CASE CHUA V.

CA

DOCTRINE Q: Explain the relevance of payment of capital gains tax in the sale of real property. The Supreme Court classified the agreement between Valdes -Choy as the seller and Chua as the buyer as a contract to sell (not a contract of sale) over a property situated in San Lorenzo Village, Makati City. Ownership over the subject property was retained by Valdes-Choy and was not to pass to Chua until full payment of the purchase price. On the topic of payment of capital gains tax, the High Court had this to say: The buyer has more interest in having the capital gains tax paid immediately since this is a pre-requisite to the issuance of a new Torrens title in his name. Nevertheless, as far as the government is concerned, the capital gains tax remains a liability of the seller since it is a tax on the sellers gain from the sale of the real estate. Payment of the capital gains tax, however, is not a pre-requisite to the transfer of ownership to the buyer. The transfer of ownership takes effect upon the signing and notarization of the deed of absolute sale.

FACTS Valdes-Choy advertised for sale her paraphernal house and lot ("Property") with an area of 718 square meters located at San Lorenzo Village, Makati City. The Property is covered by ("TCT") issued by the Register of Deeds of Makati City in the name of Valdes-Choy. Chua responded to the advertisement. After several meetings, Chua and Valdes-Choy agreed on a purchase price of P10.8 M payable in cash. Valdes-Choy received from Chua a check for P100,000.00. The receipt evidencing the transaction, signed by Valdes-Choy as seller, and Chua as buyer, Chua secured from PBCOM a manager's check for P480,000.00. Strangely, after securing the manager's check, Chua immediately gave PBCom a verbal stop payment order claiming that this manager's check for P480,000.00 "was lost and/or misplaced."8 On the same day, after receipt of Chua's verbal order, PBCom Assistant VP Julie C. Pe notified in writing9 the PBCom Operations Group of Chua's stop payment order. Chua and Valdes-Choy met with their respective counsels to execute the necessary documents and arrange the payments.Valdes-Choy as vendor and Chua as vendee signed two Deeds of Absolute Sale. The first Deed of Sale covered the house and lot for the purchase price of P8M. The second Deed of Sale covered the furnishings, fixtures and movable properties contained in the house for the purchase price of P2.82 The parties also computed the capital gains tax to amount to P485,000.00. The parties met again at the office of Valdes-Choy's counsel. Chua handed to Valdes-Choy the PBCom manager's check for P485,000.00 so Valdes- Choy could pay the capital gains tax as she did not have sufficient funds to pay the tax. Valdes-Choy issued a receipt showing that Chua had a remaining balance of P10.2 M after deducting the advances made by Chua. On the same day, Valdes-Choy, accompanied by Chua, deposited the P485,000.00 manager's check to her account with Traders Royal Bank. She then purchased a Traders Royal Bank manager's check for P480,000.00 payable to the Commissioner of Internal Revenue for the capital gains tax. Valdes-Choy and Chua returned to the office of Valdes-Choy's counsel and handed the Traders Royal Bank check to the counsel who undertook to pay the capital gains tax. It was then also that Chua showed to Valdes-Choy a PBCom manager's check for P10,2M representing the balance of the purchase price. Chua, however, did not give this PBCom manager's check to Valdes-Choy because the TCT was still registered in the name of Valdes-Choy. Chua required that the Property be registered first in his name before he would turn over the check to Valdes-Choy. This angered Valdes-Choy who tore up the Deeds of Sale, claiming that what Chua required was not part of their agreement.14 On the same day, Chua confirmed his stop payment order by submitting to PBCom an affidavit of loss15 of the PBCom Manager's Check for P480,000.00. PBCom Assistant VP, however, testified that the manager's check was nevertheless

