taxation reviewer 1

8/3/2019 Taxation Reviewer 1

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Taxation Reviewer 1

PART 1

A. INTRODUCTION

1. General Principles sources of tax laws

Sec. 21 Sources of Revenue the following taxes, fees and charges are deemed tobe national internal revenue taxes:

1. Income tax;

2. Estate and Donors taxes;

3. Value-added tax;

4. Other percentage taxes;

5. Excise taxes;

6. Documentary stamp taxes; and

7. Such other Taxes as are or hereafter may be imposed and collected by theBureau of Internal Revenue

Other Sources in general:

1. Constitution

2. NIRC

3. Other Tax Statutes

4. Revenue Regulations implementing NIRC


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2. Constitutional Limitations

SISON V. COMMISSIONER

BP 135 was enacted amending sec 21 of the NIRC[1]. Petitioner Sison assails theamendment claiming it would unduly discriminate against him by the imposition ofhigher tax rates upon his income from the exercise of his profession vis--visagainst those earning a fixed income. He claims that the measure is arbitrary andviolative of both the equal protection and due process clauses of the constitution.

Held: The power to tax is inherent in sovereignty. However, it is not limitless. The

constitution sets forth its limitations. Adversely affecting as it does property rights,both the due process and the equal protection clauses may properly be invoked toinvalidate a revenue measure. However, there has to be sufficient basis to supportsuch a claim. The due process clause may be invoked if the measure is so arbitrarythat it finds no support in the Constitution, as when it amounts to a confiscation ofproperty or where it beyond the authority of the taxing authority, or is not for apublic purpose. As for equal protection, it is sufficient if the law operates equallyand uniformly on all persons under the same circumstances or that all persons mustbe treated in the same manner, the conditions not being different, both in privilegesconferred and liabilities imposed.

In the case of BP 135, there is ample distinction to adopt a gross system of incometaxation to compensation income. In such law, the basis for classification is thesusceptibility of the income to the application of generalized rules removing alldeductible items for all tax payers whithin the class and fixing a set of reduced taxrates to be applied to all of them.

3. Classification of Income taxpayers

- Individual

- Corporations or others with separate juridical personality

D. TAX ON INDIVIDUALS


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1. Kinds of Individual Taxpayers

i) Individual Citizens- Taxable on all sources of income, whether within or withoutthe Philippines

ii) Non-resident Citizen- Taxable only on income from within the Philippines

iii) Individual Resident Aliens- Taxable only on income from within the Philippines

iv) Non- Resident Aliens-taxable only on income from within the Philippines

SEC. 24. Income Tax Rates. -

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of thePhilippines.

(1) An income tax is hereby imposed:

(a) On the taxable income defined in Section 31 of this Code, other than incomesubject to tax under Subsections (B), (C) and (D) of this Section, derived for eachtaxable year from all sources within and without the Philippines be every individualcitizen 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 eachtaxable year from all sources within the Philippines by an individual citizen of thePhilippines who is residing outside of the Philippines including overseas contractworkers referred to in Subsection(C) of Section 23 hereof; and

(c) On the taxable income defined in Section 31 of this Code, other than incomesubject to tax under Subsections (b), (C) and (D) of this Section, derived for eachtaxable year from all sources within the Philippines by an individual alien who is aresident of the Philippines.

The tax shall be computed in accordance with and at the rates established in the

following schedule:

Not over P10,000....5%

Over P10,000 but not over P30,000P500+10% of the excess

over P10,000


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Over P30,000 but not over P70,000P2,500+15% of the excess

over P30,000

Over P70,000 but not over P140,000..P8,500+20% of the excess

over P70,000

Over P140,000 but not over P250,000P22,500+25% of the

excess over P140,000

Over P250,000 but not over P500,000P50,000+30% of the

excess over P250,000

Over P500,000 ... P125,000+34% of the

excess over P500,000 in 1998.Provided, That effective January 1, 1999, the top marginal rate shall be thirty-threepercent (33%) and effective January 1, 2000, the said rate shall be thirty-twopercent (32%).

For married individuals, the husband and wife, subject to the provision of Section 51(D) hereof, shall compute separately their individual income tax based on theirrespective total taxable income: Provided, That if any income cannot be definitelyattributed to or identified as income exclusively earned or realized by either of thespouses, the same shall be divided equally between the spouses for the purpose of

determining their respective taxable income.

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate oftwenty percent (20%) is hereby imposed upon the amount of interest from anycurrency bank deposit and yield or any other monetary benefit from depositsubstitutes and from trust funds and similar arrangements; royalties, except onbooks, as well as other literary works and musical compositions, which shall beimposed 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 Lottowinnings), derived from sources within the Philippines: Provided, however, Thatinterest income received by an individual taxpayer (except a nonresident individual)from a depository bank under the expanded foreign currency deposit system shallbe 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


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deposit or investment in the form of savings, common or individual trust funds,deposit substitutes, investment management accounts and other investmentsevidenced 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 andshall be deducted and withheld by the depository bank from the proceeds of thelong-term deposit or investment certificate based on the remaining maturitythereof:

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%

(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 constructivelyreceived by an individual from a domestic corporation or from a joint stockcompany, insurance or mutual fund companies and regional operating headquartersof multinational companies, or on the share of an individual in the distributable netincome after tax of a partnership (except a general professional partnership) ofwhich he is a partner, or on the share of an individual in the net income after tax ofan association, a joint account, or a joint venture or consortium taxable as acorporation 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 onor after January 1, 1998. Income forming part of retained earnings as of December31, 1997 shall not, even if declared or distributed on or after January 1, 1998, besubject to this tax.

(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 prescribedbelow is hereby imposed upon the net capital gains realized during the taxable yearfrom the sale, barter, exchange or other disposition of shares of stock in a domesticcorporation, except shares sold, or disposed of through the stock exchange.

Not over P100,000........ 5%

On any amount in excess of P100,000 10%


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(D) Capital Gains from Sale of Real Property. -

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of sixpercent (6%) based on the gross selling price or current fair market value asdetermined 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, classifiedas 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, ongains from sales or other dispositions of real property to the government or any ofits political subdivisions or agencies or to government-owned or controlledcorporations shall be determined either under Section 24 (A) or under thisSubsection, at the option of the taxpayer.

(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrarynotwithstanding, capital gains presumed to have been realized from the sale or

disposition of their principal residence by natural persons, the proceeds of which isfully 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 thecapital gains tax imposed under this Subsection: Provided, That the historical costor adjusted basis of the real property sold or disposed shall be carried over to thenew principal residence built or acquired: Provided, further, That the Commissionershall have been duly notified by the taxpayer within thirty (30) days from the dateof sale or disposition through a prescribed return of his intention to avail of the taxexemption herein mentioned: Provided, still further, That the said tax exemptioncan only be availed of once every ten (10) years: Provided, finally, that if there is nofull utilization of the proceeds of sale or disposition, the portion of the gainpresumed to have been realized from the sale or disposition shall be subject tocapital gains tax. For this purpose, the gross selling price or fair market value at thetime of sale, whichever is higher, shall be multiplied by a fraction which theunutilized amount bears to the gross selling price in order to determine the taxableportion and the tax prescribed under paragraph (1) of this Subsection shall beimposed thereon.

SEC. 25. Tax on Nonresident Alien Individual. -

(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -

(1) In General. - A nonresident alien individual engaged in trade or business in thePhilippines shall be subject to an income tax in the same manner as an individualcitizen and a resident alien individual, on taxable income received from all sourceswithin the Philippines. A nonresident alien individual who shall come to thePhilippines and stay therein for an aggregate period of more than one hundred


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eighty (180) days during any calendar year shall be deemed a 'nonresident aliendoing business in the Philippines'. Section 22 (G) of this Code notwithstanding.

