. CBC filed with the CIR a claim for tax refund or credit
from the gross receipts tax (GRT) that CBC paid. Citing the Asian Bank case, CBC argued
that it was not liable for the sums withheld by the BSP as final withholding tax on CBCs
passive interest income. The CIR, on the other hand, argued that the FWT on a banks
interest income forms part of its gross receipts in computing the GRT. The
Commissioner contended that the term gross receipts means the entire income or
receipt, without any deduction. The CTA ruled in favour of CBC and held that the 20%
FWT on interest income does not form part of CBCs taxable gross receipts. The CA
affirmed.
Issue: Whether the 20% FWT on interest income should form part of the CBCs taxable
gross receipts?
Held: YES. The amount of interest income withheld in payment of the 20% final
withholding FWT receipts tax on banks. There are two related legal concepts that
come into play in the resolution of the first issue raised in the instant case. First is the
meaning of the term gross receipts. Second is the determination of the
circumstance when interest income becomes part of gross receipts for tax purposes.
As commonly understood, the term gross receipts means the entire receipts
without any deduction. Deducting any amount from the gross receipts changes the
result, and the meaning, to net receipts. Any deduction from gross receipts is
inconsistent with a law that mandates a tax on gross receipts, unless the law itself
makes an exception. Under RR Nos. 12-80 and 17-84, as well as in several numbered
rulings, the BIR has consistently ruled that the term gross receipts does not admit
of any deduction. This interpretation has remained unchanged throughout the various
re-enactments of the present Section 121 of the Tax Code. The only conclusion that
can be drawn is that the legislature has adopted the BIRs interpretation, following
the principle of legislative approval by re-enactment. 33
Under Section 27(D)(4) of the Tax Code, dividends received by a domestic corporation
from another corporation are not subject to the corporate income tax. Such
intracorporate dividends are some of the passive incomes that are subject to the 20%
final tax, just like interest on bank deposits. Intracorporate dividends, being already
subject to the final tax on income, no longer form part of the banks gross income
under Section 32 of the Tax Code for purposes of the corporate income tax. However,
Section 121 expressly states that dividends shall form part of the banks gross receipts
for purposes of the GRT on banks.
In addition, Section 8 of RR No. 12-80 expressly states that interest income, even if
subject to the FWT and excluded from gross income for income tax purposes, should
still form part of the banks taxable gross receipts. Thus, interest earned by banks,
even if subject to the final tax and excluded from taxable gross income, forms part of
its gross receipts for GRT purposes. The interest earned refers to the gross interest
without deduction since the regulations do not provide for any deduction. The gross
interest, without deduction, is the amount the borrower pays, and the income the
lender earns, for the use by the borrower of the lenders money. The amount of the
final tax plainly comes from the interest earned and is consequently part of the banks
taxable gross receipts. Hence, CBCs claim for refund must fail.
DETERMINATION OF GAIN OR LOSS FROM SALE OR
EXCHANGE OF PROPERTY
SEC. 40. Determination of Amount and Recognition of Gain or Loss. -
(A) Computation of Gain or Loss. - The gain from the sale or other disposition of
property shall be the excess of the amount realized therefrom over the basis or
adjusted basis for determining gain, and the loss shall be the excess of the basis or
adjusted basis for determining loss over the amount realized.
The amount realized from the sale or other disposition of property shall be the sum
of money received plus the fair market value of the property (other than money)
received;
(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The
basis of property shall be -
(1) The cost thereof in the case of property acquired on or after March 1, 1913, if such
property was acquired by purchase; or (2) The fair market price or value as of the date
of acquisition, if the same was acquired by inheritance; or (3) If the property was
acquired by gift, the basis shall be the same as if it would be in the hands of the donor
or the last preceding owner by whom it was not acquired by gift, except that if such
basis is greater than the fair market value of the property at the time of the gift then,
for the purpose of determining loss, the basis shall be such fair market value; or (4) If
the property was acquired for less than an adequate consideration in money or
money's worth, the basis of such property is the amount paid by the transferee for
the property; or (5) The basis as defined in paragraph (C)(5) of this Section, if the
property was acquired in a transaction where gain or loss is not recognized under
paragraph (C)(2) of this Section.
(C) Exchange of Property. - (1) General Rule. - Except as herein provided, upon the
sale or exchange or property, the entire amount of the gain or loss, as the case may
be, shall be recognized.
(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger
or consolidation - (a) A corporation, which is a party to a merger or consolidation,
exchanges property solely for stock in a corporation, which is a party to the merger or
consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party
to the merger or consolidation, solely for the stock of another corporation also a party
to the merger or consolidation; or (c) A security holder of a corporation, which is a
party to the merger or consolidation, exchanges his securities in such corporation,
solely for stock or securities in such corporation, a party to the merger or
consolidation.
No gain or loss shall also be recognized if property is transferred to a corporation by
a person in exchange for stock or unit of participation in such a corporation of which
as a result of such exchange said person, alone or together with others, not exceeding
four (4) persons, gains control of said corporation: Provided, That stocks issued for
services shall not be considered as issued in return for property.
(3) Exchange Not Solely in Kind. -
(a) If, in connection with an exchange described in the above exceptions, an individual,
a shareholder, a security holder or a corporation receives not only stock or securities
permitted to be received without the recognition of gain or loss, but also money
and/or property, the gain, if any, but not the loss, shall be recognized but in an amount
not in excess of the sum of the money and fair market value of such other property
received: Provided, That as to the shareholder, if the money and/or other property
received has the effect of a distribution of a taxable dividend, there shall be taxed as
dividend to the shareholder an amount of the gain recognized not in excess of his
proportionate share of the undistributed earnings and profits of the corporation; the
remainder, if any, of the gain recognized shall be treated as a capital gain.
(b) If, in connection with the exchange described in the above exceptions, the
transferor corporation receives not only stock permitted to be received without the
recognition of gain or loss but also money and/or other property, then (i) if the
corporation receiving such money and/or other property distributes it in pursuance
of the plan of merger or consolidation, no gain to the corporation shall be recognized
from the exchange, but (ii) if the corporation receiving such other property and/or
money does not distribute it in pursuance of the plan of merger or consolidation, the
gain, if any, but not the loss to the corporation shall be recognized but in an amount
not in excess of the sum of such money and the fair market value of such other
property so received, which is not distributed.
(4) Assumption of Liability. - (a) If the taxpayer, in connection with the exchanges
described in the foregoing exceptions, receives stock or securities which would be
permitted to be received without the recognition of the gain if it were the sole
consideration, and as part of the consideration, another party to the exchange
assumes a liability of the taxpayer, or acquires from the taxpayer property, subject to
a liability, then such assumption or acquisition shall not be treated as money and/or
other property, and shall not prevent the exchange from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the liabilities to which
the property is subject exceed the total of the adjusted basis of the property
transferred pursuant to such exchange, then such excess shall be considered as a gain
from the sale or exchange of a capital asset or of property which is not a capital asset,
as the case may be.
(5) Basis - (a) The basis of the stock or securities received by the transferor upon the
exchange specified in the above exception shall be the same as the basis of the
property, stock or securities exchanged, decreased by (1) the money received, and (2)
the fair market value of the other property received, and increased by (a) the amount
treated as dividend of the shareholder and (b) the amount of any gain that was
recognized on the exchange: Provided, That the property received as "boot" shall have
as basis its fair market value: Provided, further, That if as part of the consideration to
the transferor, the transferee of property assumes a liability of the transferor or
acquires form the latter property subject to a liability, such assumption or acquisition
(in the amount of the liability) shall, for purposes of this paragraph, be treated as
money received by the transferor on the exchange: Provided, finally, That if the
transferor receives several kinds of stock or securities, the Commissioner is hereby
authorized to allocate the basis among the several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the transferee shall be the
same as it would be in the hands of the transferor increased by the amount of the
gain recognized to the transferor on the transfer.
(6) Definitions. -
(a) The term "securities" means bonds and debentures but not "notes" of whatever
class or duration.
(b) The term "merger" or "consolidation", when used in this Section, shall be
understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition
by one corporation of all or substantially all the properties of another corporation
solely for stock: Provided, That for a transaction to be regarded as a merger or
consolidation within the purview of this Section, it must be undertaken for a bona fide
business purpose and not solely for the purpose of escaping the burden of taxation:
Provided, further, That in determining whether a bona fide business purpose exists,
each and every step of the transaction shall be considered and the whole transaction
or series of transaction shall be treated as a single unit: Provided, finally , That in
determining whether the property transferred constitutes a substantial portion of the
property of the transferor, the term 'property' shall be taken to include the cash assets
of the transferor.
(c) The term "control", when used in this Section, shall mean ownership of stocks in a
corporation possessing at least fifty-one percent (51%) of the total voting power of all
classes of stocks entitled to vote.
(d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby
authorized to issue rules and regulations for the purpose "substantially all" and for
the proper implementation of this Section.
Sec. 136-143, Rev. Regs. 2
SECTION 136. Basis for determining gain or loss from sale of property. For the
purpose of ascertaining the gain or loss from the sale or exchange of property, the
basis is the cost of such property, or in the case of property which should be included
in the inventory, its latest inventory value. But in the case of property acquired before
March 1, 1913, when its fair market value as of that date is in excess of its cost, the
gain to be included in gross income is the excess of the amount realized therefor over
such fair market value. (See illustration I, Section 137 of these regulations). Also in the
case of property acquired before March 1, 1913, when its fair market value as of that
date is lower than its cost the deductible loss is the excess of such fair market value
over the amount realized therefor. (See Illustration II, Id.). No gain or loss is recognized
in the case of property sold or exchanged (a) at more than cost but less than its fair
market value as of March 1, 1913 (See Illustration III, Id.), or (b) at less than cost but
at more than its fair market value as of March 1, 1913. (See Illustration IV, Id., Id., Id.)
In any case proper adjustment must be made in computing gain or loss from the
exchange or sale of property for any depreciation or depletion sustained and
allowable as deduction in computing net income; the amount of depreciation
previously charged off by the taxpayer shall be deemed to be true depreciation
sustained unless shown by clear and convincing evidence to be incorrect. What the
fair market value of property was as of March 1, 1913, is a question of fact to be
established by evidence which will reasonably and adequately make it appear. The
nature and extent of the sales and the circumstances under which they were made
should be considered. Prices received at forced sales or for small lots of property may
be and often are no real indication of the value of the amount of property in question.
For instance, sales from time to time of a small number of shares of stock is little
indication of the value of a large or controlling interest in the corporation. If the
taxpayer cannot determine the cost of securities purchased prior to March 1, 1913,
because of the loss, destruction, or failure to keep records, the value of the securities
at the date of approximate date of acquisition may be used in determining the cost
basis for purposes of computing the gain or loss from the sale of the securities. When
the date or approximate date of acquisition is unknown, no general rule can be stated
for determining the cost value of such securities. Each case must be considered
separately upon its own facts.
SECTION 137. Illustrations of the computation of gain or loss from the sale or
exchange of property acquired prior to March 1, 1913. To avoid complexity no
adjustment has been made in these examples for depreciation or depletion.
In the case of property acquired before March 1, 1913, when its fair market value as
of that date is in excess of its cost, the taxable gain is the excess of the amount realized
therefor over such fair market value.
SECTION 138. Sale of property acquired by gift. In computing the gain or loss from
the sale or other disposition of property acquired by gift, the basis shall be the selling
price and the fair market value of the property at the time the gift was made, or its
fair market value as of March 1, 1913, if acquired prior thereto, determined in
accordance with the next two preceding sections. In the case of gifts made on or after
July 1, 1939, the value taken as a basis for gift tax purposes shall be considered as the
fair market value in computing gain or loss from the sale or other disposition of the
property.
SECTION 139. Sale of property acquired by devise, bequests, or inheritance. In
computing the gain or loss from the sale or other disposition of property acquired by
devise, bequest, or inheritance, the basis shall be the fair market price or value of such
property at the time of the death of the decedent. The term "property acquired by
bequest, devise, or inheritance" as used herein includes (a) such property interests as
the taxpayer has received as the result of a transfer, or creation of a trust, in
contemplation of or intended to take effect in possession or enjoyment at or after
death, and (b) such property interest as the taxpayer has received as the result of the
exercise by a person of a general power of appointment (1) by will, or (2) by deed
executed in contemplation of or intended to take effect in possession or enjoyment
at or after death. In the case of property acquired by gift, bequest, devise, or
inheritance, prior to March 1, 1913, the taxable gain or deductible loss from the sale
or other disposition thereof shall be computed in accordance with sections 136 and
137 of these regulations. In the case of property acquired by bequest, devise or
inheritance, its value as appraised for the purpose of the inheritance tax shall be
deemed to be its fair market value when acquired.
SECTION 140. Exchange of property. Gain or loss arising from the acquisition and
subsequent disposition of property is realized only when as the result of a transaction
between the owner and another person the property is converted into other property
(a) that is essentially different from the property disposed of, and (b) that has a market
value. The requirement that the property received in exchange must be "essentially
different from the property disposed of" implies that there must be a change in
substance and not merely a change in form. By way of illustration, if a taxpayer owning
ten shares of stock exchanges his stock certificate for a voting trust certificate, no
income is realized. The term "market value" means the fair value of the property in
money as between one who wishes to purchase and one who wishes to sell. It is not,
however, what can be obtained for the property when the owner is under peculiar
compulsion to sell or the purchaser to buy; nor is it a purely speculative value which
an owner could not reasonably expect to obtain for the property although he might
possibly be fortunate enough to do so. "Market value" is the price at which a seller
willing to sell at a fair price and a buyer willing to buy at a fair price, both having
reasonable knowledge of the facts, will trade. Evidence as to the assets and liabilities
of a corporation and as to its earnings may furnish definite indications of the market
value of its stock.
SECTION 141. Determination of gain or loss from the exchange of property. The
amount of income derived or loss sustained from an exchange of property is the
difference between the market value at the time of the exchange of the property
received in exchange and the original cost, or other basis, of the property exchange.
If the property exchanged was acquired prior to March 1, 1913, see Sections 136 and
137 of these regulations.
SECTION 142. Readjustment of interest in a registered co-partnership. When a
partner retires from a duly registered co-partnership, or the partnership is dissolved,
he realizes a gain or loss measured by the difference between the price received for
his interest and the cost to him of his interest in the partnership including in such cost
the amount of his share in any undistributed partnership net income earned since he
became a partner on which the income tax has been paid. However, if such interest
in the partnership was acquired prior to March 1, 1913, both the cost as hereinbefore
provided and the amount of such interest as of date, plus the amount of the shares in
any undistributed partnership net income earned since March 1, 1913, on which the
income tax has been paid, shall be ascertained and the taxable gain derived or the
deductible loss sustained shall be computed as provided in Sections 136 and 137 of
these regulations. If the partnership distributes its assets in kind and not in cash, the
partner realizes gain or suffers loss according to the market value of the property
received in liquidation. Whenever a new partner is admitted, to a partnership, or any
existing partnership is reorganized, the facts as to such change or reorganization
should be fully set forth in the next return of income, in order that the Commissioner
of Internal Revenue may determine whether any gain or loss has been realized by any
partner.
SECTION 143. Basis of stock or securities acquired in "wash sales". In the sale or
other disposition of stocks or securities the acquisition of which (or the contract or
option to acquire which) resulted in the non-deductibility of the loss from the sale or
other disposition of substantially identical stock or securities the basis shall be the
basis of the substantially identical stock so sold or disposed of, increased or
decreased, as the case may be, by the difference, if any, between the price at which
the stock or securities was acquired and the price at which such substantially identical
stock or securities were sold or otherwise disposed of.
Computation of Gain or Loss
Sec. 40 (A) - The gain from the sale or other disposition of property shall be the excess
of the amount realized therefrom over the basis or adjusted basis for determining
gain, and the loss shall be the excess of the basis or adjusted basis for determining
loss over the amount realized.
CASE
Crane v. CIR
Facts: Petitioner was the sole beneficiary of her husbands will. He owned an
apartment building and lot subject to a mortgage. It was valued at $255,000.
Petitioner entered into an agreement with the mortgagee where she continued to
operate the property and remit the net rentals to the mortgagee. This continued for
seven years, and Petitioner reported the gross rentals as income and claimed
deductions for operating expenses paid on the property, for interest paid, and for the
physical exhaustion of the building. With the mortgagee threatening foreclosure,
Petitioner sold to a third party for $3000 cash, subject to the mortgage and paid $500
in sale expenses. She reported a taxable gain of $1,250. Petitioner believed the
property acquired was equity. The equity had a zero value basis and no depreciation
could be taken on it. The Commissioner of Internal Revenue determined that
Petitioner realized a net taxable gain of $23,767.03. His theory was that the property
was not equity but was the physical property. The Tax Court held for Petitioner but
the Court of Appeals reversed.
Issue. Should the property be considered equity with a zero basis or was the value of
the property the actual value undiminished by the mortgage?