honored because Chua subsequently verbally advised the bank that he was lifting the stop-payment order due to his "special arrangement" with the bank.16 On the deadline for the payment of the balance of the purchase price, Valdes-Choy suggested to her counsel that to break the impasse Chua should deposit in escrow the P10,215,000.00 balance.17 Upon such deposit, Valdes-Choy was willing to cause the issuance of a new TCT in the name of Chua even without receiving the balance of the purchase price. Valdes-Choy believed this was the only way she could protect herself if the certificate of title is transferred in the name of the buyer before she is fully paid. Valdes-Choy's counsel promised to relay her suggestion to Chua and his counsel, but nothing came out of it. Chua filed a complaint for specific performance against ValdesChoy which the trial court dismissed on 22 November 1989. Chua re-filed his complaint for specific performance with damages. TORCUATOR V. BERNABE Q: Explain the relevance of payment of capital gains tax in the sale of real property. the Supreme Court likewise characterized as a contract to sell the agreement between the Bernabe Spouses (seller) and the Torcuator Spouses (buyer) over a vacant lot in Ayala Alabang Village. The Court cited the following reasons: (1) the agreement imposed upon the Torcuator Spouses the obligation to fully pay the agreed purchase price for the property; (2) the parties clearly intended the construction of a residential house on the property as another suspensive condition which had to be fulfilled; and (3) there was neither actual nor constructive delivery of the property to the Torcuator Spouses. The Supreme Court further ruled that the issue of whether the agreement violated the law as it deprived the government of capital gains tax is wholly irrelevant. Capital gains taxes, after all, are only imposed on gains presumed to have been realized from sales, exchanges or dispositions of property. Having declared that the contract to sell in this case was aborted by [the Torcuator Spouses] failure to comply with the twin suspensive conditions of full payment and construction of a residence, the obligation to pay taxes never arose. Salvadors bought a lot in Ayala Alabang Village with the condition that no lot may be resold by the buyer unless a residential house has been constructed thereon. Ayala Corporation keeps the Torrens Title in their possession) Salvadors then sold the lot to the spouses Bernabe and giiven the above restrictions, the Salvadors concomitantly executed a SPA authorizing the Bernabes to construct a residential house on the lot and to transfer the title of the property in their names. The Bernabes, on the other hand, without making any improvement, contracted to sell the lot to the spouses Torcuator. Then again, confronted by the Ayala restrictions, the parties agreed to cause the sale between the Salvadors and the Bernabes cancelled in favor of a new deed of sale from the Salvadors directly to the Torcuators a new SPA executed by the Salvadors to the Torcuator. The Torcuators thereafter had the plans of their house prepared and offered to pay the Bernabes for the land upon delivery of the sale contract. For one reason or another, the deed of sale was never consummated nor was payment on the said sale ever effected. Subsequently, the Bernabes sold the subject land to Angeles. As a result, the Torcuators commenced the instant action against the Bernabes and Salvadors for Specific Performance or Rescission with Damages. The CA ruled that the parties deprived the government of taxes when they made it appear that the property was sold directly by the Salvadors to the Torcuators. Since there were actually two sales, i.e., the first sale between the Salvadors and the Bernabes and the second between the Bernabes and Torcuators, taxes should have been paid for both transfers. Petitioners assail the constitutionality of RA7496, known as the Simplified Net Income Taxation Scheme (SNIT), which amended certain provisions of the NIRC. They also seek a declaration that the Secretary of Finance have exceeded their rule-making authority in applying SNIT to general professional partnerships through the issuance of Revenue Regulations No 2-93, specifically Section 6 thereof

TAN V. DEL ROSARIO

Q: How are partners of a general professional partnership taxed? The Supreme Court held that the classification made between single proprietorships and professionals on the one hand, and corporations and partnerships on the other, was valid. Furthermore, [w]hat 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. [NOTE: See footnotes 2 and 3 of the