(2) Cash and/or Property Dividends from a Domestic Corporation or Joint StockCompany, or Insurance or Mutual Fund Company or Regional Operating

Headquarters or Multinational Company, or Share in the Distributable Net Income ofa Partnership (Except a General Professional Partnership), Joint Account, JointVenture Taxable as a Corporation or Association., Interests, Royalties, Prizes, andOther Winnings. - Cash and/or property dividends from a domestic corporation, orfrom a joint stock company, or from an insurance or mutual fund company or from aregional operating headquarters of multinational company, or the share of anonresident alien individual in the distributable net income after tax of apartnership (except a general professional partnership) of which he is a partner, orthe share of a nonresident alien individual in the net income after tax of anassociation, a joint account, or a joint venture taxable as a corporation of which heis 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 totax under Subsection (B)(1) of Section 24) and other winnings (except PhilippineCharity Sweepstakes and Lotto winnings); shall be subject to an income tax oftwenty percent (20%) on the total amount thereof: Provided, however, that royaltieson books as well as other literary works, and royalties on musical compositions shallbe 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 taxprovided under Section 28 of this Code: Provided, furthermore, That interest incomefrom long-term deposit or investment in the form of savings, common or individualtrust funds, deposit substitutes, investment management accounts and other

investments evidenced by certificates in such form prescribed by the BangkoSentral ng Pilipinas (BSP) shall be exempt from the tax imposed under thisSubsection: Provided, finally, that should the holder of the certificate pre-terminatethe deposit or investment before the fifth (5th) year, a final tax shall be imposed onthe entire income and shall be deducted and withheld by the depository bank fromthe proceeds of the long-term deposit or investment certificate based on theremaining 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%.

(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares ofstock in domestic corporations not traded through the local stock exchange, andreal properties shall be subject to the tax prescribed under Subsections (C) and (D)of Section 24.


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(B) Nonresident Alien Individual Not Engaged in Trade or Business Within thePhilippines. - There shall be levied, collected and paid for each taxable year uponthe entire income received from all sources within the Philippines by everynonresident alien individual not engaged in trade or business within the Philippinesas interest, cash and/or property dividends, rents, salaries, wages, premiums,

annuities, compensation, remuneration, emoluments, or other fixed or determinableannual or periodic or casual gains, profits, and income, and capital gains, a taxequal to twenty-five percent (25%) of such income. Capital gains realized by anonresident alien individual not engaged in trade or business in the Philippines fromthe sale of shares of stock in any domestic corporation and real property shall besubject to the income tax prescribed under Subsections (C) and (D) of Section 24.

(C) Alien Individual Employed by Regional or Area Headquarters and RegionalOperating Headquarters of Multinational Companies. - There shall be levied,collected and paid for each taxable year upon the gross income received by everyalien 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 ashonoraria and allowances, from such regional or area headquarters and regionaloperating headquarters, a tax equal to fifteen percent (15%) of such gross income:Provided, however, That the same tax treatment shall apply to Filipinos employedand occupying the same position as those of aliens employed by these multinationalcompanies. For purposes of this Chapter, the term 'multinational company' means aforeign firm or entity engaged in international trade with affiliates or subsidiaries orbranch offices in the Asia-Pacific Region and other foreign markets.

(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 everyalien individual employed by offshore banking units established in the Philippines assalaries, wages, annuities, compensation, remuneration and other emoluments,such as honoraria and allowances, from such off-shore banking units, a tax equal tofifteen percent (15%) of such gross income: Provided, however, That the same taxtreatment shall apply to Filipinos employed and occupying the same positions asthose of aliens employed by these offshore banking units.

(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 aforeign service subcontractor engaged in petroleum operations in the Philippinesshall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities,compensation, remuneration and other emoluments, such as honoraria andallowances, received from such contractor or subcontractor: Provided, however,

That the same tax treatment shall apply to a Filipino employed and occupying thesame position as an alien employed by petroleum service contractor andsubcontractor.


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Any income earned from all other sources within the Philippines by the alienemployees referred to under Subsections (C), (D) and (E) hereof shall be subject tothe pertinent income tax, as the case may be, imposed under this Code.

2. Definition of each kind of taxpayer:

a. Resident Citizens and Resident Aliens

Sec. 5-6, RR-2

An alien actually present in the Philippines who is not a mere transient or sojourneris a resident of the Philippines for purposes of the income tax. Whether he is atransient or not is determined by his intentions with regard to the length and tenureof his stay. A mere floating intention indefinite as to time, to return to anothercountry is not sufficient to constitute him a transient. If he lives in the Philippinesand has no definite intention as to his stay, he is a resident. One who comes to thePhilippines for a definite purpose which in its nature may be promptly accomplishedis a transient. But if his purpose is of such a nature that an extended stay may benecessary for its accomplishment, and to that end the alien makes his hometemporarily in the Philippines, he becomes a resident, though it may be hisintention at all times to return to return to his domicile abroad when the purpose forwhich he came has been consummated or abandoned.

RR 2-98

b. Non-Resident Citizens

i. Sec 22 (NIRC): the term non resident citizen means

(1) A citizen of the Philippines who establishes to the satisfaction of theCommissioner the fact of his physical presence abroad with a definite intention toreside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year toreside abroad, either as an immigrant or for employment on a permanent basis.


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(3) A citizen of the Philippines who works and derives income from abroad andwhose employment thereat requires him to be physically present abroad most ofthe time during the taxable year.

(4) A citizen who has been previously considered as a nonresident citizen and who

arrives in the Philippines at any time during the taxable year to reside permanentlyin the Philippines shall likewise be treated as a nonresident citizen for the taxableyear in which he arrives in the Philippines with respect to his income derived fromsources abroad until the date of his arrival in the Philippines.

(5) The taxpayer shall submit proof to the Commissioner to show his intention ofleaving the Philippines to reside permanently abroad or to return to and reside inthe Philippines as the case may be for purposes of this section.

ii. Sec. 2 - RR 1-79 Who are considered as non-resident citizens the term non-

resident citizen means one who establishes to the satisfaction of the Commissionof Internal Revenue the fact of his physical presence abroad with the definiteintention to reside therein and shall include any Filipino who leaves the countryduring the taxable year as:

(1) Immigrant one who leaves the Philippines to reside abroad as an immigrant forwhich a foreign visa as such has been secured

(2) Permanent employee one who leaves the Philippines to reside abroad foremployment on a more or less permanent basis

(3) Contract worker one who leaves the Philippines on account of a contract ofemployment which is renewed from time to time within or during the taxable yearunder such circumstances as to require him to be physically present abroad most ofthe time during the taxable year. To be considered physically present abroad mostof the time during the taxable year, a contract worker must have been outside thePhilippines for not less than 183 days during the taxable year.

Non-Resident Aliens Engaged in business in the Phil.

i. Sec. 25 (NIRC) - A nonresident alien individual who may either be:

(1) Engaged in trade or business (the term denotes habituality or sustained activity)and he is deemed so engaged if the aggregate stay in the Philippines exceeds 180days for each calendar year; or

(2) Not engaged in trade or business


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ii. Sec. 5, RR 2 A nonresident alien individual means an individual

(1) Whose residence is not within the Philippines; and

(2) Who is not a citizen of the Philippines

Sec. 25 - Tax on Nonresident Aliens

A nonresident alien engaged in trade or business in the Philippines shall be taxed inthe same manner as an individual citizen and a resident alien individual on taxableincome derived from sources within the Philippines. A nonresident alien is one whoshall come to the Philippines and stay herein for an aggregate period of more than180 days during a calendar year. Tax on their passive income is likewise the same.

The rate of tax on income from all sources within the Philippines of a non resident

alien NOT engaged in business here shall be 25%, except for gains from sale of realproperty and sale or exchange of stocks not thru the stock market.

