ATENEO CENTRAL BAR OPERATIONS 2007 Taxation Law SUMMER REVIEWER PART I – GENERAL PRINCIPLES TAXATION – power inherent in every sovereign State to impose a charge or burden upon persons, properties, or rights to raise revenues for the use and support of the government to enable it to discharge its appropriate functions SCOPE OF TAXATION TAXATION IS: Unlimited, Far-reaching, Plenary Comprehensive Supreme STAGES OF TAXATION: (LAP) 1.
Levy 2. Assessment 3. Payment Basic Principles of a Sound Tax System 1. Fiscal Adequacy 2. Theoretical Justice 3. Administrative Feasibility INHERENT LIMITATIONS (SPING) 1) Situs or territoriality of taxation 2) Must be for a Public purpose • Test is whether proceeds will be used for something which is the duty of the State to provide. • Legislature is not required to adopt a policy of “all or none. • Incidental benefit to individual does not defeat exemption 3) International comity • Property of a foreign State of government may not be taxed by another 4) Non-delegability of the taxing power • Contemplates power to QuickTime™ and a TIFF (Uncompressed) decompressor determine kind,thisobject, extent, are needed to see picture. amount, coverage, and situs of tax; • Distinguish from power to assess and collect • Exemptions: (a) presidential taxing powers; (b) local governments 5) Exemptions of Government agencies • Taking money from one pocket • to the other Applies only to entities exercising government functions (acta jure imperii)
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CONSTITUTIONAL LIMITATIONS A. Direct 1) Due process • Should not be harsh, oppressive, or confiscatory (Substantive) • By authority of valid law (Substantive) • Must be for a public purpose (Substantive) • Imposed within territorial jurisdiction (Substantive) • No arbitrariness in assessment and collection (Procedural) • Right to notice and hearing (Procedural) 2) Equal protection • All persons subject to legislation shall be treated alike, under like circumstances and conditions both in privileges conferred and liabilities imposed. Power to tax includes power to classify provided: (a) Based on substantial distinction (b) Apply to present and future conditions (c) Germane to purpose of law (d) Apply equally to all members of the same class 3) Non-impairment clause • Rules (a) When government is party to contract granting exemption cannot be withdrawn without violating nonimpairment clause (b) When exemption generally granted by law withdrawal does not violate (c) When exemption granted under a franchise may be revoked; Consti provides that franchise is subject to amendment, alteration, or repeal by Congress. 4) Must be uniform and equitable Advisers: Atty. Serafin Salvador, Atty. Michael Dana Montero, Atty. Gaudencio Mendoza; Head: Julie Ann B. Domino, Juan J. P. Enriquez III; Understudies: Rachelle T. Sy, Aldwin Mendoza, Timothy John Batan— Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Uniform: all articles or properties of the same class taxed at same rate • Equity: apportionment must be more or less just in the light of taxpayer’s ability to shoulder tax burden Non-imprisonment for non-payment of poll tax • Taxpayer may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides.
Congress shall evolve a progressive system of taxation • As resources of the taxpayer becomes higher, his tax rate likewise increases (ex. Income tax) • Constitution does not prohibit regressive taxes; this is a directive upon Congress, not a justiciable right. All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments • It is the bill, not the law, that must originate from House; bill may undergo extensive changes in Senate • Rationale: members of House are more sensitive to local needs.
Freedom of religion • Activities simply and purely for propagation of faith are exempt (e. g. sale of bibles and religious articles by nonstock, non-profit organization at minimal profit). • Tax is unconstitutional if it operates as a prior restraint on exercise of religion • Income even of religious organizations from any activity conducted for profil or from any of their property, real or personal, regardless of disposition of such income, is taxable Freedom of press/expression QuickTime™ and a TIFF (Uncompressed) decompressor • Tax thatareoperatesthisas a prior restraint needed to see picture. nvalid. • If fee is only for purpose of defraying cost of registration and not for exercise of privilege, no violation. Charitable institutions, churches, and parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and all lands, buildings and improvements • ACTUALLY, DIRECTLY and EXCLUSIVELY USED for charitable, religious and educational purposes shall be exempt from taxation • Pertains only to real estate tax. • Test of exemption: actual use of the property, not ownership • Use of word “exclusively” means “primarily” rather than “solely. • Exemption extends to property incidental to or reasonably necessary for the accomplishment of the purposes mentioned. Tax exemption of all revenues and assets of (a) non-stock, non-profit educational institutions (b) used ACTUALLY, DIRECTLY AND for educational EXCLUSIVELY purposes • Exemption covers income, property, donor’s tax, and customs duties (distinguish from previous which pertains only to property tax) • Revenue must both be (a) derived from an activity in pursuance of educational purpose; and (b) proceeds must be used for the same purpose (ex. ospital adjunct to medical school tax exempt) (ex. Interest income not exempt). • Income exempt provided it is used for maintenance or improvement of institution. • Distinguish from tax treatment of (a) proprietary educational institutions (Preferential Tax); and (b) government educational institutions (exempt, ex.
UP) Delegated authority of President to impose tariff rates, import and export quotas, tonnage and wharfage dues • delegated by Congress • through a law • subject to Congressional limits and restrictions • within the framework of national development program Law granting tax exemption (includes amnesties, condonations and refunds) shall be passed with concurrence of Congress majority of all members voting separately • Relative majority (majority of quorum) is sufficient to withdraw exemption.
No use of public money or property for religious purposes except if priest is assigned to armed forces, penal institutions, government orphanage or leprosarium Page 2 of 145 5) 6) 11) 7) 8) 12) 9) 13) 10) 14) Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 15) Special purpose – special fund for said purpose, balance goes to general funds 16) Veto power of the President – revenue/tariff bill 17) Power of review of the SC 18) Power of Local Government to create their own sources and levy taxes, fees, charges 19) Just share of local government in national revenue which shall be automatically released. 0) Tax exemption of all revenues and assets of (a) proprietary or cooperative educational institutions (b) subject to limitations provided by law 21) Tax exemption of grants, endowments, donations or contributions USED ACTUALLY, DIRECTLY and EXCLUSIVELY for educational purposes CIR v. CA (298 SCRA 85) Facts: YMCA is a non-stock, non-profit institution, which conducts various programs and activities beneficial to the public pursuant to its religious, educational and charitable objective.
In 1980, YMCA earned an income of more than P600K from leasing out a portion of its premises to small shop owners and P47K from parking fees. Issue: Is the rental income from real property owned by the YMCA subject to income tax? Held: YES, the exemption claimed by YMCA is expressly disallowed by the last paragraph of then §27 of the NIRC. Furthermore, Art. XIV, §4 (3) of the Constitution only exempts YMCA from property taxes NOT income tax. YMCA cannot be considered as an “educational institution” within the purview of the above-cited article.
