China Banking Corporation v.

CA DOCTRINE: If the shares of stock are held by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets, and thus not deductible from gross income. FACTS: Petitioner China Banking Corporation made a 53% equity investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with "deposit-taking" function. The investment amounted to P16,227,851.80, consisting of 106,000 shares with a par Value of P100 per share. First CBC Capital later became insolvent. and with the approval of Bangko Sentral, petitioner wrote-off as being worthless its investment in First CBC Capital in its Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income. CIR disallowed the deduction and assessed petitioner for income tax deficiency. CIR held the view that the worthless investment should be classified as "capital loss," and not as a bad debt expense there being no indebtedness to speak of between petitioner and its subsidiary. The Commissioners disallowance was sustained by the CTA. When the ruling was appealed to the CA, the appellate court upheld the CTA. ISSUE/HELD: WON the equity investment of CBC which has become "worthless" is deductible from gross income: NO RATIO: An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a capital asset. A capital asset is defined negatively in Section 33(1) of the NIRC. Thus, shares of stock; like the other securities defined in Section 20(t) of the NIRC, would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. Section 20(u) of the NIRC defines a dealer in securities. In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets. In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary corporation of petitioner bank whose shares in said investee corporation are not intended for purchase or sale but as an investment. Unquestionably then, any loss therefrom would be a capital loss, not an ordinary loss, to the investor. The loss cannot also be deductible as a bad debt. The shares of stock in question do not

constitute a loan extended by it to its subsidiary (First CBC Capital) or a debt subject to obligatory repayment by the latter, essential elements to constitute a bad debt, but a long term investment made by CBC.

CIR v CTA and Smith Kline DOCTRINE: A multinational firm doing business in the Philippines can claim as its deductible share a ratable part of overhead expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational corporation. FACTS: Smith Kline and French Overseas Company, a multinational firm domiciled in Philadelphia, Pennsylvania, is engaged in the importation, manufacture and sale of pharmaceuticals drugs and chemicals. It is licensed to do business in the Philippines. Among the deductions it claimed from its gross income was P501,040 ($77,060) as its share of the head office overhead expenses. In its amended return, there was an overpayment "arising from underdeduction of home office overhead." It made a formal claim for the refund of the alleged overpayment. Without awaiting the action of the CIR on its claim, Smith Kline filed a petition for review with the Court of Tax Appeals. The CTA ordered the Commissioner to refund the overpayment or grant a tax credit to Smith Kline. The Commissioner appealed to this Court. ISSUE/HELD: WON the refund should be granted: YES RATIO: Where an expense is clearly related to the production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment. The overhead expenses incurred by the parent company in connection with finance, administration, and research and development, all of which direct benefit its branches all over the world, including the Philippines, fall under a different category however. These are items which cannot be definitely allocated or Identified with the operations of the Philippine branch. For 1971, the parent company of Smith Kline spent $1,077,739. Under section 37(b) of the Revenue Code and section 160 of the regulations, Smith Kline can claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational corporation. The weight of evidence bolsters its position that the amount of P1,427,484 represents the correct ratable share, the same having been computed pursuant to section 37(b) and section 160. Decision of CTA is affirmed.