An alien individual employed by the regional or area headquarters and regionaloperating headquarters established in the Philippines by multinational companiesshall be taxed 15% on his gross income PROVIDED the same tax treatment is givento Filipinos employed in the same position by the same multinational companies.

Those aliens employed by off shore banking units[2] established in the Philippinesshall be taxed 15% on their gross income PROVIDED the same tax treatment isgiven to Filipinos employed and occupying the same positions as aliens employedby these off shore banking units.

Aliens who are permanent residents of a foreign country but are employed andassigned in the Phil by a foreign service contractor or subcontractor engaged inpetroleum operations in the Philippines shall be taxed 15% on their gross incomePROVIDED that the same tax treatment is given to Filipinos occupying the same

position as aliens by the petroleum contractor or subcontractor.

3. Kind of income and income tax of individuals


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a. Tax formula

b. Final income tax

Sec. 24 - Rates of Income Tax

A uniform tax rate schedule is used to determine tax liability of resident citizens, ofnon-resident citizens, and of resident aliens, subject however to the rule set underno.1 above.

Not over P10,000.5%

Over P10,000 but not over P30,000.P500 plus 10% of the excess overP10,000

Over P30,000 but not over P70.000.P2,500 plus 15% on the excess

Over P70,000 but not over P140,000...P8,500 plus 20% on excess

Over P140,000 but not over P250,000.P22,500plus 25% on excess

Over P250,000 but not over P500,000.P50,000plus 30% on excess

Over 500,000P125,000plus 32% of excess

For married individuals, both shall compute their individual income tax based ontheir own taxable income, provided however that if they do not derive incomepurely from compensation, they shall file a return for the taxable year to include theincome of both spouses. If is impractical to file just one return, each spouse may filea separate return but such will be consolidated by the Bureau.[3]

The taxable income subject to the rates above do not include the income derivedfrom passive income, capital gains from sales of shares of stock not traded in thestock exchange and capital gains from sale of real property, the tax rates of whichare as follows:

Passive income

Interest of Bank deposits, deposit substitutes, from trust funds


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20%

Interest received by a resident under the expanded foreign Currency depositsystem[4]

7.5%

Interest from a long-term deposit or investment

tax exempt

Interest from a pre-terminated long term deposit or investment

With a remaining maturity of 4 to less than 5 yrs

5%

3 to less than 4yrs

12%

less than 3 yrs

20%

Royalties except from books, etc

20%

Royalties from books, literary works and musical compositions

10%

Prizes up to P10,000

taxable as income

Prizes exceeding P10,000

20%

Winnings other than from sweepstakes or lotto

20%

Sweepstakes and lotto winnings

Exempt

Cash or property dividends, actually or constructively received from a domesticcorp., joint stock co., insurance or mutual fund corp. and regional operating head-


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quarters of multinationals or on the share in the distributable net income after taxof a partnership of which he is a partner, or 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

10%

Capital Gains from shares

Gains from shares of stocks sold, bartered or exchanged outside the

Stock market if not more than P100,000..5%

If over P100,000..10%

Capital Gains from the sale of Real Property

Tax rate is now 6% based on the gross selling price or current fair market value,whichever is higher. However, if the sale is made to the government or any of itssubdivisions or to any GOCC, it may be taxed as part of the taxpayers income ( asset forth in the fist paragraph of this part), at the option of the taxpayer. (RR 8-98)

EXCEPTION: If the sale is of the taxpayers principal residence of a natural personand 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 of the 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


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If proceeds are not fully utilized, portion of the gain is taxable using this formula:Taxable gain= gsp or fmv (whichever is higher) x unutilized portion/gsp

4. Personal, additional, and special exemptions; amounts

Resident Citizens and Resident Aliens

The following personal exemptions are allowed for the purpose of determining thetax to be imposed upon resident citizens and resident aliens:

For single individual or married individual judicially decreed as

Legally separated w/ no qualified dependentsP20,000

For head of the family.P25,000

For each married individualP32,000

In the case of married individuals where only one spouse is deriving gross income,only such spouse shall be allowed the personal exemption

An additional exemption of P8,000 is also allowed for each dependent notexceeding four. However, only one spouse may claim such exemption and in case ofmarried individuals who are legally separated, the one who has custody of the child/children can claim such exemption.

Personal Exemptions and Optional Standard Deduction

A) Individual

1) Kinds of individual and amount of personal exemption:

Each married individual


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P32,000

In case of married individuals where only one of the spouses is deriving grossincome, ONLY such spouse shall be allowed the personal exemption

Head of the family

P25,000

a) Single; or

b) Married individual judicially declared as legally separated with no qualifieddependents

P20,000

2) Dependents

Each dependent not exceeding 4

P8,000

The additional exemption for dependents shall be claimed by ONLY one spouse incase of married individuals

In case of legally separated spouses, additional exemptions may be claimed ONLYby the spouse who has custody of the child or children; PROVIDED that the totalamount of additional exemptions that may be claimed by both shall not exceed themaximum additional exemptions herein allowed.

Non-resident citizen

RR 1-79

Non-resident citizens are allowed the following exemptions:

Personal exemptions:


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Single or married but legally separated$2,000

Married or head of the family...$4,000

Also, the total amount of the national income tax actually paid to the nationalgovernment of the foreign country of his residence shall be deducted from histaxable income.

Non-resident aliens engaged in business in the Philippines or in the exercise of aprofession

These persons are entitled to personal exemptions in the amount equal to theexemptions allowed in the income tax law of the country of which he is a citizen, tocitizens of the Philippines not residing in that country. Such amount shall notexceed the amount fixed in Sec 36 of the NIRC. However, such nonresident alienshall file a true and accurate return of the total income received by him from allsources within the Philippines.

5. definition of:

a. head of family

A head of the family is an unmarried or a legally separated man or woman with oneor both parents, or with one or more brothers and sisters, or with one or morelegitimate, recognized natural or legally adopted children living with and dependentupon him for their chief support (more than 1/2 of the requirements for support),where such brothers of sisters or children are not more than 21 years of age,

unmarried and not gainfully employed or where such children, brother or sister,regardless of age are incapable of self-support because of mental or physical defect

b. dependent


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Dependent means a legitimate, illegitimate or legally adopted child chieflydependent upon and living with the taxpayer if such dependent is not more than 21years of age, unmarried and not gainfully employed or if such dependent,regardless of age, is not capable of self-support because of mental or physicaldefect

6. change of status and personal exemptions

If the taxpayer should change his or her status during the taxable year, he mayclaim the corresponding additional exemptions in full for such year.

If the taxpayer dies during the taxable year, his estate may claim the personaland additional exemptions for himself and his dependents as if he died at the close

of such year.

If the spouse or any of his dependents dies or if any of such dependents marries,become 21 or becomes gainfully employed during the taxable year, the taxpayermay still claim the same exemptions as if no such change had occurred.

CHANGE OF STATUS

Change

Effect

If the taxpayer should marry or should have additional dependents during thetaxable year

He may claim the corresponding exemptions in full for such year

If the taxpayer should die during the taxable year

His estate may claim the personal exemptions as if he dies at the close of such year

If the spouse or any dependent

a) should die

b) should marry (refers to the dependent)

c) become 21 years old during the year

d) becomes gainfully employed


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The taxpayer may claim the personal exemptions as if the spouse or dependentdies or as if such dependent married, became 21 years old or became gainfullyemployed that the close of such year

NOTE: For any other event that results in a change in the status of the taxpayer asit affects his personal exemptions, and for which there are no specific rulesapplicable from those abovementioned, the status of the taxpayer at the end of theyear shall determine his personal exemptions for such year.

