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    217, Enumerate y1EWER “TaxATION LAW RE pt transactions is of no of the eight percent (84 nce ate reac at sins ax since the nature of is business raneione i VATo-exempt (RR Ne 8-18) the individuals who are not qualified to avail of the income tax ral. dividuals are not qualified to avail of the 6) income tax rate ion income earners; of Php’, ight percent (8! (bo) VAToregitered taxpayers regardless ofthe amount of, gross salesreceipts and other non-operating income; receipts and ol Php3,000,000,00 VAT threshold; (4) Taxpayers who are subject (0 Other Percentage ‘Taxes under Title V of the Tax Code, as amended, except those under Section 116 of the same Title The following, among others, are subject to Other Percentage Taxes under Title V of the NI Domestic carriers and keepers of garages; Franchise grantees; Operators of overseas dispatch, message, or conversation originating from the Philippines; (4) Operators who are subject to amusement tax; and (6) Agents of foreign insurance companies; Partners of a General Professional Partnership (GPP), i distributive share from the GPP is already net of costs and expenses; and (Individuals enjoying income tax exemption such as those registered under the Barangay Micro Business © 7 CHAPTER TW, FORE: NCOME TAXATION INCOME TAKATION oe Enterprises (@) MBES), allowed to avail re SCE the taxpayers are not under diene ble or mukipte ax exemptions laws, unless law. (RMC No. so.apigyt's ‘Pell provided by ¥- CORPORATE INCOME TaxaTION 218, For income tax purposes, what are corporation? “General professional partners by persons for the sole profession, no part of engaging in any trade orb ‘The CREATE Act clarified that a “one-person corporation” created pursuant RA. No. 1182, or the Reed Corporation Code of the Philip led in the list of corporate taxpayers, 219, How is an unregistered partnership clasified under the Tax Code? Unregistered. partnerships are clasifed as corporate taxpayers. The term “corporation” includes partnerships, no rmaiter how created or organized. Hence itis axed asa corporate taxpayer. 220. Considering that partnerships are clasified under the Tax Code as ‘corporations, are partnerships subject 1 income tax in exactly the Same manner as a corporate entity? Generally, yes, because both are taxed a corporations. The income received by the partners are treated as dividend income ‘subject to final tax, considering that a partnership is deemed to gl TaxaTION LAW REVIEWER be a corporation. However, instance, und be based only on the by the board of dit p if the following money, property, or ind ong the partners. to parcels of land from ind from Roque. The first two parcels of land sual and Dragon in 2019 to Marenir Development three parcels of land were sold to Reyes and there an unregistered partnership subject to Pascual and Dragon entered money, property, or industry ended to divide the profits insactions order to constitute an unregistered partnership. In the instant case, Pascual and Dragon bought two parcels of land in 2016. They did sell the same nor make any m3. 224. CHAPTER Ty rR ‘The sharing of partnership, wheth joint or common right a cleat intent to form personality different from freedom of each party o transfer (Pascual and Dragon, Come 78133, 18 October 1988), What is a co-unershp anregistered partnership? nl propery. "of lien Reems Gi Ne ? Is a cooumership considered an A and B borrowed a sum of money from their father which, together with their own personal funds, thy wed in buying sever real ‘properties. They eppointed thir brother to manage their properties for preservation of the common fund or e acquired by them. | Mii 262 rAxATION LAW REVIEWER Said common fund wa already in existence hem pro indiviso. Th by them ri owed 8 is moe, a bls said common fund, thereof in order toes ierely in one transactioy b. They invested the same, rely in ction, butina series of transactions resaid tots were not devoted to residential peo o al uses. The properties and : ive to said propertic Ghecks, Thus, the allairs relative to said properties hhave been handled as if the same belonged to a corporation or business enterprise operated for profit, d. ‘The foregoing conditions have existed for several years. Clearly, they have every intent to establish a partnership, ‘They are, therefore, liable for taxes as a corporate entity. 225. Are all partnerships subject to corporate income tax? All partnerships, except general professional partnerships, are subject to corporate income tax because they are considered, corporate taxpayers unlike an ordinary as a corporation for is not itself an income ‘ome tax is imposed not ‘on the professional partners is tax exempt remselves in their individual capacity computed. f partnership profi, respectively, each of the individual p: J G.R. No. 109289, 03 October 1994), 27. 208. 