The term “educational institution” under the Education Act of 1982 refers to schools. The school system is synonymous with formal education, which refers to hierarchically structured and chronologically graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress through grades or more to higher levels. QuickTime™ and a Nothing in the Articles(Uncompressed) decompressor or By-Laws of TIFF of Incorporation are needed to see this picture. the YMCA suggests that it is an educational institution. Classification of Taxes A.
As to subject matter of object 1) personal, poll, capitation tax – (a) fixed amount (b) individuals residing within specified territory C. (c) without regard to their property, occupation or business Ex. Community Tax (Cedula) 2) property tax – (a) imposed on property, real or personal (b) in proportion to its value or other reasonable method of apportionment Ex. Real estate tax 3) excise, privilege tax – (different from the excise tax in Taxation II) (a) imposed upon performance of an act, the enjoyment of a privilege or the engaging in an occupation, profession or business Ex.
Income tax, VAT, estate tax, donor’s tax As to who bears the burden 1) Direct – the tax is imposed on the person who also bears the burden thereof Ex. Income tax, community tax, estate tax 2) Indirect – imposed on the taxpayer who shifts the burden of the tax to another Ex. VAT, specific tax, percentage tax, customs duties As to determination of amount 1) Specific – tax imposed and based on a physical unit of measurement, as by head, number, weight, length or volume Ex.
Tax on distilled spirits, fermented liquors, cigars 2) Ad Valorem – tax of a fixed proportion of the value of property with respect to which the tax is assessed; requires intervention of assessor. Ex. Real estate tax, excise tax on cars, nonessential goods As to purpose 1) General, fiscal or revenue – imposed for the general purpose of supporting the government Ex. Income tax, percentage tax 2) Special or regulatory – imposed for a special purpose, to achieve some social or economic objectives Ex.
Protective tariffs or customs duties on imported goods intended to protect local industries As to authority imposing the tax 1) National – imposed by the national government Ex. National internal revenue taxes, custom duties 2) Municipal or local – imposed by the municipal corporations or local governments Ex. Real estate tax, occupation tax B. D. E. Page 3 of 145 Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 F. As to graduation of rate (Three systems of taxation) 1) Proportional – based on a fixed percentage of the amount of the property, income or other basis to be taxed Ex.
Real estate tax, VAT, percentage tax 2) Progressive or graduated – tax rate increases as the tax base or bracket increases Ex. Income tax, estate tax, donor’s tax 3) Regressive – tax rate decreases as the tax base increases 4) Degressive – increase of rate is not proportionate to the increase of tax base • SITUS OF TAXATION – the place of taxation, the country that has the power to levy and collect the tax. taxes accrue to the general benefit of the citizens of the taxing State Applies to all persons, property and excises that may be subject thereto is given the owner of the expropriated property
Persons affected Only particular property is comprehended TAX DISTINGUISHED FROM LICENSE FEE TAX Exercise of Taxing power Raise revenue Persons, property and privilege no limit LICENSE FEE Emanate from the police power of the State Regulation Right to exercise a privilege only necessary to carry out regulation Source Purpose Object TAX DISTINGUISHED FROM POLICE POWER TAX Purpose Raise revenue POLICE POWER (in the form of a FEE) Exercise to promote public welfare through regulation Limited to the cost of regulation, issuance of license, or surveillance Contracts may be impaired
Amount Amount of exaction No limit • Superiority of contracts Transfer of property rights Contracts may be impaired unless (a) government is party to contract granting exemption; or (b) involves franchise Taxes paid form part of the public funds Distinction lies in the primary purpose: • License fee if primary purpose is to regulate and the excess of the amount collected from the cost to carry out the regulation is minimal and incidental. • Tax if primary purpose, or at least one of the real and substantial purposes is to raise revenue. If amount is too high for regulation, it would be a tax; unless imposed on non-useful occupations or businesses. Purpose of distinction: limitations and exemptions apply only to one and not to the other (ex. Exemption from taxation does not include exemption from fee) • Allows merely the restraint on the exercise of property rights TAX DISTINGUISHED FROM DEBT TAX Source Law; legal obligation Personal DEBT Based on contract Assignable QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture.
TAX DISTNGUISHED FROM EMINENT DOMAIN TAX Raise revenue Payment of EMINENT DOMAIN The taking of property for public use Just compensation Purpose Compensation Page 4 of 145 Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Generally not subject to compensation/setoff Imprisonment is sanction for nonpayment May be the subject of compensation/setoff No imprisonment for non-payment TAX DISTINGUISHED FROM TOLL TAX Demand of sovereignty support of government no limit – depends on need of the government TOLL Demand of ownership Collection for the use of property Fair return of the cost of the property or improvement
Kind of demand Purpose Amount GENERAL RULE: Taxes cannot be the subject of compensation or set-off * A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of tax cannot await the results of a lawsuit against the government.
Reasons: a) lifeblood theory b) taxes are not contractual obligation (absence of consent of taxpayer) c) taxpayer and government are not mutual debtors and creditors of each other EXCEPTIONS: 1) Both claims already became overdue and demandable as well as fully liquidated there must have already been an act of appropriation by the government (legislative) of funds for payment of the debt. 2) Tax overpayment (BIR’s obligation to refund or set-off arises from time tax was paid) 3) If the case involves local government taxes TAX DISTINGUISHED ASSESSMENT TAX Imposed on Why imposed Purpose FROM SPECIAL
TAX DISTINGUISHED FROM CUSTOMS DUTY TAX Coverage Object More comprehensive than customs duty Persons, prop, etc CUSTOMS DUTY kind of tax goods imported or exported DOCTRINE OF EQUITABLE RECOUPMENT 1) refund of a tax illegally or erroneously collected or overpaid by a taxpayer 2) such tax refund is barred by prescription 3) tax presently being assessed against a taxpayer 4) may be recouped or set-off against the tax barred by prescription not allowed in Philippines, reason – LIFE BLOOD CONCEPT OF DOUBLE TAXATION Kinds of Double Taxation A.
DIRECT DUPLICATE • taxing same person, property or right twice • for the same purpose • by the same taxing authority • within the same jurisdiction or taxing district • within the same taxable period • and they must be of the same kind or character of tax B. INDIRECT DUPLICATE • Exists if any of the elements for Direct taxation is not present • No constitutional prohibition on double taxation.