Held. Chief Justice Vinson issued the opinion for the Supreme Court of the United
States in affirming the lower court and holding that the proper basis is the value of
the property undiminished by the mortgage.
Amount Realized
Sec. 40(A) - The amount realized from the sale or other disposition of property shall
be the sum of money received plus the fair market value of the property (other than
money) received;
Cost or Basis for Determining Gain or Loss
Sec. 40(B) The basis of property shall be -
(1) The cost thereof in the case of property acquired on or after March 1, 1913, if such
property was acquired by purchase; or
(2) The fair market price or value as of the date of acquisition, if the same was acquired
by inheritance; or
(3) If the property was acquired by gift, the basis shall be the same as if it would be in
the hands of the donor or the last preceding owner by whom it was not acquired by
gift, except that if such basis is greater than the fair market value of the property at
the time of the gift then, for the purpose of determining loss, the basis shall be such
fair market value; or
(4) If the property was acquired for less than an adequate consideration in money or
money's worth, the basis of such property is the amount paid by the transferee for
the property; or
(5) The basis as defined in paragraph (C)(5) of this Section, if the property was
acquired in a transaction where gain or loss is not recognized under paragraph (C)(2)
of this Section.
Exchange of Property
Sec. 40 (C) -
(1) General Rule. - Except as herein provided, upon the sale or exchange or property,
the entire amount of the gain or loss, as the case may be, shall be recognized.
(2) Exception. Non-Recognition Transactions (Tax-Free Exchange) - No gain or loss
shall be recognized if in pursuance of a plan of merger or consolidation -
a. A corporation, which is a party to a merger or consolidation, exchanges property
solely for stock in a corporation, which is a party to the merger or consolidation;
or
b. A shareholder exchanges stock in a corporation, which is a party to the merger or
consolidation, solely for the stock of another corporation also a party to the
merger or consolidation; or
c. A security holder of a corporation, which is a party to the merger or consolidation,
exchanges his securities in such corporation, solely for stock or securities in such
corporation, a party to the merger or consolidation.
1. Transfer of Property to a Controlled Corporation
Sec. 40(C)(6)(c) - The term 'control', when used in this Section, shall mean ownership
of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting
power of all classes of stocks entitled to vote.
Sec. 40(C)(2), last par., NIRC - No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange for stock or unit of participation
in such a corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four (4) persons, gains control of said
corporation: Provided, That stocks issued for services shall not be considered as issued
in return for property.
Cases:
Delpher Trades Corp. v. IAC
Facts: Pacheco siblings co-owned a piece of land in Bulacan. In 1974, they leased it
Construction Components International, Inc., granting the latter the right of first
refusal should the Pachecos choose to sell. CCII then assigned its rights to Hydro Pipes
Phils., Inc. with the consent of the Pachecos.
In 1976, the Pachecos and petitioner Delpher Trades executed a deed of exchange
whereby the former exchanged the land for 2,500 no-par value shares of stock in the
latter corporation. It appears that Delpher Trade is a family corporation organized by
the children of the Pacheco siblings. By virtue of the exchange, the siblings gained 55%
control of the corporation.
Hydro objected to the exchange, claiming it to be actually a sale. Therefore, it
shouldve been given the first option to buy. The trial court ruled in favor of Hydro
and ordered the Delpher to convey the property to Hydro. On appeal, IAC affirmed
the decision. Hence, this petition.
Issue: Whether or not there was a sale between the Pachecos and Delpher.
Held: NO. The exchange was valid; it was not a sale.
The fact that they tool no-par value shares is significant because they are owners of
an aliquot part of the assets, including the land. In effect, Delpher is a business conduit
of the Pachecos. All the deed of exchange did was change the nature of ownership
from unincorporated to incorporated form.
One of the reasons for this is to save on income tax. Sec, 35 of the NIRC exempts from
taxes an exchange of a persons property for stock in a corporation as a result of such
exchange said person (or persons not exceeding 4) gains control of the corporation.
Another benefit would be that the corporation could hold on to the property instead
of it being tied down in succession proceedings and the consequential payment of
estate and inheritance taxes. There is nothing objectionable with the estate
planning that the Pachecos resorted to.
BIR Rul. No. 274-87
The CIR ruled that no gain or loss would be recognized if property is transferred to a
corporation by a person in exchange for stock in such a corporation of which as a
result of such exchange, said person alone or together with others, not exceeding four
persons, gains control of said corporation. The term "control" shall mean ownership
of stocks in a corporation possessing at least 51% of the total voting power of all
classes of stocks entitled to vote. In determining the 51% stock ownership, only those
persons who transferred property for stock in the same transaction may be counted
up to a maximum of five.
1. Dee Shook is to sell to Milo E. Wilson 182 shares of stock in S & W for the agreed
price of $500 per share.
2. Wilson is to pay Shook for said stock, interest only until 1969 at which time principal
payments of $15,000 per year are to commence.
3. As each principal payment is made the proportionate number of shares of stock are
to be transferred on the corporate records and delivered to Wilson.
Shook also executed an irrevocable proxy allowing Wilson voting rights in all the stock.
On July 1, 1967 Intermountain Lumber Co. bought all outstanding shares of S & W
stock. An agreement was made to pay Shook $91,000 more than Wilson.
Shook alleged that his transferred assets into S & W were non-taxable under Section
351. Intermountain said that the transfers were taxable because of the lack of
pertinent control Intermountain wished to use the higher FMV basis for
depreciation purposes.
Issue: Court determination of control as is requisite in applying Section 351.
Held: Shook and Wilson intended to consummate the sale of the said stock.Shook
relinquished the legal right to retain stock. Therefore he did not have the requisite
control of company to take advantage of Section 351. Section 351 No Gain or Loss
to be recognized if property is transferred for stock and that person is then in control.
Simply a transfer of form. Shooks transaction was a Sale and not simply a transfer
of form.

CASE
Intermountain Lumber v. CIR
Facts: Shook and Wilson partnered to build a saw mill. Wilson co-guaranteed a
$200,000 loan to provide financing. Shook and Wilson created S & W Sawmill, Inc. and
created a contract with the following stipulations regarding ownership of stock:
2. Statutory Merger or Consolidation
Sec. 40 (C) (6) (a) - The term 'securities' means bonds and debentures but not 'notes"
of whatever class or duration.
Sec. 40 (C) (6) (b) - The term 'merger' or 'consolidation', when used in this Section,
shall be understood to mean: (i) the ordinary merger or consolidation, or (ii) the
acquisition by one corporation of all or substantially all the properties of another
corporation solely for stock: Provided, That for a transaction to be regarded as a
merger or consolidation within the purview of this Section, it must be undertaken for
a bona fide business purpose and not solely for the purpose of escaping the burden
of taxation: Provided, further, That in determining whether a bona fide business
purpose exists, each and every step of the transaction shall be considered and the
whole transaction or series of transaction shall be treated as a single unit: Provided,
finally , That in determining whether the property transferred constitutes a
substantial portion of the property of the transferor, the term 'property' shall be taken
to include the cash assets of the transferor.
Sec. 40(C) (2) (a) A corporation, which is a party to a merger or consolidation,
exchanges property solely for stock in a corporation, which is a party to the merger or
consolidation; or
Sec. 40(C) (2) (b) A shareholder exchanges stock in a corporation, which is a party to
the merger or consolidation, solely for the stock of another corporation also a party
to the merger or consolidation; or
Sec. 40(C) (2) (c) A security holder of a corporation, which is a party to the merger or
consolidation, exchanges his securities in such corporation, solely for stock or
securities in such corporation, a party to the merger or consolidation.
CASE
CIR v. Rufino
Facts: Corporation engaged in the theatre/amusement business. Old corporations
charter was about to end. New corporation formed to absorb assets of the first and
continue operations. Because of a prohibition in the old Corporation Law, it was
necessary for the Old and New corporation to enter into a merger that involved a
Deed of Assignment that mandated transfer of assets of the old corporation to the
new corporation in exchange for New corporation stocks to be issued to the
shareholders of the Old corporation. Actual transfer of property was not made on the
date of the merger. BIR questions the series of transactions leading to the merger
claiming that it was not undertaken for bona fide business purposes but merely to
avoid liability for the capital gains tax on the exchange of the old for the new shares
of stock.
Issue: Was there a valid merger which would allow the exchange to be exempt from
capital gains tax?
Held: Yes. The Court finds no impediment to the later exchange of property for stock
between the two corporations retroacting to the day of the merger. It was necessary
for the old corporation to surrender its assets first to the new corporation before the
latter could issue its own stock to the shareholders of the old corporation. The said
issuance required a resolution from a special stockholders meeting in order to make
the Deed of Assignment valid. The basic consideration is the purpose of the merger
since this would determine whether the exchange of properties involved would be
subject or not to capital gains tax. The criterion laid down by law is that the merger
must be undertaken for a bona fide business purpose and not solely for the purpose
of escaping the burden of taxation. If the operation of the merger is one having no
business or corporate purpose 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 to transfer
a parcel of corporate shares to the petitioner, a corporation is created but is nothing
more than a contrivance. It was brought into existence for no other purpose; it
performed, as it was intended from the beginning it should perform, no other
function. When 22 that limited function had been exercised, it immediately was put
to death. this would be a devious form of conveyance masquerading as a corporate
reorganization and nothing else. No such intention is apparent in the instant case. It
is clear that the purpose of the merger was to continue the business of the old
corporation, whose corporate life was about to expire, through the new corporation
to which all the assets and obligation of the former had been transferred. Strong
factor in favor of this: no dissolution of new corporation right after the merger. On
the contrary, the New Corporation continued to operate the places of amusement
originally owned by the old corporation.
3. Transfer of Substantially All the Assets (De Facto Merger)
Sec. 40(C)(6)(a), (b) ---- Refer to above provisions
Sec. 40(C)(2)(a), (b), (c) ---- Refer to above provisions
4. Exchange Not Solely in Kind (Boot)
Sec. 40(C)(3) -
(a) If, in connection with an exchange described in the above exceptions, an individual,
a shareholder, a security holder or a corporation receives not only stock or securities
permitted to be received without the recognition of gain or loss, but also money
and/or property, the gain, if any, but not the loss, shall be recognized but in an amount
not in excess of the sum of the money and fair market value of such other property
received: Provided, That as to the shareholder, if the money and/or other property
received has the effect of a distribution of a taxable dividend, there shall be taxed as
dividend to the shareholder an amount of the gain recognized not in excess of his
proportionate share of the undistributed earnings and profits of the corporation; the
remainder, if any, of the gain recognized shall be treated as a capital gain.
(b) If, in connection with the exchange described in the above exceptions, the
transferor corporation receives not only stock permitted to be received without the
recognition of gain or loss but also money and/or other property, then (i) if the
corporation receiving such money and/or other property distributes it in pursuance
of the plan of merger or consolidation, no gain to the corporation shall be recognized
from the exchange, but (ii) if the corporation receiving such other property and/or
money does not distribute it in pursuance of the plan of merger or consolidation, the
gain, if any, but not the loss to the corporation shall be recognized but in an amount
not in excess of the sum of such money and the fair market value of such other
property so received, which is not distributed.
5. Assumption of Liability in Tax-Free Exchanges
Sec. 40(C)(4) -
(a) If the taxpayer, in connection with the exchanges described in the foregoing
exceptions, receives stock or securities which would be permitted to be received
without the recognition of the gain if it were the sole consideration, and as part of the
consideration, another party to the exchange assumes a liability of the taxpayer, or
acquires from the taxpayer property, subject to a liability, then such assumption or
acquisition shall not be treated as money and/or other property, and shall not prevent
the exchange from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the liabilities to which
the property is subject exceed the total of the adjusted basis of the property
transferred pursuant to such exchange, then such excess shall be considered as a gain
from the sale or exchange of a capital asset or of property which is not a capital asset,
as the case may be.1avvphil.et
6. Carry-Over/Substituted Basis in Tax-Free Exchanges
Sec. 40(C)(5) -
(a) The basis of the stock or securities received by the transferor upon the exchange
specified in the above exception shall be the same as the basis of the property, stock
or securities exchanged, decreased by (1) the money received, and (2) the fair market
value of the other property received, and increased by (a) the amount treated as
dividend of the shareholder and (b) the amount of any gain that was recognized on
the exchange: Provided, That the property received as 'boot' shall have as basis its fair
market value: Provided, further, That if as part of the consideration to the transferor,
the transferee of property assumes a liability of the transferor or acquires form the
latter property subject to a liability, such assumption or acquisition (in the amount of
the liability) shall, for purposes of this paragraph, be treated as money received by the
transferor on the exchange: Provided, finally, That if the transferor receives several
kinds of stock or securities, the Commissioner is hereby authorized to allocate the
basis among the several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the transferee shall be the
same as it would be in the hands of the transferor increased by the amount of the
gain recognized to the transferor on the transfer.
Rev. Regs. 18-01 (Nov. 13, 2001), Sec. 2 only
SECTION 2. Basis. - A. Substituted Basis of Stock or Securities Received by the
Transferor. The substituted basis of the stock or securities received by the transferor
on a tax-free exchange shall be as follows:
1. The original basis of the property, stock or securities to be transferred;
2. Less: (a) money received, if any, and (b) the fair market value of the other
property received, if any;
3. Plus: (a) the amount treated as dividend of the shareholder, if any, and (b) the
amount of any gain that was recognized on the exchange, if any.
However, the property received as 'boot' shall have as basis its fair market value.
The term "boot" refers to the money received and other property received in
excess of the stock or securities received by the transferor on a tax-free exchange.
If the transferee of property assumes, as part of the consideration to the
transferor, a liability of the transferor or acquires from the latter property subject
to a liability, such assumption or acquisition (in the amount of the liability) shall,
for purposes of computing the substituted basis, be treated as money received by
the transferor on the exchange. Finally, if the transferor receives several kinds of
stock or securities, the Commissioner is authorized to allocate the basis among
the several classes of stocks or securities.
B. Substituted Basis of the Transferred Property in the Hands of the Transferee. The
substituted basis of the property transferred in the hands of the transferee shall be as
follows: (a) the original basis in the hands of the transferor; (b) Plus: the amount of
the gain recognized to the transferor on the transfer.
C. The Original Basis of Property to be Transferred. The original basis of the property
to be transferred shall be the following, as may be appropriate:
(a) The cost of the property, if acquired by purchase on or after March 1, 1913;
(b) The fair market price or value as of the moment of death of the decedent, if
acquired by inheritance;
(c) The basis in the hands of the donor or the last preceding owner by whom the
property was not acquired by gift, if the property was acquired by donation. If the
basis, however, is greater than the fair market value of the property at the time of
donation, then, for purposes of determining loss, the basis shall be such fair market
value; or,
(d) The amount paid by the transferee for the property, if the property was
acquired for less than an adequate consideration in money or money's worth.
(e) The adjusted basis of (a) to (d) above, if the acquisition cost of the property is
increased by the amount of improvements that materially add to the value of the
property or appreciably prolong its life less accumulated depreciation.
(f) The substituted basis, if the property was acquired in a previous tax free
exchange under Section 40(C)(2) of the Tax Code of 1997.
D. Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of
Property Subject of the Tax-free Exchange. The substituted basis as defined in Section
40(C)(5) of the Tax Code of 1997, and implemented in Section 2.A and 2.B above, shall
be the basis for determining gain or loss on a subsequent sale or disposition of
property subject of the tax-free exchange.
7. Business Purpose stock or securities. However, this prohibition does not apply in the case of a dealer in
stock or securities if the sale or other disposition of stock or securities is made in the
Losses from Wash Sales of Stocks or Securities -
ordinary course of its business as such dealer.
Sec. 38 (A) In the case of any loss claimed to have been sustained from any sale or
(b) Where more than one loss is claimed to have been sustained within the taxable
other disposition of shares of stock or securities where it appears that within a
year from the sale or other disposition of stock or securities, the provisions of this
period beginning thirty (30) days before the date of such sale or disposition and
section shall be applied to the losses in the order in which the stock or securities the
ending thirty (30) days after such date, the taxpayer has acquired (by purchase or
disposition of which resulted in the respective losses were disposed of (beginning with
by exchange upon which the entire amount of gain or loss was recognized by law),
the earliest disposition). If the order of disposition of stock or securities disposed of
or has entered into a contact or option so to acquire, substantially identical stock or
at a loss on the same day cannot be determined, the stock or securities will be
securities, then no deduction for the loss shall be allowed under Section 34 unless
considered to have been disposed of in the order in which they were originally
the claim is made by a dealer in stock or securities and with respect to a transaction
acquired (beginning with earliest acquisition).
made in the ordinary course of the business of such dealer.
(c) Where the amount of stock or securities acquired within the sixty-one day period
Sec. 38 (B) If the amount of stock or securities acquired (or covered by the contract
is less than the amount of stock or securities sold or otherwise disposed of, then the
or option to acquire) is less than the amount of stock or securities sold or otherwise
particular shares of stock or securities the loss from the sale or other disposition of
disposed of, then the particular shares of stock or securities, the loss form the sale
which is not deductible shall be those with which the stock or securities acquired are
or other disposition of which is not deductible, shall be determined under rules and
matched in accordance with the following rule:
regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner. The stock or securities acquired will be matched in accordance with the order of their
acquisition (beginning with the earliest acquisition) with an equal number of the
(C) If the amount of stock or securities acquired (or covered by the contract or option
shares of stock or securities sold or otherwise disposed of.
to acquire which) resulted in the non-deductibility of the loss, shall be determined
under rules and regulations prescribed by the Secretary of Finance, upon (d) Where the amount of stock or securities acquired within the sixty- one-day period
recommendation of the Commissioner. is not less than the amount of stock or securities sold or otherwise disposed of, then
the particular shares of stock or securities the acquisition of which resulted in the
nondeductibility of the loss shall be those with which the stock or securities disposed
Sec. 131, Revenue Regulations. 2
of are matched in accordance with the following rule:
SECTION 131. Losses from wash sales of stock or securities.
The stock or securities sold or otherwise disposed of will be matched with an equal
(a) A taxpayer cannot deduct any loss claimed to have been sustained from the sale number of the shares of stock or securities acquired in accordance with the order of
or other disposition of stock or securities, if, within a period beginning thirty days acquisition (beginning with the earliest acquisition) of the stock or securities acquired.
before the date of such sale or disposition and ending thirty days after such date
(referred to in this section as the sixty-one-day period), he has acquired (by purchase
or by an exchange upon which the entire amount of gain or loss was recognized by
law), or has entered into a contract or option so to acquire, substantially identical
(e) The acquisition of any security which results in the non-deductibility of a loss under
the provisions of this section shall be disregarded in determining the deductibility of
any other loss.
(f) The word "acquired" as used in this section means acquired by purchase or by an
exchange upon which the entire amount of gain or loss was recognized by law, and
comprehends cases where the taxpayer has entered into a contract or option within
the sixty-one-day period to acquire by purchase or by such an exchange.
SITUS OF TAXATION
Sec. 42 (A) Gross Income From Sources Within the Philippines. - The following items
of gross income shall be treated as gross income from sources within the Philippines:
(1) Interests. - Interests derived from sources within the Philippines, and interests
on bonds, notes or other interest-bearing obligation of residents, corporate or
otherwise;
(2) Dividends. - The amount received as dividends:
(a) from a domestic corporation; and
(b) from a foreign corporation, unless less than fifty percent (50%) of the gross
income of such foreign corporation for the three-year period ending with the
close of its taxable year preceding the declaration of such dividends or for such
part of such period as the corporation has been in existence) was derived from
sources within the Philippines as determined under the provisions of this
Section; but only in an amount which bears the same ration to such dividends
as the gross income of the corporation for such period derived from sources
within the Philippines bears to its gross income from all sources.
(3) Services. - Compensation for labor or personal services performed in the
Philippines;
Sec. 42 (C) Gross Income From Sources Without the Philippines. - The following
items of gross income shall be treated as income from sources without the
Philippines:
(1) Interests other than those derived from sources within the Philippines as
provided in paragraph (1) of Subsection (A) of this Section;
(2) Dividends other than those derived from sources within the Philippines as
provided in paragraph (2) of Subsection (A) of this Section;
(3) Compensation for labor or personal services performed without the Philippines;
Cases:
CIR v. Marubeni Corp.
Facts: Petitioner Marubeni s a foreign corporation duly organized under the existing
laws of Japan and duly licensed to engage in business under Philippine laws.
Marubeni of Japan has equity investments in Atlantic Gulf & Pacific Co. of Manila.
AG&P declared and directly remitted the cash dividends to Marubenis head office in
Tokyo net of the final dividend tax and withholding profit remittance tax. Thereafter,
Marubeni, through SGV, sought a ruling from the BIR on whether or not the
dividends it received from AG&P are effectively connected with its business in the
Philippines as to be considered branch profits subject to profit remittance tax. The
Acting Commissioner ruled that the dividends received by Marubeni are not income
from the business activity in which it is engaged. Thus, the dividend if remitted
abroad is not considered branch profits subject to profit remittance tax. Pursuant to
such ruling, petitioner filed a claim for refund for the profit tax remittance
erroneously paid on the dividends remitted by AG& P. Respondent Commissioner
denied the claim. It ruled that since Marubeni is a non-resident corporation not
engaged in trade or business in the Philippines it shall be subject to tax on income
earned from Philippine sources at the rate of 35% of its gross income. On the other
hand, Marubeni contends that, following the principal-agent relationship theory,
Marubeni Japan is a resident foreign corporation subject only to final tax on
dividends received from a domestic corporation.
Issue: Whether or not Marubeni Japan is a resident foreign corporation?
Held: No. The general rule is a foreign corporation is the same juridical entity as its
branch office in the Philippines . The 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. However, when the foreign corporation transacts business in the Philippines
independently of its branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the branch or the
resident foreign corporation. Thus, the alleged overpaid taxes were incurred for the
remittance of dividend income to the head office in Japan which is considered as a
separate and distinct income taxpayer from the branch in the Philippines.
Rentals and Royalties
Sec. 42 (A)(4) Rentals and royalties. - Rentals and royalties from property located in
the Philippines or from any interest in such property, including rentals or royalties
for -
a) The use of or the right or privilege to use in the Philippines any copyright,
patent, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;
b) The use of, or the right to use in the Philippines any industrial, commercial
or scientific equipment;
c) The supply of scientific, technical, industrial or commercial knowledge or
information;
d) The supply of any assistance that is ancillary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment of, any
such property or right as is mentioned in paragraph (a), any such
equipment as is mentioned in paragraph (b) or any such knowledge or
information as is mentioned in paragraph (c);1avvphil.et
e) The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery or other apparatus
purchased from such nonresident person;
f) Technical advice, assistance or services rendered in connection with
technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme; an
g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.
Sec. 42 (C)(4) -Rentals or royalties from property located without the Philippines or
from any interest in such property including rentals or royalties for the use of or for
the privilege of using without the Philippines, patents, copyrights, secret processes
and formulas, goodwill, trademarks, trade brands, franchises and other like
properties;
Rev. Rul. 68-443, 1968-2 C.B. 304
Advice has been requested whether the place of initial sale of a product that bears a
trademark is the controlling factor in the determination of the source of the
royalties paid for the use of the trademark under the circumstances described.
X , a resident foreign corporation, owns a trademark for certain productsin many
foreign countries. X corporation entered into a license agreement with Y , a
domestic corporation, pursuant to which Y was given the right to place the foreign
trademark owned by X on Y's products and sell the trademarked products. The
United States trademark for these products is owned by Z , an unrelated party. The
license agreement between X and Y is a conventional trademark license agreement
for a limited period of time and includes customary provisions to identify and
protect the licensor's proprietorship of this mark. Under the terms of the license, Y
corporation pays X corporation a royalty measured by a percentage of the initial
sales price of the trademarked products.
Y manufactures the trademarked products in the United States and sells them to
foreign buyers in the United States for resale and consumption in foreign countries;
all rights, title, and interest of Y in the products pass to the foreign buyers within the
United States. Thus, the initial sale of the trademarked products is regarded as
having taken place in the United States.
The specific question presented is whether, by reason of the initial sale of the
products to the foreign buyers in the United States, Y corporation has `used' the
foreign trademark in the United States and the royalties paid by Y to X are income
from sources within the United States.
The gist of a trademark is its association in the public mind with the product, it being
the identifying mark of the trade. The function of a trademark is to designate the
goods as the product of a particular trader and to protect his goodwill against the
sale of another's product as his.
In the instant case the character of X Corporations income is royalty income
measured by a percentage of the sales of the foreign trademarked products. The
initial sale of the trademarked products to foreign shippers is a means of placing the
products in the avenues of commerce with a view towards their ultimate
consumption outside the United States. Although the amount of the royalty income
is measured by the sales of the trademarked products, the place of sale does not
necessarily determine the source of such royalty income.
Since Z owns the United States trademark to these products, the products
manufactured by Y and identified by the trademark under the license from X cannot
be sold in the United States for consumption in the United States. Moreover, the
foreign countries do not protect the foreign trademarks in the United States. It is
concluded, therefore, that the royalties paid by Y to X are paid for the use of the
trademarks in the foreign countries and that the place of initial sale of the
trademarked products is not the controlling factor in the determination of the
source of income.
Accordingly, in the instant case, where products are ultimately used in the foreign
country where their trademark is protected, a royalty, received by X for the use of
the foreign trademark, is income from sources outside the United States despite the
fact that the initial sale of the trademarked articles took place in the United States.
Sale of Real Property
Sec. 42 (A)(5) Sale of Real Property. - gains, profits and income from the sale of real
property located in the Philippines;
Sec. 42 (C)(5) Gains, profits and income from the sale of real property located
without the Philippines.
Sale of Personal Property
Sec. 42(A) (6) Sale of Personal Property. - Gains; profits and income from the sale of
personal property, as determined in Subsection (E) of this Section.
Sec. 42(A) (E) Income From Sources Partly Within and Partly Without the
Philippines.- Items of gross income, expenses, losses and deductions, other than
those specified in Subsections (A) and (C) of this Section, shall be allocated or
apportioned to sources within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner. Where items of gross income are separately allocated to sources
within the Philippines, there shall be deducted (for the purpose of computing the
taxable income therefrom) the expenses, losses and other deductions properly
apportioned or allocated thereto and a ratable part of other expenses, losses or
other deductions which cannot definitely be allocated to some items or classes of
gross income. The remainder, if any, shall be included in full as taxable income from
sources within the Philippines. In the case of gross income derived from sources
partly within and partly without the Philippines, the taxable income may first be
computed by deducting the expenses, losses or other deductions apportioned or
allocated thereto and a ratable part of any expense, loss or other deduction which
cannot definitely be allocated to some items or classes of gross income; and the
portion of such taxable income attributable to sources within the Philippines may be
determined by processes or formulas of general apportionment prescribed by the
Secretary of Finance. Gains, profits and income from the sale of personal property
produced (in whole or in part) by the taxpayer within and sold without the
Philippines, or produced (in whole or in part) by the taxpayer without and sold
within the Philippines, shall be treated as derived partly from sources within and
partly from sources without the Philippines.
Gains, profits and income derived from the purchase of personal property within
and its sale without the Philippines, or from the purchase of personal property
without and its sale within the Philippines shall be treated as derived entirely form
sources within the country in which sold: Provided, however, That gain from the sale
of shares of stock in a domestic corporation shall be treated as derived entirely form
sources within the Philippines regardless of where the said shares are sold. The
transfer by a nonresident alien or a foreign corporation to anyone of any share of
stock issued by a domestic corporation shall not be effected or made in its book
unless: (1) the transferor has filed with the Commissioner a bond conditioned upon
the future payment by him of any income tax that may be due on the gains derived
from such transfer, or (2) the Commissioner has certified that the taxes, if any,
imposed in this Title and due on the gain realized from such sale or transfer have
been paid. It shall be the duty of the transferor and the corporation the shares of
which are sold or transferred, to advise the transferee of this requirement.
1. Sale by Producer or Manufacturer of Personal Property
2. Purchase and Sale of Personal Property
3. Sale of Shares of Stock in a Domestic Corporation
4. Outright Sale or Assignment of Intangibles
Income from Sources Partly Within or Without the Philippines
CASE
CIR v. CTA and Smith Kline & French Overseas (Jan. 17, 1984)
Facts: This case is about the refund of a 1971 income tax amounting to P324+k.
Smith Kline and French Overseas Company, a multinational firm domiciled in
Philadelphia, Pennsylvania, is licensed to do business in the Philippines. It is engaged
in the importation, manufacture and sale of pharmaceuticals, drugs and chemicals.
In its 1971 original ITR, Smith Kline declared a net taxable income of P1.4+M and
paid P511+k as tax due. Among the deductions claimed from gross income was
P501+k as its share of the head office overhead expenses. However, in its amended
return filed on March 1, 1973, there was an overpayment of P324+k arising from
under deduction of home office overhead. It made a formal claim for the refund of
the alleged overpayment. 30 In October, 1972, Smith Kline received from its
international independent auditors an authenticated certification to the effect that
the Philippine share in the unallocated overhead expenses of the main office for the
year ended December 31, 1971 was actually P1.4+M.On April 2, 1974, without
awaiting the action of the Commissioner of Internal Revenue on its claim, Smith
Kline filed a petition for review with the CTA. The CTA ordered the CIR to refund the
overpayment or grant a tax credit to Smith Kline. The Commissioner appealed to the
SC.
Issue: Whether or not Smith Kline incurred taxable income from sources within the
Philippines?
Held: The governing law is found in section 37 of the old NIRC which reads: Xxx (b)
Net income from sources in the Philippines. From the items of gross income
specified in subsection (a) of this section there shall be deducted the expenses,
losses, and other deductions properly apportioned or allocated thereto and a
ratable part of any expenses, losses, or other deductions which cannot definitely be
allocated to some item or class of gross income. The remainder, if any, shall be
included in full as net income from sources within the Philippines. Revenue
Regulations No. 2 of the Department of Finance contains the following provisions on
the deductions to be made to determine the net income from Philippine sources:
SEC. 160. Apportionment of deductions. From the items specified in section 37(a),
as being derived specifically from sources within the Philippines there shall be
deducted the expenses, losses, and other deductions properly apportioned or
allocated thereto and a ratable part of any other expenses, losses or deductions
which cannot definitely be allocated to some item or class of gross income. The
remainder shall be included in full as net income from sources within the
Philippines. The ratable part is based upon the ratio of gross income from sources
within the Philippines to the total gross income.
REVENUE AUDIT MEMORANDUM ORDER NO. 1-95
Subject: Audit guidelines and procedures on the proper determination of the income
tax liability of Philippine branches and liaison offices, of Multi-National Enterprises
(MNEs) engaged in soliciting orders, purchases, service contracts, trading,
construction and other activities in the Philippines.
II. Objectives
This Order is issued to:
a) amend and supersede RAMO No. 1-86 dated April 25, 1986 which provides for the
procedures for tax audit of Philippine branches of foreign corporations.
b) Address the issue on the proper determination of the income tax liability of
Philippine branches and liaison offices of MNEs pursuant to Section 43 of the NIRC
wherein the CIR is authorized to distribute, apportion or allocate gross income or
deduction among organizations in order to clearly reflect the income of any such
organization.
Xxx
III. Coverage
a) This order shall apply only to Philippine branches and liaison offices of Japanese
trading firms which are members of the Sogo Shosas and registered with the
Japanese Chamber of Commerce and Industry (JCCI), and also all other foreign
trading companies similarly situated as determined by the CIR.
b) Furthermore, the contents of this Order will apply only to income tax liabilities of
Philippine branches and liaison offices of MNEs and will not affect the withholding,
including branch profit remittance, and business tax obligations of the same
Philippine branches and liaison offices of MNEs which shall be subject to the
provisions of the NIRC.
IV. Guidelines
1. The Philippine income tax due from soliciting orders, purchases, service contracts,
trading, construction and other activities of the Philippine branches and liaison
offices of MNEs will be ascertained using the following formula:
For solicitation and trading activities:
{(Worldwide Operating Sales to the Philippines attribution to tax)}
{(Income X Worldwide Sales X rate X rate)}
For construction and other activities:
Plus {(Net Income from Construction and other activities X tax rate)}
2. In implementing the above formula, the following terms shall be construed to
mean as follows:
(a) Worldwide (W/W) shall include head office accounts and those of branches
located in different countries but shall exclude subsidiary accounts.
(b) W/W Operating Income shall include the Gross Income minus Selling , General &
Administrative expenses. Operating Income does not include non-operating and
extraordinary items like interest expense, exchange profit/loss, capital gains/losses
or other income/loss not related to operation.
(c) Sales to the Philippines shall be defined as the aggregated amount of exports and
offshore transactions to the Philippines by the Head Office , all branches and liaison
offices and shall include the amount of indent transactions from which commissions
are generated. These shall also include imported materials and equipment of
construction projects undertaken in the Philippines, but shall exclude local service
income from construction projects or onshore income from local construction.
(d) W/W sales shall consist of domestic, export, import and offshore transactions
which include not only principal transactions but also indent transactions from
which commissions are generated.
(e) Attribution rate shall mean a rate of 75% to be applied against the formula
(f) The tax rate to be applied shall be in accordance with Section 25(a) of the NIRC
which is 35%.
(g) Net income on construction shall consist of local service income from
construction projects or onshore income from construction projects or onshore
income from construction projects including the cost of locally purchased materials
and equipment, if any.
(h) Net income on all other activities shall consist of income such as management
consultancy services and other undertakings that Philippine branches and liaison
offices of MNEs are engaged in, net of costs and expenses associated with such
income.
3. In the application of the formula, no offsetting of losses from one line of business
to the detriment of the other line of business shall be allowed. This would mean that
the tax due from each line of business shall be computed independently from the
other line of business.
V. Procedures
1. Request documents containing information of the nature of the business
transactions of the taxpayer as follows:
a) the structure of the Philippine branch or liaison office, the Home Office,
other branches or more than 50% owned or controlled subsidiaries located
outside the Philippines dealing with the local branch;
b) the ownership, relationship, extent of control, directors and officers of the
Philippine branch or liaison office or Home Office;
c) the business activity of the MNE and how it relates to the activity of the local
branch or liaison office and other branches or more than 50% owned or
controlled subsidiaries dealing with the local company.
3. Gross income from sources without the Philippines [Supra]
4. Income from sources partly within or without the Philippines [Supra]
5. Situs of sale of stocks of domestic corporation [Supra]
REVENUE AUDIT MEMORANDUM ORDER NO. 4-86
Subject: Audit Guidelines in the Allocation of Home Office Overhead Expenses Under
Section 37(b) of the NIRC
In order to avoid delay and conflict in the determination of Philippine sources
taxable net income of foreign taxpayers for purposes of Philippine Income tax, this
RAMO is issued.
1. Background
1.1 In computing net income from sources within the Philippines, Section 37(b)
provides that from the gross income from sources within the Philippines x x x there
shall be deducted the expenses, losses and other deductions properly allocated
thereto and a ratable part of any expenses, interests and losses and other
deductions effectively connected with the business or trade conducted exclusively
within the Philippines which cannot be definitely allocated to some items or class of
gross income x x x.
1.2 These deductions are difficult to verify because substantial amounts thereof are
incurred in the head office or elsewhere and the corresponding supporting
documents and books of accounts are not accessible to local taxing authorities.
1.3 Heretofore only an audit certificate is presented to substantiate the deductions
incurred abroad which are allocated and pro-rated to Philippine source gross
income.
1.4 In implementing the above provision of the NIRC, there is a need for adequate
and satisfactory proof and explanations in order that the claimed deductions of the
foreign taxpayer may be allowed for income tax purposes.
2. Audit Procedure
2.1 Functional Analysis At the start of investigation there should be a detailed
examination of the functions performed both by the Home Office and the Local
Branch. For this purpose, an organization and functional chart of the home office
and local branch should be secured.
2.1.1 The functions should be determined and then listed. Who does what? What is
required to do it? Who needs who from what?
2.1.2 After having listed the functions performed by each entity, the functions
themselves must be analyzed. Could anyone else perform these functions? How
difficult are they? What skill, equipment and processes are needed?
2.2 On the basis of the functional analysis, the claimed deduction properly allocable
can now be determined by applying the tests of (a) relevance (necessary) to the local
branch and (b) reasonable (ordinary) charges, keeping always in mind the arms
length principle in transactions between related parties.
2.3 As to the deductions which cannot be definitely allocated, the following are
required:
2.3.1 Breakdown or Schedule of Home or Foreign Office expenses being pro-rated,
together with an explanation of the nature of each expense. Take note of the
deductions which are directly allocable to income earned outside the Philippines.
2.3.2 Basis of pro-ration (a) Determine if the basis and method of pro-ration are
being applied consistently from year to year. (b) is the same amount of Home Office
expense being allocated worldwide?
REVENUE REGULATIONS NO. 16-86
Subject: Amendment to Section 160 of Income Tax Regulations (RR-2) regarding the
basis of determining ratable part of overseas overhead expenses apportioned under
section 37(b) of the NIRC.
Pursuant to Sections 4 and 277 of the NIRC, the first paragraph of Section 160 of RR-
2, otherwise known as the Income Tax Regulations, is hereby amended as follows:
Section 160. (a) Apportionment of deductions. From the items specified in Section
37(a) as being derived specifically from sources within the Philippines, there shall be
deducted the expenses, losses, and other deductions properly allocated thereto and
a ratable part of any other expenses, losses and other deductions effectively
connected with the business or trade conducted exclusively within the Philippines
which cannot definitely be allocated to some items or class of gross income. The
remainder shall be included in full as net income from sources within the
Philippines. The ratable part shall be based upon the following ratios consistently
followed from year to year:
1. Gross income from sources within the Philippines to the total gross income.
2. Net sales in the Philippines to total net sales.
3. If any other method of allocation is adopted, a written permission from the
CIR shall first be secured.
(b) External Auditors Certificate The income tax return to be filed should be
accompanied by a certification from an independent and reputable CPA containing
the following information:
1. The home office deductions for the year involved have been examined in
accordance with generally acceptable auditing standards and accordingly
included such tests of accounting records and such other auditing procedures as
were considered necessary in the circumstances.
2. The deductions pro-rated to the Philippine Branch do not include
(a) net losses of any operating unit or branch;
(b) income tax payment;
(c) capital expenditures; and
(d) expenses directly chargeable to any branch.
3. The amount of allocable overhead expenses used in the pro-rata allocation to
the Philippine branch is the same amount used in the pro-ration to all branches
worldwide and the amount disallowed in other countries because of
governmental requirement is not added back to the allocable amount.
4. should there be exception or qualification on the above-requested
certification, an explanation with supporting documents should be submitted.
 ACCOUNTING PERIODS AND METHODS
SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the
taxpayer's annual accounting period (fiscal year or calendar year, as the case may be)
in accordance with the method of accounting regularly employed in keeping the books
of such taxpayer, but if no such method of accounting has been so employed, or if the
method employed does not clearly reflect the income, the computation shall be made
in accordance with such method as in the opinion of the Commissioner clearly reflects
the income.
If the taxpayer's annual accounting period is other than a fiscal year, as defined in
Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep
books, or if the taxpayer is an individual, the taxable income shall be computed on the
basis of the calendar year.
SEC. 44. Period in which Items of Gross Income Included. - The amount of all items of
gross income shall be included in the gross income for the taxable year in which
received by the taxpayer, unless, under methods of accounting permitted under
Section 43, any such amounts are to be properly accounted for as of a different period.
In the case of the death of a taxpayer, there shall be included in computing taxable
income for the taxable period in which falls the date of his death, amounts accrued
up to the date of his death if not otherwise properly includible in respect of such
period or a prior period.
SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided
for in this Title shall be taken for the taxable year in which "paid or accrued" or "paid
or incurred", dependent upon the method of accounting the basis of which the net
income is computed, unless in order to clearly reflect the income, the deductions
should be taken as of a different period.
In the case of the death of a taxpayer, there shall be allowed as deductions for the
taxable period in which falls the date of his death, amounts accrued up to the date of
his death if not otherwise properly allowable in respect of such period or a prior
period.
SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months. -
(A) Returns for Short Period Resulting from Change of Accounting Period. - If a
taxpayer, other than an individual, with the approval of the Commissioner, changes
the basis of computing net income from fiscal year to calendar year, a separate final
or adjustment return shall be made for the period between the close of the last fiscal
year for which return was made and the following December 31.
If the change is from calendar year to fiscal year, a separate final or adjustment return
shall be made for the period between the close of the last calendar year for which
return was made and the date designated as the close of the fiscal year.
If the change is from one fiscal year to another fiscal year, a separate final or
adjustment return shall be made for the period between the close of the former fiscal
year and the date designated as the close of the new fiscal year. cralaw
(B) Income Computed on Basis of Short Period. - Where a separate final or adjustment
return is made under Subsection (A) on account of a change in the accounting period,
and in all other cases where a separate final or adjustment return is required or
permitted by rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, to be made for a fractional part of a year, then
the income shall be computed on the basis of the period for which separate final or
adjustment return is made. cralaw
a. Accounting Method - cash (actual or constructive) or accrual
CASH METHOD Income is reported in the year payments are received while
expenses are deducted in the year paid.
ACCRUAL METHOD Income is reported in the year it is earned while expense is
deducted in the year it is incurred regardless of receipt or disbarment of cash.

b. Hybrid Method
CASE
Consolidated Mines, Inc. v. CTA
Facts: The Company, a domestic corporation engaged in mining, had filed its income
tax returns for 1951, 1952, 1953 and 1956. In 1957 examiners of the Bureau of Internal
Revenue investigated the income tax returns filed by the Company because on August
10, 1954, its auditor, Felipe Ollada claimed the refund of the sum of P107,472.00
representing alleged overpayments of income taxes for the year 1951. After the
investigation the examiners reported that (A) for the years 1951 to 1954 the Company
had not accrued as an expense the share in the company profits of Benguet
Consolidated Mines as operator of the Company's mines, although for income tax
purposes the Company had reported income and expenses on the accrual basis;
Commissioner of Internal Revenue sent the Company a letter of demand requiring it
to pay certain deficiency income taxes for the years 1951 to 1954, inclusive, and for
the year 1956. Deficiency income tax assessment notices for said years were also sent
to the Company. The Company requested a reconsideration of the assessment, but
the Commissioner refused to reconsider, hence the Company appealed to the Court
of Tax Appeals. The assessments for 1951 to 1954 were contested in CTA Case No.
565, while that for 1956 was contested in CTA Case No. 578. Upon agreement of the
parties the two cases were heard and decided jointly.
On May 6, 1961 the Tax Court rendered judgment ordering the Company to pay the
amounts of P107,846.56, P134,033.01 and P71,392.82 as deficiency income taxes for
the years 1953, 1954 and 1956, respectively. The Tax Court nullified the assessments
for the years 1951 and 1952 on the ground that they were issued beyond the five-
year period prescribed by Section 331 of the National Internal Revenue Code.
However, on August 7, 1961, upon motion of the Company, the Tax Court
reconsidered its decision and further reduced the deficiency income tax liabilities of
the Company to P79,812.93, P51,528.24 and P71,382.82 for the years 1953, 1954 and
1956, respectively. In this amended decision the Tax Court subscribed to the theory
of the Company that Benguet Consolidated Mining Company, hereafter referred to as
Benguet, had no right to share in "Accounts Receivable," hence one-half thereof may
not be accrued as an expense of the Company for a given year.
Both the Company and the Commissioner appealed to this Court. The Company
questions the rate of mine depletion adopted by the Court of Tax Appeals and the
disallowance of depreciation charges and certain miscellaneous expenses (G.R. Nos.
L-18843 & L-18844). The Commissioner, on the other hand, questions what he
characterizes as the "hybrid" or "mixed" method of accounting utilized by the
Company, and approved by the Tax Court, in treating the share of Benguet in the net
profits from the operation of the mines in connection with its income tax returns (G.R.
Nos. L-18853 & L-18854).
Issue: The question is whether or not the accounting system used by the Company
justifies such a treatment of this item; and if not, whether said method used by the
Company, and characterized by the Commissioner as a "hybrid method," may be
allowed under the provisions of our tax code.
Held: Here we have to distinguish between (1) the method of accounting used by the
Company in determining its net income for tax purposes; and (2) the method of
computation agreed upon between the Company and Benguet in determining the
amount of compensation that was to be paid by the former to the latter. The parties,
being free to do so, had contracted that in the method of computing compensation
the basis were "cash receipts" and "cash payments." Once determined in accordance
with the stipulated bases and procedure, then the amount due Benguet for each
month accrued at the end of that month, whether the Company had made payment
or not.
Since Benguet had no right to one-half of the "Accounts Receivable," the Company
was correct in not accruing said one-half as a deduction. The Company was not using
a hybrid method of accounting, but was consistent in its use of the accrual method of
accounting.
c. Percentage of Completion Method
SEC. 48. Accounting for Long-Term Contracts. - Income from long-term contracts shall
be reported for tax purposes in the manner as provided in this Section. As used herein,
the term 'long-term contracts' means building, installation or construction contracts
covering a period in excess of one (1) year. Persons whose gross income is derived in
whole or in part from such contracts shall report such income upon the basis of
percentage of completion. The return should be accompanied by a return certificate
of architects or engineers showing the percentage of completion during the taxable
year of the entire work performed under contract. There should be deducted from
such gross income all expenditures made during the taxable year on account of the
contract, account being taken of the material and supplies on hand at the beginning
and end of the taxable period for use in connection with the work under the contract
but not yet so applied. If upon completion of a contract, it is found that the taxable
net income arising thereunder has not been clearly reflected for any year or years, the
Commissioner may permit or require an amended return.
d. Change of Accounting Period
SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual, changes
his accounting period from fiscal year to calendar year, from calendar year to fiscal
year, or from one fiscal year to another, the net income shall, with the approval of the
Commissioner, be computed on the basis of such new accounting period, subject to
the provisions of Section 47.
e. Installment Basis
Sec. 49
(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner, a person who
regularly sells or otherwise disposes of personal property on the installment plan may
return as income therefrom in any taxable year that proportion of the installment
payments actually received in that year, which the gross profit realized or to be
realized when payment is completed, bears to the total contract price.
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or
other casual disposition of personal property (other than property of a kind which
would properly be included in the inventory of the taxpayer if on hand at the close of
the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale
or other disposition of real property, if in either case the initial payments do not
exceed twenty-five percent (25%) of the selling price, the income may, under the rules
and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, be returned on the basis and in the manner above prescribed in this
Section. As used in this Section, the term "initial payments" means the payments
received in cash or property other than evidences of indebtedness of the purchaser
during the taxable period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual
who sells or disposes of real property, considered as capital asset, and is otherwise
qualified to report the gain therefrom under Subsection (B) may pay the capital gains
tax in installments under rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits
of Subsection (A) elects for any taxable year to report his taxable income on the
installment basis, then in computing his income for the year of change or any
subsequent year, amounts actually received during any such year on account of sales
or other dispositions of property made in any prior year shall not be excluded.
f. Allocation of Income and Deductions
SEC. 50. Allocation of Income and Deductions. - In the case of two or more
organizations, trades or businesses (whether or not incorporated and whether or not
organized in the Philippines) owned or controlled directly or indirectly by the same
interests, the Commissioner is authorized to distribute, apportion or allocate gross
income or deductions between or among such organization, trade or business, if he
determined that such distribution, apportionment or allocation is necessary in order
to prevent evasion of taxes or clearly to reflect the income of any such organization,
trade or business.
RETURNS AND PAYMENT OF TAXEs
A. Individual Return
(i) Who are Required to File
(1) Except as provided in paragraph (2) of this Subsection, the following individuals
are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income from sources
within the Philippines;
(c) Every alien residing in the Philippines, on income derived from sources within the
Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise of
profession in the Philippines.
(ii) Those not Required to File
(2) The following individuals shall not be required to file an income tax return;
(a) An individual whose gross income does not exceed his total personal and
additional exemptions for dependents under Section 35: Provided, That a citizen of
the Philippines and any alien individual engaged in business or practice of profession
within the Philippine shall file an income tax return, regardless of the amount of gross
income;
(b) An individual with respect to pure compensation income, as defined in Section 32
(A)(1), derived from sources within the Philippines, the income tax on which has been
correctly withheld under the provisions of Section 79 of this Code: Provided, That an
individual deriving compensation concurrently from two or more employers at any
time during the taxable year shall file an income tax return: Provided, further, That an
individual whose compensation income derived from sources within the Philippines
exceeds Sixty thousand pesos (P60,000) shall also file an income tax return;
(c) An individual whose sole income has been subjected to final withholding tax
pursuant to Section 57(A) of this Code; and
(d) An individual who is exempt from income tax pursuant to the provisions of this
Code and other laws, general or special.
(3) The forgoing notwithstanding, any individual not required to file an income tax
return may nevertheless be required to file an information return pursuant to rules
and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
(4) The income tax return shall be filed in duplicate by the following persons:
(a) A resident citizen - on his income from all sources;
(b) A nonresident citizen - on his income derived from sources within the Philippines;
(c) A resident alien - on his income derived from sources within the Philippines; and
(d) A nonresident alien engaged in trade or business in the Philippines - on his income
derived from sources within the Philippines.
(iii) Where to File
Except in cases where the Commissioner otherwise permits, the return shall be filed
with an authorized agent bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in which such person has his legal
residence or principal place of business in the Philippines, or if there be no legal
residence or place of business in the Philippines, with the Office of the Commissioner.
(iv) When to File
(1) The return of any individual specified above shall be filed on or before the fifteenth
(15th) day of April of each year covering income for the preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded thru a local stock exchange
as prescribed under Section 24(c) shall file a return within thirty (30) days after each
transaction and a final consolidated return on or before April 15 of each year covering
all stock transactions of the preceding taxable year; and
(b) From the sale or disposition of real property under Section 24(D) shall file a return
within thirty (30) days following each sale or other disposition.
(v) Where to Pay
(vi) Capital Gains on Shares of Stocks and Real Estate
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. -
The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed
below is hereby imposed upon the net capital gains realized during the taxable year
from the sale, barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock exchange.
Not over P100,000........ 5%
On any amount in excess of P100,000 10%
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six
percent (6%) based on the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code, whichever is higher, is
hereby imposed upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines, classified as
capital assets, including pacto de retro sales and other forms of conditional sales, by
individuals, including estates and trusts: Provided, That the tax liability, if any, on gains
from sales or other dispositions of real property to the government or any of its
political subdivisions or agencies or to government-owned or controlled corporations
shall be determined either under Section 24 (A) or under this Subsection, at the option
of the taxpayer.
(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or
disposition of their principal residence by natural persons, the proceeds of which is
fully utilized in acquiring or constructing a new principal residence within eighteen
(18) calendar months from the date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection: Provided, That the historical cost or
adjusted basis of the real property sold or disposed shall be carried over to the new
principal residence built or acquired: Provided, further, That the Commissioner shall
have been duly notified by the taxpayer within thirty (30) days from the date of sale
or disposition through a prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That the said tax exemption can
only be availed of once every ten (10) years: Provided, finally, that if there is no full
utilization of the proceeds of sale or disposition, the portion of the gain presumed to
have been realized from the sale or disposition shall be subject to capital gains tax.
For this purpose, the gross selling price or fair market value at the time of sale,
whichever is higher, shall be multiplied by a fraction which the unutilized amount
bears to the gross selling price in order to determine the taxable portion and the tax
prescribed under paragraph (1) of this Subsection shall be imposed thereon.
(vii) Quarterly Declaration of Income Tax
SEC. 74. Declaration of Income Tax for Individuals. -
(A) In General. - Except as otherwise provided in this Section, every individual subject
to income tax under Sections 24 and 25(A) of this Title, who is receiving self-
employment income, whether it constitutes the sole source of his income or in
combination with salaries, wages and other fixed or determinable income, shall make
and file a declaration of his estimated income for the current taxable year on or before
April 15 of the same taxable year. In general, self-employment income consists of the
earnings derived by the individual from the practice of profession or conduct of trade
or business carried on by him as a sole proprietor or by a partnership of which he is a
member. Nonresident Filipino citizens, with respect to income from without the
Philippines, and nonresident aliens not engaged in trade or business in the Philippines,
are not required to render a declaration of estimated income tax. The declaration shall
contain such pertinent information as the Secretary of Finance, upon
recommendation of the Commissioner, may, by rules and regulations prescribe. An
individual may make amendments of a declaration filed during the taxable year under
the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(B) Return and Payment of Estimated Income Tax by Individuals. - The amount of
estimated income as defined in Subsection (C) with respect to which a declaration is
required under Subsection (A) shall be paid in four (4) installments. The first
installment shall be paid at the time of the declaration and the second and third shall
be paid on August 15 and November 15 of the current year, respectively. The fourth
installment shall be paid on or before April 15 of the following calendar year when the
final adjusted income tax return is due to be filed.
(C) Definition of Estimated Tax. - In the case of an individual, the term "estimated
tax" means the amount which the individual declared as income tax in his final
adjusted and annual income tax return for the preceding taxable year minus the sum
of the credits allowed under this Title against the said tax. If, during the current
taxable year, the taxpayer reasonable expects to pay a bigger income tax, he shall file
an amended declaration during any interval of installment payment dates.
B. Corporation Returns Sec. 52, 53 & 56
(i) Quarterly Income Tax Sec. 75
- Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in
duplicate a quarterly summary declaration of its gross income and deductions on a
cumulative basis for the preceding quarter or quarters upon which the income tax, as
provided in Title II of this Code, shall be levied, collected and paid. The tax so
computed shall be decreased by the amount of tax previously paid or assessed during
the preceding quarters and shall be paid not later than sixty (60) days from the close
of each of the first three (3) quarters of the taxable year, whether calendar or fiscal
year.
(ii) Final Adjustment Return Sec. 76
- Every corporation liable to tax under Section 27 shall file a final adjustment return
covering the total taxable income for the preceding calendar or fiscal year. If the sum
of the quarterly tax payments made during the said taxable year is not equal to the
total tax due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment return
may be carried over and credited against the estimated quarterly income tax liabilities
for the taxable quarters of the succeeding taxable years. Once the option to carry-
over and apply the excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years has been made, such option shall be
considered irrevocable for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed therefor.
CASE
BPI-Family Savings Bank v. Court of Appeals
Facts: Petitioner BPI Family Savings Bank had an excess withholding taxes for the year
1989 amounting to P112,491.90. It indicated in its 1989 Income Tax Return that it
would apply the said amount as a tax credit for the succeeding taxable year, 1990.
However because of business losses, petitioner informed the Bureau of Internal
Revenue (BIR) that it would claim the amount as a tax refund, instead of applying it as
a tax credit. When no action from the BIR was forthcoming, petitioner filed its claim
with the Court of Tax Appeals.
The CTA and the CA, however, denied the claim for tax refund. Since petitioner
declared in its 1989 Income Tax Return that it would apply the excess withholding tax
as a tax credit for the following year, the Tax Court held that petitioner was presumed
to have done so. The CTA and the CA ruled that petitioner failed to overcome this
presumption because it did not present its 1990 Return, which would have shown that
the amount in dispute was not applied as a tax credit. Hence, the CA concluded that
petitioner was not entitled to a tax refund.
Issue: Whether or not petitioner is entitled to the refund of P112,491.90, representing
excess creditable withholding tax paid for the taxable year 1989.
Held: It is undisputed that petitioner had excess withholding taxes for the year 1989
and was thus entitled to a refund amounting to P112,491. Pursuant to Section 69 of
the 1986 Tax Code which states that a corporation entitled to a refund may opt either
(1) to obtain such refund or (2) to credit said amount for the succeeding taxable year.
Petitioner presented evidence to prove its claim that it did not apply the amount as a
tax credit.A copy of the Final Adjustment Return for 1990 was attached to petitioner's
Motion for Reconsideration filed before the CTA. A final adjustment return shows
whether a corporation incurred a loss or gained a profit during the taxable year. In
this case, that Return clearly showed that petitioner incurred P52,480,173 as net loss
in 1990. Clearly, it could not have applied the amount in dispute as a tax credit.
The BIR did not controvert the veracity of the said return. It did not even file an
opposition to petitioner's Motion and the 1990 Final Adjustment Return attached
thereto.
Philam Asset Mgt., Inc. v. CIR
Facts: Petitioner acts as investment manager of PFI &PBFI. It provides management
&technical services and thus respectively paid for its services. PFI & PBFI withhold the
amount of equivalent to 5% creditable tax regulation. On April 3, 1998, filed ITR with
a net loss thus incurred withholding tax. Petitioner filed for refund from BIR but was
unanswered. CTA denied the petition for review. CA held that to request for either a
refund or credit of income tax paid, a corporation must signify its intention by marking
the corresponding box on its annual corporate adjustment return.
Issue: Whether or not petitioner is entitled to a refund of its creditable taxes.
Ruling: Any tax income that is paid in excess of its amount due to the government
may be refunded, provided that a taxpayer properly applies for the refund. One
cannot get a tax refund and a tax credit at the same time for the same excess to
income taxes paid. Failure to signify ones intention in Final Assessment Return (FAR)
does not mean outright barring of a valid request for a refund
Requiring that the ITR on the FAR of the succeeding year be presented to the BIR in
requesting a tax refund has no basis in law and jurisprudence. The Tax Code likewise
allows the refund of taxes to taxpayer that claims it in writing within 2 years after
payment of the taxes. Technicalities and legalism should not be misused by the
government to keep money not belonging to it, and thereby enriched itself at the
expense of its law-abiding citizens.
(iii) Where to File
SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. -
(A) Place of Filing. - Except as the Commissioner other wise permits, the quarterly
income tax declaration required in Section 75 and the final adjustment return
required in Section 76 shall be filed with the authorized agent banks or Revenue
District Officer or Collection Agent or duly authorized Treasurer of the city or
municipality having jurisdiction over the location of the principal office of the
corporation filing the return or place where its main books of accounts and other data
from which the return is prepared are kept.
(iv) When to File
(B) Time of Filing the Income Tax Return. - The corporate quarterly declaration shall
be filed within sixty (60) days following the close of each of the first three (3) quarters
of the taxable year. The final adjustment return shall be filed on or before the fifteenth
(15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month
following the close of the fiscal year, as the case may be.
(v) When to Pay
(C) Time of Payment of the Income Tax. - The income tax due on the corporate
quarterly returns and the final adjustment income tax returns computed in
accordance with Sections 75 and 76 shall be paid at the time the declaration or return
is filed in a manner prescribed by the Commissioner.
(vi) Capital Gains on Shares of Stock
Sec. 52 (D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded
in the Local Stock Exchange. - Every corporation deriving capital gains from the sale
or exchange of shares of stock not traded thru a local stock exchange as prescribed
under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return
within thirty (30) days after each transactions and a final consolidated return of all
transactions during the taxable year on or before the fifteenth (15th) day of the fourth
(4th) month following the close of the taxable year.
(vii) Return of Corporations Contemplating Dissolution/Reorganization
Sec. 52 (C) Return of Corporation Contemplating Dissolution or Reorganization. -
Every corporation shall, within thirty (30) days after the adoption by the corporation
of a resolution or plan for its dissolution, or for the liquidation of the whole or any
part of its capital stock, including a corporation which has been notified of possible
involuntary dissolution by the Securities and Exchange Commission, or for its
reorganization, render a correct return to the Commissioner, verified under oath,
setting forth the terms of such resolution or plan and such other information as the
Secretary of Finance, upon recommendation of the commissioner, shall, by rules and
regulations, prescribe.cralaw
The dissolving or reorganizing corporation shall, prior to the issuance by the Securities
and Exchange Commission of the Certificate of Dissolution or Reorganization, as may
be defined by rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, secure a certificate of tax clearance from the
Bureau of Internal Revenue which certificate shall be submitted to the Securities and
Exchange Commission.
CASE
Bank of the Philippine Islands v. CIR
Facts: Upon the SECs approval of the Articles of Merger in July 1, 1985, BPI became
the successor-in-interest of Family Bank and Trust Company (FBTC). Prior to the
approval of the merger, FBTC earned rental fees and interest from treasury notes.
FBTCs lessees withheld 5% on the rentals pursuant to the Expanding Withholding Tax
Regulations while the Central Bank withheld 15% on the treasury notes. The withheld
taxes totalling to 174k were remitted to FBTC. FBTCs excess credit amounted to
2.14M. In 1986, FBTC filed its return showing (a 65.5M net loss and) a refundable
amount of the withheld tax. BPI, as successor0in-interest, asked the BIR for refund of
the excess credit and the withheld taxes. The BIR refused. In 1987 BPI brought a
petition for review before the CTA. The CTA dismissed it on the ground that the claim
for tax refund had prescribed. MR denied, hence this petition for review.
CTA : The return should have been filed within 30 days from SECs approval of the
articles of merger (Formerly Sec 78, currently SEC. 52 C)
BPI: The return should have been filed on the 15th day of the 4thmonth following the
close of FBTCs taxable year. Sec. 70b of the old Tax Code provides that the final
adjustment return shall be filed on or before the 15th of April or on or before the 15th
of the fourth month following the close of the fiscal years. The old Sec 78 requires an
information return, NOT an income tax or final adjustment return.
Issue: WON BPIs claim for refund of the 174k withheld income taxes had prescribed.
Held: YES. BPI may no longer claim refund. Since FBTC is a dissolving corporation, it is
required to file its income tax return within 30 day after the cessation of business or
30 days after the approval of the merger. For BPI to claim the refund, it should have
filed the action within to years from the day in which FBTC as corporate taxpayer is
required to file its final income tax return. BPI filed it on Dec 1987, when it had until
July 1987 to file it. Petitioner misled the CTA by claiming that what is required is only
an information return. An ongoing corporation files a quarterly corporate return and
the final adjustment return refers to final adjustment income tax return. All
references by BPI relate to the filing if an accurate income tax return.
(viii) Returns of GPPs
SEC. 55. Returns of General Professional Partnerships. - Every general professional
partnership shall file, in duplicate, a return of its income, except income exempt under
Section 32 (B) of this Title, setting forth the items of gross income and of deductions
allowed by this Title, and the names, Taxpayer Identification Numbers (TIN),
addresses and shares of each of the partners
WITHHOLDING TAX
A. Final Withholding Tax at Source Sec. 57(A)
(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the
Secretary of Finance may promulgate, upon the recommendation of the
Commissioner, requiring the filing of income tax return by certain income payees, the
tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2),
25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4),
28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4),
28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of
income shall be withheld by payor-corporation and/or person and paid in the same
manner and subject to the same conditions as provided in Section 58 of this Code.
CASE
CIR vs. Wander Philippines
Facts: Wander is a domestic corporation which is a wholly-owned subsidiary of Glaro
S.A. Ltd., a Swiss corporation not engaged in trade/business in the Philippines. In two
instances, Wander filed its withholding tax return and remitted to Glaro (the parent
company) dividends (P222,000 in the first instance and P355,200 in the second), on
which 35% tax was withheld and paid to the BIR.
Wander now files a claim for refund of the withheld tax contending that it is liable
only to 15% withholding tax pursuant to Section 24. B.1 of the Tax Code. The BIR did
not act upon the claim filed by Wander so the corporation filed a petition to the Court
of Tax Appeals (CTA). The CTA held that the corporation is entitled to 15% withholding
tax rate on dividends remitted to Glaro, a non-resident foreign corporation.
Issue: Whether or not Wander is entitled to the 15% withholding tax rate.
Held: Yes. According to Sec. 24.B.1 of the Tax Code, the dividends received from a
domestic corporation is liable to a 15% withholding tax, provided that the country in
which the foreign corporation is domiciled shall allow a tax credit (equivalent to 20%
which is the difference between the 35% tax due on regular corporations and the 15%
tax due on dividends) against the taxes due to have been paid in the Philippines.
In the case, Switzerland did not impose any tax on the dividends received by Glaro
thus it should be considered as a full satisfaction of the given condition. To deny
respondent the privilege to withhold 15% would run counter to the spirit and intent
of the law and will adversely affect the foreign corporations interest and discourage
them from investing capital in our country.
CIR v. Procter & Gamble Phil
NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders of a Philippine
corporation. This rate goes down to 15% ONLY IF the country of domicile of the foreign
stockholder corporation shall allow such foreign corporation a tax credit for taxes
deemed paid in the Philippines, applicable against the tax payable to the domiciliary
country by the foreign stockholder corporation. However, such tax credit for taxes
deemed paid in the Philippines MUST, as a minimum, reach an amount equivalent to
20 percentage points
Facts: Procter and Gamble Philippines declared dividends payable to its parent
company and sole stockholder, P&G USA. Such dividends amounted to Php 24.1M.
P&G Phil paid a 35% dividend withholding tax to the BIR which amounted to Php 8.3M
It subsequently filed a claim with the Commissioner of Internal Revenue for a refund
or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal
Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of
withholding tax on the dividends remitted was only 15%.
Issue: Whether or not P&G Philippines is entitled to the refund or tax credit.
Held: YES. P&G Philippines is entitled. Sec 24 (b) (1) of the NIRC states that an ordinary
35% tax rate will be applied to dividend remittances to non-resident corporate
stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF he
country of domicile of the foreign stockholder corporation shall allow such foreign
corporation a tax credit for taxes deemed paid in the Philippines, applicable against
the tax payable to the domiciliary country by the foreign stockholder corporation.
However, such tax credit for taxes deemed paid in the Philippines MUST, as a
minimum, reach an amount equivalent to 20 percentage points which represents the
difference between the regular 35% dividend tax rate and the reduced 15% tax rate.
Thus, the test is if USA shall allow P&G USA a tax credit for taxes deemed paid in
the Philippines applicable against the US taxes of P&G USA, and such tax credit must
reach at least 20 percentage points. Requirements were met.
Sec. 2.57(A) & 2.57.1, Rev. Regs. 2-98
SECTION 2.57. Withholding of Tax at Source (A) Final Withholding Tax. -
Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due
from the payee on the said income. The liability for payment of the tax rests primarily
on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or
in case of under withholding, the deficiency tax shall be collected from the
payor/withholding agent. The payee is not required to file an income tax return for
the particular income.
The finality of the withholding tax is limited only to the payee's income tax liability on
the particular income. It does not extend to the payee's other tax liability on said
income, such as when the said income is further subject to a percentage tax. For
example, if a bank receives income subject to final withholding tax, the same shall be
subject to a percentage tax.
SECTION 2.57.1. Income Payments Subject to Final Withholding Tax. The following
forms of income shall be subject to final withholding tax at the rates herein specified;
(A) Income payments to a citizen or to a resident alien individual;
(1) Interest from any peso bank deposit, and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements; royalties
(except on books as well as other literary works and musical compositions), prizes
(except prizes amounting to ten thousand pesos (P10,000.00) or less which shall be
subject to tax under Sec. 24 (A) of the Code) and other winnings (except Philippine
Charity Sweepstakes winnings and lotto winnings) derived from sources within the
Philippines Twenty percent (20%).