230. caren fessional Partnershiy {Note Wile 1 general projeina Subject ones test PRE incoe tempt may be Beta of era VAT epg tay ence ioe Whats the composition ofthe gros (partnership? he erosncome ofa general professional All income earned from the practice of form part of the gross Pili ofa profession shall partnership (GPP), Feceipts of the general professional What are the allowable ded partnership? Section 26 of the NIRC provides that shall be computed in the same manner asa corporation” ‘As such, a GPP may claim ether the itemized deductions allowed under Section 34 of the NIRC, or in lie thereof it can opt to aval of the optional standard deduction alowed wo corporations in claiming the deductions in an amount not exceeding 40% ofits sgross income. (RR No, 08-18) luctions of @ general professional “for purposes of 2. What is the composition of the grass income of a partner in a ‘general professional partnership? Each partner shall report as gross income hiviher distributive share, actually or constructively received, inthe net income of the in the same manner asa corporation, (Section 26, NIRC). Is a partner entitled to allowable deductions against hisher distributive share? ‘The partners comprising the GPP can no longer claim further deductions from their distributive sharein the net income cof the GPP since their distributive shar from the GPP is already net of cost and expenses. (RR No. 08-18). 231 232, wy REVIEWER aati general profesional partnership Byway ofan exception rrners can wiz itemized adopts itemized deduction eed by the general profesional Te nO acenatio when a part Scena io hisher distributive share ares Ti ae deducons with T= No, 16-2008, as ane) : S vine chase teegt percent (6%) income ax OBON ith rape thie ar? ne isibutve shares ofthe partners Fost expenses hee (8) income tax rate 0 season, Ti the eight percent (8%) income (2x rate option is no ofa GPP are al 1A; B, and C, all lawyers, formed a partnership called ABC Law ‘Firm co that they ean protce their profesion as lawyers. For the sear 2012, ABC Law Firm received earnings and paid expenses, ‘among ohich areas fll: Earnings (1) ProfessionaUlegl fees from various clients (2) Cash prize received from a religious society in recognition of the exemplary service of ABC Law Firm (3) Gains derived from sale of excess computers and laptops Payments (D) Salaries of office staff (2) Rental for office space (3). Representation expentesincured in meetings with clients Questions: (a) What items in the above-mentioned earnings should be {included inthe computation of ABC Law Firm's gross income? Explain. (6) What items in the above-mentioned payments may be considered ax deductions rom the gros tcomeo feed dtu rom te gro nce of ABC Law if any, is insofar any, is B, and C as individual PAR Of ABC Law Fi eal fes from tax. Rather, the amount the gross income, The ga ‘and laptops should The law firm, being formed as. gen ited to the same de =p ar dll they bing nthe ary and necesary expenses cued in their profession. Sat partnership. Each partner is based on their respective taxable income as an individual taxpayer. sgaxarion LAW REVIEWER Joint Ventures 233, Arent tres om ‘As a general rule j considered corporate txPayers and comortams sujet (01087 ‘entures and consortiUms are sptums are subject (normal Jong ventures oF censor corporate income tax exceP fa) Joint ventures oF co renderaking coms! ures oF cso sns formed for the purpose mn projects OF rciums engagingin petroleum, “i other energy operations Ce ee 08, coment a ty an operalng consort agreement pursuant eon with Une Government (Scion 22(B), NIRO). What are the requirements for tax exempion of joint ventures sndertaking construction projets? “The requirements for the implementation oftax exemptions onjpint venturesunderaking construction projects are as follows: @) 234. 1 venture or consortium should be: \dertaking of a construction project; purces by licensed censed as general For: Should involve pooling of of Trade and Industry (DTI); (8) These local constructos faciors are engaged in iness; and “) ‘The joint venture itself my licensed by the PCAB of the D’ For joint ventures involving foreign contractors, ‘member foreign contractors should be: ©) Covered by spec PCAB of the D’ icense as a contractor by the struction project is certified by the te Tendering Agency (government agency) aa freign financed or internationally funded project. (RR No, 10-12) 235. 236. courrer vo, come ¥ Comme mG TION Absence of any one nquaton an et ements wl re What are the lax obligation in undertaking construction projec ie 2D it ventures The joint venture, bein ibe Joint venture, being exempt from corporate income tas isnt required equates aa Spe but the co-venturers are separately subject to the regular corporate income tax imposed under Serine 2A) of the Tae Code of 1997, as amended, on their taxa taxable year respectively derived by them nwtruction prof income during each from the aforesaid ‘The respective net income ofthe. eg inetepe co-venturers derived from the joint venture project is subject to the creditable withholding tax imposed under Section 57 of the Tax Code. Thus, before the joint venture distributes the net income of the co- pursuant to their agreed profisincome shari the tax based on the net income ofits co-venturers. (BIR Roling No, 13-2018). ‘Malayan isthe owner of a parcel of land. It entered into a contract with St, Francis Realty whereby the partes agreed tht St. Francis will construct @ building for condominium units and commercial spaces onthe said land of Malayan. The parties wil then share in the