However, where there is direct duplicate taxation then there may be violation of the constitutional precepts of equal protection and uniformity in taxation. When imposed Basis persons, properties, etc. regardless of Public improvement public that benefits the land improvement QuickTime™ and a TIFF (Uncompressed) decompressor Support are needed to see this picture. of Contribution to cost government of public improvement Regular exaction Exceptional as to time and locality Necessity Benefits obtained SPECIAL ASSESSMENT Only on land Page 5 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 TAX TREATY AS A MODE OF ELIMINATING DOUBLE TAXATION: 1) EXEMPTION METHOD – the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may taken into account in determining the rate of tax applicable to the tax payer’s remaining income or capital (ex. Tax Sparing Credit scheme) 2) CREDIT METHOD – the tax paid in the state of source is credited against the tax levied in the state of residence Afisco Insurance Corp v. CA (G. R. No. 12675, Jan. 25, 1999) Petitioners are local non-life insurance corps. Which formed a “pool” in order to enter into a Reinsurance Treaty with a German company. BIR assessed deficiency taxes against the “pool” on the ground that it is considered a partnership taxable as a corp. Petitioners insist that the pool is a mere agent, not acting on its own and therefore, cannot be taxed as a corp. , there being no risk undertaken by the pool, no common fund and no control exercised by its board in the management of its fund. Issue (1) : Is the Pool Taxable as a Corp? Held (1): YES.
Pursuant to §24 of the NIRC, the pool is included within the definition of “domestic corps. ” Which comprises even unregistered partnerships and associations. In this case, the ceding cos. Entered into an association that would handle all business under the Treaty. It has a common fund and an executive board to manage its affairs. Moreover, even if the pool itself did not issue any policies on its own, its work was indispensable to the business of the ceding companies and the German Co, Issue (2): Is there double taxation? Held(2): NO. Double taxation means taxing the same person twice by the same jurisdiction for the same thing.
The pool is a taxable entity distinct from the individual corporate entities of the ceding QuickTime™ and a companies. The TIFF (Uncompressed) decompressor is obviously tax on its income are needed to see this picture. different from the tax on the dividends received by the said companies. Power to Tax Involves Power to Destroy [Chief Justice Marshall, McCullough v. Maryland, 4 L. Ed. 579 (1819)] The imposition of a valid tax could not be judicially restrained merely because it would prejudice a taxpayer’s property. As long as the power to tax does not violate any constitutional or statutory provisions, said power can be a power to destroy.
But for all its plenitude, the power to tax is not unconfined as there are restrictions. Adversely effecting as it does property rights, both the due process and equal protection clauses of the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to the dictum that “the power to tax involves the power to destroy. ” The web or unreality spun from Justice Marshall’s famous dictum was brushed away by one stroke of Mr. Justice Holmes’ pen, thus: “The power to tax is not the power to destroy while this Court sits. ” “So it is in the Philippines. [Reyes v. Almanzor (1991), citing Sison v. Ancheta (1984); Obillos v. CIR (1985)]. Tax Avoidance (Tax Minimization) – tax saving device that is legally permissible Tax Evasion (Tax Dodging) – connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes; must be willful and intentional. CIR vs. The Estate of Benigno Toda, GR No. 147188, Sept. 14, 2004 Facts: This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes tax evasion that would justify an assessment of deficiency income tax. CIC authorized Toda, Jr. , President and owner of 99. 91% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an Toda then amount of not less than P90M. purportedly sold the property for P100 M to Rafael Altonaga, who, in turn, sold the same property on the same day to RMI for P200M. These 2 transactions were evidenced by Deeds of Absolute Sale. For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10M. CIC filed its corporate annual ITR for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of P75,728. 21. Toda sold all his shares. He died 3 yrs. later. The BIR sent an assessment notice and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999. 22, representing the tax, surcharge, & interest on the Page 6 of 145 Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture. Page 7 of 145 Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 particular accused and not the character of the acts charged in the information PART II – THE NATIONAL INTERNAL REVENUE CODE OF 1997 TITLE I.
ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL REVENUE (BIR) POWERS AND DUTIES OF THE BIR (ACEEGA) 1) Assessment and Collection of national internal revenue: (a) taxes (b) fees (c) charges 2) Enforcement of all (a) forfeitures (b) fines and (c) penalties connected therewith 3) Execution of all judgments decided in BIR’s favor by (a) the Court of Tax Appeals (CTA) and (b) the ordinary courts 4) Give effect to and Administer the supervisory and police powers conferred to it by NIRC or by other laws. (Sec. 2) Officials of the BIR 1) one chief – Commissioner of Internal Revenue (Commissioner) 2) four ssistant chiefs – Deputy Commissioners (Sec. 3) *E. O. 430 (July 28, 1997) designates each of the 4 Deputy Commissioners to head the following functional groups: (a) Operations group (b) Legal Enforcement Group (c) Information Systems Group (d) Resource Management Group Powers of the Commissioner A. Power to interpret tax law and decide tax cases (Sec 4) 1) Interpret provisions of NIRC and other tax laws subject to review by the Secretary of Finance 2) Decide: (a) disputed assessments (b) refunds of internal revenue taxes, fees and charges (c) penalties imposed in relation thereto (d) other matters arising from NIRC or other Page 8 of 145
NATURE OF TAX AMNESTY 1) general or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law 2) partakes of an absolute forgiveness or waiver of the Government of its right to collect 3) to give tax evaders, who wish to relent & are willing to reform a chance to do so RULES ON TAX AMNESTY 1) Tax amnesty (a) like tax exemption, never favored nor presumed (b) construed strictly against the taxpayer (must show complete compliance with the law) 2) Government not estopped from questioning the tax liability even if amnesty tax payments were already received QuickTime™ and a TIFF (Uncompressed) decompressor Reason: Erroneous this picture. application and are needed to see enforcement of the law by public officers do not block subsequent correct application of the statute. The government is never estopped by mistakes or errors of its agents. Basis: Lifeblood Theory 3) Defense of Tax amnesty, like insanity, is a personal defense. Reason: Relates to the circumstances of a Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 laws or portions thereof administered by the BIR subject to the exclusive appellate jurisdiction of the CTA B. Power to obtain information, summon, examine and take testimony of persons (Sec. ) 1) For the Commissioner to ascertain: (a) correctness of any return or in making a return where none has been made (b) liability of any person for any internal revenue tax or in correcting such liability (c) tax compliance The Commissioner is authorized: 2) to Examine any relevant Book, paper, record or other data 3) to Obtain any Information (costs, volume of production, receipts, sales, gross income, etc), on a regular basis from: (a) any person other than the person under investigation or (b) any office or officer of the national/local government, government agencies and instrumentalities (Bangko Sentral, GOCCs) 4) To Summon (a) the person liable for tax or required to file a return or (b) any officer or employee of such person or (c) any person having in his possession/custody/ care 1. the books of accounts 2. ccounting records of entries relating to the business of the person liable for tax or any other person 5) to Produce such books, papers, records and other data and to give testimony 6) to take the Testimony