7. premium payments on health and/or hospitalization insurance

Premium payments of such nature paid during the taxable year, not exceedingP2,400 per family OR P200 a month paid during the taxable year by the taxpayerfor himself, including his family, shall be allowed as deductions from his grossprovided that the gross income of the family does not exceed P250,000 for thetaxable year. For married couples, only the spouse claiming deductions for thedependents may avail of such exemption. (Sec. 34 [m]).

Deduction from gross income of an amount not to exceed

a) P2,400 per family; or

b) P200 a month

Rules for application

a) Such deduction should have been paid during the taxable year for health and/orhospitalization insurance

b) Said family has a gross income of not more than P250,000 for the taxable year

In case of married taxpayers, only the spouse claiming the additional exemption fordependents shall be entitled to the deduction

PART 2

TAX ON CORPORATIONS


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8. Definition of Corporations:

Sec. 22 NIRC the term corporation shall include partnerships, no matter howcreated or organized, joint-stock companies, joint accounts (cuentas en

participacion), associations, or insurance companies, but does not include generalprofessional partnerships and a joint venture or consortium formed for the purposeof undertaking construction projects or engaging in petroleum, coal, geothermaland other energy operations pursuant to an operating or consortium agreementunder a service contact with the Government. General professional partnershipsare partnerships formed by persons for the sole purpose of exercising their commonprofession, no part of the income of which is derived from engaging in any trade orbusiness.

Commissioner v. Batangas Tayabas Bus Co. (102 P 822)

Issue: W/n the 2 transportation companies are liable to payment of income tax as acorporation on the theory that the Joint Emergency Operation organized & operatedby them is a corporation w/in the meaning of the Revised Internal Revenue Code.

Held: Yes, liable as a corporation.

In the present case, the 2 companies contributed money to a common fund to paythe sole gen. manager, the accounts & office personnel attached to the office ofsaid manager, as well as for maintenance & operation of a common maintenance &repair shop. Said common fund was also used to buy spare parts, & equipment forboth companies, including tires. Said common fund was also used to pay all thesalaries of the personnel of both companies, & at the end of each year, the grossincome receipts of both companies were merged, & after deducting there from thegross expenses of the 2 companies, also merged, the net income was determined &divided equally between them, wholly disregarding the expenses incurred in themaintenance & operation of each company & of the individual income of said

companies.

From the standpoint of income tax law, this procedure & practice of determining thenet income of each company was arbitrary & unwarranted, disregarding as it did thereal facts of the case. Considering that Batangas Transportation & the Laguna Busoperated different lines, under different franchises, w/ different equipment &personnel, it cannot possibly be true & correct to say that at the end of each year,the gross receipts & income & the gross expenses of the 2 companies are exactly


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the same for purposes of the payment of income tax. Therefore, the JointEmergency Operation in this case is a corporation under the Internal Revenue Code& is liable to income tax as a corporation.

Ona vs CIR (25 SCRA 74)

Ruling: For tax purposes, the co-ownership of inherited properties is automaticallyconverted into an unregistered partnership the moment the said commonproperties are used as a common fund with intent to produce profits for the heirs inproportion to their respective shares in the inheritance. From the moment of suchpartition, the heirs are entitled already to their respective definite shares of theestate & the incomes thereof, for each of them to manage & dispose of asexclusively 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 hisshare to be held in common with his co-heirs under a single management to beused with the intent of making profit thereby in proportion to his share, there canbe 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 theexception of only duly registered gen. co-partnershipswithin the purview of theterm corporation.

BIR Ruling No. 317-92

Ayala Land, Inc.(ALI) & Appleyard Properties, Inc(API) entered into a Memorandumof 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% ofthe building while API will own 40%, while there is separate ownership, they willshare common area expenses, real estate taxes, etc in the same proportion. ALI &API now propose to enter into a another agreement, a Joint VentureAgreement(JVA). Under the JVA, both ALI & API will contribute money as additionalworking capital & ALI will be appointed as manager & will be responsible for leasing

the floors.

HELD: The MOA has not by itself created a taxable joint venture. However, the jointventure to be subsequently entered into by & between ALI & API will create a jointventure subject to tax.


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Obillos vs. Commissioner (139 SCRA 436)

The Supreme Court, applying Art. 1769 of the Civil Code, said that the sharing ofgross returns does not itself establish a joint partnership whether or the personssharing them have a joint or common right or interest in the property from whichthe returns are derived. There must, instead, be an unmistakable intention to formthat partnership or joint venture. A sale of a co-ownership property at a profit doesnot necessarily establish that intention.

This is about the tax liability of 4 brothers & sisters who sold 2 parcels of land whichthey had acquired from their father. In 1973, Jose Obillos Sr bought 2 parcels of landfrom Ortigas & Co & transferred his rights to his 4 children to enable them to buildtheir residences. In 1974, the 4 children resold the lots to Walled City Securities

Corp & earned profit. CIR assessed the 4 children with corporate income tax.

HELD: It is error to hold that petitioners (Obillos) have formed a taxableunregistered partnership simply because they contributed in buying the lots, resoldthe same & divided the profit among themselves. They are simply co-owners. Theywere not engaged in any joint venture by reason of the isolated transaction. Theoriginal purpose was to divide the lots for residential purposes. The division of theprofit was merely incidental to the dissolution of the co-ownership.

9. Classification of Corporation and the tax rules: (Sec. 27, NIRC)

a. In General

i. Domestic

Sec. 27, (A) In General. - Except as otherwise provided in this Code, an income taxof thirty-five percent (35%) is hereby imposed upon the taxable income derivedduring each taxable year from all sources within and without the Philippines byevery corporation, as defined in Section 22(B) of this Code and taxable under this

Title as a corporation, organized in, or existing under the laws of the Philippines:


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Provided, That effective January 1, 1998, the rate of income tax shall be thirty-fourpercent (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-twopercent (32%).

In the case of corporations adopting the fiscal-year accounting period, the taxableincome shall be computed without regard to the specific date when specific sales,purchases and other transactions occur. Their income and expenses for the fiscalyear shall be deemed to have been earned and spent equally for each month of theperiod.

The reduced corporate income tax rates shall be applied on the amount computedby multiplying the number of months covered by the new rates within the fiscalyear by the taxable income of the corporation for the period, divided by twelve.

Provided, further, That the President, upon the recommendation of the Secretary ofFinance, may effective January 1, 2000, allow corporations the option to be taxed atfifteen percent (15%) of gross income as defined herein, after the followingconditions have been satisfied:

(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP); (2) Aratio of forty percent (40%) of income tax collection to total tax revenues; (3) A VATtax effort of four percent (4%) of GNP; and (4) A 0.9 percent (0.9%) ratio of theConsolidated Public Sector Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whoseratio of cost of sales to gross sales or receipts from all sources does not exceedfifty-five percent (55%).

The election of the gross income tax option by the corporation shall be irrevocablefor three (3) consecutive taxable years during which the corporation is qualifiedunder the scheme.

For purposes of this Section, the term 'gross income' derived from business shall beequivalent to gross sales less sales returns, discounts and allowances and cost ofgoods sold. "Cost of goods sold" shall include all business expenses directly incurredto 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 goodsto the place where the goods are actually sold, including insurance while the goodsare in transit.

For a manufacturing concern, "cost of goods manufactured and sold" shall includeall costs of production of finished goods, such as raw materials used, direct laborand manufacturing overhead, freight cost, insurance premiums and other costsincurred to bring the raw materials to the factory or warehouse.


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In the case of taxpayers engaged in the sale of service, 'gross income' means grossreceipts less sales returns, allowances and discounts.

ii. Resident Foreign

Sec. 28, (1) In General. - Except as otherwise provided in this Code, a corporationorganized, authorized, or existing under the laws of any foreign country, engaged intrade or business within the Philippines, shall be subject to an income taxequivalent to thirty-five percent (35%) of the taxable income derived in thepreceding taxable year from all sources within the Philippines: Provided, Thateffective 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%).