decision. Schedular approach is defined as a system employed where the income tax treatment varies and made to depend on the kind or category of taxable income of the taxpayer. Global approach, on the other hand, refers to a system where the tax treatment view indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer.] On the topic of partnerships, the Supreme Court confirmed that general professional partnerships and ordinary business partnerships are treated differently for purposes of income taxation. In general professional partnerships, 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. Q: Is passive income considered in the computation of taxable income? One of the questions answered in the case was whether gross income included those items constituting passive income. Gross income means income derived from whatever source, including compensation for services, the conduct of trade or business or the exercise of a profession, dealings in property, interests, rents, royalties, dividends, annuities, prizes and winnings, pensions, and a partners distributive share in the net income of a general professional partnership. The Supreme Court held that: The definition of gross income is broad enough to include all passive incomes subject to specific rates or final taxes. However, since these passive incomes are already subject to different rates and taxed Q: What are government owned or controlled corporations (GOCCs)? What are government instrumentalities? According to the Supreme Court, a government owned or controlled corporation must be organized as a stock or non-stock corporation. MIAA was not a stock corporation because it did not have stockholders. MIAA was not a non-stock corporation since it did not have members. The High Court classified MIAA as a government instrumentality vested with corporate powers to perform efficiently its governmental functions. When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, police authority and the levying of fees and charges. At the same time, MIAA exercises all the powers of a corporation under the Corporation Code, insofar as these powers are not inconsistent with the provisions of this Executive Order.

CIR VS. PHILIPPINE AIRLINES, INC.

PALs franchise which contained the following provisos: (1) as consideration for the franchise, PAL is liable to pay either (a) its basic corporate income tax based on its net taxable income in accordance with the Tax Code, or (b) a franchise tax of 2% based on its gross revenues, whichever is lower; and (2) the tax paid shall be in lieu of all other taxes imposed by all government entities in the country.

MIAA VS. CITY OF PASAY

MIAA received Final Notices of Real Estate Tax Delinquency from the City of Paraaque for the taxable years 1992 to 2001. MIAAs real estate tax delinquency was estimated at P624 million. The City of Paraaque, through its City Treasurer, issued notices of levy and warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Paraaque threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax delinquency. MIAA filed with the Court of Appeals an original petition for prohibition and injunction, with prayer for preliminary injunction or temporary restraining order. The petition sought to restrain the City of Paraaque from imposing real estate tax on, levying against, and auctioning for public sale the Airport Lands and Buildings. Paranaques Contention: Section 193 of the Local Government Code expressly withdrew the tax exemption privileges of government-owned and-controlled corporations upon the effectivity of the Local Government Code. Respondents also argue that a basic rule of statutory construction is that the express mention of one person, thing, or act excludes all others. An international airport is not among the exceptions mentioned in Section 193 of the Local Government Code. Thus, respondents

assert that MIAA cannot claim that the Airport Lands and Buildings are exempt from real estate tax. MIAAs contention: Airport Lands and Buildings are owned by the Republic. The government cannot tax itself. The reason for tax exemption of public property is that its taxation would not inure to any public advantage, since in such a case the tax debtor is also the tax creditor. COMPAGNIE FINANCIERE SUCRES VS CIR Q: How is capital gains tax computed in sales of shares of stock? The Supreme Court disagreed. In the Capital Gains Tax Return on Stock Transaction, which petitioner filed with the Bureau of Internal Revenue, the acquisition cost of the shares it sold, including the stock subscription is Php 69,143,630.28. The transfer price to Kerry Holdings, Ltd. is Php 70,332,869.92. Obviously, petitioner has a net gain in the amount of Php 1,189,239.64. As the CTA aptly ruled, a tax on the profit of sale on net capital gain is the very essence of the net capital gains tax law. To hold otherwise will ineluctably deprive the government of its due and unduly set free from tax liability persons who profited from said transactions. VIVE EAGLE LAND VS. CA Q: How is capital gains tax computed in sales of real property? The Supreme Court pointed out that the Third Sale occurred in November 1988. At that time, it was the 1977 Tax Code, as amended, which was in effect. Under the old Tax Code, VELI, being a corporation, was not obliged to pay capital gains tax. [Only individual taxpayers were then required to pay capital gains tax on sale of real property.] However, petitioner VELI, as seller, should have included in its ordinary income tax return, whatever gain or loss it incurred with respect to the sale of the property in dispute, pursuant to Section 24(a) of the 1977 NIRC, as amended. In 1987, Spouses Flores, as owners, sold 2 parcels of land in Cubao to Tatic Square International Corp for P5.7M. Tatic applied for a loan with Capital Rual Bank of Makati to finance its purchase of the said lots, which the bank granted provided that the torrens title over the lots would be registered under its name as collateral for the payment of the loan. In 1988, Tatic sold these parcels of land to Vive Eagle Land Inc (VELI) for P6.3M, although the torrens titles over the lots were still in the custody of the bank. During the same year, VELI sold one of these parcels of land to Genuino Ice Co. Inc. for P4M. Also, a deed of assignment of rights in which VELI assigned in favor of Genuino Ice all rights and interests under the Deed of Sale executed by spouses Flores and the other Deed of Sale executed by Tatic in VELI's favor, in so far as that lot is concerned. Genuino Ice demanded that VELI pay its capital gains tax amounting to P285,000. However, VELI refused saying that the Spouses Flores and Tobias (broker of the sale) are responsible to pay the tax. Genuino Ice filed an action for specific performance against VELI, contending that VELI failed to transfer title to and in the name of Genuino Ice, to cause the eviction of the occupants, and to pay the tax and other dues to effectuate the transfer of the title of the property. RTC ruled in favor of Genuino Ice, CA affirmed. The Supreme Court took the opportunity to explain the concept and rationale of MCIT as follows: MCIT on domestic corporations came about as a result of the perceived inadequacy of the selfassessment system in capturing the true income of corporations. Congress intended to put a stop to the practice of corporations which, while having large turn- overs, report minimal or negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of income or over-deduction of expenses otherwise called tax shelters. In other words, MCIT Petitioner was a nonresident foreign corporation which sold its shareholding in the Makati Shangri-La Hotel to Kerry Holdings, Ltd. Petitioner alleged that the transfer of deposits on stock subscriptions was not a sale/assignment of shares of stock subject to documentary stamp tax and capital gains tax.