saleable units. When the building was constructed, the parties executed a Memorandum of Sharing, specifying which units shall Fealbcatedtocachop tiene Mie Hh we Questions: (a) Did Malayan and St. Francs create a separate corporation {for tax purposes? (8) Discuss the income tax and VAT consequences of the foregoing. Answers: (a) Malayanand St. Francisdid notcreatea separate corporation for tax purposes. A joint venture to undertake construction projects is not a taxable corporation under Section 22(B) of the Tax Code. For as long as St. Francs is able to comply with the requirement that have an accreditation from the Philippine C ‘Accreditation Board (PCAB) of the Department of Trade and Industry (DTD), the agreement between the parties forthe construction of y REVIEWER “TAXATION LAW EVIE 268 snym nits and commercial spaces ondomini the building or con ont venture, as it Was created for a construction projec units t0 partners of ied for the purpose of not subject to income received a return on 1e allocation of condominium © ture or consortium | 3s. The owner of th inary course of business 2 ibn his property neither sel Darters, sar eaages goods or properties nor renders any service or er esneguet dostiony he us allocated to them shall be subject to enturersoftheaTeas : co-venturersof the lity attaches, ofl income tax and VAT, asthe touchstone by then, (See Malayan Insurance Company, Int. o. St. Panis Square Realty Corp, CAR. Nos, 19891617 @ 19892021, 23 July 2018). Normal Corporate Income Tax 237, What isthe tax implication of income from business or trade earned by a corporate taxpayer? ‘Asa general rule, income derived by a domestic corporation ora resident foreign corporation issubjectto the normal corporate income tax, which is also called regular corporate income tax, isat arate of 30% of the taxable income of ‘ome derived by a non-resident foreign corporation is subject, 310% final withholding tax based on the corporation's gross ‘Motes: In determining the taxable income of corporations, al ‘exclusion, precious dace in this Chae, shall be removed saleaciis a deermine the gras income, From the gas income, the various items fellate deductions, aso as previously ascused inthis Chapter, hal be deduced a dlerine he acl income. Theta income is then mile by tie normal tax ae of 3% ena emai ps imax oer ee bis al x a goons fom ning ath popes ee peo ‘eal al pp ocean Sepnenty ‘ole also thatthe CREATE Act introduced a to-tiered approach to income taxation of orpraions beginning 1 Ju 2020, nth the general income tae caneren yo, tNconn F coRronaTE Nou TION ar situated), hick shal ‘axa income) Porations that are corporate income tex rate Not subject othe normal tax rates (€g., proprietary edu hospital corporate income tax, corporat ‘enjoying preferential tutions and non-profit hese corporati subject to the normal Tax Exem} at 239. What are the corporations exempt from tax under Section 30 of the ‘IRC? ‘These are the entities entitled to income tax exemption, provided they comply with the tests under Section 30 of the NIRC: @ ©) © Labor, agricultural, or horticultural organization not ‘organized principally for profit Mutual savings bank not having a capital stock represented by shares, and cooperative bank without. capital stock organized and operated for mutual purposes and without profit, A beneliciary soci for the exclusi order, or association, operating benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid assocation or a non-stock by employees providing for the ‘or other benefits exclusively t0 ‘or association, oF non-stock corporation or their dependents; R spuxartoN LAW REVIENE enefit of any member, fic person merce, or board of “organized for profit, promotion of social ich or irrigation company, lephone company, oF like aaacaion ofa purely ol characte ly of assessment umber for the so ‘meeting its expenses; and -rmers' tit growers, o like association organized Ind operated a2 sls agent fr the purpose of ting the products ofits members and turning ceeds of sal regardless of the Ibe subject to income tax. CHAPTER TWO. 1 FConPORATE OOM ra ATION " , Pursuant 10 Section 30 of the Ni 240" that are the 0 tests in dou ‘The two tests in determin under Section $0 ofthe NIRC are ement 9 tx exemption (a) Organizational This requires that the or a governm ie Primary purpose is exclusivel described in Section 30 of the NIRC. ac he "Bization of the institution refers {0 its corporate form, as shown by its atides of incorporation, ‘by-laws, and other’ consituive documents. Secon 30(E) of the NIRC specifically requires that the corporation or association be non- stock, vi “one where no part of dividends any profit “obtained shall, whenever necess furtherance of the pur an incident to its operations ary oF proper, be used for the se oF purposes for which the corporation was organized” However, any profit by a charitable mn must not only be plowed back “whenever necessary o proper,” but must be"devoted ‘or used altogether tothe charitable object which itis intended to achieve.” (CIR v. St, Lakes Medial Cnter, {nc G.R. Nos. 195809 and 195960, 26 Sepember 2012). (©) Operational test — This test prescribes that the regular activities of the corporation or association bbe exclusively