In the case of corporations adopting the fiscal-year accounting period, the taxableincome shall be computed without regard to the specific date when sales,purchases and other transactions occur. Their income and expenses for the fiscalyear shall be deemed to have been earned and spent equally for each month of theperiod.

The reduced corporate income tax rates shall be applied on the amount computedby multiplying the number of months covered by the new rates within the fiscalyear by the taxable income of the corporation for the period, divided by twelve.

Provided, however, That a resident foreign corporation shall be granted the optionto be taxed at fifteen percent (15%) on gross income under the same conditions, asprovided in Section 27 (A).

(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimumcorporate income tax of two percent (2%) of gross income, as prescribed underSection 27 (E) of this Code, shall be imposed, under the same conditions, on aresident foreign corporation taxable under paragraph (1) of this Subsection.

(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. -The provisions of existing special or general laws to the contrary notwithstanding,all corporations, agencies, or instrumentalities owned or controlled by theGovernment, except the Government Service Insurance System (GSIS), the SocialSecurity System (SSS), the Philippine Health Insurance Corporation (PHIC), thePhilippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement andGaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income


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as are imposed by this Section upon corporations or associations engaged in ssimilar business, industry, or activity.

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from DepositSubstitutes and from Trust Funds and Similar Arrangements, and Royalties. - A finaltax at the rate of twenty percent (20%) is hereby imposed upon the amount ofinterest on currency bank deposit and yield or any other monetary benefit fromdeposit substitutes and from trust funds and similar arrangements received bydomestic corporations, and royalties, derived from sources within the Philippines:Provided, however, That interest income derived by a domestic corporation from adepository bank under the expanded foreign currency deposit system shall besubject to a final income tax at the rate of seven and one-half percent (7 1/2%) ofsuch interest income.

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the StockExchange. - A final tax at the rates prescribed below shall be imposed on net capitalgains realized during the taxable year from the sale, exchange or other dispositionof shares of stock in a domestic corporation except shares sold or disposed ofthrough the stock exchange:

Not over P100,000..... 5%

Amount in excess of P100,000.. 10%

(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. -Income derived by a depository bank under the expanded foreign currency depositsystem from foreign currency transactions with local commercial banks, includingbranches of foreign banks that may be authorized by the Bangko Sentral ngPilipinas (BSP) to transact business with foreign currency depository system unitsand other depository banks under the expanded foreign currency deposit system,including interest income from foreign currency loans granted by such depositorybanks under said expanded foreign currency deposit system to residents, shall besubject 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 incometax.

(4) Intercorporate Dividends. - Dividends received by a domestic corporation fromanother domestic corporation shall not be subject to tax.

(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/orBuildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed


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to have been realized on the sale, exchange or disposition of lands and/or buildingswhich are not actually used in the business of a corporation and are treated ascapital assets, based on the gross selling price of fair market value as determined inaccordance with Section 6(E) of this Code, whichever is higher, of such lands and/orbuildings.

(E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of thegross income as of the end of the taxable year, as defined herein, is herebyimposed on a corporation taxable under this Title, beginning on the fourth taxableyear immediately following the year in which such corporation commenced itsbusiness operations, when the minimum income tax is greater than the taxcomputed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporateincome tax over the normal income tax as computed under Subsection (A) of thisSection shall be carried forward and credited against the normal income tax for thethree (3) immediately succeeding taxable years.

(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - TheSecretary of Finance is hereby authorized to suspend the imposition of theminimum corporate income tax on any corporation which suffers losses on accountof prolonged labor dispute, or because of force majeure, or because of legitimatebusiness reverses.

The Secretary of Finance is hereby authorized to promulgate, uponrecommendation of the Commissioner, the necessary rules and regulation that shalldefine the terms and conditions under which he may suspend the imposition of theminimum corporate income tax in a meritorious case.

(4) Gross Income Defined. - For purposes of applying the minimum corporateincome tax provided under Subsection (E) hereof, the term 'gross income' shallmean gross sales less sales returns, discounts and allowances and cost of goodssold. "Cost of goods sold' shall include all business expenses directly incurred toproduce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, "cost of goods sold' shall include theinvoice cost of the goods sold, plus import duties, freight in transporting the goodsto the place where the goods are actually sold including insurance while the goodsare in transit.

For a manufacturing concern, cost of "goods manufactured and sold" shall includeall costs of production of finished goods, such as raw materials used, direct labor


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and manufacturing overhead, freight cost, insurance premiums and other costsincurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means grossreceipts less sales returns, allowances, discounts and cost of services. "Cost of

services" shall mean all direct costs and expenses necessarily incurred to providethe services required by the customers and clients including (A) salaries andemployee benefits of personnel, consultants and specialists directly rendering theservice and (B) cost of facilities directly utilized in providing the service such asdepreciation or rental of equipment used and cost of supplies: Provided, however,

That in the case of banks, "cost of services" shall include interest expense.

(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 fromany currency bank deposit and yield or any other monetary benefit from depositsubstitutes and from trust funds and similar arrangements and royalties derivedfrom sources within the Philippines shall be subject to a final income tax at the rateof twenty percent (20%) of such interest: Provided, however, That interest incomederived by a resident foreign corporation from a depository bank under theexpanded foreign currency deposit system shall be subject to a final income tax atthe rate of seven and one-half percent (7 1/2%) of such interest income.

(b) Income Derived under the Expanded Foreign Currency Deposit System. - Incomederived by a depository bank under the expanded foreign currency deposit systemfrom foreign currency transactions with local commercial banks including branchesof foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) totransact business with foreign currency deposit system units, including interestincome from foreign currency loans granted by such depository banks under saidexpanded foreign currency deposit system to residents, shall be subject to a finalincome tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactionswith depository banks under the expanded system shall be exempt from incometax.

(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - Afinal tax at the rates prescribed below is hereby imposed upon the net capital gainsrealized during the taxable year from the sale, barter, exchange or other dispositionof shares of stock in a domestic corporation except shares sold or disposed ofthrough the stock exchange:

Not over P100,000...... 5%


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On any amount in excess of P100,000. 10%

(d) Intercorporate Dividends. - Dividends received by a resident foreign corporationfrom a domestic corporation liable to tax under this Code shall not be subject to taxunder this Title.

Applies to foreign corporation engaged in trade or business within the Philippines

Table II

Source of Income

Tax

(a) On sale of shares of stock of a domestic corporation not listed and traded thru alocal stock exchange, held as capital assets:

On the net capital gain -

Not over P100,000

On any amount in excess of P10,000

NOTE: sale of shares of stock of a domestic corporation thru a local stock agent orthru initial public offering pays the stock transaction tax of the Tax Code, and shallnot be subject to income tax

Final tax of 5%

Final tax of 10%

(b) From sources within the Philippines, on passive income of interest under theexpanded foreign currency deposit system


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Final tax of 7 1/2%

(c) From sources within the Philippines, in passive income of:

i. Interest on any currency bank deposit, yield or other monetary benefits fromdeposit substitutes, trust funds and similar arrangement;

ii. Royalties

Final tax of 20%

(d) Dividend received from a domestic corporation

Exempt

Take note of the "sources of income" of the corporation given in the problem if

such falls under (a) - (e) above, take it out and tax it accordingly. The incomeremaining may now be subject to either the NORMAL TAX, or the MCIT:

THE NORMAL TAX:

Taxable income (net) from sources within the Philippines

i. Beginning January 1, 1998

ii. Beginning January 1, 1999

iii. Beginning January 1, 2000 and thereafter

Final tax of 34%


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Final tax of 33%

Final tax of 32%

The normal tax is taxed on taxable income, which means that after taking out thesources of income as enumerated in Table I (a) - (e) above, giving you the gross

income, deduct the allowable deductions for expenses.