CHAMBER OF REAL ESTATE VS. ROMULO

Q: What is the minimum corporate income tax? The Chamber of Real Estate and Builders Association assails the validity of the imposition of minimum corporate income (MCIT) on corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets. Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no realized gain. Moreover, petitioner seeks to nullify RRs on the imposition of CWT on income from sales of real

properties classified as ordinary assets. Petitioner contends that these RRs are contrary to law because they fail to distinguish between the treatment of ordinary assets and capital assets.

CIR VS. BRITISH OVERSEAS AIRWAYS CORPORATION

Q: Explain the concept of gross Philippine billings. British Overseas Airways Corporation (BOAC) is a 100% British Government Owned airline corporation organized under the laws of the UK. BOAC maintains a general sales agent (of its tickets) in the Philippines namely Warner and Barnes and Qantas Airways. It also did not have landing rights in the Philippines. It was assessed deficiency income taxes by CIR in the years 1959-1963 and 19681979. However, on appeal, the CTA held that the proceeds of sales of BOAC tickets in the Philippines do not constitute BOAC income from Philippine sources since no service of carriage of passengers or freight was performed by BOAC within the Philippines therefore said income is not subject to income tax. The CTA held that the place where services are rendered determines the source of the income. The petitioner contends that the revenue derived by BOAC from sales of tickets in the Philippines are taxable and that BOAC should be considered a resident foreign corporation and accordingly taxed as such.

serves to put a cap on such tax shelters. On petitioners argument that the imposition of MCIT amounted to deprivation of property without due process of law, the Supreme Court held that 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 sale. Clearly, the capital is not being taxed. Otherwise stated, MCIT is a tax on income. Furthermore, 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 corporations gross income. Was BOAC a resident foreign corporation doing business in the Philippines? The Supreme Court held affirmatively. BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the Philippines which performed activities in the exercise of the functions normally incident to, and in progressive pursuit of, the purpose and object of its organization as an international air carrier. BOAC was held to be engaged in business in the Philippines through its local agent during the period covered by the assessments. Did BOACs income from the sale of tickets in the Philippines come from sources within the Philippines? The source of an income is the property, activity or service that produced the income. The Supreme Court stated that in BOACs case, the sale of tickets in the Philippines was the activity that produced the income. The tickets exchanged hands here and payment for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. Additionally, the Supreme Court differentiated between gross Philippine billings tax and common carriers tax. Gross Philippine billings tax is an income tax, i.e., a direct tax on the income of persons and other entities of whatever kind and in whatever form derived from any source. On the other hand, common carriers tax is an excise tax, that is, a tax on the activity of transporting, conveying or removing passengers and cargo from one place to another. Burroughs Limited is a foreign corporation authorized to engage in trade or business in the Philippines through a branch office located at Makati. Sometime in 1979, said branch office applied with the Central Bank for authority to remit to its parent company abroad, branch profit. It paid the 15% branch profit remittance tax. Claiming that the 15% profit remittance tax should have been computed on the basis of the amount actually remitted and not on the amount before profit remittance tax, Burroughs filed a written claim for the refund or tax credit representing alleged overpaid branch profit remittance tax. Thereafter Burroughs filed with the CTA a petition for review for the recovery of the amount. CTA ordered the CIR to grant a tax credit in favour of Burroughs Limited.