devoted to the accomplishment of the purpose specified in Section 80 of the NIRG. A corporation or association fils to meet this test if a substantial part of its operations is considered an activity conducted for profit. (RMO No, 38-2019). for an entity to qualify as @ non-stock and/or non-profit ne porting fo am de Son 90 of the NIRG, its earnings or assets should not inure to the benefit af any ofits trustees, organizers, offices, members, or any specific ‘person. Give examples of what are considered “inurements” that ‘would disqualify an entity from the tax exemption? raxaTiON LAW REVIEWER viparements” tat would diSquaiy py inure scion 30 ofthe NIRC arg tion un tion, salaries, or honorarium Some examples of ety from the ta e86 . he paymentofcompens se agustees OF organizers ) @ rnd other benefits exclusive! tion to any person or entity (except donations (2) Donation to any Ps med for the purpose) (The purchase of goods or services for amounts in eae atthe ir market valve of uch goods or value of such services from an entity in which one or more of its trustees, officers, or fiduciaries hasan interest; and and sasuction ofall : ted to its trustees, ‘purposes earned income from selling handwoven products. The ‘income was used for charitable purposes. Is the income exempt from disposition of thei conducted for pro Rome, any income earned from an U be subject irs iy and ton that speak of exemption, the ‘intron oes Tera kr for ado aes tii srry i wr ape tuition fees and from leasing a portion ofits premises to various Concesionires of fond, bos od hospi (@) Cam the City Treasurer of Caloocan City collect real property tear an han eet aloe aes (8) Is the income earned by San Juan University forthe year 2017 subject to income tax? Explain your answer. (2017 Bar) ‘Answers: The Gity Treasurer can collet real property taxes on the portions ofthe properties leased to various concessionaires ‘of food, books, and school supplies because these porti rectly, and exchusively sed for religious, ding js exempt from tax because suc educational purposes Wy REVIEWER TAXATION 0 of the NIRC, San Jug 44, non-profit corporation, donated ing 245, CMI Schoo, Inc 6 a ae ated in the Municipality of Cuyapo, le land sells the thee parcels of ile land to Puregola tock cr , will SLC University be Table for capital gains tax? Explain your answer. (2017 Bar) ject to capital gains tax ifthe proceeds ly, and exclusively used for educational purposes, shall be exempt In this case, as long as the proceed of the sales will be directly, and exclusively used for educational purposes, ie same will be exempt from ta. ons and hospitals which are ir taxable income, except Interest from depositsand yield or any other monetary from deposit substitutes, and from trust funds 247. cHarren E-coRvoRATS (COME: NCOME TAR a ® feo from thes stock exhanee hares of oxk na rade derived under, Alepott systems ST Y€ expanded foreign currency Inter-corporate d from the le, exchange, or dor buildings * exchange, 8. St, Luke's is a hospital organized as @ non-stock, profit corporation. The Articles of Incorporation g Lape sr ert nt should be given to any person or group of persons Frits services to paying patients during the year, the hospital received more than Phpl.7 bilion. Of this amount about Pip.3 Billion were used for he hospital in rendering services othe said paying services to charity patients, St. Luke's spent around The remaining amount was reinvested by St. Luke's {0 improve its facilities for al its patients. Is St. Luke's subject i ied as an income tax-free charitable corporation under Section 30(E) ofthe NIRC? ‘St. Luke's is subject to the preferential tax of 10% based on its taxable income. To be an income tax-free chatital Section 30(E) of the NIRC, a charitable th the following requisites— a under comply {must be a non: ck corporation or association; It must be organized exclusively for charitable purposes; WER _yaxaTION JAW REVI 276 ctvties conducted for profit. They ‘other way, There is “purpose to ma cost” of services conducted for p "No, 195909, 26 Seplember 2012). Income Tax of GOCCS 248. Are government-owned or controlled corporations (GOCCs), ‘agencies, or instrumentalities subject to income taxi s, agencies, of instrumentalties owned hall pay normal taxable income. However, be exempt from tax: Al corporat led by ‘corporate income tax upon uder P.D. No. 1869, as amended, PAGCOR's income is classified me from its operations conducted under its income from its operations and from granting the license to operate casinos to PAGCOR's contractees and licensees, CHAPTER ny FCORPoRA 7 similar ny tl mene, operation 10m ganing operations”, ee ome from Cre related sein nd ted vie are subject income from gai ofl ind of tes Ong eg ee) fanche tax sie ar tthe me on the aed Subsequently when he Nine of gpp nn ‘The action of the BIR is proper, but income from other related serves the normal corporate income tx wih ooo gaming operations; corporate income tax with rey related services PAGCOR is no longer exer exempt from corporate income tax as it has been effectively omited from the it of GOCCs that exempt from it In this case, PAGCOR filed to proved exe PAGCOR to pay corporate income tax; hence, ‘or removal of PAGCOR from