of the person concerned, under oath as may be relevant to the inquiry 7) To cause revenue officers and employees to make a Canvass of any revenue district or region nothing in Section QuickTime™ andbe construed as 5 shall a TIFF (Uncompressed) decompressor are needed to see this granting the Commissionerpicture. authority to the inquire into bank deposits other than as provided for under Sec. 6 (F) of the Code (authority to inquire into bank deposits). Power to make assessments, prescribe additional requirements for tax administration and enforcement (Sec. ) 1) Examination of returns and determination of tax due (a) After a return has been filed the Commissioner or his representative may authorize i. the Examination of any taxpayer; and ii. the Assessment of the correct amount of tax; (b) Failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer; Any tax or deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or his representative. Any return, statement or declaration filed in any authorized office shall not be withdrawn; but within THREE YEARS from date of filing, the same may be modified, changed or amended; provided that no notice for audit or investigation of such return, has in the meantime, been actually served upon the taxpayer. ) Failure to submit required returns and other documents If a person (a) fails to file a required return or report at the time prescribed or (b) Willfully or otherwise files a false or fraudulent return, The Commissioner shall Make or Amend the return from (a) his own knowledge or (b) from such information as he can obtain through testimony or otherwise which shall be prima facie correct and sufficient for all legal purposes 3) Inventory-taking, Surveillance, Presumptive Gross Sales (a) Commissioner may, at any time during the taxable year 1. order the Inventory taking of goods of any taxpayer; or 2. may place the business operations of any person natural/juridical) under Observation or Surveillance if there is reason to believe that such person is not declaring his correct income, sales or receipts for tax purposes. The findings may be used as basis for assessing the taxes and shall be deemed prima facie correct. Page 9 of 145 • C. Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 (b) Commissioner may prescribe a Minimum amount of gross receipts, sales and taxable base (taking into account the sales and income of other persons engaged in similar business) : 1. When a person has failed to issue receipts as required by Sec. 113 (Invoice requirements for VATregistered persons) and Sec. 237 (Issuance of Receipts or Commercial Invoices); or 2.
When the books of accounts or records do not correctly reflect the declarations made or required to be made in a return, such minimum amount shall be prima facie correct 4) Terminate taxable period Commissioner shall declare the tax period of a taxpayer terminated and send notice to the taxpayer of such decision with a request for immediate payment of the tax, when it has come to the knowledge of the Commissioner: (RIRHO) (a) that a taxpayer is Retiring from business subject to tax or (b) is Intending to leave the Philippines or (c) to Remove his property therefrom or (d) to Hide or conceal his property or (e) is performing any act tending to Obstruct the proceedings for the collection of tax 5) Prescribe Real Property Values The Commissioner is authorized to: (a) divide the Philippines into different zones or areas and (b) determine the fair market value of real properties located in each zone or area For tax purposes, the value of the property shall be whichever is higher of: (a) Fair market value as determined by the Commissioner; or (b) Fair market value as shown in the schedule of values of the provincial and city assessors. are needed into Bank 6) Authority to Inquire to see this picture. Deposit Notwithstanding R. A. 405 (Bank Secrecy Law) the Commissioner is authorized to inquire into the Bank deposits of: (a) a decedent to determine his gross estate (b) a taxpayer who has filed an application to compromise payment of tax liability by reason of financial incapacity QuickTime™ and a TIFF (Uncompressed) decompressor The taxpayer’s application for compromise shall not be considered unless he waives in writing his privilege under RA 1405 and other general or special laws. Such waiver shall authorize the Commissioner to inquire into his bank deposits. 7) Authority to Register tax agents (a) The Commissioner shall Accredit and Register, individuals and general professional partnerships and their rep. ho prepare and file tax returns and other papers or who appear before the BIR (b) The Commissioner shall create national and regional accreditation boards Those who are denied accreditation may appeal the same to the Sec. of Finance who shall rule on the appeal within 60 days from receipt of such appeal. Failure of the Sec. of Finance to rule on the appeal within the said period shall be deemed as approval for accreditation. 8) Authority to Prescribe Additional RequirementsThe Commissioner may prescribe the manner of compliance with any documentary or procedural requirement for the submission or preparation of financial statements accompanying tax returns. D. Authority to delegate power (Sec. ) The Commissioner may delegate the powers vested in him to subordinate officials with rank equivalent to Division Chief or higher, subject to limitations/restrictions imposed under the rules and regulations EXCEPT, (the following powers shall NOT be delegated): (RIR CoA A) 1) power to Recommend the promulgation of rules and regulations by the Sec. of Finance 2) power to Issue rulings of first impression or to Reverse, revoke, modify any existing rule of the BIR 3) power to Compromise or Abate any tax liability EXCEPT, the regional evaluation board may compromise: (a) assessments issued by regional offices involving deficiency taxes of P500,000 or less; and (b) minor criminal violations as may be Page 10 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 determined by the rules 3) To Submit reports to the appropriate committee of Congress upon its request and in aid of legislation, which information or report shall include, but not be limited to: (a) industry audits (b) collection performance data (c) status reports in criminal actions initiated against persons (d) taxpayer’s returns provided, any return or information which can be associated with or identifies, directly or indirectly a particular taxpayer, shall be furnished to the appropriate committee of Congress only when sitting in Executive Session, unless the taxpayer consents in writing to such disclosure 4) Submit reports to the Oversight Committee through the Chairman of the Committee on Ways and Means of the Senate and House of Representatives, on the exercise of his powers of abatement and compromise of taxes (Sec. 204) every 6 months of each calendar year. (Sec. 0) NATIONAL INTERNAL REVENUE TAXES: (Sec. 21) (I VEE DOO) 1) Income tax 2) Estate and Donor’s tax 3) Value-Added tax 4) Other percentage tax 5) Excise tax 6) Documentary stamp tax 7) Such Other taxes as are or hereafter may be imposed and collected by the BIR Regional Evaluation Board is composed of: i. Regional Director as Chairman ii. Asst. Regional Director iii. Heads of the Legal, Assessment and Collection Div. iv. Revenue District Officer having jurisdiction over the taxpayer 4) power to Assign or reassign internal revenue officers to establishments where articles subject to excise tax are kept E. Assignment of Internal Revenue Officers (Secs. 6 &17) The Commissioner may assign/ reassign internal revenue officers: 1) involved in excise tax functions as often as the exigencies of revenue service may require; provided that he shall in no case stay in his assignment for more than 2 years (Sec. 16) 2) without change in rank and salary, to other or special duties connected with the enforcement and administration of internal revenue laws as the exigencies of the service may require; provided that officers assigned to perform assessment or collection functions shall not remain in the same assignment for more than 3 years; assignment of officers and employees to special duties shall not exceed 1 year (Sec. 17) F. Internal Revenue Districts (Sec. 9) The Commissioner, with approval of the Sec. of Finance, shall divide the Philippines into such number of revenue districts for administrative purposes.
