tax 1 digest 4th meeting

Fisher v Trinidad (43 Phil 973),

G.R. No. 21186. February 27, 1924

• The Philippine American Drug Company (PADC) was a corporation duly organized and existing under Phil law and Fisher was a stockholder in the coproration.

• PADC, as result of the business for that year, declared a "stock dividend." The proportionate share of the said stock divided of the Fisher as P24,800, such amount being issued to Fisher.

• Later on, Fisher, upon demand of the CIR, paid under protest the sum of about P889 as income tax on the said stock dividend.

• CIR demurred to the petition upon the ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained, so Fisher appealed.

• Fisher cited US SC decisions to sustain his claim where in each of the cases, an effort was made to collect an "income tax" upon "stock dividends" and it was held that "stock dividends" were CAPITAL and NOT income and therefore NOT subject to the "income tax" law.

• CIR argued that although in Eisner v Macomber, a "stock dividend is NOT income," said Act No. 2833, in imposing the tax on the stock dividend, does not violate the provisions of the Jones Law, and that US statutes providing for tax on stock dividends are diff from Phil statutes.

• In the US (Chapter 463, Act of Congress), the term "dividends" pertains to any distribution made / ordered to be made by a corporation-- stock dividend shall be considered income, to the amount of its cash value.

• In the Phils, Act No. 2833, the term "dividends" pertains to any distribution made / ordered to be made by a corporation, . . . out of its earnings or profits accrued since March 1, 1913 and payable to its shareholders, whether in cash or in stock of the corporation, . . . . Stock dividend shall be considered income, to the amount of the earnings or profits distributed.

I: W/n "stock dividends" are "income" and taxable under the provisions of Act 2833

R: NO, they are not. In this case, SC first determined the definition of “stock dividends.” Stock dividends represent undistributed increase in the capital of corporations/ entities for a particular period. They are used to show the increased interest or proportional shares in the capital of each stockholder.

In other words, the inventory of the property of the corporation, etc., for particular period shows an increase in its capital, so that the stock theretofore issued does NOT show the real value of the stockholder's interest, and

additional stock is issued showing the increase in the actual capital, or property, or assets of the corporation, etc.

• Black’s Law: An income is the return in money from one's business, labor, or capital invested; gains, profit or private revenue.

• Justice Hughes of US SC defined income as cash / its equivalent. IT DOES NOT mean choses in action/ unrealized increments in the value of the property

• The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation, but ALL THE PROPERTY / CAPITAL of the corp STILL BELONGS to the corp. There has been no separation of the interest of the stockholder from the general capital of the corporation.

• Thus, a certificate of stock represented by the stock dividend is simply a statement of his proportional interest or participation in the capital of the corporation.

• The Legislature, when it provided for an "income tax," intended to tax only the "income" of corporations, firms or individuals, as that term is generally used in its common acceptation. They DID NOT intend that at a mere increase in the value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." Such property can be reached under the ordinary from of taxation.

• There is a DISTINCTION between an extraordinary cash dividend, no matter when earned, and stock dividends declared.

• ECD is a disbursement to the stockholder of accumulated earnings, and the corp parts w/ AL INTEREST on it.

• SD, on the other hand, involves NO disbursement and parts w/ NOTHING. • The stockholder receives NOT an actual dividend but certificate of stock

which simply evidences his interest in the entire capital, including such as by investment of accumulated profits has been added to the original capital. They are not income to him, but represent additions to the source of his income, namely, his invested capital.

• Until the dividend is declared and paid, the corporate profits still belong to the corporation, not to the stockholders, and are liable for corporate indebtedness

• Justice Wilkin: "A dividend is a corporate profit set aside, declared, and ordered by the directors to be paid to the stockholders on demand or at a fixed time. Until the dividend is declared, these corporate profits belong to the corporation, NOT to the stockholders, and are liable for corporate indebtedness.

• A careful reading of ACT 2833 will show that, while it permitted a tax upon income, the same provided that income shall include gains, profits, and

income derived from salaries, wages, or compensation for personal services, as well as from interest, rent, dividends, securities, etc.

• Thus, income received as dividends IS taxable as an income but an income from "dividends" is a very different thing from receipt of a "stock dividend." INCOME FROM DIVIDENDS is the actual receipt of profits while STOCK DIVIDEND is the a receipt of a representation of the increased value of the assets of corporation.

CHAPTER II: CLASSIFICATION OF INCOME TAXPAYERS

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS, respondents. G.R. No. L-66838 December 2, 1991 DOCTRINE: The WITHHOLDING AGENT is the agent of both the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The WITHHOLDING AGENT is an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such claim.

FACTS: For the taxable years 1974 and 1975, private respondent P&G-Phil. declared dividends payable to its parent company and sole stockholder, P&G-USA, amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the 35% withholding tax at source was deducted. On 1/5/1977, P&G-Phil. filed with CIR a claim for refund, claiming, that pursuant to Section 24 (b)(1) of the NIRC, the applicable rate of withholding tax on the dividends remitted was only 15% and not 35%, of the dividends. CIR did not respond to the claim. Subsequently, P&G-Phil. filed a petition for review with CTA. CTA ordered petitioner to refund or grant the tax credit. On appeal, the Court through its Second Division reversed the decision, based on the following grounds:

P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit here involved;

There is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US tax due from P&G-USA of taxes deemed to

have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax of 35% on corporations and the tax of 15% on dividends; and

Private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received by its non-resident parent company in the US (P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%.

It is to be noted that the question of the capacity of P&G-Phil. to bring the claim for refund or tax credit was raised for the first time on appeal. The question was not raised by the Commissioner on the administrative level and neither was it raised by him before the CTA.

ISSUE: As a withholding agent, is P&G-Phil entitled to a tax refund? - YES HELD: Law Applicable: Section 309 (3) of the NIRC, provides: 1. Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.

—The Commissioner may: 2. (3) credit or refund taxes erroneously or illegally received, . . . No credit or refund

of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within 2 years after the payment of the tax or penalty.

P&G-Phil’s Capacity: Is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC? 1. The term "TAXPAYER" refers to "any person subject to tax imposed by the

Title [on Tax on Income]." 2. Under Section 53(c) of the NIRC, the WITHHOLDING AGENT (P&G-PHIL)

who is "required to deduct and withhold any tax" is made " personally liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances. Moreover, the withholding agent is subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

3. A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be

regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.

4. In Philippine Guaranty Company, Inc. v. CIR, the Court ruled that a WITHHOLDING AGENT is in fact the agent both of the government and of the taxpayer:

The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The WITHHOLDING AGENT, therefore, is no ordinary government agent especially because under Section 53 (c) he is held personally liable for the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made liable by law.

4. As pointed out in Philippine Guaranty, the WITHHOLDING AGENT is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the government, such authority may reasonably be held to INCLUDE THE AUTHORITY TO FILE A CLAIM FOR REFUND and TO BRING AN ACTION FOR RECOVERY OF SUCH CLAIM.

5. The implied authority is especially warranted where the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such parent-stockholder.

6. In the circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

7. There is nothing to preclude the BIR from requiring P&G-Phil. to show some written confirmation by P&G-USA of the subsidiary's authority to claim the refund and to remit the proceeds of the refund.

8. What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-vis taxpayers.

9. We believe and so hold that, under the circumstances of this case, P&G-Phil. is

properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such claim.

COMMENT: A wholly-owned subsidiary of P&G-USA, P&G-Phil is a taxpayer and hence, entitled to a refund.