CIR VS. BURROUGHS LIMITED

Q: What is the branch profit remittance tax? The Supreme Court cited Section 327 (now Section 246 of the 1997 Tax Code) in holding that RMC No. 8-82 could not be given retroactive effect. The prejudice that would result to [respondent] by a retroactive application of [RMC No. 8-82] is beyond question for it would be deprived of the substantial amount of P172,058.90.

MARUBENI CORPORATION VS. CIR

Q: What is the branch profit remittance tax? The Supreme Court deemed it wise to first determine the classification of the Head Office for income taxation purposes. The Head Office contended that following the principal-agent relationship theory, because the Branch Office was a resident foreign corporation, the Head Office was likewise a resident foreign corporation. Hence, the Head Office was subject only to the 10% final dividend tax. Upon the other hand, the CIR argued that the Head Office was a nonresident foreign corporation which was neither subject to the 10% final dividend tax nor the withheld 15% branch profit remittance tax. Instead, the Head Office was subject to the 35% final withholding tax on its gross income earned from Philippine sources. The Supreme Court declared that in this particular transaction, the Head Office was considered a nonresident foreign corporation. The general rule is that a foreign corporation is the same juridical entity as its branch office in the Philippines. 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. Being a nonresident foreign corporation with respect to the transaction in question, generally, the Head Office must be taxed 35% of its gross income from all sources within the Philippines. However, based on now Section 28(B)(5)(b) of the 1997 Tax Code and the relevant provision of the RP-Japan Tax Treaty (i.e., the tax sparing rule), a discounted rate of 15% was given to the Head Office on dividends received from AG&P. Q: What is the branch profit remittance tax? The Supreme Court held that the law was clear. The 15% branch profit remittance tax was based on the profits actually remitted. The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a majority of all the latters shares of stocks are owned by such foreign corporations. xxx In order to avert what would otherwise appear to be an unequal tax treatment on such subsidiaries vis--vis local branch offices, a 20%, later reduced to 15%, profit remittance tax was imposed on local branches on their remittances of profits abroad. But this is where the tax pari passu ends between domestic branches and subsidiaries of foreign corporations. Q: What is the branch profit remittance tax? Was respondent entitled to the preferential rate of 15% withholding tax on dividends declared and remitted to the Swiss corporation? Particularly, did Switzerland allow as tax credit the deemed paid Philippine tax on such dividends? [Otherwise stated, did Switzerland grant to the Swiss corporation a tax credit against the tax due it equivalent to 20%, or the difference between the regular 35% rate and the preferential 15% rate?] The Supreme Court noted that during the period in question, Switzerland did not impose any income tax on dividends received by a Swiss corporation from corporations domiciled in foreign countries. To the Courts mind, the fact that