Each district shall be under the supervision of a Revenue District Officer. Duties of the Commissioner: (PASO) 1) To Prescribe, provide and distribute to the proper officials the requisiteQuickTime™ and a internal revenue licenses, TIFF (Uncompressed) decompressor needed to see this forms, stamps, labels, areall other picture. certificates, bonds, records, invoices, books, receipts, instruments and appliances used in administering laws falling within the jurisdiction of BIR 2) To Acknowledge payment of any tax under this Code expressing a) the amount paid and b) the particular account for which payment was made (Sec. 8) TITLE II. TAX ON INCOME DEFINITION OF TERMS 1) Person – an individual, a trust, estate or corp. ) Corporation – include partnerships (distinguish between ordinary and general professional partnership) 3) General professional partnership – partnerships formed for the sole purpose of exercising their common profession, no part of its income being derived from engaging in any trade or business 4) Shares of stock – includes shares of stock of a corp. , warrants & options to purchase shares of stock, as well as units of participation in a partnership (except gen. professional partnership), joint stock companies, joint accounts, joint ventures taxable as corp. , associations & recreation or amusement clubs & mutual fund certificates Page 11 of 145
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 5) Taxpayer – any person subject to tax 6) Taxable Year – can either be calendar year (Jan 1 to Dec 31), or the fiscal year 7) Fiscal Year – an accounting period of 12 months ending on the last day of any month other than December (ex. Feb 1 to Jan 31) 8) Paid or incurred (cash method) or Paid or accrued (accrual method) – payment actually made or if not paid, actually liable for the expense TAXABLE INCOME REQUISITES FOR INCOME TO BE TAXABLE: 1) There must be a gain or addition to net worth 2) The gain must be realized or received, actually or constructively; recipient must have complete dominion 3) The gain must not be excluded by law or treaty from taxation Income can be realized actually and constructively. • Assignment of Income Doctrine – Ex: A is entitled to his salary of P10m but assigns it to B for unknown reasons. In this case, both A and B realize income.
A constructively received income (because he was able to assign thus has complete control/dominion over it) and B actually received it. The income is taxable in the hands of both A and B. • Doctrine of Constructive Receipt – Ex: A was informed that his check dated December 16 is already available and he can get it anytime. A did not get the check until January 30. In this case, A constructively received income in December and is taxable in that taxable period. • Not recognized as income if proceeds are merely a return of capital. Ex. Creditor lends debtor x amount. Debtor repays x amount plus y interest. Creditor does not have income on x amount as this is merely return on capital; he has income only with respect to the amount of y interest.
COMPUTATION OF TAXABLE INCOME 1) Taxpayer earning purely compensatory income Gross Compensation less : Personal Exemption premium payments on health and/or hospital insurance amounting to P2,400 per year equals: Taxable income 2) Taxpayer doing business, whether individual or corporation (domestic or FC doing business) Gross Revenue/Sales less: Cost of Sales equals: Gross Income less : Allowable Deductions equals: Taxable Income for individuals, an additional deduction for personal exemptions is allowed Situs of Taxation is the place or authority that has the right to impose and collect taxes (CIR v. Marubeni Corp). The state where the subject to be taxed has a situs may rightfully levy and collect the tax.
The situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question. SOURCES OF INCOME Page 12 of 145 • Note: • • • • • Not recognized as income – when funds were merely entrusted/held money in trust (with obligation to return) to taxpayer because taxpayer acquires no control and does not receive economic benefit from it. Proceeds of embezzlement/swindling are income because embezzler/swindler already has complete dominion over them and can use such for his economic benefit. Increase in the value of property is not recognized as income; this only constitutes an unrealized increase which becomes taxable income only upon disposition and realization of gains. Same situation for stocks and stock dividends.
Deposit with no interest does not produce income for the depositary; there is no flow of wealth. In a debt/loan situation it is important to determine whether there was an original intention to pay/consensual recognition of an obligation to repay. • If yes, then the liability that QuickTime™ and a TIFF (Uncompressed) decompressor results just offsets the increase in are needed to see this picture. assets of the taxpayer borrower; therefore, no increase in net worth and no income derived from the debt/loan. • If no (as in the case of a swindler/estafa), the proceeds will be considered as income and therefore taxable in the hands of the borrower swindler.
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Taxpayer ITEM Interest Compensation for personal services Rent and royalty Gain from sale of real property Gain from sale of personal property Gain from sale of shares of stock of domestic corporation Dividend income SOURCE Residence of the debtor Place of performance Location of property Location of property Place of sale Philippine source Resident Citizen Tax Base Taxable Income Taxable Income Taxable Income Taxable Income Gross Income Taxable Income Taxable on income Within and without the Philippines Within the Philippines Within the Philippines Within the Philippines Within the Philippines Within or/and without the Philippines (depending on classification of individual partner) Same basis as an individual (depending on classification of decedent, if estate, trustor, if trust) Within and Without the Philippines Within the Philippines Within the Philippines Nonresident Citizen Resident Alien Nonresident Alien engaged in trade or business Nonresident Alien not engaged in trade or business General Professional Partnership (a) From a domestic corp. – deemed income from within Phil. (b) From a foreign corp. – deemed income from without provided more than 50% of the corp. s worldwide income is not derived from Phil. sources Allocation of Unallocated Deductions (partly Phil. partly foreign) GI, Philippines GI, Worldwide GI, Outside Phil GI, Worldwide x x Unallocated = Phil deductions deductions Unallocated = Foreign deductions deductions Estate and Trust Taxable Income Income from sale of personal property derived from sources partly within and partly without the Phils. Domestic Corporation Gain from sale of personal property produced in whole or in part in one country and sold in another country, where one of the countries is the Philippines is income derived from sources partly within and partly outside the Philippines.