THE MINIMUM CORPORATION INCOME TAX:

The MCIT is 2% of the MCIT gross income

Beginning with the 4th year from start of business operations, the company will betaxed depending on which is higher, the NORMAL TAX or the MCIT gross incomefrom sources, within the Philippines. The MCIT is

2%

The same Rules with regard to the MCIT of a domestic corporation apply here

The Secretary of Finance may suspend the imposition of the MCIT on anycorporation which suffers losses:

a) due to prolonged labor dispute; or

b) due to force majeure; or

c) due to legitimate business reverses

REMEMBER: The difference between Table I (domestic corporations) and Table II

(resident foreign corporations) is that the latter is ONLY taxed on sources of incomewithin the Philippines.

THE GROSS CORPORATE TAX INCOME


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Application: The President of the Philippines, upon the recommendation of theSecretary of Finance, may, effective 2000, allow domestic corporations the option tobe taxed on gross income as follows:

a) the tax is 15%

b) available only to firms whose ration of cost of sales to gross sales or receipt fromall sources does not exceed 55%

c) shall be irrevocable for 3 consecutive years during which the corporation isqualified under the scheme

To compute the gross income, consult the computation for gross income in theNORMAL TAX (Caveat: Sir says that the IRR gives a different way to compute thegross income for the GCIT. But the NIRC says they are all the same.)

REMEMBER: After (a) - (d) in Table I, the remaining income will be taxed either bythe NORMAL TAX, the MCIT or the GCIT. But take note of the applicability of each.Moreover, the computation for gross income was included in this reviewer becauseyou have to take note that the NORMAL TAX is taxed on taxable income (GrossIncome - Expenses), while the MCIT and GCIT are taxed on gross income.

iii. Non-Resident (Sec. 28, NIRC)

(1) In General. - Except as otherwise provided in this Code, a foreign corporation notengaged in trade or business in the Philippines shall pay a tax equal to thirty-fivepercent (35%) of the gross income received during each taxable year from allsources within the Philippines, such as interests, dividends, rents, royalties, salaries,premiums (except reinsurance premiums), annuities, emoluments or other fixed ordeterminable annual, periodic or casual gains, profits and income, and capital gains,except capital gains subject to tax under subparagraphs (C) and (d): Provided, Thateffective 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 January1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

(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 onor after August 1, 1986;


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(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 receivedfrom a domestic corporation, which shall be collected and paid as provided inSection 57 (A) of this Code, subject to the condition that the country in which thenonresident foreign corporation is domiciled, shall allow a credit against the tax due

from the nonresident foreign corporation taxes deemed to have been paid in thePhilippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter,which represents the difference between the regular income tax of thirty-fivepercent (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 thefifteen 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. - Afinal tax at the rates prescribed below is hereby imposed upon the net capital gainsrealized 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 ofthrough the stock exchange:

Not over P100,000........5%

On any amount in excess of P100,000 10%

Applies to a foreign corporation NOT engaged in trade or business within thePhilippines

Table III

Sources of Income

Tax

(a) On sale of shares of stock of a domestic corporation not listed and traded thru alocal stock exchange, held as capital assets:

On the net capital gain -

Not over P100,000

On any amount in excess of P10,000

NOTE: sale of shares of stock of a domestic corporation thru a local stock agent orthru initial public offering pays the stock transaction tax of the Tax Code, and shallnot be subject to income tax


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Final tax of 5%

Final tax of 10%

(b) Interest on foreign loans

Final tax of 20%

(c) Dividend from domestic corporations, under certain conditions (that the countryin which the nonresident foreign corporation is domiciled, shall credit against the

tax due from such corporation taxes deemed to have been paid in the Philippinesequivalent to 20%)

Final tax of 15%

(d) Gross income from sources within the Philippines

i. Beginning January 1, 1998

ii. Beginning January 1, 1999

iii. Beginning January 1, 2000 and thereafter

Final tax of 34%

Final tax of 33%


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Final tax of 32%

REMEMBER: Take note that unlike Table I and II, nonresident foreign corporationsare taxed on gross income. Also, the MCIT and GCIT do not apply to them.

iv. Special Corporations

1. Private Educational Institutions and Non-Profit Hospitals

Sec. 27, (B) Proprietary Educational Institutions and Hospitals. - Proprietary

educational institutions and hospitals which are nonprofit shall pay a tax of tenpercent (10%) on their taxable income except those covered by Subsection (D)hereof: Provided, that if the gross income from unrelated trade, business or otheractivity exceeds fifty percent (50%) of the total gross income derived by sucheducational institutions or hospitals from all sources, the tax prescribed inSubsection (A) hereof shall be imposed on the entire taxable income. For purposesof this Subsection, the term 'unrelated trade, business or other activity' means anytrade, business or other activity, the conduct of which is not substantially related tothe exercise or performance by such educational institution or hospital of itsprimary purpose or function. A "Proprietary educational institution" is any privateschool maintained and administered by private individuals or groups with an issuedpermit to operate from the Department of Education, Culture and Sports (DECS), orthe Commission on Higher Education (CHED), or the Technical Education and SkillsDevelopment Authority (TESDA), as the case may be, in accordance with existinglaws and regulations.

Proprietary Educational Institutions Taxable proprietary educational institutionsshall pay a tax of 10% on their taxable income except those subject to final taxes,provided, however, that if the gross income from unrelated trade, business or otheractivity exceeds 50% (predominance test) of the total gross income derived by anyeducational institutions from all sources, the corporate tax rates mentioned aboveare imposed on the entire taxable income of the educational institution. For thispurpose, the term unrelated trade, business or other activity means any trade,business or other activity, the conduct of which is not substantially related to theexercise or performance by such educational institution of its educational purposeor function. A proprietary educational institution is any private school maintained


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and administered by private individuals or groups and issued a permit to operate bythe DECS or the CHED or the TESDA, as the case may be. (Vitug, Acosta).

Sec. 4(3) Art. XIV 1987 Constitution: All revenues and assets of non-stock, non-profit

educational institutions used actually, directly and exclusively for educationalpurposes shall be exempt from taxes and duties. Upon the dissolution and cessationof the corporate existence of such institutions, their assets shall be disposed of inthe manner provided by law.

Proprietary educational institutions, including those cooperatively owned, maylikewise be entitled to such exemptions subject to the limitations provided by lawincluding restrictions on dividends and provisions fore reinvestment.

Finance Department Order # 137-87

Taxpayer

Tax Base

Rate

Propriety educational institution and non-profit hospital

Taxable income from all sources

10%Resident international carrier

Gross Philippine Billings

2 1/2%

Non-resident owner or lessor of vessel

Gross rentals, leases, and charter fees from the Philippines

4 1/2%

Non-resident cinematographic film owner, lessor or distributor

Gross income from the Philippines

25%

Non-resident lessor of aircraft, machinery and other equipment


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Gross rentals, charter and other fees from Philippine sources

7 1/2%

Regional operating headquarters of multinational company

Philippines taxable income

10%

GOCCs (except: GSIS, SSS, PHIC, PCSO and PAGCOR)

N/A

The same as other corporations engaged in similar activities

There is no minimum corporate income tax for special corporations

All revenues of non-stock, non-profit educational institutions used actually, directlyand exclusively for educational purposes shall be exempt from taxes

If the gross income of a proprietary educational institution or hospital fromunrelated trade, business or other activity exceeds 50% of the total gross incomederived from all sources, such educational institution or hospital shall be taxed asan ordinary corporation

Non-resident owners of vessels are treated as special corporations only fromcharters or leases of the vessels to Filipino citizens or corporations approved by theMaritime Industry Authority

What are the income tax rules on regional headquarters of a multinationalcompany?