“Who is a Person liable to tax”

Silkair (Singapore) PTE. LTD. v. CIR

GR No. 184398 February 25, 2010

FACTS: Petitioner, a foreign corporation organized under the laws of Singapore with a Philippine representative office in Cebu City, is an online international carrier plying the Singapore-Cebu-Singapore and Singapore-Cebu-Davao-Singapore routes.

Respondent Commissioner of Internal Revenue is impleaded herein in his official capacity as head of the Bureau of Internal Revenue (BIR), an attached agency of the Department of Finance which is duly authorized to decide, approve, and grant refunds and/or tax credits of erroneously paid or illegally collected internal revenue taxes.

Petitioner filed with the BIR an administrative claim for the refund of P3,983,590.49 in excise taxes which it allegedly erroneously paid on its purchases of aviation jet fuel from Petron Corporation. Petitioner used as basis BIR Ruling No. 339-92 dated December 1, 1992, which declared that the petitioners Singapore-Cebu-Singapore route is an international flight by an international carrier and that the petroleum products purchased by the petitioner should not be subject to excise taxes under Section 135 of Republic Act No. 8424 or the 1997 NIRC.

BIR took no action on petitioners claim for refund, petitioner sought judicial recourse and filed on June 27, 2002, a petition for review with the CTA, to prevent the lapse of the two-year prescriptive period within which to judicially claim a refund under Section 229 of the NIRC. Petitioner invoked its exemption from payment of excise taxes in accordance with the provisions of Section 135(b) of the NIRC, which exempts from excise taxes the entities covered by tax treaties, conventions and other international agreements; provided that the country of said carrier or exempt entity likewise exempts from similar taxes the petroleum products sold to Philippine carriers

or entities. In this regard, petitioner relied on the reciprocity clause under Article 4(2) of the Air Transport Agreement entered between the Republic of the Philippines and the Republic of Singapore.

CTA First Division found that petitioner was qualified for tax exemption under Section 135(b) of the NIRC, as long as the Republic of Singapore exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies under Article 4(2) of the Air Transport Agreement quoted above. However, it ruled that petitioner was not entitled to the excise tax exemption for failure to present proof that it was authorized to operate in the Philippines during the period material to the case due to the non-admission of some of its exhibit.

CTA Presiding Justice Ernesto D. Acosta opined that petitioner was exempt from the payment of excise taxes based on Section 135 of the NIRC and Article 4 of the Air Transport Agreement between the Philippines and Singapore. However, despite said exemption, petitioners claim for refund cannot be granted since it failed to establish its authority to operate in the Philippines during the period subject of the claim. In other words, Presiding Justice Acosta voted to uphold in toto the Decision of the CTA First Division.

ISSUE: WON petitioner is the proper party to claim for the refund or tax credit of excise taxes it allegedly paid on its aviation fuel purchases.

HELD: No. Petron, not petitioner, is the proper party to question, or seek a refund of, an indirect tax. The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. Section 130 (A) (2) of the NIRC provides that [u]nless otherwise specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before removal of domestic products from place of production. Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore.

Thus, under Section 130(A)(2) of the NIRC, it is Petron, the taxpayer, which has the legal personality to claim the refund or tax credit of any erroneous payment of excise taxes. Section 130(A)(2) states:

SEC. 130. Filing of Return and Payment of Excise Tax on Domestic Products.

(A) Persons Liable to File a Return, Filing of Return on Removal and Payment of Tax.

Persons Liable to File a Return. x x x

Time for Filing of Return and Payment of the Tax. Unless otherwise specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before removal of domestic products from place of production: x x x.

From the foregoing discussion, it is clear that the proper party to question, or claim a refund or tax credit of an indirect tax is the statutory taxpayer, which is Petron in this case, as it is the company on which the tax is imposed by law and which paid the same even if the burden thereof was shifted or passed on to another. It bears stressing that even if Petron shifted or passed on to petitioner the burden of the tax, the additional amount which petitioner paid is not a tax but a part of the purchase price which it had to pay to obtain the goods.

G.R. No. 109289 October 3, 1994 RUFINO R. TAN, petitioner, vs.RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 109446 October 3, 1994

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners, vs.RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.

FACTS: These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and, in G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant to said law.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic Act No. 7496 violates one of the provisions of the Constitution: Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships.

Solicitor General espouses the position taken by public respondents.

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

ISSUES:

1.WON RA 7496 violates the constitutional requirement that taxation "shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships.

2. WON public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.

HELD:

1. No. The contention clearly forgets, however, that such a system of income taxation has long been the prevailing rule even prior to Republic Act No. 7496. Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class.

What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards the schedular approach in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment on taxable corporations. The plea of petitioner to have the law declared unconstitutional for being violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power.

2. No. The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply SNIT to partners in general professional partnerships.

The questioned regulation reads: Sec. 6. General Professional Partnership — The general professional partnership (GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his gross income.

The Court, should like to correct the apparent misconception that general professional partnerships are subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged in business or in the practice of their respective professions and partners in general professional partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so

subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits.

No distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules.

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships which are independently subject to the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. A general professional partnership is such an example. 4 Here, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the

above standing rule as now so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-compensation income. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their respective professions individually and of those who do it through a general professional partnership.

PART II. CHAPTERS I-III 7

COMMISSIONER OF INTERNAL REVENUE vs. VISAYAN ELECTRIC COMPANY G.R. No. L-22611, May 27, 1968

FACTS: Visayan Electric Co. (Visayan) holds a legislative franchise to operate and maintain an electric light, heat, and power system in Cebu City, some municipalities in the Province of Cebu and other surrounding places. It established a pension fund known as the Employees Reserve for Pensions for the benefit of its present and future employees in the event of a retirement, accident, and disability. An amount is set aside for this purpose every month and is taken from the gross operating receipts of the company. This reserve fund was later invested by the company in stocks of San Miguel Brewery, Inc. for which dividends have been regularly received but these dividends were not declared for tax purposes. The Auditor General sent Visayan a letter in 1949, informing them that since the company retained full control of the fund, the dividends are therefore not tax exempt but that such dividends may be excluded from gross receipts for franchise tax purposes provided that they are declared for income tax purposes. Because of this, the Provincial Auditor of Cebu allowed the company the option to declare the dividends either as part of the company’s income for income tax purposes or as part of its income for franchise tax purposes. The company chose the latter. The Revenue Examiner of Cebu conducted a separate investigation for the BIR and also discovered that the company is the custodian or has complete control of the fund but disagreed with the Provincial Auditor and instead considered the dividends as subject to the corporate income tax under Sec. 24 of the NIRC. The Examiner also concluded that Visayan violated Sec. 259 of the Tax Code which imposes a 25% surcharge of the franchise taxes remain unpaid for fifteen days and Sec. 2 of Act 465 for not paying additional residence tax. With the Examiner’s report as the basis, the Commissioner of Internal Revenue assessed P2,443.30 as deficiency income tax for 1953 to 1958 plus interest and 50% surcharge, P3,850 as additional residence tax from 1954 to 1959, and P35,419.05 as 25% surcharge for late payment of franchise taxes for the years 1957, 1958, and 1959. Visayan appealed to the CA which sustained the additional residence tax but freed the company from liability for deficiency income tax and the 25% surcharge for late payment of franchise taxes and cited Sec. 8, Act 3499 as basis.