exemption from the payment ‘of corporate income tax. (Philippine Amusement and. Ganing Cosporation v. Bureau of Internal Revenue, G.R. No. 172087, 15 ‘March 201 However, PAGCOR's tax privilege of paying five percent ) franchise tax in lew of all other taxes with respect to its come from gaming operations, pursuant o P.D. No. 1869, as 3t repealed or amended by Section 1 of R.A. No. effect of Section 1 of RA. No. 9837 is to remove PAGCOR’ tax exemption concerning income from other related services. PAGCOR's income from gaming operations remains to be subject to the five percent (5) franchise tax only, pursuant axaTiON LAW REVIENER whl risa special laws 1 abjet to corporate income tay ng Crp. v. Burea of Inter to the PAGCOR oie related serves ‘nly (PhiipineAmasenent 2 vou Of Ne 2302, ing opera incom Jr iron of alkinds of texes. The PAGCOR s tions ranted for earnings derived ha dere franchise special from yme or otherwise, as feet any form ad Ere a te Fromtheoperats cone the pay 9 an of charge foo ee, 2 cope), estat ne PAGCOR o ort a 9 : eens eration of the sino) entored ob conducted ander PAGCOR Franch Bloomber tes the Solaire casino, under a license from PAGCOR. Consequent, iis poying a fie percent (5%) franchise tax, which it elaims tobe in leu ofall forms of taxes such as the te income tax and VAT. The BIR disagreed, arguing that tax exemptions arent looked upon favorably. Is Bloomberry Ble for corporate income tax and VAT for its casino operations? Bloomberry isnot liable for corporate income tax and VAT uding VAT and corporate income tax. +r amended nor repealed by any subsequent Contractual relationship paasino(s). Thus, it must “AGCOR, upon payment shall likewise be exempted ‘orporate income tax (Blomberry Resrs and 4 GR. No. 212530, 10 Industry or ecg” pa BCDAis able fricome tren als ofpope i exemption previously granted tothe BCDA tea ee IIRC. Te the argument ofthe ooo ened ake by the ‘The argument does not persuade. Section 27 of the NIRC Section 8 of RA. No. 7227, as amended Pecial law. Asa rule, a general law canne impliedly repeal a special . : Secon 27 governs erations, agencies, or by the Governinent ofa few, and requires that GOCCs income tax. On the other hand, amended by RA. No. 7917, 5 disposition of the properties enumerated therein and their sale proceeds. The law exempts these sale proceeds from al kinds of fees and taxes asthe same Jaw has already appropriated them for specific purposes and for that between a gen For a special law re an a general law does. Verily, law. (Commisioner of Inernal Revenue x. Bass Conversion and Dewlopment Authoiy, G.R. No, 217898, 15 January 2020). ewe operating as yet tax at 10% ond roprietary 255. 256. ‘tile a rem (@) Fisethat ste tated undcra pecs oe ‘ such those in acinar Bee ihe PEZA law and the Base Og oe Development Act, res ly). (RR No. 9.98). Discuss the rule on carry forward of excess MCIT. Any excess of the mini normal income tax sl the normal taxable years lat the crediting o against the normal tax only. An another MCIT. (Section 271 mediately succeeding A the excess MCIT is IT cannot be credited aginst Can a corporate taxpayer seek relief fom the MCIT? Yes, the Secretary of Finance, the Commissioner, may suspend in submission of proof by the aplicantcorp. by the Commissioner's authorized rep corporation sustained substan following— (a) Prolonged labor dispute — The te from a prolonged labor dispute” meat from a strike staged by the employees for more than six months within a taxable period and hich has caused the temporary shutdown of business operations, oration, duly verified resentative, that the ‘on account of any of the substantial losses (0) Force majeure — means a cause due to an ives force as by an “Act of God lke lightning, earthquake, storm, flood, and the ike. Tis term shall also include armed conflicts ike war or insurgency, clude subs 3 for other economic. reas (3), NIRG; RR No. 9-98, as amended) eviEWwER bw -paxaTION 1257. KKK Corp. sect 2014, Ms, Searing 1 ee ie anna vate of ERK CP A, acon tht ih ream of the coronene corporat iNeOme Laxor he shoul preper® ; nina copra ae your ade? As Ms Ps sapere regular corporate inco cons between Bar) What are the distinct ncome tax? (2015 Bar) nd minimum corral avs her to prepare an annua payment for regular corpora we that MCIT is not yet applicable ted a four-year grace per rT, MCTT is imposed beginning on the jfamediately following the year in which th aable yea menced its business operations, The such corporation eto ts business operations 2013, year of commence besoning the taxable year ote apliate MJ wil prepare Tre ort ine nd py sich tween regular corporate income tax and, 1um corporate income tax are: {sto rate regular income taxis pegged atthe rate of 0% while minimum corporate income tax is pegged two percent (2%) (2) sto tax base, regular corporate income tax is based ‘on the net taxable while minimum corporate income tax is based on gross income, (8) Astoperiod of applicability, regular corporate income tax is applicable once the corporation commences its operations, while minimum corporate income CHAPTER Ty on F CORPORATE cou RATION “ cable be sinning 1y follow ® pension, ia comp business reverses, Gy s. On the Provide forthe suspension ofthe