Marubeni Corporation of Japan, a foreign corporation duly organized and existing under the laws of Japan and duly licensed to engage in business under Philippine laws, has equity investments in Atlantic Gulf and Pacific Co. of Manila (AG&P). AG&P declared and paid cash dividends to Marubeni and withheld the corresponding final dividend tax thereon. AG&P directly remitted the cash dividends to Marubenis head office in Tokyo, Japan net not only of the 10% final dividend tax but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding tax of 10%. Marubeni Corporation sought a ruling from the BIR on whether or not the dividends it received from AG&P are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to 15% profit remittance tax. Then Acting Commissioner Ancheta ruled that only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit remittance tax. Consequently, Marubeni claimed for a refund or issuance of a tax credit representing profit tax remittance erroneously paid on the dividends remitted by AG&P to head office in Tokyo. CIR denied Marubeni Corporationss claim for refund/credit. Petitioner appealed to the CTA which affirmed the denial of the refund by the CIR. On appeal to the SC, it is the argument of Marubeni that following the principal-agent relationship theory, Marubeni Japan is a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received from a domestic corporation.

BANK OF AMERICA VS CA

Bank of America is a foreign corporation duly licensed to engage in business in the Philippines. It paid the 15% branch profit remittance tax on profit from its foreign currency deposit unit operations. The tax was based on net profits after income tax without deducting the amount corresponding to the 15% tax. Thereafter, Bank of America filed a claim for refund with the BIR. Of that portion of its payment which corresponds to the 15% branch profit remittance tax. It based its claim on Section 24(B)(2)(ii) (Now Section 28(A)(5)) of the NIRC which provides that any profit remitted abroad by a branch of a foreign corporation to its head office shall be subject to 15% tax. The Bank of America argues that the 15% branch profit remittance tax should be assessed on the amount actually remitted or in other words, the 15% profit remittance tax should not form part of the tax base. The CTA upheld Bank of America in its claim for refund. The CA reversed. Hence, this appeal by Bank of America Wander is a domestic corporation which is a wholly-owned subsidiary of Glaro S.A. Ltd.,a Swiss corporation not engaged in trade/business in the Philippines. In two instances, Wander filed its withholding tax return and remitted to Glaro (the parent company) dividends (P222,000 in the first instance and P355,200 in the second), on which 35% tax was withheld and paid to the BIR. Wander now files a claim for refund of the withheld tax contending that it is liable only to 15% withholding tax pursuant to Section 24. B.1 of the Tax Code. The BIR did not act upon the claim filed by Wander so the corporation filed a petition to the Court of Tax Appeals (CTA). The CTA held that the corporation is

CIR VS. WANDER PHILIPPINES

MARUBENI VS. CIR

Switzerland did not impose any tax or the dividends received by [the Swiss corporation] from the Philippines should be considered as a full satisfaction of the given condition. Hence, the dividends should be subject to the preferential rate of 15% withholding tax. Q: What is the branch profit remittance tax? The Supreme Court deemed it wise to first determine the classification of the Head Office for income taxation purposes. The Head Office contended that following the principal-agent relationship theory, because the Branch Office was a resident foreign corporation, the Head Office was likewise a resident foreign corporation. Hence, the Head Office was subject only to the 10% final dividend tax. Upon the other hand, the CIR argued that the Head Office was a nonresident foreign corporation which was neither subject to the 10% final dividend tax nor the withheld 15% branch profit remittance tax. Instead, the Head Office was subject to the 35% final withholding tax on its gross income earned from Philippine sources. The Supreme Court declared that in this particular transaction, the Head Office was considered a nonresident foreign corporation. The general rule is that a foreign corporation is the same juridical entity as its branch office in the Philippines. 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. Being a nonresident foreign corporation with respect to the transaction in question, generally, the Head Office must be taxed 35% of its gross income from all sources within the Philippines. However, based on now Section 28(B)(5)(b) of the 1997 Tax Code and the relevant provision of the RP-Japan Tax Treaty (i.e., the tax sparing rule), a discounted rate of 15% was given to the Head Office on dividends received from AG&P. Q: What is the branch profit remittance tax? The Supreme Court stated that our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US shall allow [P&G US] a deemed paid tax credit in an amount equivalent to twenty (20) percentage points waived by the Philippines. Did the US law comply with the above requirement? The Supreme Court ruled positively. Thus, the dividends should be subject to the preferential rate of 15% withholding tax.