ISSUES: 1. Is Visayan Electric Company liable for deficiency income tax on dividends

from the stock investment of its employees' reserve fund for pension 2. Is it also liable for 25% surcharge on alleged late payment of franchise tax?

RULING: 1. No. 2. No RATIO: 1.The disputed income are not receipts, revenues or profits of the company. They do not go to the general fund of the company. They are dividends from the San Miguel Brewery, Inc. investment which form part of and are added to the reserve pension fund which is solely for the benefit of the employees to be distributed among them. Visayan is merely acting, with respect to the reserve fund, as trustee for its employees when it sets aside monthly amounts from its gross operating receipts for that fund. And for tax purposes, the employees’ reserve fund is a separate taxable entity. Visayan then, while retaining legal title and custody over the property, holds it in trust for the beneficiaries mentioned in the resolution creating the trust, in the absence of any condition therein which would, in effect, destroy the intention to create a trust. And there is no such condition because nothing in the company’s act suggests that it reserved the power to revoke the fund or appropriate it for itself. The fund may not be diverted for any other purpose and the trust created is irrevocable. Therefore, the CIR misconceived the import of the law when he assessed such dividends as part of the income of the company. But the trust fund is still subject to tax under individuals under Sec. 56 (a) of the Tax Code. But under Sec. 331 of the Tax Code, internal revenue taxes should be assessed within 5 years after the return is filed and since the Company was in good faith and the CIR made the honest mistake of assessing income tax based on corporate tax and not on income tax, then Sec. 332 applies and thus, the tax on the employees’ reserve fund as individual income tax may still be collected within 10 years. But the 50% surcharge cannot be imposed on Visayan because there was no willful or fraudulent neglect to file a return. 2. Sec. 183 provides that taxes shall be paid within 20 days after the end of each month while the franchise extended to Visayan states that the taxes are due and payable quarterly. The due and payable quarterly in the franchise only indicates the frequency of payment of the franchise tax, that is, every three months. It does not refer to the time limit or the date on which the taxes must be paid. There is no conflict between Sec. 183 and the franchise payment period given to Visayan in the franchise. If there is no period, then Sec. 183 is controlling, which gives the taxed entity 15 days to pay the tax. But where there is a period, then the period is controlling. In this case, Visayan’s franchise indicated that franchise tax shall be due and payable quarterly or every 3 months. Since Sec. 183 grants 20 days after the last day of each quarter and Sec. 259 grants another 15 days grace period after that, before imposing the 25% surcharge, then the period for Visayan to pay the

Taxation 1- SY 2015-2016 (Zarate)

franchise tax is within 20 days after the end of each quarter and if such tax remains unpaid for 15 days after that 20 days, then the 25% surcharge shall be imposed upon them. The tax cannot be immediately demandable at the end of each calendar quarter because the transactions on the last day of the quarter must have to be included in the computation of the taxpayer’s return for each particular quarter. It is well impossible for the taxpayer to add up his income, write down the deductions, and compute the net amount taxable as of the last working hour of the last day of the quarter, and at the same time go to the nearest revenue office, submit the quarterly return and pay the tax.

COMMISSIONER OF INTERNAL REVENUE, vs. THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL RETIREMENT PLAN, G.R. No. 95022 March 23, 1992

Facts: GCL Retirement Plan is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917.In 1984, Respondent GCL made investments and earned therefrom interest income from which was withheld the fifteen per centum (15%) final withholding tax imposed byPres. Decree No. 1959, which took effect on 15 October 1984. GCL filed with Petitioner a claim for refund in the amounts of P1,312.66 withheld by Anscor Capital and Investment Corp., and P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a second claim for refund of the amount of P7,925.00withheld by Anscor, stating in both letters that it disagreed with the collection of the 15%final withholding tax from the interest income as it is an entity fully exempt from income tax as provided under Rep. Act No. 4917 in relation to Section 56 (b) 3 of the Tax Code.CIR – denied the refund, Petitioner elevated the matter to CTA CTA - ruled in favor of GCL, holding that employees' trusts are exempt from the 15%final withholding tax on interest income and ordering a refund of the tax withheld. CA - upheld the CTA Decision. CIR’ s Contention - the exemption from withholding tax on interest on bank deposits previously extended by Pres. Decree No. 1739 if the recipient (individual or corporation)of the interest income is exempt from income taxation, and the imposition of the preferential tax rates if the recipient of the income is enjoying preferential income tax treatment, were both abolished by Pres. Decree No. 1959. Petitioner thus submits that the deletion of the exempting and preferential tax

treatment provisions under the old law is a clear manifestation that the single 15% (now 20%) rate is impossible on all interest incomes from deposits, deposit substitutes, trust funds and similar arrangements,regardless of the tax status or character of the recipients thereof. In short, petitioner’s position is that from 15 October 1984 when Pres. Decree No. 1959 was promulgated,employees' trusts ceased to be exempt and thereafter became subject to the final withholding tax.\GCL contention - the tax exempt status of the employees' trusts applies to all kinds of taxes, including the final withholding tax on interest income. That exemption, according to GCL, is derived from Section 56(b) and not from Section 21 (d) or 24 (cc) of the TaxCode.

Issue: Whether GCL is exempted from Income Tax

Held: GCL Plan was qualified as exempt from income tax by the Commissioner of InternalRevenue in accordance with Rep. Act No. 4917 approved on 17 June 1967. In so far as employees' trusts are concerned, the foregoing provision should be taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No.1983, supra,which took effect on 22 June 1957. The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs from the foregoing provision. It is unambiguous.Manifest therefrom is that the tax law has singled out employees' trusts for tax exemption. And rightly so, by virtue of the raison de’etre behind the creation of employees' trusts.Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death,sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose.The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential tax rates under the old law, therefore, can not be deemed to extent to employees' trusts. Said Decree, being a general law, can not repeal by implication a specific provision, Section 56(b) now 53 [b]) in relation to Rep. Act No. 4917 granting exemption from income tax to employees' trusts. Rep. Act 1983, which excepted employees' trusts in its Section 56 (b) was effective on 22 June 1957 while Rep. Act No.4917 was enacted on 17 June 1967, long before the issuance of Pres. Decree No. 1959on 15 October 1984. A subsequent statute, general in character as to its terms and application, is not to be construed as repealing a special or specific enactment, unless the legislative purpose to do so is manifested. This is so even if the provisions of the latter are sufficiently comprehensive to include what was set forth in the special act (Villegas v. Subido, G.R. No. L-31711, 30 September 1971, 41 SCRA 190).There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt (Sec. 56 [b], now 53 [b], TaxCode). The


application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place. We herein rule that Pres. Decree No. 1959 did not have the effect of revoking the tax exemption enjoyed by employees' trusts, reliance on those authorities is now misplaced.

Corporations – Definition under NIRC

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR. vs. COMMISSIONER OF INTERNAL REVENUE (1972)

FACTS: Julia Buñales died leaving as heirs her surviving spouse, Lorenzo T. Oña and 5 children. Civil Case for the settlement of her estate was instituted. Later, Lorenzo Oña was appointed administrator of the estate of the deceased. Then, the administrator submitted the project of partition, which was approved by the Court. Because 3 of the children were still minors when the project of partition was approved, Lorenzo filed a petition for appointment as guardian of persons and property of said minors, which was approved.