Gains from the purchase of personal property within and sold without the Philippines or the purchase of personal property without and and a sale within the QuickTime™ its TIFF (Uncompressed) decompressor Philippines shall be are needed to see this picture. entirely from treated as derived sources within the country in which it was sold. Taxable Income Taxable Income Gross Income Resident Foreign Corporation Non-resident Foreign corporation *Taxable Income = Gross income (less) Deductions (less) Personal and additional exemptions *Gross Income = all income derived from whatever source TYPES OF INCOME TAXATION UNDER THE NIRC 1) Net Income Tax/Taxable Income (GI – Deductions – Exemptions) 2) Gross Income Tax (All income from whatever source) 3) Final Income Tax (On passive income and capital Page 13 of 145
GENERAL PRINCIPLES OF INCOME TAXATION IN THE PHILIPPINES Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 gains) 4) Fringe Benefits Tax (amount of benefits to Managerial and Supervisory Employee paid by Employer; Ee is taxed but burden is on Er) 5) Capital Gains Tax (Real property and stocks not traded in stock market) 6) Optional Corporate Income Tax 7) Minimum Corporate Income Tax (2% of GI) 8) Improperly Accumulated Earnings Tax 9) Preferential Rates (for special corporations) 10) Branch Profit Remittance Tax TYPES OF INCOME 1) General (part of gross income, subject to 532%) a) Compensation Income b) Income from Business c) Income from Exercise of Profession 2) Special Types of
Income (not part of gross income, subject to final tax) a) Interests, royalties, prizes and other winnings subject to final tax (Passive Income) b) Cash & property dividends (does not include stock dividends; these are realized only upon their subsequent sale) (Passive Income) c) Capital gains from sale of real property d) Capital gains from sales of shares of stock not listed in the stock exchange e) Capital gains from sale of shares of stock listed in stock exchange (subject to percentage tax B. Estates and Trusts Estate: property, rights and obligations of a person which are not extinguished by his death and those that accrues thereto; taxed in the same way as an individual provided it is irrevocable and earns income; what is taxed is not the property that constitutes the trust (this was already subject to donor’s tax) but the income of such property.
Trust: arrangement created by agreement under which title to property is passed to another for conservation or investment with the income and the corpus/principal distributed in accordance with the directions of the creator; to be taxable as a separate entity, grantor must have absolutely and irrevocably given up control and benefit over the trust. C. Corporation A corporation shall include partnerships, no matter how created or organized. Joint stock companies, joint accounts, associations, and insurance companies • But does not include, for the purpose of imposing ordinary 35% corporate income tax: o general professional partnerships o joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal & other energy operations pursuant to an operating or consortium agreement under a service contract with Page 14 of 145 TYPES OF TAXPAYERS A.
Individuals Kinds of Individuals 1) Resident Citizen 2) Nonresident Citizen = citizen of the Philippines who: (a) Establishes the fact of his physical presence abroad with a definite intention to reside therein (b) Leaves the Philippines during the taxable year to reside abroad, as immigrant or for employment on a permanent basis (c) Works & derives income from abroad & whose employment requires him to be physically present abroad most of the time (i. e. not less than 183 days) during the taxable year (d) Previously considered as nonresident citizen & arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines 3) Resident Alien 4) Nonresident Alien a) Those engaged n trade or business in the Philippines who come and stay in the Philippines for an aggregate period of more than 180 days during any calendar year b) Those not engaged in trade or business in the Philippines, which include nonresident aliens whose stay in the Philippines is QuickTime™ and a less 180 days or TIFF (Uncompressed) decompressor are needed to see by regional or area c) Aliens employed this picture. headquarters and regional operating headquarters of multinational companies in the Philippines d) Aliens employed by offshore banking units e) Aliens employed by petroleum contractors and subcontractors Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 the govt.
General Types: 1) Domestic Corporation is created or organized in the Philippines or under its laws 2) Foreign Corporation is organized and existing under the laws of a foreign country (a) Resident foreign corporation – foreign corp. engaged in trade or business within the Philippines (b) Nonresident foreign corporation – foreign corp. not engaged in trade or business within the Philippines D. Partnerships Kinds of Partnerships 1) General Professional Partnerships • Established solely for purpose of exercising common profession and not part of income derived from engaging in trade or business. • As an entity, it is not subject to income tax. Partners are liable for income tax on their distributive share (computed by dividing net income of GPP). Each partner shall report his distributive share as part of his gross income. ) Taxable/Business/Ordinary Partnership • All other partnerships no matter how created or organized. • Includes unregistered joint ventures and business partnerships. • Taxable as an entity ordinary corporate income tax. • Joint ventures are not taxable as corporations when its purpose if a) undertaking construction projects; b) engaged in petroleum, coal and other energy operation under a service contract with the government. • Partners are considered stockholders; therefore, their distributive share is taxed as dividends. TAX ON CORPORATIONS I. DOMESTIC CORPORATIONS A. In general QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture. B. Optional Gross Income Taxation Effective Jan. , 2000: the President (upon recommendation of the Sec of Finance) may allow corporation an option to be taxed at 15% of gross income after the ff. conditions are satisfied: Tax effort ratio Ratio of IT collection to total tax revenue VAT tax effort Ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP Ratio of Cost of Sales to Gross Sales from all sources 20% of GNP 40% 4% of GNP 0. 9% Does not exceed 55% The election of the option shall be irrevocable for 3 consecutive taxable years during which the corp. is qualified under the scheme Gross Income = Gross Sales ( – ) Sales returns, discounts and allowances ( – ) Cost of goods sold
Cost of Goods Sold Trading and Merchandising Concern • Invoice cost plus import duties and freight in transporting goods to the place where actually sold, including insurance while in transit Manufacturing concern • Cost of production of finished goods (raw materials, direct labor and manufacturing overhead, freight cost, insurance premiums, and other costs to bring the raw materials to the factory) If taxpayer is engaged in sale of service: Gross Income = Gross receipts ( – ) Sales returns, allowances and discounts C. Special Types of Domestic Corporations Proprietary educational institutions and hospital which are 10% On related trade, business or activity; 35% (2006) if total gross income from
On taxable income from all sources within and without the Philippines 32% (2000-2005) 35% (2006-2008) 30% (2009 onwards) Page 15 of 145 Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 nonprofit unrelated trade, business, or activity exceed 50% of total income Same tax rate upon their taxable income in a similar business, industry, or activity D. Rule for Corporations Exempt from Taxation General Rule: those enumerated under section 30 are exempt. Exception: exempted corporations are subject to income tax on their income from any of their properties, real or personal, or from any activities conducted for profit regardless of the disposition made of such income. • Ex.