entitled to 15% withholding tax rate on dividends remitted to Glaro, a non-resident foreign corporation. Marubeni Corporation (the Head Office) was a Japanese corporation which established a branch office (the Branch Office) in the Philippines. The Head Office made equity investments in Atlantic Gulf and Pacific Co. of Manila. In 1981, AG&P declared and paid cash dividends to the Head Office. AG&P directly remitted the cash dividends to the Head Office, net not only of the 10% final dividend tax, but also of the withheld 15% profit remittance tax (based on the remittable amount after deducting the 10% final dividend tax). Later, the Head Office filed a claim for tax refund or credit of alleged erroneously paid branch profit remittance tax on the dividends remitted by AG&P to the Head Office. The issue in this case revolved around the Head Offices tax liability on its dividend income from Philippine sources.

CIR VS. PROCTER & GAMBLE PHILIPPINE MANUFACTURING

BASILAN ESTATES VS. CIR

Q: What is the improperly accumulated earnings tax? On the topic of unreasonably accumulated profits, the Supreme Court said that: In order to determine whether profits were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not subsequently declared intentions which are merely the products of afterthought. Moreover: In determining whether accumulations of earnings or profits in a particular year are within the reasonable needs of a corporation, it is necessary to take into account prior accumulations, since accumulations prior to the year involved may have been sufficient to cover the business needs

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) as the withholding agent of the Philippine Government with respect to dividend taxes paid by PMC-USA, filed a claim for the refund of 20 percentage point portion of the 35 percentage whole tax paid with the Commissioner of Internal Revenue. Basilan Estate, Inc. a Philippine corporation engaged in coconut industry filed in 1954 its income tax returns for 1953 and paid an income tax of P8,028. On February 26, 1959, the Commissioner of Internal Revenue, assessed Basilan Estates, Inc a deficiency income tax of a. P3,912 for 1953 and b. P86,867.85 as 25% surtax on unreasonably accumulated profits as of 1953 pursuant to Section 25 of the Tax Code. On non-payment of the assessed amount, a warrant of distraint and levy was issued. Basilan Estate, Inc. filed before the Court of Tax Appeals a petition for review of the following: a. prescription of the period of assessment and collection

MANILA WINE MERCHANTS VS. CIR

Q: What is the improperly accumulated earnings tax? According to the Supreme Court, to avoid the imposition of the 25% surtax, petitioner should prove that the purchase of the U.S.A. Treasury Bonds in 1951 was an investment within the reasonable needs of the company. To determine the reasonable needs of the business in order to justify an accumulation of earnings, the Courts of the United States have invented the so-called Immediacy Test which construed the words reasonable needs of the business to mean the immediate needs of the business, and it was generally held that if the corporation did not prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply. American cases likewise hold that investment of the earnings and profits of the corporation in stock or securities of an unrelated business usually indicates an accumulation beyond the reasonable needs of the business. Here, the Supreme Court held that the purchase of the U.S.A. Treasury Bonds was in no way related to petitioners business of importing and selling wines, whisky, liquors and distilled spirits. It was thus construed to be an investment beyond the reasonable needs of petitioners business.

b. error in disallowing claimed depreciations (upon these supplemented facts) i. Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to 1949 on the basis of their acquisition cost. Accordingly, from 1950 to 1953 it deducted from gross income the value of depreciation computed on the reappraised value. Upon investigation and examination of taxpayer's books and papers, the Commissioner of Internal Revenue found that the reappraised assets depreciated in 1953 were the same ones upon which depreciation was claimed in 1952. And for the year 1952, the Commissioner had already determined, the depreciation allowable on said assets to be P36,842.04, computed on their acquisition cost at rates fixed by the taxpayer. Hence, the Commissioner pegged the deductible depreciation for 1953 on the same old assets at P36,842.04 and disallowed the excess thereof in the amount of P10,500.49. 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 government 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 Banks payment of 33M is correct, since its operations were merely interrupted during 1987-1999. CA affirmed CTA. CTA set aside petitioners revenue commissioners assessment of 1.1 M as the 25% surtax on private respondents unreasonable accumulation of surplus for the year 1975-1978.