Although the project of partition was approved by the court, no attempt was made to divide the properties listed. Instead, the properties remained under the management of Lorenzo who used them in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners' properties and investments gradually increased. From said investments and properties petitioners derived such incomes as profits from installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests. The said incomes are recorded in the books of account kept by Lorenzo where the corresponding shares of the petitioners in the net income for the year are also known. Every year, petitioners returned for income

tax purposes their shares in the net income derived from said properties and securities and/or from transactions involving them. However, petitioners did not actually receive their shares in the yearly income. The income was always left in the hands of Lorenzo, who invested them in real properties and securities.

On the basis of the foregoing facts, Commissioner of Internal Revenue decided that petitioners formed an unregistered partnership and therefore, subject to the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956, respectively. Petitioners protested against the assessment and asked for reconsideration of the ruling of respondent that they have formed an unregistered partnership. The commissioner DENIED.

CTA: AFFIRMED BIR

ISSUES/RULING:

1. WON the petitioners formed an unregistered partnership. YES.

Petitioners' predecessor in interest died in 1944 and the project of partition of her estate was judicially approved as early as 1949, and presumably petitioners have been holding their respective shares in their inheritance since those dates admittedly under the administration or management of the head of the family, the widower and father Lorenzo, the assessment in question refers to the later years 1955 and 1956. Apparently, at the start, or in the years 1944 to 1954, the Commissioner of Internal Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he considered them as having formed an unregistered partnership. There is nothing in the record indicating that an earlier assessment had already been made. Such being the case, there’s no reason how it could be otherwise, it is easily understandable why petitioners' position that they are co-owners and not unregistered co-partners, for the purposes of the impugned assessment, cannot be upheld. Petitioners were not similarly assessed earlier by the BIR.


From the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo as a common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of the above-mentioned provisions of the Tax Code.

in cases of inheritance, there should be a period when the heirs can be considered as co-owners rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the partition and distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs, obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-owners continues until the inheritance is actually and physically distributed among the heirs, for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding said shares under the common management of the administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code.

For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. REASON: From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed.

2. WON the petitioners are liable to pay Corporate Taxes. YES

Since there was an unregistered partnership, the taxable income of the partnership should be limited to the income derived from the acquisition and sale of real properties and corporate securities and should not include the income derived from the inherited properties. It is admitted that the inherited properties and the income derived therefrom were used in the business of buying and selling other real properties and corporate securities. Accordingly, the partnership income must include not only the income derived from the purchase and sale of other properties but also the income of the inherited properties.

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA vs. COLLECTOR OF BIR AND CTA (1957)

FACTS: Petitioners borrowed from their father a certain sum of money for buying real properties. They bought several properties from different persons. They appointed their brother Simeon to manage their properties, to collect and receive rents, to bring suits against defaulting tenants, to sign documents for and in their behalf, and to endorse and deposit checks for them. After buying the properties, they leased them out. In 1954, the Collector of BIR demanded the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949, computed, according to assessment made by the officer. The petitioners instituted a case in CTA.

CTA: Petitioners liable for the income tax, real estate dealer's tax and the residence tax for the years 1945 to 1949.

ISSUE: WON petitioners are subject to the tax on corporations provided for in section 24 NIRC.

HELD: YES. Meaning of the terms "corporation" and "partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:

SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized but not including duly registered


general co-partnerships (compañias colectivas), a tax upon such income equal to the sum of the following: . . .

SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not include duly registered general copartnerships. (compañias colectivas).

Pursuant to the Art. 1767 Civil Code, the essential elements of a partnership are:

(a) an agreement to contribute money, property or industry to a common fund; and

(b) intent to divide the profits among the contracting parties. Both elements are present in the case, hence, they are PARTNERS.

For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships — with the exception only of duly registered general copartnerships — within the purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned and are subject to the income tax for corporations.

AFISCO INSURANCE CORP vs CIR

Facts: • The petitioners are 41 local non-life insurance corporations organized and

existing under Philippine laws. • The petitioners entered into a Quota Share Reinsurance Treaty and a Surplus

Reinsurance Treaty with the foreign insurance corporation, Munchener Ruckversicherungs-Gesselschaft (Munich).

• Pursuant to “reinsurance treaties,” a number of local insurance firms formed themselves into a“pool” in order to facilitate the handling of business contracted with a non resident foreign reinsurance company.

• Subsequently, the pool of insurers submitted a financial statement and filed an “Information Return of Organization Exempt from Income Tax” for the year ending in 1975.

• After assessing their submitted financial statement, the BIR Commissioner required them to pay deficiency taxes on the ground that they have formed an unregistered partnership taxable as a corporation

• The petitioners filed a protest which the denied. The Court of Tax Appeals affirmed this decision.

• The CA ruled that the pool of insurers was considered as a partnership taxable as a corporation, and that the latter’s collection of premiums on behalf of its members was taxable income.

Issue:

WON the pool or clearing house was a partnership or association subject to tax as a corporation.

Held:

Yes, it is taxable as a corporation.

Section 24(A) of the NIRC, provides that a tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized, but not including duly registered general co-partnership, general professional partnerships, private educational institutions, and building and loan associations xxx.

In Evangelista v. Collector of Internal Revenue the Court held that Section 24 covered in its definition these unregistered partnerships and even associations or joint accounts, which had no legal personalities a part from their individual members. The Court said that the term partnership includes a syndicate, group, p o o l , j o i n t v e n t u r e o r o t h e r u n i n c o r p o r a t e d o r g a n i z a t i o n , through or by means of which any business, financial operation, or venture is carried on. Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or morepersons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Its requisites are: (1) mutual contribution to a common stock, and (2)a joint interest in the profits. Meanwhile, an association implies associates who enter into a joint enterprise for the transaction of a business.

In the case before us, the companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC. The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that of the pool being used in the transaction of


business for profitThough the profit was apportioned among the members, this is only a matter of consequence, as it implies that profit actually resulted.

PASCUAL vs CIR

FACTS: • Petitioners bought two (2) parcels of land in 1965, an another three (3) parcels

of land in 1968. • Said lots were subsequently sold in 1968 and 1970, and realized net profits. • The corresponding capital gains taxes were paid by petitioners in 1973 and

1974. • Respondent Commissioner assessed and required Petitioners to pay a total

amount of P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970.

• Petitioners protested the said assessment asserting that they had availed of tax amnesties way back in 1974.

• In a reply, respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Section 20(b)and its income was subject to the taxes prescribed under Section 24, both of the National Internal Revenue Code; that the unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership.

• Hence, the petitioners were required to pay the deficiency income tax assessed.

ISSUE:

Whether or not petitioners formed an unregistered partnership thereby assessed with corporate income tax.

HELD:

No. The petitioners were under the regime of co-ownership; hence, not liable for corporate income tax.

Art 1767 of the Civil Code provides that by the contract of partnership, two or more persons bind themselves to contribute money, industry or property to a common fund with the intention of dividing profits among themselves.

In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. Hence, there is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have been formed, since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid obligation of the partnership.

CHAPTER III: TAX BASE &RATES

N.V. Reederij Armsterdam vs. Commissioner

In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous

FACTS:

• Both vessels of petitioner N.V. Reederij “Amsterdam” called on Philippine ports to load cargoes for foreign destinations.

• The freight fees for these transactions were paid in abroad. In these two transactions, petition Royal Interocean Lines acted as husbanding agent for a fee or


commission on said vessels. No income tax has been paid by “Amsterdam” on the freight receipts.