(2) Royalties on books, as well as other literary works and musical compositions
Ten percent (10%).
(3) Interest income received by a resident individual taxpayer from a depository
bank under the Foreign Currency Deposit System Seven and one-half percent
(7.5%).
(4) Interest income from long-term deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas which was pre-terminated by the holder before
the fifth (5th) year at the rates herein prescribed to be deducted and withheld from
the proceeds thereof based on the length of time that the instrument was held by
the taxpayer
Holding Period Rate
Four (4) years to less than five (5) years 5%
Three (3) years to less than four (4) years 12%
Less than three (3) years 20%
 (5) Cash and/or property dividends actually or constructively received from a
domestic corporation, joint stock company, insurance or mutual fund companies
or on the share of an individual partner in the distributable net income after tax
of a partnership (except general professional partnership) or on the share of an
individual in the net income after tax of an association, a joint account or a joint
venture or consortium of which he is a member or a co-venturer.
6% - beginning January 1, 1998
8% - beginning January 1, 1999 and
10% - beginning January 1, 2000 and thereafter
The tax on cash and property dividends shall only be imposed on dividends
which are declared from profits of corporations made after December 31, 1997.
(6) On capital gains presumed to have been realized from the sale, exchange or
other disposition of real property located in the Philippines, classified as capital
assets, including pacto de retro sales and other forms of conditional sales based
on the gross selling price or fair market value as determined in accordance with
Sec. 6(E) of the Code (i.e. the authority of the Commissioner to prescribe the real
property values), whichever is higher Six percent (6%).
In case of dispositions of real property made by individuals to the government or
any of its political subdivisions or agencies or to government-owned or controlled
corporations, the tax to be imposed shall be determined either under Section
24(A) of the Code for normal income tax for individual citizens and residents or
under Section 24(D)(1) of the Code for the final tax on capital gains from sale of
property at six percent (6%), at the option of the taxpayer. LLphil
(B) Income Payment to Non-resident Aliens Engaged in Trade or Business in the
Philippines. The following forms of income derived from sources within the
Philippines shall be subject to final withholding tax in the hands of a non-resident alien
individual engaged in trade or business within the Philippines, based on the gross
amount thereof and at the rates prescribed therefor:
(1) On Certain Passive Income A tax of twenty (20%) percent is hereby imposed on
certain passive income received from all sources within the Philippines.
(a) Cash and/or property dividend from a domestic corporation or from a joint
stock company, or from an insurance or mutual fund company or from a regional
operating headquarter of a multinational company;
(b) Share in the distributable net income after tax of a partnership (except general
professional partnership) of which he is a partner, or share in the net income after
tax of an association, a joint account, or a joint venture of which he is a member
or a co-venturer;
(c) Interests from any currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements;
(d) Royalties (except royalties on books, as well as other literary works and musical
compositions which shall be subject to 10% final withholding tax);
(e) Prizes (except prizes amounting to ten thousand pesos (P10,000.00) or less
subject to tax under Sec. 25 (A) (1) of the Code for the normal rates of income tax
for individuals) and other winnings (except Philippine Charity Sweepstakes
winnings and lotto winnings);
(2) Interest income derived from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas which was pre-terminated by the holder
before the fifth (5th) year at the rates herein prescribed to be deducted and withheld
from the proceeds thereof based on the length of time that the instrument was held
by the taxpayer
Holding Period Rate
Four (4) years to less than five (5) years 5%
Three (3) years to less than four (4) years 12%
Less than three (3) years 20%
 (3) On capital gains presumed to have been realized from the sale exchange or
other disposition of real property located in the Philippines, classified as capital
assets, including pacto de retro sales and other forms of conditional sales based
on the gross selling price or fair market value as determined in accordance with
Sec. 6(E) of the Code (i.e. the authority of the Commissioner to prescribe zonal
values), whichever is higher Six percent (6%).
In case of dispositions of real property made by individuals to government or any
of its political subdivisions or agencies or to government-owned or controlled
corporations, the tax to be imposed shall be determined either under Section
24(A) of the code for the normal rate of income tax for individual citizens and
residents or under Section 24(D)(1) of the Code for the final tax on capital gains
from sale of property at six percent (6%), at the option of the taxpayer.
(C) Income Derived from All Sources Within the Philippines by a Non-resident Alien
Individual Not Engaged in Trade or Business Within the Philippines. The following
forms of income derived from all sources within the Philippines shall be subject to a
final withholding tax in the hands of a non-resident alien individual not engaged in
trade or business within the Philippines based on the following amounts and at the
rates prescribed therefor:
(1) On the gross amount of income derived from all sources within the Philippines
by a non-resident alien individual who is not engaged in trade or business in the
Philippines as interest, cash and/or property dividends, rents, salaries, wages,
premiums, annuities, compensation, remuneration, emoluments, or other fixed
or determinable annual or periodic or casual gains, profits and income and capital
gains Twenty five percent (25%). pr
(2) On capital gains presumed to have been realized from the sale, exchange or
other disposition of real property located in the Philippines, classified as capital
assets, including pacto de retro sales and other forms of conditional sales based
on the gross selling price or fair market value as determined in accordance with
Sec. 6(E) of the Code (i.e. the authority of the Commissioner to prescribe the real
property values), whichever is higher Six percent (6%).
In case of dispositions of real property made by individuals to government or any
of its political subdivisions or agencies or to government-owned or controlled
corporations, the tax to be imposed shall be determined either under Sec. 24(a) of
the Code for the rates of income tax for individual citizens and residents or under
Sec. 24(D)(1) of the Code for the final tax on capital gains from sale of property at
six percent (6%), at the option of the taxpayer.
(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters
and Regional Operating Headquarters of Multinational Companies. A final
withholding tax equivalent to fifteen percent (15%) shall be withheld by the
withholding agent from the gross income received by every alien individual occupying
managerial and technical positions in regional or area headquarters and regional
operating headquarters and representative offices established in the Philippines by
multinational companies as salaries, wages, annuities, compensation, remuneration,
and other emoluments, such as honoraria and allowances, except income which is
subject to the fringe benefits tax, from such regional or area headquarters and
regional operating headquarters.
The same tax treatment shall apply to Filipinos employed and occupying the same as
those of alien employed by these multinational companies.
The term "multinational company" means a foreign firm or entity engaged in
international trade with its affiliates or subsidiaries or branch offices in the Asia Pacific
Region and other foreign markets.
(E) Income Derived by Alien Individuals Employed by Offshore Banking Units. A
final withholding tax equivalent to fifteen (15%) shall be withheld by the withholding
agent from the gross income of alien individuals occupying managerial or technical
positions in offshore banking units established in the Philippines, as salaries, wages,
annuities, compensations, remuneration and other emoluments such as honoraria
and allowances, received from such offshore banking units.
The same tax treatment shall apply to Filipinos employed and occupying the same
positions as those of aliens who are employed by these offshore banking units.
(F) Income of Aliens Employed by Foreign Petroleum Service Contractors and
Subcontractors. A final withholding tax equivalent to fifteen percent (15%) shall be
withheld from the gross income of an alien individual who is a permanent resident of
a foreign country but who is employed and assigned in the Philippines by a foreign
service contractor or by a foreign service subcontractor who is engaged in petroleum
operations in the Philippines. His gross income includes salaries, wages, annuities,
(H) Income Payment to a Resident Foreign Corporation. The following forms of
compensation, remuneration and other emoluments, such as honoraria and
income shall be subject to a final withholding tax in the hands of a foreign corporation,
allowances, received from such contractor or subcontractor.
based on the gross amount thereof and at the rate of tax prescribed therefor:
The same tax treatment shall apply to Filipinos who are employed and occupying the
same positions as those of aliens employed by a foreign petroleum service contractor
or subcontractor.
(G) Income Payment to a Domestic Corporation. The following items of income
shall be subject to a final withholding tax in the hands of a domestic corporation,
based on the gross amount thereof and at the rate of tax prescribed therefor:
(1) Interest from any currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust fund and similar arrangements
derived from sources within the Philippines Twenty Percent (20%).
(2) Royalties derived from sources within the Philippines Twenty percent (20%).
(3) Interest income derived from a depository bank under the Expanded Foreign
Currency Deposit System, otherwise known as a Foreign Currency Deposit Unit
(FCDU) Seven and one-half percent (7.5%).
(4) Income derived by a depository bank under the Expanded Foreign Currency
Deposit System from foreign transactions with local commercial banks including
branches of foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with Foreign Currency Deposit System Units and
other depository banks under the expanded foreign currency deposit system
including interest income from foreign currency loans granted by such depository
bank under the said expanded foreign currency deposit system to residents Ten
percent (10%).
(5) On capital gains presumed to have been realized from the sale, exchange or
other disposition of real property located in the Philippines classified as capital
assets, including pacto de retro sales and other forms of conditional sales based
on the gross selling price or fair market value as determined in accordance with
Sec. 6(E) of the Code, whichever is higher Six percent (6%).
(1) Offshore Banking Units On income derived by offshore banking units
authorized by the Bangko Sentral ng Pilipinas (BSP) from foreign currency
transactions with local commercial banks and branches of foreign banks that may
be authorized by the BSP to transact business with offshore banking units and
other OBUs including interest income derived from foreign currency loans granted
to resident Ten percent (10%).
(2) Tax on Branch Profit Remittances On any profit remitted by the Philippine
branch of a foreign corporation to its head office abroad based on the total profits
applied or earmarked for remittance without any deduction for the tax component
thereof except those registered with the Philippine Economic Zones Authority
(PEZA) and other companies within the special economic zones such as Subic Bay
Metropolitan Authority (SBMA) and Clark Development Authority (CDA) Fifteen
percent (15%).
Interests, dividends, rents, royalties (including remunerations for technical
services), salaries, wages, premiums, annuities, emoluments or other fixed or
determinable annual periodic or casual gains, profits, income and capital gains
received by a foreign corporation during each taxable year from all sources within
the Philippines shall not be considered as branch profits unless the same are
effectively connected with the conduct of its trade or business in the Philippines.
(3) Interest on any currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements and
royalties derived from sources within the Philippines Twenty percent (20%).
 (4) Interest income derived from a Depository Bank under the Expanded Foreign
Currency Deposit system Seven and one-half percent (7.5%).
(5) Income derived by a depository bank under the expanded foreign currency
deposit system from foreign currency transactions with local commercial banks
including branches of foreign banks that may be authorized by the Bangko Sentral
ng Pilipinas to transact business with foreign currency deposit system units and
other depository banks under the expanded foreign currency deposit system
including interest income from foreign currency loans granted by such depository
banks under the said expanded foreign currency deposit system to resident Ten
percent (10%).
(I) Income Derived From all Sources Within the Philippines by Non- Resident Foreign
Corporation. The following shall be subject to final withholding tax based on the
gross amount of income and at the rate of tax prescribed therefor:
(1) In general On gross income derived from all sources within the Philippines
such as interests, dividends, rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments, or other fixed or determinable
annual, periodic or casual gains, profits and income and capital gains (except
capital gains realized from sale, exchange, disposition of shares of stock in any
domestic corporation which is subject to capital gains tax under Sec. 28(B)(5)(c)
at the following rates:
34% - beginning January 1, 1998
33% - beginning January 1, 1999 and
32% - beginning January 1, 2000 and thereafter
(2) Gross income from all sources within the Philippines derived by non-resident
cinematographic film owners, lessors or distributors Twenty five percent (25%).
(3) On the gross rentals, lease and charter fees, derived by non-resident owner or
lessor of vessels from leases or charters to Filipino citizens or corporations as
approved by the Maritime Industry Authority Four and one-half percent (4.5%).
(4) On the gross rentals, charter and other fees derived by non-resident lessor of
aircraft, machineries and other equipment Seven and a half percent (7.5%).
(5) Interest on foreign loans contracted on or after August 1, 1986 Twenty
percent (20%).
(6) Dividends received from a domestic corporation Fifteen percent (15%) of
the cash and/or property dividends received from a domestic corporation subject
to the condition that the country in which the non-resident foreign corporation is
domiciled (a) shall allow a credit against the tax due from the said non-resident
foreign corporation which are equivalent to taxes deemed to have been paid in
the Philippines equal to twenty percent (20%) for 1997, nineteen percent (19%)
for 1998, eighteen percent (18%) for 1999 and seventeen percent (17%)
thereafter, which represents the difference between the regular income tax of
thirty-five percent (35%) in 1997, thirty four percent (34%) in 1998, thirty three
percent (33%) in 1999, and thirty two percent (32%) thereafter on corporations
and the fifteen percent (15%) tax on dividends as herein provided; or, (b) does not
impose any income tax on dividends received from a domestic corporation.
(J) Fringe Benefits Granted to the Employee (Except Rank and File Employee).
There shall be imposed a final tax of 34% beginning January 1, 1998; 33% beginning
January 1, 1999 and 32% beginning January 1, 2000 and thereafter, on the grossed-
up monetary value of fringe benefits, granted or furnished by the employer to his
employees (except rank and file as defined in the Code). Fringe benefits however,
which are required by the nature of or necessary to the trade, business or profession
of the employer, or where such fringe benefit is for the convenience and advantage
of the employer shall not be subject to the fringe benefits tax. pr
The term fringe benefit means any good, service or other benefit furnished or
granted in cash or in kind by an employer to an individual employee (except rank
and file employees) such as but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference
between the market rate and actual rate granted;
 (6) Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.
Fringe benefits granted to the following employees and taxable under Sec. 25 (B),
(C), (D) and (E) shall also be subject to the fringe benefit tax to wit:
Sec. 25(B) Non-resident alien individual not engaged in trade or business in the
Philippines.
Sec. 25(C) Alien individual employed by regional or area headquarters and regional
operating headquarters of a multinational company, including any of its Filipino
employees employed and occupying the same position as those of its aforesaid
alien employees;
Sec. 25(D) Alien individual employed by an offshore banking unit of a foreign bank
established in the Philippines, including any of its Filipino employees employed and
occupying the same position as those of its aforesaid alien employees;
Sec. 25(E) Alien individual employed by a foreign service contractor and
subcontractor engaged in petroleum operations in the Philippines, including any of
its Filipino employees employed and occupying the same position as those of its
aforesaid alien employees.
The computation and the scheme for withholding the tax on fringe benefits shall
be governed by such revenue orders that the Commissioner shall issue as
guidelines and clarifications for its proper and consistent implementation.
(K) Informer's Reward to Persons Instrumental in the Discovery of Violations of the
National Internal Revenue Code and the Discovery and Seizure of Smuggled Goods.
The following rewards shall be subject to a final withholding tax at the rate of ten
percent (10%):
(1) Those given to persons, except an internal revenue official or employee, or
other public official or employee or his relative within the sixth degree of
consanguinity, who voluntarily gives definite and sworn information not yet in the
possession of the BIR, leading to the discovery of frauds upon the Internal Revenue
Laws or violations of any of the provisions thereof, thereby resulting in the recovery
of revenues, surcharges and fees and/or the conviction of the guilty party and/or
imposition of any fine or penalty.
(2) Those given to an informer where the offender has offered to compromise the
violation of law committed by him and his offer has been accepted by the
Commissioner and collected from the offender.
The amount of reward shall be equivalent to ten percent (10%) of the revenues,
surcharges or fees recovered and/or fine or penalty imposed and collected or one
million pesos (P1,000,000.00) per case whichever is lower.
The reward shall be paid under the rules and regulations issued by the Secretary of
Finance, upon the recommendation of the Commissioner. However, such person
shall not be entitled to a reward, should no revenue, surcharges or fees be actually
recovered or collected nor shall apply to a case already pending or previously
investigated or examined by the Commissioner or any of his deputies or agents or
examiners, or the Secretary of Finance or any of his deputies or agents.
(3) Those given to persons instrumental in the discovery and seizure of such
smuggled goods.
The amount of reward shall be equivalent to ten percent of the market value of the
smuggled and confiscated goods or one million pesos (P1,000,000.00) per case
whichever is lower.
B. Creditable Withholding Tax Sec. 57(B)
Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the
recommendation of the Commissioner, require the withholding of a tax on the items
of income payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent
(1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year.
CASE
Filipinas Synthetic Fiber Corporation v. CA
Facts: Filipinas Synthetic Fiber Corp., a domestic corporation received on December
27, 1979 a letter of demand from the Commissioner of Internal Revenue assessing it
for deficiency withholding tax at source in the total amount of P829,748.77 inclusive
of interest and compromise penalties, for the period from the fourth quarter of 1974
to the fourth quarter of 1975. The assessment was seasonably protested by petitioner
through its auditor, SGV and Company. Respondent denied the protest on May 14,
1985 on the following ground: For Philippine internal revenue tax purposes, the
liability to withhold and pay income tax withheld at source from certain payments due
to a foreign corporation is at the time of accrual and not at the time of actual payment
or remittance thereof.