regular income ta, Accumulated Tax 258. What is improper eccumaaed earnings a? Properly Accumulated Earnings Tax (IAET) is a tax equal t0 10% of the improperly accumulated taxable incone of a corporation that is formed or araled for the peer avoiding the income tax with respect wa shareholders of any oth and profits to accumulate {Section 28, NIRC). Note specify thatthe TAET apples o No. 02-01 requires that forthe emp it must be a domestic corporation, for the purpose of shareholders or the oration by permiting earnings ing divided or dstbuted. ‘Tax Code itself does not 1 domestic corporations, RR eration tobe subject to LAB, through corporate do not declare ‘sare not paid on the undeclared dividends rcholders. The tax on improper accumulation ‘of surplus is essentially a penaly tax designed to compel corporations to distribute earnings so thatthe said earnings by shareholders could, in turn, be taxed. (Cyanamid Philippines, Ine 1. Court of Appeals, G.R. No, 108067, 20 January 2000).. the CREATE Act, the provision in the NIRC concerning the Imposition of he Improperly Acusalaed Earns Tax ws repealed) When will there be improperly accumulated earnings? 2 \e whether profits are accumt re meey ie proof aero ‘speculative and indefinite purpose will not suffice. The mere rep ie problem andthe discussion of posible and 260. Give examples of proper accumulation of earnings. te accumulation of earnings for the ‘Alowance for the increase in the accumulation of » 100% of the paid-up capital of the as of Balance Sheet date, inclusive of 1s taken from othe years; Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body; Earnings reserved for building, plants or equipment acquisition a5 approved by the Board of Directors or ‘equivalent body; Earnings reserved f covenan 261. 262. 263. cour F comromre ncaa RUAN . (©) Eavaings od Lard bY lav oF applicable regulations to 3 the corporation or in respect of which tion again case of subsidiaries of fo eign corporations in oF reserved for invesinen within he can be proven by corporate records an documentary evidence (RR Na 02.01) Whatarethe requisites forthe impos haart eis frte imposition inpraperyaccumulaed Improperly accumulated earnings tax wil (a) The taxpayer isa closely held domestic corporation; (0) Theres improper accumulation of earnings; and (0 There is no reasonable need that will need that will justify the accumulation of profits. The term “reasonable needs of the business are hereby construed to mean the immediate needs ofthe busines, including reasonably ‘anticipated needs, otherwise knowin as the "Inimediacy Test” For purposes of imposing the improperly accumulated earnings tax, the accumulation of profits for the reasonable needs ofthe business is allowed. How can the “reasonable needs” of the business be determined? 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«alled "Immediacy Test” ied the words “reasonable needs of the business” to needs of the business. It was generally held he 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. (Cjanamid Philippines, Inc v. Court of Appeals, et a, GR. No. 108067, 20 January 2000) What are closely-held corporations for purposes? hheld corporations are those corporations at least of the outstanding capital stock or at least 50% of bined voting power ofall classes of stock entitled to q for not more than 3p tion engaged in th 188 of 264, Bria, Incy 0 Korean OPN, ahished a branch office iy manufacturing elec rhe philippine branch constructed q the Philippines in 2010 aguna, and the contruction mannan Pen i eal operations in the Laguna Play, ion, the Philippine branch hag mount exceeding 175% of its capital, a heat i at a arwaicer is concerned that the BIR might hoig ee pe oa er it profits to accumulate Beyond cE ne ee ttt aoa ni jomestic corporation. “anch offce, which isan extension of the personality poration. ronmental circumstances ‘of commercial dealings and hat extent, the performance works or the exercise of some ofthe functions normally ressive prosecution of commercial gain or ss organization. In ordet ded as doing business yofconductand intention ere 09 : : Conn = An example of a fo ni Philippines is when tse "PO dong business inthe Ns ice in the Phil mec on ref ele Be me tax purposes, will the establishment i corporation ofa subsidiary in the Phlppinsginesiaros ene corporation of ssh pines give rise toa resident No, it will not. Seting up a Philippi incorporation under the ans othe Pitipines na iary has a separate and from the parent company, A parent company may be the sole owner, or one of the several ofthe subsidiary. Hence, the establishment ofa subsidiary se to a resident foreign corporation. Since we oration test for income tax purposes, the ty of foreign corporation shall be regarded ate entity—a domestic corporation—yhle the parent ion shall be regarded as a separate taxpayer—a non- foreign corporation. 267. ZZ Corporation, a corporation based in Delaware, USA, establishes ‘ZEPhilippines, a branch office herein the Philippi tax purposes, what is the classification of ZZ-Philippines? What ‘about 22 Corporation? 1g with head office-branch setup, the rule shaped prudence is that we follow the single entity concept wed office and the branch are considered as one juridical personality. The b mere extension of the he hhas no separate and dist 268. 