• As a result, Commissioner of Internal Revenue filed the corresponding income tax returns for the petitioner. Commissioner assessed petitioner for deficiency of income tax, as a non-resident foreign corporation NOT engaged in trade or business.

• On the assumption that the said petitioner is a foreign corporation engaged in trade or business in the Philippines, petitioner Royal Interocean Lines filed an income tax return of the aforementioned vessels and paid the tax in pursuant to their supposed classification.

• On the same date, petitioner Royal Interocean Lines, as the husbanding agent of “Amsterdam”, filed a written protest against the abovementioned assessment made by the respondent Commissioner. The protest was denied.

• On appeal, CTA modified the assessment by eliminating the 50% fraud compromise penalties imposed upon petitioners. Petitioner still was not satisfied and decided to appeal to the SC.

ISSUE: Whether or not N.V. Reederij “Amsterdam” should be taxed as a foreign corporation not engaged in trade or business in the Philippines?

HELD:

• Petitioner is a foreign corporation not authorized or licensed to do business in the Philippines. It does not have a branch in the Philippines, and it only made two calls in Philippine ports, one in 1963 and the other in 1964.

• In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. A casual business activity in the Philippines by a foreign corporation does not amount to engaging in trade or business in the Philippines for income tax purposes.

• A foreign corporation doing business in the Philippines is taxable on income solely from sources within the Philippines. It is permitted to claim deductions from

gross income but only to the extent connected with income earned in the Philippines. On the other hand, foreign corporations not doing business in the Philippines are taxable on income from all sources within the Philippines . The tax is 30% (now 35% for non-resident foreign corp which is also known as foreign corp not engaged in trade or business) of such gross income. (*take note that in a resident foreign corp, what is being taxed is the taxable income, which is with deductions, as compared to a non-resident foreign corp which the tax base is gross income)

• Petiioner “Amsterdam” is a non-resident foreign corporation, organized and existing under the laws of the Netherlands with principal office in Amsterdam and not licensed to do business in the Philippines.

Marubeni vs. CIR

Facts: Petitioner Marubeni s a foreign corporation duly organized under the existing laws of Japan and duly licensed to engage in business under Philippine laws.

Marubeni of Japan has equity investments in Atlantic Gulf & Pacific Co. of Manila.

AG&P declared and directly remitted the cash dividends to Marubeni’s head office in Tokyo net of the final dividend tax and withholding profit remittance tax.

Thereafter, Marubeni, through SGV, sought a ruling from the BIR on whether or not the dividends it received from AG&P are effectively connected with its business in the Philippines as to be considered branch profits subject to profit remittance tax.

The Acting Commissioner ruled that the dividends received by Marubeni are not income from the business activity in which it is engaged. Thus, the dividend if remitted abroad are not considered branch profits subject to profit remittance tax.

Pursuant to such ruling, petitioner filed a claim for refund for the profit tax remittance erroneously paid on the dividends remitted by AG& P.

Respondent Commissioner denied the claim. It ruled that since Marubeni is a non resident corporation not engaged in trade or business in the Philippines it shall be subject to tax on income earned from Philippine sources at the rate of 35% of its gross income.


On the other hand, Marubeni contends that, following the principal-agent relationship theory, Marubeni Japan is a resident foreign corporation subject only to final tax on dividends received from a domestic corporation.

Issue: Whether or not Marubeni Japan is a resident foreign corporation.

Held: No. The general rule is a foreign corporation is the same juridical entity as its branch office in the Philippines . The rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent.

However, when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation.

Thus, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is considered as a separate and distinct income taxpayer from the branch in the Philippines.

BANK OF AMERICA NT & SA vs CA and CIR

FACTS:

Petitioner is a foreign corporation duly licensed to engage in business in the Philippines. It paid 15% branch profit remittance tax in the amount of P7,538,460.72 on profit from its regular banking unit operations and P445,790.25 on profit from its foreign currency deposit unit operations or a total of P7,984,250.97. The tax was based on net profits after income tax without deducting the amount corresponding to the 15% tax.

Petitioner filed a claim for refund with the BIR of that portion of the payment which corresponds to the 15% branch profit remittance tax, on the ground that the tax should have been computed on the basis of profits actually remitted, which is P45,244,088.85, and not on the amount before profit remittance tax, which is P53,228,339.82. Subsequently, without awaiting respondent's decision, petitioner

filed a petition for review CTA for the recovery of the amount. CTA upheld petitioner bank in its claim for refund. CIR filed an appeal before the CA. CA reversed CTA’s ruling.

ISSUE: W/N the petitioner is entitled to refund.

HELD: YES.

In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the amount sent abroad, and the law (then in force) calls for nothing further. The taxpayer is a single entity, and it should be understandable if, such as in this case, it is the local branch of the corporation, using its own local funds, which remits the tax to the Philippine Government.

There is absolutely nothing in Section 24(b) (2) (ii) which indicates that the 15% tax on branch profit remittance is on the total amount of profit to be remitted abroad which shall be collected and paid in accordance with the tax withholding device provided in Sections 53 and 54 of the Tax Code. The statute employs "Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15%)" — without more. Nowhere is there said of "base on the total amount actually applied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad, which shall be collected and paid as provided in Sections 53 and 54 of this Code." Where the law does not qualify that the tax is imposed and collected at source based on profit to be remitted abroad, that qualification should not be read into the law.

COMMISSIONER OF INTERNAL REVENUE vs PROCTER & GAMBLE PHIL MANUFACTURING CORP and the CTA

FACTS:

Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA (PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and business therein. PMC-USA is the sole shareholder of


PMC Philippines and is entitled to receive income from PMC Philippines in the form of dividends, if not rents or royalties. For the taxable years 1974 and 1975, PMC Philippines filed its income tax return and also declared dividends in favor of PMC-USA. In 1977, PMC Philippines, invoking the tax-sparing provision of Section 24 (b) of NIRC (the withholding tax on dividends remitted was only 15% and not 35% of the dividend) filed a claim for refund. CTA granted the refund. On appeal by the Commissioner, CTA reversed the decision.

ISSUE: Whether PMC Philippines is entitled to the 15% preferential tax rate on dividends declared and remitted to its parent corporation.

HELD: YES, it is entitled to the refund which it seeks.

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.

The Court ruled in favor of PMC Philippines pursuant to the Philippines-United States Convention “With Respect to Taxes on Income”. The treaty established an obligation on the part of the United States that it "shall allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary]. This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of US law (Section 902)

with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine subsidiary.

G.R. NO. L-68275, April 15, 1988

Commissioner of Internal Revenue, petitioner

vs

WANDER Philippines, Inc., and the Court of Tax Appeals, respondentsFACTS:

Facts: Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss corporation not engaged in trade for business in the Philippines.

Wander filed it's witholding tax return for 1975 and 1976 and remitted to its parent company Glaro dividends from which 35% withholding tax was withheld and paid to the BIR.

In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for reimbursement, contending that it is liable only to 15% withholding tax in accordance with sec. 24 (b) (1) of the Tax code, as amended by PD nos. 369 and 778, and not on the basis of 35% which was withheld ad paid to and collected by the government. petitioner failed to act on the said claim for refund, hence Wander filed a petition with Court of Tax Appeals who in turn ordered to grant a refund and/or tax credit. CIR's petition for reconsideration was denied hence the instant petition to the Supreme Court.

ISSUE: Whether or not Wander is entitled to the preferential rate of 15% withholding tax on dividends declared and to remitted to its parent corporation.