On June 28, 1985, petitioner brought a petition for review before the Court of Tax
Appeals, the said court came out with its decision on June 15, 1993, which is against
the petitioner.
With the denial of its motion for reconsideration, petitioner appealed the CTA
disposition to the Count of Appeals, which affirmed in toto the appealed decision. So,
petitioner found its way to this count via petition for review on certiorari.
Issue: Whether the liability to withhold tax at source on income payments to non-
resident foreign corporation arises upon remittance of the amounts due to the foreign
creditors, or upon accrual thereof
Held: The Supreme Court held that since Sec. 53, NIRC (now, Sec. 57 of 1997 NIRC) in
relation to Sec. 54 (now Sec. 58) is silent as to when the duty to withhold arises, it is
necessary to look into the nature of the accrual method of accounting, which was used
by therein petitioner corporation. Inasmuch as under the accrual basis, income is
reportable when all the events have occurred to fix taxpayers right to receive the
income and the amounts can be determined with reasonable accuracy, hence, it is the
right to receive income, and not the actual receipt thereof, that determines when the
amount is includible in gross income. Thus, the duty of the withholding agent to
withhold the corresponding tax arises at the time of such accrual. The withholding
agent/corporation is then obliged to remit the tax to the Government since it already
and properly belongs to the Government. If a withholding agent who is personally
liable for income tax withheld at source fails to pay said withholding tax, an
assessment for said deficiency withholding tax would, therefore, be legal and proper.
Sec. 2.57(B) & 2.57.2, Rev. Regs. 2-98
2.57(B) Withholding of Creditable Tax at Source. - The Secretary of Finance may,
upon the recommendation of the Commissioner, require the withholding of a tax on
the items of income payable to natural or juridical persons, residing in the Philippines,
by payor-corporation/persons as provided for by law, at the rate of not less than one
percent (1%) but not more than thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer for the taxable year.
SECTION 2.57.2. Income Payment Subject to Creditable Withholding Tax and Rates
Prescribed Thereon. Except as herein otherwise provided, there shall be withheld
a creditable income tax at the rates herein specified for each class of payee from the
following items of income payments to persons residing in the Philippines:
(A) Professional fees, talent fees, etc., for services rendered by individuals On the
gross professional, promotional and talent fees or any other form of remuneration for
the services of the following individuals Ten percent (10%);
(1) Those individually engaged in the practice of professions or callings: lawyers;
certified public accountants; doctors of medicine; architects; civil, electrical, chemical,
mechanical, structural, industrial, mining, sanitary, metallurgical and geodetic
engineers; marine surveyors; doctors of veterinary science; dentist; professional
appraisers; connoisseurs of tobacco; actuaries; and interior decorators;
(2) Professional entertainers such as but not limited to actors and actresses, singers
and emcees;
(3) Professional athletes including basketball players, pelotaris and jockeys;
(4) All directors involved in movies, stage, radio, television and musical productions;
(5) Insurance agents and insurance adjusters;
(6) Management and technical consultants;
(7) Bookkeeping agents and agencies;
(8) Other recipients of talent fees;
(9) Fees of directors who are not employees of the company paying such fees, whose
duties are confined to attendance at and participation in the meetings of the board of
directors.
The amounts subject to withholding under this paragraph shall include not only fees,
but also per diems, allowances and any other form of income payments. In the case
of professional entertainers, athletes, and all recipient of talent fees, the amount
subject to withholding tax shall also include amounts paid to them in consideration
for the use of their names or pictures in print, broadcast, or other media or for public
appearances, for purposes of advertisements or sales promotion.
(B) Professional fees, talent fees, etc. for services of taxable juridical persons On
the gross professional, promotional and talents fees, or any other form of
remuneration enumerated in the preceding subparagraph for the services of taxable
juridical persons Five percent (5%).
(C) Rentals On gross rental for the continued use or possession of real property
used in business which the payor or obligor has not taken or is not taking title, or in
which he has no equity Five percent (5%).
(D) Cinematographic film rentals and other payments On gross payments to
resident individuals and corporate cinematographic film owners, lessors or
distributors Five percent (5%).
(E) Income payments to certain contractors On gross payments to the following
contractors, whether individual or corporate One percent (1%).
(F) Income payments to certain brokers and agents. On gross commissions of
customs, insurance, real estate and commercial brokers and fees of agents of
professional entertainers Five percent (5%);
(G) Income payments to partners of general professional partnerships. Income
payments made periodically or at the end of the taxable year by a general professional
partnership to the partners, such as drawings, advances, sharings, allowances,
stipends, etc. Ten percent (10%);
(H) Professional fees paid to medical practitioners. Any amount collected for and
paid to medical practitioners by hospitals and clinics or paid by patients to the medical
practitioners through the hospital or clinic Ten percent (10%);
(I) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of . Real property, other than capital
assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and
the seller/transferor is habitually engaged in the real estate business in accordance
with the following schedule
Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5
of these regulations Exempt
With a selling price of five hundred thousand pesos (P500,000.00) or less 1.5% With a
selling price of more than five hundred thousand pesos (P500,000.00) but not more
than two million pesos (P2,000,000.00) 3.0% With selling price of more than two
million pesos (P2,000,000.00) 5.0%
(J) Additional income payments to government personnel from importers, shipping
and airline companies, or their agents. On gross additional payments by importers,
shipping and airline companies, or their agents to government personnel for overtime
services as authorized by law Fifteen percent (15%);
For this purpose, the importers, shipping and airline companies or their agents, shall
be the withholding agents of the Government;
(K) Certain income payments made by credit card companies. On the gross
amounts paid by any credit card company in the Philippines to any business entity,
whether a natural or juridical person, representing the sales of goods/services made
by the aforesaid business entity to cardholders One half percent (1/2%);
L) Income payments made by the top five thousand (5,000) corporations. Income
payments made by any of the top five thousand (5,000) corporations, as determined
by the Commissioner, to their local supplier of goods One percent (1%);
C. Return and Payment of Tax
SECTION 58. Returns and Payment of Taxes Withheld at Source. -
(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and
withheld under Section 57 by withholding agents shall be covered by a return and paid
to, except in cases where the Commissioner otherwise permits, an authorized agent
bank, Revenue District Officer, Collection Agent, or duly authorized Treasurer of the
city or municipality where the withholding agent has his legal residence or principal
place of business, or where the withholding agent is a corporation, where the principal
office is located.
The taxes deducted and withheld by the withholding agent shall be held as a special
fund in trust for the government until paid to the collecting officers.
The return for final withholding tax shall be filed and the payment made within
twenty-five (5) days from the close of each calendar quarter, while the return for
creditable withholding taxes shall be filed and the payment made not later than the
last day of the month following the close of the quarter during which withholding was
made: Provided, That the Commissioner, with the approval of the Secretary of
Finance, may require these withholding agents to pay or deposit the taxes deducted
or withheld at more frequent intervals when necessary to protect the interest of the
government.
(B) Statement of Income Payments Made and Taxes Withheld. - Every withholding
agent required to deduct and withhold taxes under Section 57 shall furnish each
recipient, in respect to his or its receipts during the calendar quarter or year, a written
statement showing the income or other payments made by the withholding agent
during such quarter or year, and the amount of the tax deducted and withheld
therefrom, simultaneously upon payment at the request of the payee, but not later
than the twentieth (20th) day following the close of the quarter in the case of
corporate payee, or not later than March 1 of the following year in the case of
individual payee for creditable withholding taxes. For final withholding taxes, the
statement should be given to the payee on or before January 31 of the succeeding
year.
(C) Annual Information Return. - Every withholding agent required to deduct and
withhold taxes under Section 57 shall submit to the Commissioner an annual
information return containing the list of payees and income payments, amount of
taxes withheld from each payee and such other pertinent information as may be
required by the Commissioner. In the case of final withholding taxes, the return shall
be filed on or before January 31 of the succeeding year, and for creditable withholding
taxes, not later than March 1 of the year following the year for which the annual
report is being submitted. This return, if made and filed in accordance with the rules
and regulations approved by the Secretary of Finance, upon recommendation of the
Commissioner, shall be sufficient compliance with the requirements of Section 68 of
this Title in respect to the income payments.
The Commissioner may, by rules and regulations, grant to any withholding agent a
reasonable extension of time to furnish and submit the return required in this
Subsection.
(D) Income of Recipient. - Income upon which any creditable tax is required to be
withheld at source under Section 57 shall be included in the return of its recipient but
the excess of the amount of tax so withheld over the tax due on his return shall be
refunded to him subject to the provisions of Section 204; if the income tax collected
at source is less than the tax due on his return, the difference shall be paid in
accordance with the provisions of Section 56.
All taxes withheld pursuant to the provisions of this Code and its implementing rules
and regulations are hereby considered trust funds and shall be maintained in a
separate account and not commingled with any other funds of the withholding agent.
(E) Registration with Register of Deeds. - No registration of any document
transferring real property shall be effected by the Register of Deeds unless the
Commissioner or his duly authorized representative has certified that such transfer
has been reported, and the capital gains or creditable withholding tax, if any, has been
paid: Provided, however, That the information as may be required by rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, shall be annotated by the Register of Deeds in the Transfer
Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases
of transfer of property to a corporation, pursuant to a merger, consolidation or
reorganization, and where the law allows deferred recognition of income in
accordance with Section 40, the information as may be required by rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, shall be annotated by the Register of Deeds at the back of the
Transfer Certificate of Title or Condominium Certificate of Title of the real property
involved: Provided, finally, That any violation of this provision by the Register of Deeds
shall be subject to the penalties imposed under Section 269 of this Code.
D. Withholding on Wages Sec. 78 83
SECTION 78. Definitions. - As used in this Chapter:
(A) Wages. - The term 'wages' means all remuneration (other than fees paid to a
public official) for services performed by an employee for his employer, including the
cash value of all remuneration paid in any medium other than cash, except that such
term shall not include remuneration paid:
(1) For agricultural labor paid entirely in products of the farm where the labor is
performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or business, or
(4) For services by a citizen or resident of the Philippines for a foreign government
or an international organization.
If the remuneration paid by an employer to an employee for services performed
during one-half (1/2) or more of any payroll period of not more than thirty-one (31)
consecutive days constitutes wages, all the remuneration paid by such employer to
such employee for such period shall be deemed to be wages; but if the remuneration
paid by an employer to an employee for services performed during more than one-
half (1/2) of any such payroll period does not constitute wages, then none of the
remuneration paid by such employer to such employee for such period shall be
deemed to be wages.
SECTION 79. Income Tax Collected at Source. -
(A) Requirement of Withholding. - Every employer making payment of wages
shall deduct and withhold upon such wages a tax determined in accordance with the
rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner: Provided, however, That no withholding of a
tax shall be required where the total compensation income of an individual does not
exceed the statutory minimum wage, or Five thousand pesos (P5,000.00) per month,
whichever is higher.
(B) Tax Paid by Recipient. - If the employer, in violation of the provisions of this
Chapter, fails to deduct and withhold the tax as required under this Chapter, and
thereafter the tax against which such tax may be credited is paid, the tax so required
to be deducted and withheld shall not be collected from the employer; but this
Subsection shall in no case relieve the employer from liability for any penalty or
addition to the tax otherwise applicable in respect of such failure to deduct and
withhold.
(C) Refunds or Credits. -
(1) Employer. - When there has been an overpayment of tax under this Section,
refund or credit shall be made to the employer only to the extent that the amount of
such overpayment was not deducted and withheld hereunder by the employer.
(2) Employees. - The amount deducted and withheld under this Chapter during
any calendar year shall be allowed as a credit to the recipient of such income against
the tax imposed under Section 24(A) of this Title. Refunds and credits in cases of
excessive withholding shall be granted under rules and regulations promulgated by
the Secretary of Finance, upon recommendation of the Commissioner.
(D) Personal Exemptions. -
(1) In General. - Unless otherwise provided by this Chapter, the personal and
additional exemptions applicable under this Chapter shall be determined in
accordance with the main provisions of this Title.
(2) Exemption Certificates. -
(a) When to File. - On or before the date of commencement of employment with
an employer, the employee shall furnish the employer with a signed withholding
exemption certificate relating to the personal and additional exemptions to which
he is entitled.
(b) Change of Status. - In case of change of status of an employee as a result of
which he would be entitled to a lesser or greater amount of exemption, the
employee shall, within ten (10) days from such change, file with the employer a
new withholding exemption certificate reflecting the change.
(c) Use of Certificates. - The certificates filed hereunder shall be used by the
employer in the determination of the amount of taxes to be withheld.
(d) Failure to Furnish Certificate. - Where an employee, in violation of this
Chapter, either fails or refuses to file a withholding exemption certificate, the
employer shall withhold the taxes prescribed under the schedule for zero
exemption of the withholding tax table determined pursuant to Subsection (A)
hereof.
(E) Withholding on Basis of Average Wages. - The Commissioner may, under
rules and regulations promulgated by the Secretary of Finance, authorize employers
to:
(1) estimate the wages which will be paid to an employee in any quarter of the
calendar year;
(2) determine the amount to be deducted and withheld upon each payment of
wages to such employee during such quarter as if the appropriate average of the
wages so estimated constituted the actual wages paid; and
(3) deduct and withhold upon any payment of wages to such employee during
such quarter such amount as may be required to be deducted and withheld during
such quarter without regard to this Subsection.
(F) Husband and Wife. - When a husband and wife each are recipients of wages,
whether from the same or from different employers, taxes to be withheld shall be
determined on the following bases:
(1) The husband shall be deemed the head of the family and proper claimant of
the additional exemption in respect to any dependent children, unless he explicitly
waives his right in favor of his wife in the withholding exemption certificate.
(2) Taxes shall be withheld from the wages of the wife in accordance with the
schedule for zero exemption of the withholding tax table prescribed in Subsection
(D)(2)(d) hereof.
(G) Nonresident Aliens. - Wages paid to nonresident alien individuals engaged in
trade or business in the Philippines shall be subject to the provisions of this
Chapter.
(H) Year-end Adjustment. - On or before the end of the calendar year but prior to
the payment of the compensation for the last payroll period, the employer shall
determine the tax due from each employee on taxable compensation income for the
entire taxable year in accordance with Section 24(A). The difference between the tax
due from the employee for the entire year and the sum of taxes withheld from January
to November shall either be withheld from his salary in December of the current
calendar year or refunded to the employee not later than January 25 of the
succeeding year.
SECTION 80. Liability for Tax. -
(A) Employer. - The employer shall be liable for the withholding and remittance of the
correct amount of tax required to be deducted and withheld under this Chapter. If the
employer fails to withhold and remit the correct amount of tax as required to be
withheld under the provision of this Chapter, such tax shall be collected from the
employer together with the penalties or additions to the tax otherwise applicable in
respect to such failure to withhold and remit.
(B) Employee. - Where an employee fails or refuses to file the withholding exemption
certificate or wilfully supplies false or inaccurate information thereunder, the tax
otherwise required to be withheld by the employer shall be collected from him
including penalties or additions to the tax from the due date of remittance until the
date of payment. On the other hand, excess taxes withheld made by the employer
due to:
(1) failure or refusal to file the withholding exemption certificate; or
(2) false and inaccurate information shall not be refunded to the employee but shall
be forfeited in favor of the Government.
SECTION 81. Filing of Return and Payment of Taxes Withheld.
Except as the Commissioner otherwise permits, taxes deducted and withheld by the
employer on wages of employees shall be covered by a return and paid to an
authorized agent bank, Collection Agent, or the duly authorized Treasurer of the city
or municipality where the employer has his legal residence or principal place of
business, or in case the employer is a corporation, where the principal office is
located.
The return shall be filed and the payment made within twenty-five (25) days from the
close of each calendar quarter: Provided, however, That the Commissioner may, with
the approval of the Secretary of Finance, require the employers to pay or deposit the
taxes deducted and withheld at more frequent intervals, in cases where such
requirement is deemed necessary to protect the interest of the Government.
The taxes deducted and withheld by employers shall be held in a special fund in trust
for the Government until the same are paid to the said collecting officers.
SECTION 82. Return and Payment in Case of Government Employees.
- If the employer is the Government of the Philippines or any political subdivision,
agency or instrumentality thereof, the return of the amount deducted and withheld
upon any wage shall be made by the officer or employee having control of the
payment of such wage, or by any officer or employee duly designated for the purpose.
SECTION 83. Statements and Returns.
(A) Requirements. - Every employer required to deduct and withhold a tax shall
furnish to each such employee in respect of his employment during the calendar year,
on or before January thirty-first (31st) of the succeeding year, or if his employment is
terminated before the close of such calendar year, on the same day of which the last
payment of wages is made, a written statement confirming the wages paid by the
employer to such employee during the calendar year, and the amount of tax deducted
and withheld under this Chapter in respect of such wages. The statement required to
be furnished by this Section in respect of any wage shall contain such other
information, and shall be furnished at such other time and in such form as the
Secretary of Finance, upon the recommendation of the Commissioner, may, by rules
and regulations, prescribe.
(B) Annual Information Returns. - Every employer required to deduct and
withhold the taxes in respect of the wages of his employees shall, on or before January
thirty-first (31st) of the succeeding year, submit to the Commissioner an annual
information return containing a list of employees, the total amount of compensation
income of each employee, the total amount of taxes withheld therefrom during the
year, accompanied by copies of the statement referred to in the preceding paragraph,
and such other information as may be deemed necessary. This return, if made and
filed in accordance with rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, shall be sufficient compliance
with the requirements of Section 68 of this Title in respect of such wages.
(C) Extension of Time. - The Commissioner, under such rules and regulations as
may be promulgated by the Secretary of Finance, may grant to any employer a
reasonable extension of time to furnish and submit the statements and returns
required under this Section.
Sec. 2.78, Rev. Regs. 2-98
SECTION 2.78. Withholding Tax on Compensation. The withholding of tax on
compensation income is a method of collecting the income tax at source upon receipt
of the income. It applies to all employed individuals whether citizens or aliens,
deriving income from compensation for services rendered in the Philippines. The
employer is constituted as the withholding agent.
SECTION 2.78.1. Withholding of Income Tax on Compensation Income.
(A) Compensation Income Defined. In general, the term "compensation" means all
remuneration for services performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded by the Code.
The name by which the remuneration for services is designated is immaterial. Thus,
salaries, wages, emoluments and honoraria, allowances, commissions (e.g.
transportation, representation, entertainment and the like); fees including director's
fees, if the director is, at the same time, an employee of the employer/corporation;
taxable bonuses and fringe benefits except those which are subject to the fringe
benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and
other income of a similar nature constitute compensation income.
The basis upon which the remuneration is paid is immaterial in determining whether
the remuneration constitutes compensation. Thus, it may be paid on the basis of
piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly
or annually.
Remuneration for services constitutes compensation even if the relationship of
employer and employee does not exist any longer at the time when payment is made
between the person in whose employ the services had been performed and the
individual who performed them.
(1) Compensation paid in kind. Compensation may be paid in money or in some
medium other than money, as for example, stocks, bonds or other forms of property.
If services are paid for in a medium other than money, the fair market value of the
thing taken in payment is the amount to be included as compensation subject to
withholding. If the services are rendered at a stipulated price, in the absence of
evidence to the contrary, such price will be presumed to be the fair market value of
the remuneration received. If a corporation transfers to its employees its own stock
as remuneration for services rendered by the employee, the amount of such
remuneration is the fair market value of the stock at the time the services were
rendered.
(2) Living quarters or meals. If a person receives a salary as remuneration for
services rendered, and in addition thereto, living quarters or meals are provided, the
value to such person of the quarters and meals so furnished shall be added to the
remuneration paid for the purpose of determining the amount of compensation
subject to withholding. However, if living quarters or meals are furnished to an
employee for the convenience of the employer, the value thereof need not be
included as part of compensation income.
(3) Facilities and privileges of a relatively small value. Ordinarily, facilities and
privileges (such as entertainment, medical services, or so called "courtesy" discounts
on purchases), furnished or offered by an employer to his employees generally, are
not considered as compensation subject to withholding if such facilities or privileges
are of relatively small value and are offered or furnished by the employer merely as a
means of promoting the health, goodwill, contentment, or efficiency of his
employees.
Where compensation is paid in property other than money, the employer shall make
necessary arrangements to ensure that the amount of the tax required to be withheld
is available for payment to the Commissioner.
(4) Tips and gratuities. Tips or gratuities paid directly to an employee by a customer
of the employer which are not accounted for by the employee to the employer are
considered as taxable income but not subject to withholding.
(5) Pensions, retirement and separation pay. Pensions, retirement and separation
pay constitute compensation subject to withholding, except those provided under
Subsection B of this section.
(6) Fixed or variable transportation, representation and other allowances compensation and is deemed to be paid to the employee as compensation at the time
the deduction is made.
(a) IN GENERAL, fixed or variable transportation, representation and other
allowances which are received by a public officer or employee or officer or (9) Remuneration for services as employee of a nonresident alien individual or
employee of a private entity, in addition to the regular compensation fixed for his foreign entity. The term "compensation" includes remuneration for services
position or office, is compensation subject to withholding. performed by an employee of a nonresident alien individual, foreign partnership or
foreign corporation, whether or not such alien individual or foreign entity is engaged
(b) Any amount paid specifically, either as advances or reimbursements for
in trade or business within the Philippines. Any person paying compensation on behalf
travelling, representation and other bonafide ordinary and necessary expenses
of a non-resident alien individual, foreign partnership, or foreign corporation which is
incurred or reasonably expected to be incurred by the employee in the
not engaged in trade or business within the Philippines is subject to all provisions of
performance of his duties are not compensation subject to withholding, if the
law and regulations applicable to an employer.
following conditions are satisfied:
(10) Compensation for services performed outside the Philippines. Remuneration
(i) It is for ordinary and necessary travelling and representation or
for services performed outside the Philippines by a resident citizen for a domestic or
entertainment expenses paid or incurred by the employee in the pursuit of the
a resident foreign corporation or partnership, or for a non-resident corporation or
trade, business or profession; and
partnership, or for a non-resident individual not engaged in trade or business in the
(ii) The employee is required to account/liquidate for the foregoing expenses Philippines shall be treated as compensation which is subject to tax.
in accordance with the specific requirements of substantiation for each
A non-resident citizen as defined in these regulations is taxable only on income
category of expenses pursuant to Sec. 34 of the Code. The excess of actual
derived from sources within the Philippines. In general, the situs of the income
expenses over advances made shall constitute taxable income if such amount
whether within or without the Philippines, is determined by the place where the
is not returned to the employer. Reasonable amounts of reimbursements/
service is rendered.
advances for travelling and entertainment expenses which are pre-computed
on a daily basis and are paid to an employee while he is on an assignment or (B) Exemptions from withholding tax on compensation. The following income
duty need not be subject to the requirement of substantiation and to payments are exempted from the requirement of withholding tax on compensation:
withholding.
(1) Remunerations received as an incident of employment, as follows:
(7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick
(a) Retirement benefits received under Republic Act under 7641 and those received
leave credits" which are paid to an employee constitute compensation. Thus, the
by officials and employees of private firms, whether individual or corporate, under a
salary of an employee on vacation or on sick leave, which are paid notwithstanding
reasonable private benefit plan maintained by the employer which meet the following
his absence from work, constitutes compensation. However, the monetized value of
requirements:
unutilized vacation leave credits of ten (10) days or less which were paid to the
employee during the year are not subject to income tax and to the withholding tax. (i) The plan must be reasonable;
(ii) The benefit plan must be approved by the Bureau;
(8) Deductions made by employer from compensation of employee. Any amount
which is required by law to be deducted by the employer from the compensation of
an employee including the withheld tax is considered as part of the employee's
 (iii) The retiring official or employee must have been in the service of the same
employer for at least ten (10) years and is not less than fifty (50) years of age at
the time of retirement; and
(iv) The retiring official or employee should not have previously availed of the
privilege under the retirement benefit plan of the same or another employer.
(b) Any amount received by an official or employee or by his heirs from the employer
due to death, sickness or other physical disability or for any cause beyond the control
of the said official or employee, such as retrenchment, redundancy, or cessation of
business.
(c) Social security benefits, retirement gratuities, pensions and other similar benefits
received by residents or non-resident citizens of the Philippines or aliens who come
to reside permanently in the Philippines from foreign government agencies and other
institutions private or public;
(d) Payments of benefits due or to become due to any person residing in the
Philippines under the law of the United States administered by the United States
Veterans Administration;
(e) Payments of benefits made under the Social Security System Act of 1954 as
amended; and
(f) Benefits received from the GSIS Act of 1937, as amended, and the retirement
gratuity received by government officials and employees.
(2) Remuneration paid for agricultural labor
(a) Remuneration for services which constitute agricultural labor and paid entirely
in products of the farm where the labor is performed is not subject to withholding.
In general, however, the term, "agricultural labor" does not include services
performed in connection with forestry, lumbering or landscaping.
(b) Remuneration paid entirely in products of the farm where the labor is
performed by an employee of any person in connection with any of the following
activities is except as remuneration for agricultural labor:
(i) The cultivation of soil;
(ii) The raising, shearing, feeding, caring for, training, or management of
livestock, bees, poultry, or wildlife; or
(iii) The raising or harvesting of any other agricultural or horticultural
commodity. The term "farm" as used in this subsection includes, but is not
limited to stock, dairy, poultry, fruits and truck farms, plantations, ranches,
nurseries ranges, orchards, and such greenhouse and other similar structures
as are used primarily for the raising of agricultural or horticultural commodities.
(c) The remuneration paid entirely in products of the farm where labor is performed
for the following services in the employ of the owner or tenant or other operator of
one or more farms is not considered as remuneration for agricultural labor, provided
the major part of such services is performed on a farm:
(i) Services performed in connection with the operation, management,
conservation, improvement, or maintenance of any such farms or its tools or
equipment; or
(ii) Services performed in salvaging timber, or clearing land brush and other
debris left by a hurricane or typhoon.
(d) Remuneration paid entirely in products of the farm where labor is performed by
an employee in the employ of any person in connection with any of the following
operations is not considered as remuneration for agricultural labor without regard to
the place where such services are performed:
(i) The making of copra, stripping of abaca, etc.;
(ii) The hatching of poultry;
(ii) The raising of fish;
(iv) The operation or maintenance of ditches, canals, reservoirs, or waterways
used exclusively for supplying or storing water for farming purposes; and
(v) The production or harvesting of crude gum from a living tree or the processing
of such crude gum into gum spirits or turpentine and gum resin, provided such
processing is carried on by the original producer of such crude gum.
(e) Remuneration paid entirely in products of the farm where labor is performed by
an employee in the employ of a farmer or a farmer's cooperative, organization or
group in the handling, planting, drying, packing, packaging, processing, freezing,
grading, storing or delivering to storage or to market or to carrier for transportation
to market, of any agricultural or horticultural commodity, produced by such farmer or
farmer-members of such organization or group, is excepted as remuneration for
agricultural labor. Services performed by employees of such farmer or farmer's
organization or group in handling, planting, drying, packaging, processing, freezing,
grading, storing, or delivering to storage or to market or to carrier for transportation
to market of commodities produced by persons other than such farmer or members
of such farmer's organization or group are not performed "as an incident to ordinary
farming operation".
(3) Remuneration for domestic services. Remuneration paid for services of a
household nature performed by an employee in or about the private home of the
person by whom he is employed is not subject to withholding. However, the services
of household personnel furnished to an employee (except rank and file employees)
by an employer shall be subject to the fringe benefits tax pursuant to Sec. 33 of the
Code, as amended.
A private home is the fixed place of abode of an individual or family. If the home is
utilized primarily for the purpose of supplying board or lodging to the public as a
business enterprise, it ceases to be a private home and remuneration paid for services
performed therein is not exempted.
In general, services of a household nature in or about a private home include services
rendered by cooks, maids, butlers, valets, laundresses, gardeners, chauffeurs of
automobiles for family use.
The remuneration paid for the services above enumerated which are performed in or
about rooming or lodging houses, boarding houses, clubs, hotels, hospitals or
commercial offices or establishments is considered as compensation;
ESTATES AND TRUSTS
SEC. 60. Imposition of Tax.
(A) Application of Tax. The tax imposed by this Title upon individuals shall apply to
the income of estates or of any kind of property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or unascertained person
or persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries,
and income collected by a guardian of an infant which is to be held or distributed
as the court may direct;
(3) Income received by estates of deceased persons during the period of
administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either distributed to
the beneficiaries or accumulated.
(B) Exception. The tax imposed by this Title shall not apply to employees trust which
forms part of a pension, stock bonus or profit-sharing plan of an employer for the
benefit of some or all of his employees (1) if contributions are made to the trust by
such employer, or employees, or both for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to employees under the
trust, for any part of the corpus or income to be (within the taxable year or thereafter)
used for, or diverted to, purposes other than for the exclusive benefit of his
employees: Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to the extent
that it exceeds the amount contributed by such employee or distributee.
(C) Computation and Payment.
(1) In General. The tax shall be computed upon the taxable income of the estate
or trust and shall be paid by the fiduciary, except as provided in Section 63
(relating to revocable trusts) and Section 64 (relating to income for the benefit of
the grantor).
(2) Consolidation of Income of Two or More Trusts. Where, in the case of two or
more trusts, the creator of the trust in each instance is the same person, and the
beneficiary in each instance is the same, the taxable income of all the trusts shall
be consolidated and the tax provided in this Section computed on such
consolidated income, and such proportion of said tax shall be assessed and
collected from each trustee which the taxable income of the trust administered
by him bears to the consolidated income of the several trusts.
SEC. 61. Taxable Income. The taxable income of the estate or trust shall be
computed in the same manner and on the same basis as in the case of an individual,
except that:
(A) There shall be allowed as a deduction in computing the taxable income of the
estate or trust the amount of the income of the estate or trust for the taxable year
which is to be distributed currently by the fiduciary to the beneficiaries, and the
amount of the income collected by a guardian of an infant which is to be held or
distributed as the court may direct, but the amount so allowed as a deduction shall
be included in computing the taxable income of the beneficiaries, whether distributed
to them or not. Any amount allowed as a deduction under this Subsection shall not
be allowed as a deduction under Subsection (B) of this Section in the same or any
succeeding taxable year.
(B) In the case of income received by estates of deceased persons during the period
of administration or settlement of the estate, and in the case of income which, in the
discretion of the fiduciary, may be either distributed to the beneficiary or
accumulated, there shall be allowed as an additional deduction in computing the
taxable income of the estate or trust the amount of the income of the estate or trust
for its taxable year, which is properly paid or credited during such year to any legatee,
heir or beneficiary but the amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned
in Subsections (A) and (B) of this Section shall not be allowed: Provided, that the
amount of any income included in the return of said trust shall not be included in
computing the income of the beneficiaries.
SEC. 65. Fiduciary Returns. Guardians, trustees, executors, administrators,
receivers, conservators and all persons or corporations, acting in any fiduciary
capacity, shall render, in duplicate, a return of the income of the person, trust or
estate for whom or which they act, and be subject to all the provisions of this Title,
which apply to individuals in case such person, estate or trust has a gross income of
Twenty thousand pesos (P20,000) or over during the taxable year. Such fiduciary or
person filing the return for him or it, shall take oath that he has sufficient knowledge
of the affairs of such person, trust or estate to enable him to make such return and
that the same is, to the best of his knowledge and belief, true and correct, and be
subject to all the provisions of this Title which apply to individuals: Provided, That a
return made by or for one or two or more joint fiduciaries filed in the province where
such fiduciaries reside; under such rules and regulations as the Secretary of Finance,
upon recommendation of the Commissioner, shall prescribe, shall be a sufficient
compliance with the requirements of this Section.
SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. Trustees, executors,
administrators and other fiduciaries are indemnified against the claims or demands of
every beneficiary for all payments of taxes which they shall be required to make under
the provisions of this Title, and they shall have credit for the amount of such payments
against the beneficiary or principal in any accounting which they make as such
trustees or other fiduciaries
A. General Rule on Taxability: Fiduciary or Beneficiary
- IF INCOME IS:
for the benefit of the GRANTOR taxpayer is GRANTOR
retained by the TRUST taxpayer is FIDUCIARY
distributed to BENEFICIARY taxpayer is BENEFICIARY
or (2) may, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income, be distributed to the
grantor, or (3) is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income may be
applied to the payment of premiums upon policies of insurance on the life of the
grantor, such part of the income of the trust shall be included in computing the
taxable income of the grantor.

B. Personal Exemption Allowed (B) As used in this Section, the term in the discretion of the grantor means in the
discretion of the grantor, either alone or in conjunction with any person not having a
- Entitlement to personal exemption is limited only to Php20,000.00 substantial adverse interest in the disposition of the part of the income in question.
- SEC. 62. Exemption Allowed to Estates and Trusts. For the purpose of the tax
provided for in this Title, there shall be allowed an exemption of Twenty thousand
pesos (P20,000) from the income of the estate or trust.

C. Decedents Estate Administration

D. Revocable Trusts (SEC. 63)
- Where at any time the power to revest in the grantor title to any part of the corpus
of the trust is vested
(1) in the grantor either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus or the
income therefrom, or
(2) in any person not having a substantial adverse interest in the disposition of
such part of the corpus or the income therefrom, the income of such part of
the trust shall be included in computing the taxable income of the grantor.

E. Income for Benefit of Grantor (SEC. 64)

(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor
or of any person not having a substantial adverse interest in the disposition of such
part of the income may be held or accumulated for future distribution to the grantor,