265 spaxaTiON LAW REVIEWER jnciuding its Philip poration Gnetuding ts Philippine oie, 22 Carport 2 ieredasone resident forign Pippin’ ebotharesidentandanon. A singlecorporaeentiy aN naure ofthe particular resent corporation 4eRe707E "pice and the olfice branch involved. The heat ich, under both Philippine eign corporation because wid ilppines. (Marubeni Cop. i GH No. 16573, 14 Selene What is the tax implication of the ar orcign corparation from business oF : earned by a resident foreign rule the income ce era sabe sujet 938 ncome daeerite of 30% ofthe taxable income derived from all sources 1 ne Philippines Arles dealing with normal corporate me tax and fil ‘ax imposed on the income of om wise apply to resident foreign corporations. Or income ofa resident foreign corporation that is subject to normal corporate income tax may be subject to minimum corporate income tax, is fifth year of operations and onwards, the (Mate: Under the CREATE Act, effective 01 July 2020, resident orign corporations ae subject o 25% income tx om ter tal income. Further, the ‘provision giving corporations he tion tb aed at 13% of gros income as pected) The Tax Code provides that an international carrier doing business in the Philippines shall pay a tax of tuo and one-half percent (2 ‘A%e) on its “Gross Philippine Billings.” What is meant by “Gross Philippine Billings"? “Gross Philippine revenue derived from ca is" refers to the amount of gross “of persons, excess baggage, cargo. 270. The Gross Phil curren ny oo car 7 FORTE TION and mail origina i Point of transshipment shall form hippie ling Sem yea lo pe fg Xphine Bilings (CPB) Tax covers gross revenue Demurrage fee is the allowance or compensation due to the maser oF oer ofa hip, by the Boge ee ene the vessel may have been detained beyond the time specified or implied in the contract of affreightment or the charter-party. On the other hand, detention occurs when the consignee holds on to the carrier’ container outside ofthe port, terminal, or depot beyond the free time that is allotted Under RR No. 8, demurrage and detention fees of GPB. For demurrage fees the detention fees and other charges “relating to outbound cargoes and inbound cargoes are all considered. Philippine-sourced income of international sea carriers they being collected for the the Philippine income tax under the regular rate.” jon of demurrage and detention fees cima Foonrone naa Tin ing rights in the Philippines so land re 271. A foreign cnn carrier has 0 ending OA opine income sure Arrival Airways (SAA) is a foreign corporation, organized een ra ee mn el nat operat tin Philippine triton, o service assengers goes era og “barking from Philippine airports. The firm i represented inthe Philippine by its general agent, Narotel : ugh Narotel, and these tickets are the Philippines. The total sales ‘it only serviced passengers. of the income from its ti iipines. Hence, no income tax should be imposed onthe same protest meritorious? Explain, (2019 Bar) round thet the alleged deficiency income income derived exclusively from is the activity that produced income of an offline carrier in 5, not the service rendered to a “ AXATION LAW REVIEWER \0% normal tx Tate is branch profit remittance a3? 2 ht en penitent 15% ofthe Branch prot earmarked tobe remitted by a resident Hea appt its ead office. (Section 25(4)(9) NERC), ign corporation to smpostion of tax 08 Branch pro 276, What isthe rationale for imposition of Profits remitonert — was conesve branch profit remiuance tx empl peguntne ic incometax burden on ON Orpo ainaining nd, hnoffices and orga corporations wh tock are owned by vrta NT SA v. Court of tax? 278. Kria, Inc, a Korean corporation engaged in the business of manufacturing electric vehicles, established a branch office in the Philippines in 2010. The Philippine branch constructed a ‘manufacturing plant in Kabuyao, Laguna, and the construction lasted three (3) years. Commercial operations in the Laguna plant began in 2014. Jn just two (2) years of operation, the Philippine branch had renittable profits in an amount exceeding 173% of its capital. However, the head office in Korea instructed the Branch not to remit ‘he profits tothe Korean head office until instructed otherwise. The branch chief finance officer is concerned that the BIR might hold ‘he Philippine branch liable for the 10% improperly accumulated éarnings tax IAET) for permiting its profits to accumulate beyond reasonable business needs, ae ‘ens 279, 280. CHAPTER Ty TCOkRe ANS |NCOME TAXATION INCOME TAXATION ms (a) Is the Philippine branch ‘atder the of Kria subject Sirounstances tated above? 