HELD:Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved in this case, reads:

sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is hreby further amended to read as follows:


(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation not engaged in trade or business in the Philippines, including a foreign life insurance company not engaged in life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as interest (except interest on a foreign loans which shall be subject to 15% tax), dividends, premiums, annuities, compensation, remuneration for technical services or otherwise emolument, or other fixed determinable annual, periodical ot casual gains, profits and income, and capital gains: xxx Provided, still further that on dividends received from a domestic corporation liable to tax under this chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in sec 53 (d) of this code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporation and the tax (15%) dividends as provided in this section: xxx."

From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivakent to 20% which represents the difference betqween the regular tax (35%) on corpoorations and the tax (15%) on dividends.

While it may be true that claims for refund construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose any tax on the dividends received by Glaro from the Philippines should be considered as a full satisfaction if the given condition. For, as aptly stated by respondent Court, to deny private respondent the privilege to withhold only 15% tax provided for under PD No. 369 amending section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations interest here and discourage them for investing capital in our country.

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC. VS. ROMULO

Congress has the power to condition, limit or deny deductions from gross income in order to arrive at the net that it chooses to tax. This is because deductions are a matter of legislative grace. The assignment of gross income, instead of net income, as the tax base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.

FACTS:

Chamber of Real Estate and Builders' Associations, Inc. (CHAMBER) is questioning the constitutionality of Sec 27 (E) of RA 8424 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable withholding taxes (CWT). [CWT issues will not be discussed] CHAMBER assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets. Chamber argues that the MCIT violates the due process clause because it levies income tax even if there is no realized gain.

MCIT scheme: (Section 27 (E). [MCIT] on Domestic Corporations.) A corporation, beginning on its fourth year of operation, is assessed an MCITof 2% of its gross income when such MCIT is greater than the normalcorporate income tax imposed under Section 27(A) (Applying the 30% tax rate to net income). If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT.Any excess of the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years. The Secretary of Finance is hereby authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. The term ‘gross income’ shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. CHAMBER claims that the MCIT under Section 27(E) of RA 8424 is


unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross income as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into account. Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not "realized gain."

ISSUE:

1. WON the imposition of the MCIT on domestic corporations is unconstitutional 2. WON RR 9-98 is a deprivation of property without due process of law because the MCIT is being imposed and collected even when there is actually a loss, or a zero or negative taxable income

HELD:

1. NO. MCIT is not violative of due process. The MCIT is not a tax on capital. The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed. Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income. CHAMBER failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory. It does not cite any actual, specific and concrete negative experiences of its members nor does it present empirical data to show that the implementation of the MCIT resulted in the confiscation of their property. Taxation is necessarily burdensome because, by its nature, it adversely affects property rights. The party alleging the law’s unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.

2. NO. RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income, merely defines the coverage of Section 27(E).

This means that even if a corporation incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income.

G.R. No. 168118 August 28, 2006

THE MANILA BANKING CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

*** The intent of Congress relative to the minimum corporate income tax(MCIT) is to grant a 4-year suspension of tax payment to newly formed corporations. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry.

FACTS:

1961- Manila Banking Corp was incorporated. It engaged in the banking industry til 1987.

May 1987- Monetary Board of Bangko Sentral ng Pilipinas (BSP) issued Resolution # 505 {pursuant to the Central Bank Act (RA 265)} prohibiting Manila Bank from engaging in business by reason of insolvency. So, Manila Bank ceased operations and its assets and liabilities were placed under charge of a gov.- appointed receiver.

1998- Comprehensive Tax Reform Act (RA8424) imposed a minimum corporate income tax on domestic and resident foreign corporations.

Implementing law: Revenue Regulation # 9-98 stating that the law allows a 4year period from the time the corporations were registered with the BIR during which the minimum corporate income tax should not be imposed.

June 23, 1999- BSP authorized Manila Bank to operate as a thrift bank.

NOTE: June 15, 1999 Revenue Regulation #4-95 (pursuant to Thrift Bank Act of 1995) provides that the date of commencement of operations shall be understood to mean the date when the thrift bank was registered with SEC or when Certificate of Authority to Operate was issued by the Monetary Board, whichever comes LATER.

Dec 1999- Manila Bank wrote to BIR requesting a ruling on whether it is entitled to the 4 year grace period under RR 9-98.


April 2000- Manila bank filed with BIR annual income tax return for taxable year 1999 and paid 33M.

Feb 2001- BIR issued BIR Ruling 7-2001 stating that Manila Bank is entitled to the 4year grace period. Since it reopened in 1999, the min. corporate income tax may be imposed not earlier than 2002. It stressed that although it had been registered with the BIR before 1994, but it ceased operations 1987-1999 due to involuntary closure.

Manila Bank, then, filed with BIR for the refund. • Due to the inaction of BIR on the claim, it filed with CTA for a petition for review, which was denied and found that Manila Bank’s payment of 33M is correct, since its operations were merely interrupted during 1987-1999. CA affirmed CTA.

ISSUE: Whether or not Manila Bank is entitled to a refund of its minimum corporate income tax paid to BIR for 1999.

RULING: Yes.

CIR’s contensions are without merit. He contended that based on RR# 9-98, Manila Bank should pay the min. corporate income tax beg. 1998 as it did not close its operations in 1987 but merely suspended it. Even if placed under suspended receivership, its corporate existence was never affected. Thus falling under the category of a existing corporation recommencing its banking business operations

** Sec. 27 E of the Tax Code provides the Minimum Corporate Income Tax (mcit) on Domestic Corporations.

(1) Imposition of Tax- MCIT of 2% of gross income as of the end of the taxable year, as defined here in, is hereby imposed on a corporation taxable under this title, beginning on the 4th taxable year immediately following the year in which such corp commenced its business operations, when the mcit is greater than the tax computed under Subsec. A of this section for the taxable year.

(2) Any excess in the mcit over the normal income tax… shall be carried forward and credited against the normal income tax for the 3 succeeding taxable years.

• Let it be stressed that RR 9-98 imposed the mcit on corps, the date when business operations commence is the year in which the domestic corporation registered with the BIR. But under RR 4-95, the date of commencement of operations of thrift banks, is the date of issuance of certificate by Monetary Board or registration with SEC, whichever comes later. Clearly then, RR 4-95 applies to Manila banks, being a thrift bank. 4-year period= counted from June 1999.

WHEREFORE, we GRANT the petition. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 77177 is hereby REVERSED. Respondent Commissioner of Internal Revenue is directed to refund to petitioner bank the sum of P33,816,164.00 prematurely paid as minimum corporate income tax.

G.R. No. 85749 May 15, 1989

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. ANTONIO TUASON, INC. and THE COURT OF TAX APPEALS, Respondents.

FACTS:

In 1981, CIR assessed Antonio Tuason, Inc. 25% surtax on unreasonable accumulation of surplus for the years 1975 to 1978 by virtue of Section 25 of the Tax Code, which levies an additional tax on corporation improperly accumulating profits or surplus.

CIR based his determination on the ground that: a. Antonio Tuason, Inc. was a mere holding or investment company for

the corporation did not involve itself in the development of subdivisions but merely subdivided its own lots and sold them for bigger profits. It derived its income mostly from interest, dividends and rental realized from the sale of realty.

b. 99.99% in value of the outstanding stock of Antonio Tuason, Inc., is owned by Antonio Tuason himself.