CIR VS. ANTONIO TUASON

Q: What is the improperly accumulated earnings tax? Unfortunately, as the Supreme Court held, respondent failed to

overcome the presumption of correctness of the CIRs assessment. The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of using the undistributed earnings and profits for the reasonable needs of the business, that purpose would not fall within the interdiction of the statute.

CYANAMID PHILIPPINES VS. CA

Q: What is the improperly accumulated earnings tax? [NOTE: Under the 1997 Tax Code, the improperly accumulated earnings tax does not apply to publicly held corporations, banks and other nonbank financial intermediaries, and insurance companies. However, the present case was decided under the 1977 Tax Code. Under the old code, only the following were exempted from the improperly accumulated earnings tax: banks, nonbank financial intermediaries, corporation organized primarily and authorized by the Central Bank of the Philippines to hold shares of stocks of banks, and insurance companies.] Under the 1977 Tax Code, as amended, therefore, petitioner did not fall among those exempt from the imposition of improperly accumulated earnings tax. The Supreme Court likewise had occasion to discuss the rationale behind the imposition of the surtax, to wit: The provision discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed. Q: What is the tax consequence of real property owned by exempt corporations? The Supreme Court held that while YMCA was an organization which should not be taxed in respect of income received by it as such, YMCAs rental income from its real estate was subject to income tax. The last paragraph of now Section 30 of the 1997 Tax Code provides that income from the property of covered organizations is taxable. The rental income is taxable regardless of whence such income is derived and how it is used or disposed of. Where the law does not distinguish, neither should we.

Private respondent protested the assessment 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 a real estate broker. Private res. Filed a petition that pending determination of the case, an order be issued restraining the commissioner and/or his reps from enforcing the warrants of distraint and levy. Writ of injunction was issued by tax court. Due to the reversal of CTA of the commissioners decision, CIR appeals to the SC. Cyanamid Philippines, Inc., a domestic corporation, is a wholly owned subsidiary of American Cyanamid Co. based in the USA. It is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an importer.CIR sent an assessment to Cynamid Philippines and demanded the payment of deficiency income tax. Petitioner protested the assessments specifically the 25% surtax assessment. Cynamid Philippines claimed that the CIR's assessment representing the 25% surtax on its accumulated earnings had no legal basis since: (a) petitioner accumulated its earnings and profits for reasonable business requirements to meet working capital needs and retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of American Cyanamid Company, whose shares of stock are listed and traded in NYSE. Thus, no individual shareholder of petitioner could have evaded or prevented the imposition of individual income taxes by petitioners accumulation of earnings and profits, instead contribution of the same. CTA denied the petition. CA Affirmed

CIR VS. CA

Young Men's Christian Association of the Philippines, Inc. (YMCA) was established as a welfare, educational and charitable non-profit corporation." YMCA earned, among others, income from leasing out a portion of its premises to small shop owners and parking fees. The CIR issued an assessment to YMCA , for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. YMCA protested. However, CIR denied the claims of YMCA. YMCA then filed a petition for review at the CTA. CTA ruled in favor of the YMCA and stated that the leasing of the facilities to small shop owners and operation of the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the YMCA. CIR elevated the case to the CA. The CA initially decided in favour but thereafter reversed itself.

PANASACOLA VS. CIR

Q: What is taxable income? How is it computed? The Supreme Court held that the 1997 Tax Code could not be applied retroactively. What the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid. In other words, since the 1997 Tax Code took effect on 1 January 1998, the increased amounts of personal and additional exemptions indicated therein could only be allowed as deductions from an individual taxpayers income for the taxable year 1998 to be filed in 1999.

Section 31 defines taxable income as the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the NIRC or other special laws. As defined under Section 22(P), taxable year means the calendar year, upon the basis of which the net income is computed under Title II of the NIRC. Section 43 also supports the rule that the taxable income of an individual shall be computed on the basis of the calendar year. In addition, Section 45 provides that the deductions provided for the taxable year in which they are paid or accrued or paid or incurred. In this case, the Supreme Court had occasion to explain the nature of personal and additional exemptions as fixed amounts to which certain individual taxpayers (citizens, resident aliens) are entitled. Personal exemptions are the theoretical personal, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. They are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer.