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TAXATION I
QUIZZLER ON INCOME TAXATION
FOREWORD
This Reviewer covers the study of the law on Income Taxation which includes: 1. Title II of the National Internal Revenue Code (NIRC) 2. Statutes related or amending the NIRC 3. Related Revenue Regulations, BIR Rulings and other administrative issuances 4. Cases decided by the Supreme Court As a complement to this reviewer, I suggest you get any book containing the complete codal provisions of the NIRC (either the green codal from Rex Bookstore or the NIRC annotated codal by Casasola and Bernaldo. As for reference books, I would recommend Income Taxation by Mamalateo or Tax Law and Jurisprudence by Vitug and Acosta. As Albert Einstein puts it, the hardest thing in the world to understand is the income tax. May this reviewer serve its purpose in helping us in our efforts in overcoming this challenge and achieve excellence. Yours in Honor and Excellence, Pierre Martin DL Reyes
Q: How do you distinguish schedular treatment from global treatment as used in income taxation?
A: Under the schedular tax system, the various types of income (i.e. compensation; business/professional income) are classified accordingly and are accorded different tax treatments , in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. On the other hand, under the global tax system , all income received by the taxpayer are grouped together, without any distinction as to type or nature of the income , and after deducting therefrom expenses and other allowable deductions, are subjected to tax at a graduated or fixed rate.
Q: To which system does the method of taxation under the NIRC belong?
A: The current method of taxation under the NIRC belongs to semischedular and semi-global tax system.
Q: What are the features of the Philippine Income Tax Law? OVERVIEW OF INCOME TAXATION Q: What is an Income Tax?
A: Income Tax has been defined as a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a persons income, emoluments, profits and the like. A: The features are as follows: 1. Income tax is a direct tax because the tax burden is borne by the income recipient upon whom the tax is imposed. 2. Income tax is a progressive tax since the tax base increases as the tax rate increases. 3. The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, resident principle and the source principle. 4. The Philippines follows the semi-schedular or semi-global system of income taxation.
Q: What are the different income tax systems adopted by the Philippines?
A: The types of income tax systems adopted are as follows: 1. Global Tax System where the taxpayer is required to lump up all items of income earned during a taxable period and pay under a single set of income tax rates on these different items of income. 2. Schedular Tax System where there are different tax treatments of different types of income so that a separate tax return is required to be filed for each type of income and the tax is computed on a per return or per schedule basis. 3. Semi-Schedular or Semi-Global Tax System where the tax system is either (a) global (e.g. taxpayer with compensation income not subject to final withholding tax or business or professional income or mixed income compensation and business or professional income) or (b) schedular (e.g. taxpayer with compensation, capital gains, passive income, or other income subject to final withholding tax) or (c) both global and schedular may be applied depending on the nature of the income realized by the taxpayer during the year.
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3. 4.
Minimum corporate income tax on corporations Special income tax on certain corporations (e.g. private educational institutions, FCDUs, and international carriers) 5. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as a capital asset 6. Capital gains tax on sale or exchange of real property located in the Philippines and classified as a capital asset 7. Final withholding tax on certain passive investment incomes 8. Fringe benefit tax 9. Branch profit remittance tax; and 10. Tax on improperly accumulated earnings.
Resident alien Nonresident alien Resident foreign corporation Nonresident foreign corporation Fiduciary
Withholding agent
Shares of stock
Shareholder Person Corporation An individual, a trust, estate or corporation Includes partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, 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 and other energy operations pursuant to an operating agreement under a service contract with the Government 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 When applied to a corporation, means created or organized in the Philippines or under its laws When applied to a corporation, means a corporation which is not domestic The term means a citizen of the Philippines: 1. who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with intention to reside therein 2. who leaves the Philippines during the taxable year to reside abroad either as an immigrant or for employment on a permanent basis 3. 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. who has been previously considered a non-resident citizen and who
and
Fiscal year
Paid or incurred and paid or accrued Trade or business Securities Dealer in securities
Bank
Non-bank institution
financial
Quasi-banking activities
arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines with respect to his income derived from sources abroad until date of his arrival in the Philippines An individual whose residence is within the Philippines and who is not a citizen thereof An individual whose residence is not within the Philippines and who is not a citizen thereof A foreign corporation engaged in trade or business within the Philippines A foreign corporation not engaged in trade or business within the Philippines A guardian, trustee, executor, administrator, receiver, conservator or any person acting in any fiduciary capacity for any person Any person required to deduct and withhold tax under the provisions of Section 57 (Withholding of Tax at source) Includes shares of stock of a corporation, warrants and/or options to purchase shares of stocks 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 and mutual fund certificates Includes any holder of shares of stock and others which are considered shares of stock under this code (refer to definition of Shares of Stock) Any person subject to tax When used in a definition, it shall not be deemed to exclude other things otherwise within the meaning of the term Means the calendar year or the fiscal year ending during such calendar year, upon the basis of which the net income is computed Means an accounting period of 12 months ending on the last day of any month other than December Shall be construed according to the method of accounting upon the basis of which net income is computed Includes the performance of the functions of a public office Means share of stock n a corporation and rights to subscribe for or to receive such shares 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 Every banking institution as defined in RA 337 as amended by RA 8791 (General Banking Act of 2000) A financial intermediary as defined in RA 337 as amended by RA 8791 (General Banking Act of 2000) authorized by the BSP to perform quasibanking activities Means borrowing funds from 20 or more personal or corporate lenders at any one time, through the issuance, endorsement, or
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Deposit substitutes
Ordinary Income
Mutual fund company Trade, business or profession Regional or area headquarters Long-term deposit or investment certificate
Minimum earner
Wage
acceptance of debt instruments of any kind other than deposits for the borrowers own account or through the issuance of certificates of assignments or similar instruments, with recourse, or of purchase agreements for purposes of re-lending or purchasing receivables and other similar obligations An alternative form of obtaining funds from the public (the term public means borrowing from 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 purposes of re-lending or purchasing receivables and other similar obligations, or financing their own needs or the needs of their agent or dealer Any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1) (which defines what capital assets are and those which are not) Includes any loss from the sale or exchange of property which is not a capital asset Mean all employees who are holding neither managerial nor supervisory position as defined under existing provisions of the Labor Code An open-end and close-end investment company as defined under the Investment Code Include performance of services by the taxpayer as an employee A branch established in the Philippines by multinational companies 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 maturity period of not less than 5 years, the form of which shall be prescribed by the BSP and issued by Banks only to individuals in denominations of P10,000 and other denominations as may be prescribed by the BSP Refers to the rate fixed by the Regional Tripartite Wage and Productivity Boar, as defined by the Bureau of Labor and Employment Statistics (BLES) of DOLE 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
Commission on Audit (COA) conducted an examination of the books of accounts and records of MERALCO and thereafter recommended, among others, that: (1) income taxes paid by MERALCO should not be included as part of MERALCO's operating expenses and (2) the "net average investment method" or the "number of months use method" should be applied in determining the proportionate value of the properties used by MERALCO during the test year. The ERB adopted the recommendations of the COA and held that income tax should not be treated as operating expense as this should be "borne by the stockholders who are recipients of the income or profits realized from the operation of their business" hence, should not be passed on to the consumers. The decision directed the reduction of the MERALCO rates by an average of P0.167 per kwh and the refund of such amount to MERALCO's customers beginning February 1994 and until its billing cycle beginning February 1998. ISSUE: Whether income tax should be included in the computation of operating expenses of a public utility? HELD: NO. Income tax paid by a public utility is inconsistent with the nature of operating expenses. In general, Operating expenses are those which are reasonably incurred in connection with business operations to yield revenue or income. They are items of expenses which contribute or are attributable to the production of income or revenue. On the other hand, Income tax is imposed on an individual or entity as a form of excise tax or a tax on the privilege of earning income. In exchange for the protection extended by the State to the taxpayer, the government collects taxes as a source of revenue to finance its activities. Clearly, by its nature, income tax payments of a public utility are not expenses which contribute to or are incurred in connection with the production of profit of a public utility. Income tax should be borne by the taxpayer alone as they are payments made in exchange for benefits received by the taxpayer from the State. To charge consumers for expenses incurred by a public utility which are not related to the service or benefit derived by the customers from the public utility is unjustified and inequitable. Accordingly, the burden of paying income tax should be Meralco's alone and should not be shifted to the consumers by including the same in the computation of its operating expenses.
Relevant Cases assigned: REPUBLIC OF THE PHILIPPINES VS. MANILA ELECTRIC COMPANY
GR NO. 141314, NOVEMBER 15, 2002 FACTS: MERALCO filed with the ERB an application for revised rates, with an average increase of P0.21 per kwh in its distribution charge. The ERB granted a provisional increase of P0.184 per kwh subject to the condition that in the event the ERB determines that MERALCO is entitled to a lesser increase in rates, all excess amounts collected by MERALCO shall be refunded to its customers or credited in their favor. The
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remittances in the event the company would declare cash dividends, and to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly, envisioned by Don Andres. It likewise invoked the amnesty provisions of P.D. 67. ISSUES: (1) May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? (2) Whether ANSCOR's redemption of stocks from its stockholder and the exchange of stocks can be considered as "essentially equivalent to the distribution of taxable dividend" making the proceeds thereof taxable under the provisions of the above-quoted law? HELD: (1) NO. PD 67 condones the taxpayer. 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 its personality as a taxpayer. In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer he is the person subject to tax impose by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still impose on and due from the latter. The agent is not liable for the tax as no wealth flowed into him he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguish from its duty to pay tax. (2) The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. The test of taxability under the exempting clause of Section 83(b) is whether income was realized through the redemption of stock dividends. The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder's separate property. Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. Hence, the proceeds are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income" subject to tax under Section 22 ( tax on non-resident alien individual) in relation to Section 21 (rates of tax on citizens or residents) of the then 1939 Code. As income, it is subject to income tax which is required to be withheld at source.
revenue officers unsatisfied sought the opinion of the US Treasury Department. The US CIR reversed the opinion of the Attorney-General and decided against the claim of Madrigal. Madrigal paid under protest and brought the action before the Trial Court which ruled in defendants favor. On appeal, petitioner argues that the income should be divided into two equal parts, because of the conjugal partnership existing between him and his wife. The respondents, on the other hand, contend that the taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon capital and property; that the fact that Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal partnership, has no bearing on income considered as income, and that the distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting from the relation of marriage. ISSUE: Whether the income should be divided into two equal parts because of the conjugal partnership existing between Madrigal and his wife? HELD: NO. Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth. A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." In this case, Paterno, wife of Madrigal, has an inchoate right, a mere expectancy, in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husband's property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. Moreover, the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in the Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law must be given effect. GENERAL PRINCIPLES OF INCOME TAXATION (SECTION 23, NIRC)
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5.
6.
within the Philippines (Residence and source of income principle) A domestic corporation is taxable on all income derived from sources within and outside the Philippines (Citizenship principle) 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 (source of income principle).
TAX ON INDIVIDUALS (EXCEPT ESTATES AND TRUSTS) (SECTIONS 24-26, NIRC) Q: Who are the individual taxpayers?
A: They are: 1. Citizens a. Resident Citizens b. Nonresident Citizens 2. Aliens a. Resident Aliens b. Nonresident Aliens i. Engaged in trade or business in the Philippines ii. Not engaged in trade or business in the Philippines
In other words, under Title II, only resident citizens and domestic corporations are taxable on their worldwide income while the other types of individual and corporate taxpayers are taxable only on income derived from sources within the Philippines . (Remember this!)
(Note that the definitions of all the kinds of taxpayers mentioned above
can be found in Section 22, NIRC. This is why it is important to memorize them!)
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respect to his income derived from sources abroad until date of his arrival in the Philippines
Q: What are the graduated income tax rates on taxable income of individuals?
A: In relation to Section 23 of the NIRC, the taxable income (i.e. the pertinent items of gross income less deductions and/or personal and additional exemptions authorized for such types of income by the Tax Code or other special laws) derived for each taxable year: 1. 2. 3. From all sources within and without the Philippines by resident citizens; From all sources within the Philippines only by a non-resident citizen including overseas contract workers; From all sources within the Philippines only, by a resident alien or a non-resident alien engaged in trade or business in the Philippines
Shall be subject to the graduated income tax in accordance with the following schedule provided under Section 24: Not over P10,000 Over 10,000 but not over P30,000 Over P30,000 but not over P70,000 Over P70,000 but not over P140,000 Over P140,000 but not over P250,000 Over P250,000 but not over P500,000 5% P500 + 10% of excess over P10,000 P2,500 + 15% of the excess over P30,000 P8,500 + 20% of the excess over P70,000 P22,500 + 25% of the excess over P140,000 P50,000 + 30% of the excess over P250,000 P125,000 + 32% of the excess over P500,000
Over P500,000
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e.
2.
3.
If the recipient of the above passive income is a non-resident alien engaged in trade or business in the Philippines, the rate is 20% except: a. Royalties on books as well as other literary works and musical compositions which shall be subject to 10% BUT cinematographic films and similar works are subject to 25% tax as provided in Section 28, NIRC b. Interest income from long-term deposit or investment which is tax-exempt c. Prizes amounting to P10,000 or less which shall be subject to the graduated income tax rates d. Winnings from PCSO which are tax-exempt If the recipient is a non-resident alien not engaged in trade or business in the Philippines, the rate is 25%. They shall be subject to the following rates: 6% beginning January 1, 1988 8% beginning January 1, 1999 10% beginning January 1, 2000 Applies to citizens and resident aliens If the shares of stock is listed but not traded in PSE, the rates are: a. Not over P100,000 5% b. In excess of P100,000 10% If the shares of stock is listed and traded in the PSE, it is subject to 1% of stock transaction tax. (Note that that this is one of the only two exceptions where the kind of taxpayer is immaterial. The rates is uniform whether the seller is an individual, citizen or alien or a corporation, domestic or foreign) Subject to final tax of 6% based on the gross selling price or current fair market value as determined by the Commissioner in accordance with Section 6(E), NIRC whichever is higher. However, if the buyer is the government or any of its political subdivisions or to GOCCs (buyer, not recipient of capital gains), the tax liability shall be either the graduated income tax rates under Section 24(A) or the 6% stated above whichever is higher. If the recipient of the capital gain from sale of real property is an alien whether engaged or not engaged in trade or business in the Philippines , he shall be subject to 6% based on the gross selling
Q: What are the incomes subject to preferential tax rates and what are the tax rates applicable to each? A: As a general rule, income, gain or profit derived by an individual
during the taxable year shall be subject to the graduated income tax rates. As exceptions, certain income subject to tax are not subject to the graduated tax rates stated previously and are subject to preferential tax rates. They are: 1. Tax on certain passive income under Section 24(B) a. Interests, royalties, prizes and other winnings under Section 24(B)(1) b. Cash and/or property dividends under Section 24(B)(2) Capital gains from sale of shares of stock not traded in the Stock exchange under Section 24(C) Capital gains from sale of real property under Section 24(D) Compensation income of alien and Filipino employees of a. Regional or area headquarters and regional operating headquarters of MNCs under Section 25(C) b. Offshore Banking Units under Section 25(D) c. Foreign petroleum service contractors and subcontractors under Section 25(E) Cash and Dividends Property
2. 3. 4.
The preferential rates are as follows: Interests, royalties, prizes and other winnings Citizens and Resident aliens are subject to 20% except: a. Interest income from a depository bank which is subject to 7.5% b. Interest income from long-term deposit or investment which is tax-exempt c. Royalty on books as well as other literary works and musical compositions which are subject to 10% d. Prizes amounting to P10,000 or less which shall be subject to the graduated income tax rates
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price or fair market value, whichever is higher. Compensation income of alien and Filipino employees of Regional or area headquarters and regional operating headquarters, Offshore Banking Units, Foreign petroleum service contractors and subcontractors. The applicable tax rate is 15% on their gross income from sources within the Philippines.
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partnership under consideration is taxable on its income, to require that income to be included in the individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would even conflict with the Code: for the Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compaia colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code taxes the latter on its income, but not the former, because it is in the case of compaias colectivas that the members, and not the firm, are taxable in their individual capacities for any dividend or share of the profit derived from the duly registered general partnership. The difference in tax rates between the income of the limited partnership being consolidated with, and when split from the income of the spouses, is not a justification for requiring consolidation; the revenue code, as it presently stands, does not authorize it, and even bars it by requiring the limited partnership to pay tax on its own income. As to CIRs argument that the income of the limited partnership is constructively the income of the spouses and forms part of the conjugal partnership of gains, the conjugal partnership of gains is not a taxable unit. What is taxable is the "income of both spouses in their individual capacities. Though the amount of income (income of the conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given taxable year, their consequences would be different, as their contributions in the business partnership are not the same.
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the expenses were fictitious or non-existent. Said conclusion was prompted by the absence of supporting receipts in the voucher covering the expenses and by the failure of the recipients thereof to declare them in their income tax returns
Q: What is the difference between a resident foreign corporation and non-resident foreign corporation?
A: A Resident foreign corporation is foreign corporation engaged in trade or business within the Philippines . Resident here is used to describe a corporation organized under the laws of a foreign country which does business in the Philippines and it not being used in its ordinary sense that the foreign corporation acquires residence in the Philippines. A good example of a resident foreign corporation is the Philippine branch of a foreign corporation. For income tax purposes, only the income of the Philippine branch from sources within the Philippines is subject to income tax while the income of the Philippine branch and the foreign head office arising from foreign sources are exempt. On the other hand, a nonresident foreign corporation is a foreign corporation not engaged in trade or business within the Philippines. The term non-resident here means not engaged in trade or business in the Philippines. Except as provided in the NIRC, gross income from sources within the Philippines paid to a non-resident foreign corporation shall be subject to income tax that must be withheld by the Philippine payor of the income and remitted to the BIR.
On the other hand, as provided in Section 28(B)(1), the rate of RCIT on the gross income from all sources within the Philippines for a nonresidence foreign corporation during the taxable year are as follows: 1. 35% effective November 1, 2005 2. 30% effective January 1, 2009 .
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Q: May the President allow domestic and resident foreign corporations the option to be taxed on their gross income?
A: Yes. As provided under Section 27(A)(1) and Section 28(A)(1), the President upon recommendation of the Secretary of Finance may allow domestic and resident foreign corporations the option to be taxed at 15% of gross income after the following conditions have been satisfied: 1. 2. 3. 4. a tax effort ratio of 20% of the GNP a ratio of 40% of income tax collection to total tax revenues a VAT tax effort of 4% of GNP a 0.9% ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP
Q: What domestic corporations are subject to preferential tax rates and what are the tax rates applicable to each?
A: As a general rule, all domestic corporations are subject to the RCIT or MCIT. As exceptions, certain domestic corporations enjoy preferential rates. They are: 1. 2. 3. 4. 5. Proprietary education institutions and hospitals Foreign currency deposit unit of a local universal or commercial bank Firms that are taxed under a special income tax regime Private educational institutions Hospitals
This option is available to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed 55%. Upon election of the gross income tax option, it shall be revocable for 3 consecutive taxable years during which the corporation is qualified.
The preferential rates are as follows: Proprietary institutions hospitals education and They shall pay a tax of 10% on their taxable income except those items covered by Section 27(D), namely: 1. Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements 2. Capital gains from the Sale of Shares of stock not traded in the Stock Exchange 3. Tax on Income derived under the Expanded Foreign Currency Deposit System 4. Intercorporate dividends 5. Capital gains realized from the sale, exchange or disposition of lands and/or buildings Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks, including branches of foreign banks that may be authorized by the BSP shall be taxexempt. (Note that Mamalateos book still states that its 10% as introduced by RA 8424. This is wrong because by virtue of RA 9294, the tax exemption of OBUs and FCDUs is now restored.) These are enterprises such as those registered with the PEZA Law (RA 7916) and the Bases Conversion and Development Act (RA 7227). They are subject to 5% final tax on gross income earned after the expiration of the income tax holiday if qualified. All revenue assets of a non-stock, non-profit private educational institution shall be taxexempt provided that they are used directly, exclusively and actually for educational purposes. (Note: This is in accordance with Section 4(3), Article 16 of the Constitution) Revenues derived from and assets used in the operation of hospitals shall be taxexempt from taxation, provided they are
Hospitals
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owned and operated by the educational institution as an indispensable requirement in the operation and maintenance of its medical school or college.
Q: What resident foreign corporations are subject to preferential tax rates and what are the tax rates applicable to each?
A: As a general rule, all resident foreign corporations are subject to the RCIT or MCIT. As exceptions, certain resident foreign corporations enjoy preferential rates. They are: 1. Regional or area headquarters (RHQ) (a branch established in the Philippines by MNCs and which does not earn or derive income from the Philippines and whose role is supervisory) Representative office (a branch in the Philippines of a MNC whose activities are limited to information dissemination, product promotion) International carriers by air or water Offshore Banking Units Foreign Currency deposit Unit in the Philippines of a foreing bank Regional Operating Headquarters (ROHQ) Branch of foreign corporation with respect to profit remittances to head office. Branch of foreign corporations registered with PEZA, SBMA, CDA, CDJHA. Qualified service contractor or subcontractor engaged in petroleum operations in the Philippines
local commercial banks that may be authorized by the BSP to transact business with offshore banking units shall be taxexempt except from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board which shall be subject to the regular income tax payable to banks. However, any interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units shall be subject only to a 10% final tax. (Note, however, that Mamalateos book still states 10% with no exemptions. This is wrong. RA 9294 has superseded RA 8424 and restored the tax exemptions of OBUs and FCDUs.) Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the BSP to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be tax-exempt, except from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board which shall be subject to the regular income tax payable to banks. However, any interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents other offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to 10% final tax. (This is as amended by RA 9294) ROHQ shall pay a 10% tax on their net taxable income from sources within the Philippines. Any profit remitted by a branch to its head office shall be subject to a 15% branch profit remittance tax. (Note that the purpose of a branch profit remittance tax is to equalize the tax burden on foreign corporations maintaining on one hand, local branch offices, and organizing, on the other hand, a subsidiary domestic corporation where at least majority of all the latters stocks are owned by such foreign corporation) After the income tax holiday of PEZAregistered firms, their gross income earned
2.
3. 4. 5. 6. 7. 8. 9.
The preferential rates are as follows: Regional or area headquarters Representative office RHQs and representative offices are taxexempt. Note, however, that income from passive investments like interest income on bank deposits or deposit substitutes in the Philippines is subject to the final withholding tax. They shall pay a tax of 2.5% on its gross Philippine billings. (For an 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. For international shipping , Gross Philippine billings means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.) The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the BSP, from foreign currency transactions with nonresidents, other offshore banking units,
Regional Operating Headquarters (ROHQ) Branch of foreign corporation with respect to profit remittances to head office.
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shall be subject to 5% final tax. However, enterprises registered under the BCDA law are not entitled to tax holiday and are immediately subject to 5% final tax on gross income earned. Aside from being subject to the regular tax on income from all other sources within the Philippines, a subcontractor is subject to the final tax equivalent to 8% of its gross income derived from its contract with the service contractors engaged in petroleum operations.
Note: Now, lets go to incomes of domestic, resident foreign and non resident foreign corporations.
Q: What income of a domestic corporation or resident foreign corporation is subject to preferential tax rates?
A: As a general rule, all taxable income of a domestic corporation or resident foreign corporation is subject to the flat rate tax of 30%. As exceptions, the following are subject to preferential tax rates: 1. Certain passive incomes such as interests from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties Capital gains from the Sale of Shares of Stock not traded in the Stock Exchange Intercorporate dividends (dividends actually or constructively received by a domestic corporation or resident foreign corporation from another domestic corporation) Capital gains realized from the sale, exchange or disposition of lands and/or buildings.
6.
The preferential rates are: Income of a non-resident cinematographic film owner, lessor or distributor Income of a non-resident owner or lessor of vessels chartered by Philippine nationals Income of a non-resident owner of aircraft, machineries and other equipment Interest income on foreign loans contract on or after August 1, 1986. Intercorporate dividends received from a domestic corporation They shall pay a tax of 25% of its gross income from sources within the Philippines
2. 3.
They shall be subject to a tax of 4.5% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations as approved by the MARINA. They shall pay a tax of 7.5% of their gross rentals or fees.
4.
The preferential rates are: Certain passive incomes such as interests from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties Capital gains from the Sale of Shares of Stock not traded in the Stock Exchange Intercorporate dividends They are subject to 20% tax. Note, however, that interest income coming from a depository bank under the expanded foreign currency deposit system is subject to 7.5% tax.
Net capital gains from the sale, exchange or other disposition of shares of stock shall be subject to the following rates: a. Not over P100,000 5% b. In excess of P100,000 10% They are tax-exempt (Note that they are exempt in order to reduce the extra or double taxation of distributed earnings) A final tax of 6% is 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.
They shall be subject to a final withholding tax of 15% subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against tax due from the nonresident foreign corporation deemed to have been paid in the Philippines equivalent to 15% which represents the difference between the regular income tax of 30% and the 15% tax on dividends. Note that beginning Jan. 1, 2009, the RCIT has been reduced to 30% from 35%. Net capital gains from the sale, exchange or other disposition of shares of stock shall be subject to the following rates: a. Not over P100,000 5% b. In excess of P100,000 10%
Capital gains realized from the sale, exchange or disposition of lands and/or buildings.
Capital gains from sale of shares of stock in a domestic corporation not traded in the Stock exchange
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the 25 % rate imposed by the Philippine-Japan Tax Convention. To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad." Marubeni, being a non-resident foreign corporation with respect to the transaction in question, the applicable provision of the Tax Code is Section 24 (b)(1)(iii) ( Now Section 27(B)(5)(b)) in conjunction with the Philippine-Japan Treaty of 1980. In applying said section, Marubeni, being a non-resident foreign corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines. However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the dividends received. This 20 % represents the difference between the regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation. Consequently, petitioner is entitled to a refund.
Q: What is the income tax imposed on a corporation if its earnings and profits are accumulated (undistributed) instead of being divided and distributed to its stockholders?
A: Section 29(A) provides that, in addition to other taxes imposed under Title II, an improperly accumulated earnings tax (IAET) equal to 10% is imposed for each taxable year on the improperly accumulated taxable income of each corporation.
Q: How do you determine if a corporation is formed or availed for the purpose of avoiding the income tax with respect to shareholders?
A: Section 29(C)(1) provides that 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. Moreover, Section 29(C)(2) provides that 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 the contrary. Note that under Section 29(E) , the term reasonable needs of the business includes the reasonably anticipated needs of the business .
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Q: What is meant by improperly accumulated taxable income in connection with the imposition of IAET?
A: Section 29(D) provides that 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
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consistent with Section 27(A). In comparison, the 2% MCIT under Section 27(E) shall be based on the gross income of the domestic corporation. There is a distinction between taxable income, which is the basis for basic corporate income tax under Section 27(A); and gross income, which is the basis for the MCIT under Section 27(E). The two terms have their respective technical meanings, and cannot be used interchangeably. Hence, the basic corporate income tax, for which PAL is liable under PD 1590, cannot cover MCIT under Section 27(E) since the basis for the first is the annual net taxable income, while the basis for the second is gross income. Third, even if the basic corporate income tax and the MCIT are both income taxes under Section 27 of the NIRC of 1997, and one is paid in place of the other, the basic corporate income tax and the MCIT are distinct and separate taxes. Fourth , the evident intent of PD 1520 is to extend to PAL tax concessions not ordinarily available to other domestic corporations. Neither can it be said that the NIRC of 1997 repealed or amended Presidential Decree No. 1590. It is true that when Presidential Decree No. 1590 was issued on 11 June 1978, PAL was then a governmentowned and controlled corporation; but when Republic Act No. 8424, amending the NIRC, took effect on 1 January 1998, PAL was already a private corporation for six years. The repealing clause under Section 7(B) of Republic Act No. 8424 simply refers to charters of government-owned and controlled corporations, which would simply and plainly mean corporations under the ownership and control of the government at the time of effectivity of said statute. It is already a stretch for the Court to read into said provision charters, issued to what were then governmentowned and controlled corporations that are now private, but still operating under the same charters.
refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding year. The carrying forward of any excess or overpaid income tax for a given taxable year is limited to the succeeding taxable year only. The confusion as to Paseo Realtys entitlement to a refund could altogether have been avoided had it presented its tax return for 1990. Such return would have shown whether petitioner actually applied its 1989 tax credit, which includes the creditable taxes withheld for 1989 subject of the claim for refund, against its 1990 tax liability as it had elected in its 1989 return, or at least, whether petitioners tax credit of was applied to its approved refunds as it claims. The return would also have shown whether there remained an excess credit refundable to Paseo after deducting its tax liability for 1990. This omission is fatal to Paseos claim.
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about the language of the provision. The tax is imposed on the amount sent abroad, and the law (then in force) calls for nothing further. Hence, the Bank of America is entitled to the refund.
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does constitute taxable income to the shareholders is that a stock dividend constitutes income if its gives the shareholder an interest different from that which his former stockholdings represented. On the other hand, it does constitute income if the new shares confer no different rights or interests than did the old shares. Therefore, whenever the companies involved parted with a portion of their earnings to bnuy the corporate holdings of Reese, they were making a distribution of such earnings to respondents. These amounts are thus subject to income tax as a flow of cash benefits to respondents. Hence, respondents are liable for deficiency income taxes.
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consideration the value of which can be deducted from that of the property transferred as a gift. Like "love and affection," gratitude has no economic value and is not "consideration" in the sense that the word is used in this section of the Tax Code. (Note: In other words, the whole proceed of the insurance is taxable income given that gratitude cannot be deducted for taxation purposes.)
allowances in question, and only the amount of P4,800 annually, the reasonable amount they would have spent for house rental and utilities such as light, water, telephone, etc., should be the amount subject to tax, and the excess considered as expenses of the corporation. Likewise, the findings of the CTA that the wife-taxpayer had to make the trip to New York at the behest of her husband's employer-corporation to help in drawing up the plans and specifications of a proposed building, is also supported by the evidence. No part of the allowance for travelling expenses redounded to the benefit of the taxpayers. Neither was a part thereof retained by them. The fact that she had herself operated on for tumors while in New York was but incidental to her stay there and she must have merely taken advantage of her presence in that city to undergo the operation. Hence, the CIR is ordered to refund the taxpayers. (Note: What is the taxable income here? Gross income! The Court held basically upheld the CTA in (1) only the ratable value of the allowances for housing shall form part of the income as the apartment is used for his business functions as well and (2) the trip allowances does not form part of income as they are for business purposes.
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