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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.
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the same class 3) Non-impairment clause • Rules (a) When government is party to contract granting exemption cannot be withdrawn without violating nonimpairment clause (b) When exemption generally granted by law withdrawal does not violate (c) When exemption granted under a franchise may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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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 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.

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