Non-stock, non-profit religious organization is exempt from 35% ordinary income tax on corporations (by virtue of section 30 which uses “as such”) and from all property tax (by virtue of Constitution, provided ADE use for its religious purpose). However, if it derives income from its property or conducts an activity that is for profit (even if the proceeds will be used for the religious purpose), the proceeds will be taxable. • Ex. For educational institutions, the proceeds, to be exempt, must be both a) realized from educational activities and b) used for educational activities. GOCC, Agencies and Intrumentalities, including PAGCOR GSIS/ SSS / PHIC / PCSO Depository Banks 32% (20002005) 35% (2006) Exempt 10% On interest income from foreign currency transactions including interest income from foreign loans
Proprietary Educational Institutions & Hospitals (non-profit) • Proprietary educational institution – any private school maintained & administered by private individuals or groups with an issued permit to operate from DECS, or CHED or TESDA Taxable at 10% on taxable income, except on certain passive income (which are subject to final tax) Predominance Test: if GI from unrelated trade/business/other activity > 50% of the total GI from all sources, ENTIRE taxable income shall be subject to the REGULAR corporate tax rate (35% Effective 2006) Distinguish from non-profit non-stock educational institutions which are exempt from tax on revenues and assets Actually, Directly and Exclusively used for educational purposes (See above for discussion). • • E. Minimum Corporate Income Tax (MCIT) 1. MCIT Rate = 2% of gross income (GI) When to begin/apply MCIT?
Beginning on the th 4 taxable year immediately following the year in which such corporation commenced its business operation (Commencement of Business Operation: Upon Issuance of BIR Certificate of Registration) Imposed when on the 4th taxable year, 2% of the corporations GI is greater than 35% of its TI. Example: for 2006 calendar year GI = P500,000 2% of GI = P10,000 TI = P27,000 35% of TI = P9,450 2006 IT = P10,000 Rationale: This is designed to prevent corporations from escaping being taxed by including frivolous expenses in their statement of income (Ex. Over statement of depreciation expense) 2. Carry Forward of Excess Minimum Tax Page 16 of 145 • GOCCs QuickTime™ and a General Rule:TIFF (Uncompressed) decompressor agencies, or all corporations, are needed to see this picture. instrumentalities owned or controlled by the govt. are taxable. Exceptions: 1) GSIS 2) SSS 3) PHIC 4) PCSO
Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Excess of MCIT over the normal income tax shall be carried forward & credited against normal income tax for the 3 succeeding years Example: (proceeding from above example) Situation A: If regular income tax (35% of taxable income) is greater than MCIT (2% of GI) Pay Regular Income Tax For 2007 calendar year: GI = P500,000 TI = P50,000 2% of GI = P10,000 35% of TI = P17,500 ( – ) Sales returns, discounts and allowances ( – ) Cost of Services *means all direct costs and expenses necessarily incurred to provide the services required by the customers including: a) salaries and employee benefits of personnel, consultants and specialists directly rendering the service; b) costs of facilities directly utilized in providing the service such as depreciation or rental of equipment used and costs of supplies II. RESIDENT FOREIGN CORPORATION A. In General (the rest is the same as domestic corp. On taxable income from all the sources within Philippines. 32% (2000-2005) 35% (2006-2008) 30% (2009 onwards) Income Tax payable for 2007 = 17,500 (Regular Income Tax) – 550 (MCIT Carry Forward from 2006: 10,000-9450) = 16,950 NOTE: You can deduct MCIT Carry Forward only if Regular Income Tax is greater than MCITY Situation B: If regular income tax is less than MCIT Pay MCIT For 2007 calendar year: GI = P500,000 TI = P20,000 2% of GI = P10,000 35% of TI = P7,000 B. MCIT – same as domestic corp. C. Special types of resident foreign corporations: International Air 2. 5% On Gross Philippine carriers Billings (see case of Air Canada vs. CIR infra) International 2. % On Gross Philippine Shipping Billings Offshore 10% Any interest income banking units 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 Offshore Exempt Income derived by banking units offshore banking units authorized by the BSP, from foreign currency transactions with nonresidents, other offshore banking units, local commercial banks, including Page 17 of 145 Income Tax payable for 2007 = 10,000 NOTE: MCIT carry forward as of 2007 is already 3,550 (550 from 2006 and 3,000 from 2007). So if in 2008, Regular Income Tax is already greater than MCIT, you may deduct 3,550 from payable Regular Income Tax. 3. Relief from MCIT MCIT may be suspended by the Sec of Finance when corporation’s losses are due to: (a) prolonged labor dispute (b) force majeure (c) legitimate business reverses 4.
Gross Income (for purposes of applying MCIT) Gross Income = Gross Sales ( – ) Sales returns, discounts & allowances ( – ) Cost of Goods sold If taxpayer is engaged in sale of service: Gross Income = Gross Receipts QuickTime™ and a TIFF (Uncompressed) decompressor are needed to see this picture. Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units. Regional/Area Headquarters Regional Operating Headquarters of Multinational companies Exempt 10% On taxable income o Off line carriers: those without landing rights but may nevertheless be selling tickets in the Phil subject to tax treatment of ordinary resident foreign corporation What’s controlling is the amount stated in the ticket and not the actual purchase value. • Air Canada vs. CIR, CTA Case No. 6572, Dec. 2, 2004 It is evident that the definition of ‘Gross Philippine Billings’ under Section 28(A)(3)(a) of the 1997 Tax Code covers the gross revenue derived from the carriage of persons, excess baggage, cargo and mail ‘originating from the Philippines in a continuous and uninterrupted flight’ irrespective of the place or sale or issue and the place of payment of the ticket or passage document. ‘To originate’ would mean ‘to cause the beginning of; to start (a person or thing) on a course or journey; to begin, start’. In other words, the flights carrying the passengers must have originated or started from the Philippines. Verily, petitioner, being an off-line international carrier, as authorized to operate by the CAB and having no flights originating from the Philippines in a continuous and uninterrupted flight, cannot be taxed pursuant to Section 28(A)(3)(a) of the 1997 Tax Code, that is, based on their Gross Philippine Billings. However, although petitioner Air Canada is not liable to pay the tax as an international air carrier (2. 5% on gross Phil. Billings), it is still liable to pay income tax as a resident foreign corporation. Under Section 22 of the 1997 Tax Code, the term ‘resident foreign corporation’ applies to a foreign corporation engaged in trade or business within the Philippines, while the term ‘non-resident foreign corporation’ applies to a foreign corporation not engaged in trade or business within the Philippines. However, with regard to the term ‘doing’ or ‘engaged in’ business, there is no fixed or specific criterion as what constitutes ‘doing’ or ‘engaging’ in business. In the case of The Mentholatum Co. , Inc. et al. vs. Mangiliman, et al. , 72 PHIL 524, the Honorable Supreme Court had thoroughly and clearly explained the term in this way: “…There is no specific criterion as to what constitutes ‘doing’ or ‘engaging in’ or ‘transacting’ business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. ” Page 18 of 145
Gross Philippine Billings • For international air carriers, refers to gross revenue derived from carriage of persons, excess baggage, cargo, and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document Provided, tickets revalidated, exchanged and/or indorsed to another international airline form part of the GPB if the passenger boards a plane in a port or point in the Philippines o If the ticket is indorsed to another airline, the GPB will be charged to the transferee/indorsee Provided, for a flight which orginates in the Philippines but transshipment (transfer) of passenger takes place at any port outside the Philippine on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the GPB. o Note: Transfer of airline company, not transfer of aircraft GPB rule in the NIRC is a departure from the old rule which emphasized where tickets were bought.