Regional headquarters of a multinational company

Regional operating headquarters of a multinational company

A branch established in the Philippines by a multinational company and whichheadquarters do not earn or derive income from the Philippines and which act as

supervisory, communications and coordinating center for its affiliates, subsidiariesor branches in the Asia-Pacific region and other foreign markets

A branch established in the Philippines by a multinational company which isengaged in any of the following qualifying services: general administration andplanning, business planning and coordination, sourcing/procurement of rawmaterials and components, corporate finance advisory, marketing control and salespromotion, training and personnel management, logistics services, R&D


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development services and project development, technical support andmaintenance, data processing and communication, and business development

Shall not be subject to income tax

Shall pay a tax of 10% of its net income

Non-Profit Non-Stock Educational Institution

Dept Order # 149-95

Non-stock, nonprofit educational institutions are exempt from taxes on all their

revenues and assets used actually, directly, and exclusively for educationalpurposes. They shall, however be subject to internal revenue taxes on income fromtrade, business or other activity the conduct of which is not related to the exerciseor performance by such educational institution of its educational purpose orfunction.

2. Non-Resident Cinematographic Film Owner, Lessor, Or Distributor

Sec. 28, (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - Acinematographic film owner, lessor, or distributor shall pay a tax of twenty-fivepercent (25%) of its gross income from all sources within the Philippines.

3. International Carriers

Sec. 28, (3) International Carrier. - An international carrier doing business in thePhilippines shall pay a tax of two and one-half percent (2 1/2%) on its "GrossPhilippine Billings" as defined hereunder:

(a) International Air Carrier. - "Gross Philippine Billings" refers to the amount ofgross revenue derived from carriage of persons, excess baggage, cargo and mail


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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 orpassage document: Provided, That tickets revalidated, exchanged and/or indorsedto another international airline form part of the Gross Philippine Billings if thepassenger boards a plane in a port or point in the Philippines: Provided, further,

That for a flight which originates from the Philippines, but transshipment ofpassenger takes place at any port outside the Philippines on another airline, onlythe aliquot portion of the cost of the ticket corresponding to the leg flown from thePhilippines to the point of transshipment shall form part of Gross Philippine Billings.

BOAC v. CIR

BOAC maintained a general sales agent in the Phil. The general sales agent was

engaged in selling & issuing tickets, breaking down the whole trip into series oftrips, receiving fare from the whole trip & allocating to the various airline companiesthe services rendered. In fact, the regular sales of ticket, its main activity is the verylifeblood of the airline business, the generation of sales being the paramountobjective. There should be no doubt that BOAC was engaged in business in the Philthru a local agent. It is a resident foreign corporation subject to tax upon its totalnet income from all sources w/in the Phil.

Source of income is the property, activity or service that produced the income. Forthe source of the income to be considered as coming from the Phil, it is sufficientthat the income is derived from activity within the Phil. In BOACs case, the sale oftickets in the Phil is the activity that produces the income. The tickets exchangedhands here & payments for fares were also made here in Phil currency. The situs ofthe source of payment is the Phil. The absence of the flight operations to & from thePhil is not determinative of the source of income or the situs of income taxation.

RR 15-2002

Continuous and Uninterrupted Flight shall refer to a flight in the carrier of thesame 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 thepassenger, excess baggage, cargo and/or mail. The flight is not consideredcontinuous and uninterrupted if transshipment of passenger, excess baggage, cargoand / or mail takes place at any port outside the Philippines on another aircraftbelonging to a different airline company.


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Tax on Foreign Airline Companies without flights starting from or passing throughany point in the Philippines An off-line airline having a branch office or a salesagent in the Philippines which sells passage documents for compensation orcommission to cover off-line flights of its principal or head office, or for other airlinescovering flights originating from Philippine ports or offline flights, is not considered

engaged in business as an international air carrier NO TAX Imposed

Tax on International Air Carrier with Flights originating from Philippine ports ---irrespective of the place where passage documents are sold or issued, 2 % unlesssubject to a different tax rate under the applicable tax treaty to which thePhilippines is a signatory.

4. Non-Resident Owner Of Vessels

Sec. 28, (3) Nonresident Owner or Lessor of Vessels Chartered by PhilippineNationals. - A nonresident owner or lessor of vessels shall be subject to a tax of fourand one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases orcharters to Filipino citizens or corporations, as approved by the Maritime IndustryAuthority.

5. Non-Resident Lessor Or Aircraft, Machineries, And Other Equipment

Sec. 28, (4) Nonresident Owner or Lessor of Aircraft, Machineries and OtherEquipment. - Rentals, charters and other fees derived by a nonresident lessor ofaircraft, machineries and other equipment shall be subject to a tax of seven andone-half percent (7 1/2%) of gross rentals or fees.

6. Foreign Currency Deposit System/Offshore Banking Units


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Sec. 28, (4) Offshore Banking Units. - The provisions of any law to the contrarynotwithstanding, income derived by offshore banking units authorized by theBangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units,including any interest income derived from foreign currency loans granted toresidents, 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 transactionswith said offshore banking units shall be exempt from income tax.

RR 10-76

RR 14-77

Gross Onshore Income shall mean gross interest income arising from foreigncurrency loans and advances to and/or investments with residents made byoffshore banking units or expanded foreign currency loan transactions. In the caseof foreign currency loan transactions, such gross interest income shall refer only tothe stipulated interest and shall not include all fees, commissions and other chargeswhich are integral parts of the income from the above transactions.

Tax on Gross Onshore Income shall be 10% thereof and shall be a final tax

RR 10-98

Sec. 2.24. Income Tax Rate of Interest Income from Foreign Currency Deposit

Individual Income Tax on Interest Income from a Depository Bank under the ForeignCurrency Deposit System

(1) Resident Citizen or Resident Alien 7.5% final withholding tax

(2) Non-Resident Citizen Exempt

If a bank account is jointly in the name of the non-resident citizen such as anoverseas contract worker and his spouse who is a resident in the Philippines, 50% ofthe interest income from such bank deposit shall be exempt, while the other 50%subject to 7.5% final withholding tax.


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Sec. 2.27 and 2.28 Corporate Income Tax on Interest Income from a DepositoryBank under the Foreign Currency Deposit System

Taxation of Income of an FCDU or OBU from Foreign Currency Transactions Ingeneral, income derived by an FCDU or an OBU from foreign currency transactions

with residents of the Philippines, including local commercial banks, local branches offoreign banks, and other depository banks under the foreign currency depositsystem, shall be subject to final withholding tax of 10% based on gross income.

7. Petroleum Service Contractor And Subcontractor

PD 1354 Imposing final income tax on subcontractors and alien employees ofservice contractors and subcontractors engaged in petroleum operations in thePhilippines

1. Every subcontractor, whether domestic or foreign, entering into contract with aservice contractor engaged in petroleum operations in the Philippines derived fromcontract8% of gross income in lieu of any and all taxes

2. Provided: Income received from all other sources subject to regular income taxunder NIRC

a. For domestic corporations sources from within and without the Philippines

b. For foreign corporations sources from within the Philippines

3. Aliens who are permanent residents of a foreign country but are employed andassigned in the Philippines by service contractors or subcontractors engaged inpetroleum operations15%

PD 87 Amended Act to Promote the Discovery and Production of IndigenousPetroleum and Appropriate Funds

Privileges of Contractor:

(1) Exempt from all taxes except income tax;


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(2) Exemption from payment of tariff duties and compensating tax on theimportation of machinery and equipment, and spare parts and all materials requiredfor petroleum operations subject to the condition that:

a. Said machinery are not manufactured domestically

b. Directly and actually needed and will be used exclusively by the contractor /subcontractor in its operations

c. Prior approval of the Petroleum Board was obtained by the contractor beforeimportation

8. enterprises registered under Bases conversion & Dev. Act of 1992 and PEZA Act

of 1995RR 20-2002

Tax treatment Income derived by an enterprise registered with the Subic BayMetropolitan Authority, Clark Development Authority, or the PEZA from itsregistered activities shall be subject to such tax treatment as may be specified in itsterms of registration (i.e. the 5% preferential tax rate, the income tax holiday, orthe regular income tax rate, as the case may be.) Nonetheless, whatever the taxtreatment of said enterprise with respect to its registered activities, income realizedby such registered enterprise that is not related to its registered activities shall besubject to the regular internal revenue taxes, such as the 20% final income tax oninterest from Philippine Currency bank deposits and yield or any other monetarybenefit from deposit substitutes, and from trust funds and similar arrangements, the7.5% tax on foreign currency deposits and 5% / 10% capital gains tax or % stocktransaction tax, as the case may be, on the sale of shares of stock.