CIR "conclusively presumed" that when the corporation accumulated (instead of distributing to the shareholders) a surplus of over P3 million from its earnings in 1975 up to 1978, the purpose was to avoid the imposition of the progressive income tax on its shareholders

Tuason Inc. protested the assessment on the 25% surtax on the ground that the accumulation of surplus profits during the years in question was solely for the purpose of expanding its business operations as real estate broker (surplus profits set aside to build sufficient capital to construct an apartment building, condo unit, etc). It DENIED that its purpose was to evade payment.

However, it was found out that the corporation did not really use up its surplus profits. It allegation that P1.5M+ was spent for the construction of an apartment building and P1.7M+ for the purchase of a condominium unit in Urdaneta Village in 1980 was REFUTED by the Declaration of Real Property on the apartment building which shows that its market value is only P429k+, and the Tax Declaration on the


condominium unit which reflects a market value of P293k+ only (total is P 773,720).

The enormous discrepancy between the alleged investment cost and the declared market value of these pieces of real estate was not denied nor explained by Tuason.

ISSUE: W/n Tuason is a holding company and/or investment company, accumulated surplus and is liable for 25% surtax on undue accumulation of surplus– YES

RULING: CIR’s assessment of a 25% surtax against the Antonio Tuason, Inc. is reinstated, but only on the latter's unspent accumulated surplus profits of P2,489,585.88. The P 773,720 invested in its business operations (apartment and condominium unit) is not subject to the 25% surtax.

1) Tuazon IS a holding / investment company because it did not involve itself in the development of subdivisions but merely SUBDIVIDED its own lots and sold them for bigger profits. It derived its income from interest, dividends and rental realized from the sale of realty.

The touchstone of liability is the PURPOSE behind the accumulation of the income and NOT the CONSEQUENCES of the accumulation. Thus, failure to pay dividends to stockholders must be for the purpose of using undistributed earnings and profits for reasonable needs of the business. Otherwise, the company would be liable for unreasonable accumulation of surplus.

In this case, it is plain to see that the company's failure to distribute dividends to its stockholders was for reasons other than the reasonable needs of the business.

2) Tuazon is liable for the 25% surtax because 99.9% in value of the outstanding stock of Tuazon is owned by Antonio Tuazon himself. This gives the conclusive presumption that the purpose of accumulated earnings was to avoid the income tax of its shareholder.

Also, that the amount spent for construction of the bldg and amount for purchase of the condo has a BIG DISCREPANCY shows that it was beyond the reasonable needs requirement.

All presumptions are in favor of the correctness of petitioner's assessment against the private respondent. It is incumbent upon the taxpayer to prove the contrary. Unfortunately, the private respondent failed to overcome the presumption of correctness of the Commissioner's assessment and the

presumption that its failure to distribute surplus profits is for the reasonable needs of the business.

Cyanamid vs. CA (2000) – Improperly accumulated Tax Income

FACTS: Petitioner is a wholly owned subsidiary of American Cyanamid Co. based in USA. It is organized under Philippine laws. CIR assessed the petitioner and demanded deficiency in income tax. The Petitioner protested the assessment particularly the 25% Surtax Assessment, the 1981 Deficient income assessment, and the 1981 percentage assessment. According to it, the surtax assessment was not proper since the said profits were retained to include petitioner’s working capital and it would be used for reasonable business needs of the company. Also, it contended that it availed of the tax amnesty under EO 41, thus it enjoyed the amnesty from civil and criminal prosecution granted by the law.

The CIR refused to allow the cancellation of assessment. Hence, the appeal to the CTA. During the pendency of the appeal, there was a compromise settlement wherein the petitioner paid the reduced amount. However, the surtax on improperly accumulated profits remained unresolved.

CTA: Denied Petition.

CA: Affirmed CTA since the decision was supported by the evidence (company’s FIS and Balance Sheets)

ISSUE: WON the petitioner is liable for the accumulated earnings tax.

HELD: Yes.

In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts. The accumulated profits must be used within reasonable time after the close of the taxable year. Here, petitioner did not establish by clear and convincing evidence that such accumulated was for the immediate needs of the business.


To determine the reasonable needs of the business, the US Courts have invented the “Immediacy Test” which construed the words “reasonable needs of the business” to mean the immediate needs of the business, and it is held that if the corporation did not prove an immediate need for the accumulation of earnings and profits such was not for reasonable needs of the business and the penalty tax would apply. (Law of Federal Income Taxation Vol 7) The working capital needs of a business depend on the nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit and other similar factors. The Tax Court opted to determine the working capital sufficiency by using the ration between the current assets to current liabilities. Unless, rebutted, the presumption is that the assessment is correct. With the petitioner’s failure to prove the CIR incorrect, clearly and conclusively, the Tax Court’s ruling is upheld.

JESUS SACRED HEART COLLEGE VS. CIR

G.R. No. L-6807 May 24, 1954 FACTS:

Jesus Sacred Heart College was an educational organization authorized to operate in Lucena, Quezon. It offered public elementary, secondary and collegiate courses. It realized net incomes from tuition and other fees in carrying on its educational activity in the amounts of P5,659.07; P3,743.82; and P3,572.74 for the years 1947, 1948 and 1949 respectively. The school paid its income tax and penalties for the net incomes and compromise for late filing of its income tax returns for said years. It filed a claim for refund of P2,241.86 with CIR but it was denied. In a suit filed by the school against the CIR, CFI Manila sentenced the CIR to refund to the school the sum of P2,241.86 paid by the school by way of income tax for the years 1947, 1948 and 1949 on the ground that the school is exempt from taxation under section 27(e) of the NIRC. Hence, this appeal. ISSUE:

Whether or not the income of the school was taxable. HELD:

No. Section 27(e) of the National Internal Revenue Code, as amended by Republic Act No. 82 (section 5), exempts from taxation the "net income" of corporations organized and operated exclusively for educational purposes provided no part of the net income of which inures to the benefit of any private stockholder or individual.

In this case, it was conceded that the school belonged to this class. To hold that an educational Institution is subject to income tax whenever it is so administered as to reasonably assure that it will not incur in deficit, is to nullify and defeat the aforementioned exemption. Indeed, the effect, in general, of the interpretation advocate by CIR would be to deny the exemption whenever there is net income, contrary to the tenor of said section 27(e) which positively exempts from taxation those corporations or associations which, otherwise, would be subject thereto, because of the existence of said net income. Needless to say, every responsible organization must be so run to, at least insure its existence, by operating within the limits of its own resources, especially its regular income. In other words, it should always strive, whenever possible, to have a surplus.

The amount of fees charged by a school, college or university depends, ultimately, upon the policy of a given administration, at a particular time. It is not conclusive of the purpose of the institution. Otherwise, such purpose would vary with the particular in charge of the administration of the organization. At any rate, the main evidence of the purpose of a corporation should be its articles of incorporation and by-laws, for such purpose is required by statute to be stated in the articles of incorporation and the by-laws outline the administrative organization of the corporation which, in turn, is supposed to insure or facilitate the accomplishment of said purpose. And the purposes for which the school was formed were the instruction and education of young girls. Moreover, article 21 of its by-laws stated that the school was a non-profit corporation. All income would be devoted to the maintenance, improvement and expenses of the College. And no part of its net income should inure to the benefit of private individuals

Under section 27(e) of our National Internal Revenue Code, as amended, an institution operated exclusively for educational purposes need not have, in addition thereto, a charitable or philanthropic character, to be exempt from taxation, provided only that no part of its net income inures to the benefit of any private stockholder or individual.