10% ET (0) Is it subject t0 15% by, (2018 Bar) bch profit remittance tax (BPRID? answers: The Tegebins branch of Kia isnot subject to 10 IAET. Improperly accumulated earni imposed on clcy-held domesiccrporsions Clery ie resident fregn corporat RT Bee (©) Kria is not subject o BERT. liable for BPRT. What is an offshore banking unit? Offshore Banking Unit (OBU) means a branch, or affiliate of a foreign corporation whi authorized by the Bangko Sentral ng Pilipinas (BSP) offshore banking business in the Philippines. (RR No What is the income tax implication of the income earned by an offshore banking unit? ‘The income derived by ofshore banking units authorized by the BSP, from foreign currency transac other offshore banking units, local comm luding branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units shall be exempt from all taxes except net income from such transactions as may be specie bythe Secretary of Finance, upon recommendations of regular income tax payable by banks: provided, however, income derived from foreign currency loans granted to transact business be subject only to a final tax NIRG, as amended by R.A. No. 9294). CREATE Ache foregoing tcxempion ond preferential ax ‘ere eae.) ie of 10%. (Section 28(AN-4), Ea sea reionator are weoageaTe( a. 281, What isa regional shall mean a branch, 1, communications, ang tetates, subsidiaries, or branches i aver foreign markets. (Sectign 22101 H? rating headquarter (ROI 282. What is regional operating mean a branch ‘and componé ‘and procurement control and sales promotion, finance advisory services, marketing 283. What isthe income tax implication of the income earned by RAH and ROH? Regional or area headquart wo income tax. On the oer hand, er the CREATE Ae, ter shal eal What isthe income tax 01 January 2022, Regional Operating onfrae income tax at 25%) ication ofthe income earned by a non- 284, of a non-resident foreign Ye final withholding tax, except with respect tothe following income: imposed on sale of unlisted shares, final tax atthe rate of five percent (6%) forthe frst Php100,000.00 net gain and 10% for a Cone TNO: INCOME taxaTiON RATE INCOME TAXATION * theexcessofthe Php100,000,00 net ga {Re net capa gains realized dining he eee fromthe se pens Faled during the able year arter, exchange, or other disposition of shares of stock in gd OF other disposition of this is not affee eESSE corporaton. (Note that the ca tax has been adj toalso 154 OS Pia gains tax has been adjusted (©) Interest on fore withholding tax ign loan, which is subject to a final atthe rate of 20%; © which is subject to a final € of 15%, subject to the condition 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 equivalent 15%, which represents the difference between the regular income tax of 30% and the 15% tax on dividends. (See previous discussions on the Taz ‘Sparing Rule concerning corporate dividends) (Section 28(B), NIRC)." 285. Enumerate the special non-resident forcign corporations and the ‘income tax implication of their income, ‘The special non-resident foreign corporations are (a) Non-resident cinematographic film owner, lessor or distributor, which is subject to 25% final tax on its gross income from all sources within the Philippines. (b) Non-resident owner or lessor of vessels chartered by Philippine nationals, which is subject to 4.89% final tax on its se, or charter fees from leases or charters ns or corporations, as approved by the Maritime Industry Authority. The prev etining 1 Janary "The previous rate of $0 reduced 10 25% beginning 2021 pessoa che CREATE Act. The credit against the tax due ae 7 equivalent to the diference between the regular ncome tx of 5% andthe duced tax of 15% if the tx sparing ale present. {AxaTION of airerafi, machin, or lesor hiner, owner Oi is subject t0 7.5% OM its grog” (oNomresident ome and other equiP! rentals or fees oF ESTATES AND TRUSTS (6. TAXATION OF INCOME mia continued the businesses of ¥ en ‘one shall take any portion of iy, eving on ener ‘As per agreement by the wed for the furtherance of the business of zat as uch il et ternal Revenue (CIR), having receiveg i inne Smerating to reliable information Vt ced the hrs of deficiency corporate ar sv ihe propria ofthis move bythe CIR. ae eae Sn yh BIR as trop s jpaecinaaion ty te BO Noeome xpeyet i Is own righ the cenetrporte es separate entity created from an irrevocable trust ere an entity (called “trustee") holds properties owned by another person (called “trustor”) for the benefit of certain persons or entities (called “beneficiaris’) 288, What is the rule on the recognition of income from the property being held in trast? ren the trust is an irrevocad a separate and distinct taxpayer. (Sections 60, 63, and 64, NIRC; See alsa: Tan Del Rosai, jr, 6.R. No, 109289, 03 October 1994) ‘In cases of revocable trust, where at any time the power to Fevest in the grantor ttle to any part ofthe corpus of the trust is ve the grantor either alone or in conjunction wit petson not having substantial adverse interest in the disposition ‘of such part ofthe corpus or the income therefrom, or (2) in any 290. 291. . How is the income of a Harr G.TAXATION o} TAXATION STATES AND TRUSTS person not having a substan of such part ofthe copia on such part of the trust the get hale in verse interestin the disposition 'come therefrom, the income of luded in computing the taxable estate under irrevocable trust dete indica setdement oF on income taxpayers shall uted and on the same basis as in the case of an in m 61, NIRC). Are estates ond trusts ented to deduction? Yes, estates and truss are they are entitled to deductions ava (0 the beneficiary or heit. Note, included in cos the legatee, heir, or beneficiary. (Seto Johnny transferred a valuable 10

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