Income payments made by a registered enterprise to an entity in the CustomsTerritory shall not be subject to the preferential tax rates or tax exemption enjoyedby the registered enterprise. Thus, dividends paid to the shareholders of aregistered enterprise, interest payments to creditors of such registered enterprise(regardless of any tax provision for grossing up of taxes) , and other such payments

shall be subject to the appropriate rate of tax imposable on the recipient of suchincome.


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10. Kinds of Taxes: (Domestic, Resident, Non-Resident Corporations)

a. Final income tax interest, royalties, capital gains on shares of stock dividends

b. Income tax at the end of the year / quarterly income tax

CIR v Procter & Gamble(including MR)

The ordinary 35% tax rate applicable to dividend remittances to non-residentcorporate stockholders of a Philippine corporation, goes down to 15% if the countryof domicile of the foreign stockholder corporation shall allow such foreigncorporation a tax credit for taxes deemed paid in the Philippines, applicable

against the tax payable to the domiciliary country by the foreign stockholdercorporation. In other words, in the instant case, the reduced 15% dividend tax rateis applicable if the USA shall allow to P&G-USA a tax credit for taxes deemed paidin the Philippines applicable against the US taxes of P&G-USA. The NIRC specifiesthat such tax credit for taxes deemed paid in the Philippines must, as a minimum,reach an amount equivalent to 20% points which represents the difference betweenthe regular 35% dividend tax rate and the preferred 15% dividend tax rate. It isimportant to note that Sec. 24(b)1 of the NIRC does not require that the US mustgive a deemed paid tax credit for the dividend tax (20% points) waived by thePhilippines in making applicable the preferred dividend tax rate of 15%. In other

words, our NIRC does not require that the US tax law deem the parent-corporationto have paid the 20% points of dividend tax waived by the Philippines. The NIRConly requires that the US shall allow P&G-USA a deemed paid tax credit in anamount equivalent to the 20% points waived by the Philippines.

CIR v Wander Phils. (160 SCRA 573)

Wander Phils. Inc is a domestic corporation, a wholly-owned subsidiary of Glaro S.A.

Ltd. A Swiss corp not engaged in trade or business in the Phil. In 1975&1976,Wander remitted to Glaro dividends on which 35% was withheld & paid to the BIR.In 1977, Wander filed a claim for refund contending it is liable only to 15%withholding tax in accordance with sec 24(b)(1) of the Tax Code.

Under the said provision, dividends received from a domestic corporation liable totax shall be 15% of the dividends received, subject to the condition that the countryin which the non-resident foreign corporation is domiciled shall allow a credit


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against the tax due from the non-resident foreign corporation taxes deemed to havebeen paid in the Philippines equivalent to 20% w/c represents the differencebetween the regular tax of 35% on corporations & the tax of 15% on dividends.

HELD: In the instant case, Switzerland did not impose any tax on the dividendsreceived by Glaro. The fact that Switzerland did not impose any tax on thedividends received by Glaro from the Philippines should be considered as a fullsatisfaction of the given condition. Wander liable only to withholding tax rate of15% & is therefore entitled to refund.

As to the contention of the Commissioner that Wander is but a withholding agent ofthe government & therefore can not claim reimbursement of the alleged overpaidtaxes is UNTENABLE. Wander is a wholly owned subsidiary of Glaro. The fact that itbecame a withholding agent of the government, which was not by choice, cannot beconsidered as an abdication of its responsibility to its mother company. As thePhilippine counterpart, Wander is the proper entity who should claim for the refundor credit of overpaid withholding tax on dividends paid or remitted by Glaro.

11. Branch Profit Remittance Tax

Sec. 28, (5) Tax on Branch Profits Remittances. - Any profit remitted by a branch toits head office shall be subject to a tax of fifteen (15%) which shall be based on thetotal profits applied or earmarked for remittance without any deduction for the taxcomponent thereof (except those activities which are registered with the PhilippineEconomic Zone Authority). The tax shall be collected and paid in the same manneras provided in Sections 57 and 58 of this Code: provided, that interests, dividends,rents, royalties, including remuneration for technical services, salaries, wagespremiums, annuities, emoluments or other fixed or determinable annual, periodic orcasual gains, profits, income and capital gains received by a foreign corporationduring each taxable year from all sources within the Philippines shall not be treatedas branch profits unless the same are effectively connected with the conduct of its

trade or business in the Philippines.

Rev. Memo Circ. 55-80

Addition of 2 non-deductible taxes under Sec. 30 (c) of the NIRC:


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1. Taxes paid on articles imported by the taxpayer where such importation is notconnected with his trade or business

2. Excess electric energy consumption tax imposed by BP 36

Bank of America vs. Commissioner

Facts: Bank of America is a foreign corporation duly licensed to engage in businessin the Philippines. On July 20, 1982, it paid 15% branch profit remittance tax in theamount of P7,538,460,.72 on profit from its regular banking unit operations andP44,790.25 on profit from its foreign currency deposit unit operations or a total ofP7,984,250.97. The tax base was based on net profits after income tax withoutdeducting the amount corresponding to the 15% tax.

Petitioner filed a claim with the BIR of that portion of the payment whichcorresponds to the 15% branch profit remittance tax, on the ground that the taxshould have been computed on the basis of profits actually remitted, which isP45,244,088.85, and not on the amount before profit remittance tax, which isP53,228,339.82. Subsequently, without awaiting respondents decision, petitionerfiled 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 bededucted from the tax base?

Held: In the 15% remittance tax, the law specifies its own tax base to be on theprofit remitted abroad. The tax is imposed on the amount sent abroad, and thelaw calls for nothing further. The taxpayer is a single entity and it should beunderstandable 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 andorganizing, on the other hand, subsidiary domestic corporations where at least amajority 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 madeto pay only the usual corporate income tax of 25%-35% on net income applicable toresident foreign corporation. While Philippine subsidiaries of foreign corporationssubject to the same rate of 25%-35% on their net income, dividend payments,


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however, were additionally subjected to a 15% withholding tax. In order to avertwhat would otherwise appear to be an unequal tax treatment on such subsidiariesvis--vis local branch offices, a 20%, later reduced to 15%, profit remittance tax wasimposed on local branches on their remittances of profits abroad. But this is wherethe tax pari-passu ends between domestic branches and subsidiaries of foreign

corporations.

12. Minimum Corporate Income Tax

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 thegross income as of the end of the taxable year, as defined herein, is herebyimposed on a corporation taxable under this Title, beginning on the fourth taxableyear immediately following the year in which such corporation commenced itsbusiness operations, when the minimum income tax is greater than the taxcomputed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporateincome tax over the normal income tax as computed under Subsection (A) of thisSection shall be carri

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