It should be noted that in dealing with institutions organized and operated exclusively for education purposes, the profit motive was disregarded, on condition that the net income does not inure to the benefit of any private stockholder or individual

Lastly, the history of the legal provision under consideration does not bear out the theory of CIR. It was clear that Congress had no intention of taxing matriculation, laboratory, library, athletic and graduation fees and other fees of similar nature, essential to, or necessarily connected with, the educational purposes of an institution of learning. The legislative department positively intended such fees to be exempt from taxation. Hence, viewed from any angle, the contention of CIR cannot be sustained.

The decision appealed from was affirmed.


Exemption from Tax on Corporation: Cooperatives Dumaguete Cathedral Credit Cooperative v. Commissioner of Internal Revenue, G.R. No. 182722, January 22, 2010 Facts: Dumaguete Cathedral Credit Cooperative (the Cooperative) was assessed by the Commissioner of Internal Revenue (CIR) on deficiency withholding taxes for taxable years 1999 and 2000 which it protested on July 23, 2002. Thereafter, on October 16, 2002, the Cooperative received two (2) other Pre-Assessment Notices for deficiency withholding taxes also for taxable years 1999 and 2000. The deficiency withholding taxes cover the payments of the honorarium of the Board of Directors, security and janitorial services, legal and professional fees, and interest on savings and time deposits of its members. In another letter dated November 8, 2002, the Cooperative informed the CIR, that it would pay the withholding taxes due on the honorarium and per diems of the Board of Directors, security and janitorial services, commissions and legal and professional fees for the year 2000 excluding penalties and interest, and that it would avail of the Voluntary Assessment and Abatement Program (VAAP) of the BIR under Revenue Regulations No. 17-2002. On November 29, 2002, the Cooperative availed of the VAAP and paid the amounts corresponding to the withholding taxes on the payments for the compensation, honorarium of the Board of Directors, security and janitorial services, and legal and professional services, for the years 1999 and 2000. On April 24, 2003, the Cooperative received from the BIR Regional Director, Sonia L. Flores, Letters of Demand Nos. 00027-2003 and 00026-2003, with attached Transcripts of Assessment and Audit Results/Assessment Notices, ordering it to pay the deficiency withholding taxes, inclusive of penalties, for the years 1999 and 2000 in the amounts of P1,489,065.30 and P1,462,644.90, respectively. On May 9, 2003, the Cooperative protested the Letters of Demand and Assessment Notices with the CIR. However, the latter failed to act on the protest within the prescribed 180-day period. Hence, on December 3, 2003, the Cooperative filed a Petition for Review before the CTA. The Court of Tax Appeals First Division partially granted the petition and cancelled the deficiency assessment against the Cooperative for deficiency withholding taxes on the honorarium and per diems of the Cooperative’s Board of Directors, security and janitorial services, commissions and legal and professional fees in view of its VAAP application. However, The CTA ordered the Cooperative to pay the amounts representing deficiency withholding taxes on interests from savings and time deposits of its members for the taxable years 1999 and 2000 plus the 20%

delinquency interest from May 26, 2003 until the amount of deficiency withholding taxes are fully paid pursuant to Section 249 (C) of the Tax Code. Aggrieved, the Cooperative filed an appeal before the CTA En Banc. However, the CTA En Banc denied its appeal. The Cooperative elevated its case before the Supreme Court. Issue: Is the Cooperative liable to pay the deficiency withholding taxes on interest from savings and time deposits of its members, as well as the delinquency interest of 20% per annum. Held: The Supreme Court held that the Cooperative is not liable. The Supreme Court found that the BIR has previously issued rulings dealing with the subject matter. In BIR Ruling No. 551-888, the BIR stated that cooperatives are not required to withhold taxes on interest from savings and time deposits of their members which ruling was reiterated in BIR Ruling [DA- 591-2006] dated October 5, 2006. The Court found that both BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006] are in perfect harmony with the Constitution and the laws they seek to implement. Also, given that the Cooperative is duly registered with the Cooperative Development Authority (CDA), Section 24(B)(1) of the NIRC must be read together with RA 6938, as amended by RA 9520. Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to foster the creation and growth of cooperatives as a practical vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development and social justice. Thus, to encourage the formation of cooperatives and to create an atmosphere conducive to their growth and development, the State extends all forms of assistance to them, one of which is providing cooperatives a preferential tax treatment. The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles 61 and 62 of RA 6938, which read: ART. 61. Tax Treatment of Cooperatives. — Duly registered cooperatives under this Code which do not transact any business with non-members or the general public shall not be subject to any government taxes and fees imposed under the Internal Revenue Laws and other tax laws. Cooperatives not falling under this article shall be governed by the succeeding section. ART. 62. Tax and Other Exemptions. — Cooperatives transacting business with both members and nonmembers shall not be subject to tax on their transactions to members. Notwithstanding the provision of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions; x x x.


This exemption extends to members of cooperatives. It must be emphasized that cooperatives exist for the benefit of their members. In fact, the primary objective of every cooperative is to provide goods and services to its members to enable them to attain increased income, savings, investments, and productivity. Therefore, limiting the application of the tax exemption to cooperatives would go against the very purpose of a credit cooperative. Extending the exemption to members of cooperatives, on the other hand, would be consistent with the intent of the legislature. Thus, although the tax exemption only mentions cooperatives, this should be construed to include the members, pursuant to Article 126 of RA 6938, which provides: ART. 126. Interpretation and Construction. – In case of doubt as to the meaning of any provision of this Code or the regulations issued in pursuance thereof, the same shall be resolved liberally in favor of the cooperatives and their members. The Supreme Court likewise noted that the tax exemption in RA 6938 was retained in RA 9520. The only difference is that Article 61 of RA 9520 (formerly Section 62 of RA 6938) now expressly states that transactions of members with the cooperatives are not subject to any taxes and fees. ART. 61. Tax and Other Exemptions. Cooperatives transacting business with both members and non-members shall not be subjected to tax on their transactions with members. In relation to this, the transactions of members with the cooperative shall not be subject to any taxes and fees, including but not limited to final taxes on members’ deposits and documentary tax. Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions: (Underscoring Supplied) This amendment in Article 61 of RA 9520, specifically providing that members of cooperatives are not subject to final taxes on their deposits, affirms the interpretation of the BIR that Section 24(B)(1) of the NIRC does not apply to cooperatives and confirms that such ruling carries out the legislative intent. Under the principle of legislative approval of administrative interpretation by reenactment, the reenactment of a statute substantially unchanged is persuasive indication of the adoption by Congress of a prior executive construction. Moreover, no less than the Constitution guarantees the protection of cooperatives. Section 15, Article XII of the Constitution considers cooperatives as instruments for social justice and economic development. At the same time, Section 10 of Article II of the Constitution declares that it is a policy of the State to promote social justice in all phases of national development. In relation thereto, Section 2 of Article XIII of the Constitution states that the promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance. Bearing in mind the foregoing provisions, the Court found that an interpretation exempting the members of cooperatives from the imposition of the

final tax under Section 24(B)(1) of the NIRC is more in keeping with the letter and spirit of the Constitution.

tax 1 digest 4th meeting

Documents

additional stock

certificate of stock

said stock dividend

definition of stock

wn stock dividends

property capital

income tax law

actual capital