Now we adopt the originating rule meaning to form part of GPB, passenger/cargo must QuickTime™ and a TIFF the Philippines decompressor originate from(Uncompressed) this picture. are needed to see Does not apply to domestic corporations (Ex. PAL) Carrier must be an alien resident corporation; if its not, then it will be subject to 35% tax on GI as non-resident alien corporation. Does not apply to offline carriers o On line carriers: those with landing rights in the Philippines • • • • • • • Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 “In order that a foreign corporation may be regarded as doing business, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character.
In other words, a foreign airline company selling tickets in the Philippines through their local agents, whether liaison offices, agencies or branches, as in the case at bar, shall be considered as resident foreign corporation engaged in trade or business in that country for such activities show continuity of commercial dealings or arrangements and performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of commercial gain or for the purpose and object of the business organization. ” Branch Profit Remittance Tax • • BPRT shall be imposed on any profit remitted by a branch to its head office. Distinguish between a branch and a subsidiary o If branch, subject to BPRT o If subsidiary amounts received by non-resident foreign corporation would be treated as dividends it becomes part of its Gross Income from within taxable at 35% Branch will first be subjected to ordinary corporate tax as a resident foreign corporation (35%).
Afterwards, the profits for remittance shall then be subject to 15% BPRT. (Because branch assumes personality of an RFC and is therefore taxable as such) Any remittance, so long as you can trace it from a branch to the foreign parent corporation subject to BPRT o Ex. X foreign corp. has both regional headquarters and branch in Philippines. Instead of remitting straight to X, branch pays amount to regional headquarters supposedly for administrative support services The amount paid for the services will still be subject to BPRT because the tax is imposed on “any form QuickTime™ and a TIFF (Uncompressed) decompressor of remittance, direct or indirect. ” are needed to see this picture. III.
NONRESIDENT FOREIGN CORPORATION A. In General Gross Income from all sources within the Philippines (except Capital Gains on sale of domestic shares subject to final tax) 32% (2000-2005) 35% (2006-2008) 30% (2009 onwards) • reducing their tax liability in the Philippines and in their residence countries. Ex. Domestic corporation paid cash dividend to non-resident foreign corporation (NRFC) organized in Brazil. This shall form part of NRFC’s income therefore taxable also in Brazil. The dividend received shall only be taxed at 15% in the Phils (instead of 35%) if Brazil will reduce/credit at least 20% of the tax imposed in the Phils. from its tax imposed in Brazil. See Section 28(5)(b)] If Brazil will credit/reduce less than 20% or will not credit any amount, then the Phils will tax the dividend at 35% (ordinary income tax). Phils. cannot give more than 15% tax credit because the law only allows such. • • • Gross Income includes interest, dividends, rents, royalties, salaries, premiums (except reinsurance prem. ), annuities, emoluments or other fixed/determinable annual, periodic/casual gains, Capital Gains (not subject to FT) NON-RESIDENT FOREIGN CORPORATION Cinematographic 25% On gross income Film owner, lessor or distributor Owner or lessors 4. 5% On gross income of vessel charted by Philippine nationals Owner or lessors 7. 5% On gross income of aircraft, machineries and other equipment •
TAX SPARING CREDIT • Tax reduced by the Philippines should be fully applied or credited to the tax on dividend income received by the non-resident foreign corporation imposed by the country of its domicile. This serves as an incentive by INCOME TAX RATES I. INDIVIDUALS A. In general Page 19 of 145 Taxation Law Summer Reviewer ATENEO CENTRAL BAR OPERATIONS 2007 Graduated rates of 5 to 32%. o utilization of the proceeds), the difference will be subject to CGT. Exemption does not include exchange of principal residence for a new principal residence subject to rules on exchange above. B. Passive Income – Please see exhibit Capital Gains from Sale of Real Property • Final tax on gross selling price or current fair market value, whichever is higher. Imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, including pacto de retro sales and other forms of conditional sales. • Law presumes a gain, hence, even if the sale was at a loss (bought for 2M, sold for 1M), CGT will still be imposed on entire proceeds of the disposition; law does not talk about the net gain, it only considers gross selling price/FMV whichever is higher. • Refers to real property held as capital asset (not used for business/investment) as opposed to ordinary asset (used in ordinary course of business). • Special Rule for disposition to government o Taxpayer has option of treating the proceeds as (a) taxable income (5-32% on net gain) or as capital gains (6% final tax on FMV/gross selling price). If second option is chosen: 6% final tax shall be based on actual consideration and not FMV since the former is usually lower than FMV (BIR Ruling). o If the disposition took nature of expropriation (no meeting of the minds, not voluntary), transaction is not subject to CGT. Net gain (if any) will be treated as part of GI. Includes disposition by judicial order and other forms of forced disposition. • Rule for Exchange o FMV of the property exchanged/given up shall be basis of CGT. (Ex. A exchanges property worth 1M for B’s property worth 2M CGT on A will be based on 1M, CGT on B will be based on 2M) • Exception on Principal Residence QuickTime™ and a o Gains TIFF (Uncompressed) this have been realized presumedsee decompressor to picture. re needed to from sale or disposition of principal residence, the proceeds of which is fully utilized in acquiring new principal residence within 18 months from disposition shall be exempt from CGT. o Can be availed only once every 10 years. o If the new principal residenc