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Additional Cases On Passive and Compensation Income-Tax 2
Additional Cases On Passive and Compensation Income-Tax 2
1. Dumaguete Cathedral Credit Cooperative vs. and 2000.[10] The deficiency withholding taxes
Commissioner of Internal Revenue cover the payments of the honorarium of the
[G.R. No. 182722, January 22, 2010] Board of Directors, security and janitorial
services, legal and professional fees, and
Doctrines: interest on savings and time deposits of its
Cooperatives are not required to withhold members.
taxes on interest from savings and time deposits
of their members. On October 22, 2002, petitioner informed BIR
Regional Director Sonia L. Flores that it would
To encourage the formation of cooperatives only pay the deficiency withholding taxes
and to create an atmosphere conducive to their corresponding to the honorarium of the Board
growth and development, the State extends all of Directors, security and janitorial services,
forms of assistance to them, one of which is legal and professional fees for the year 1999 in
providing cooperatives a preferential tax the amount of P87,977.86, excluding penalties
treatment. and interest.
Although the tax exemption only mentions On November 29, 2002, petitioner availed of
cooperatives, this should be construed to the VAAP and paid the amounts of P105,574.62
include the members. It must be emphasized and P143,867.24. corresponding to the
that cooperatives exist for the benefit of their withholding taxes on the payments for the
members. In fact, the primary objective of every compensation, honorarium of the Board of
cooperative is to provide goods and services to Directors, security and janitorial services, and
its members to enable them to attain increased legal and professional services, for the years
income, savings, investments, and productivity. 1999 and 2000, respectively.
Therefore, limiting the application of the tax
exemption to cooperatives would go against the On April 24, 2003, petitioner received from the
very purpose of a credit cooperative. Extending BIR Regional Director Flores, Letters of Demand
the exemption to members of cooperatives, on ordering petitioner to pay the deficiency
the other hand, would be consistent with the withholding taxes, inclusive of penalties, for the
intent of the legislature. years 1999 and 2000 in the amounts of
P1,489,065.30 and P1,462,644.90, respectively.
Facts:
Petitioner Dumaguete Cathedral Credit
Cooperative (DCCCO) is a credit cooperative Issue: Whether or not it is liable to pay the
duly registered with and regulated by the deficiency withholding taxes on interest from
Cooperative Development Authority (CDA). On savings and time deposits of its members for
November 27, 2001, the Bureau of Internal the taxable years 1999 and 2000, as well as the
Revenue (BIR) Operations Group Deputy delinquency interest of 20% per annum.
Commissioner, Lilian B. Hefti, issued Letters of
Authority Nos. 63222 and 63223, authorizing Held: Petitioners invocation of BIR Ruling No.
BIR officers to examine petitioners books of 551-888, reiterated in BIR Ruling [DA-591-
accounts and other accounting records for all 2006], is proper. On November 16, 1988, the
internal revenue taxes for the taxable years BIR declared in BIR Ruling No. 551-888 that
1999 and 2000. cooperatives are not required to withhold taxes
on interest from savings and time deposits of
On October 16, 2002, petitioner received two their members.
other Pre-Assessment Notices for deficiency
withholding taxes also for taxable years 1999
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According to the CTA En Banc, the BIR Ruling corresponding tax on the interest from savings
was based on the premise that the savings and and time deposits of their members, which was
time deposits were placed by the members of reiterated in BIR Ruling [DA-591-2006], applies
the cooperative in the bank. Consequently, it to the instant case.
ruled that the BIR Ruling does not apply when
the deposits are maintained in the cooperative Members of cooperatives deserve a
such as the instant case. preferential tax treatment pursuant to RA
6938, as amended by RA 9520.
There is nothing in the ruling to suggest that it Given that petitioner is a credit
applies only when deposits are maintained in a cooperative duly registered with the
bank. Rather, the ruling clearly states, without Cooperative Development Authority (CDA),
any qualification, that since interest from any Section 24(B)(1) of the NIRC must be read
Philippine currency bank deposit and yield or together with RA 6938, as amended by RA 9520.
any other monetary benefit from deposit Under Article 2 of RA 6938, as amended by RA
substitutes are paid by banks, cooperatives are 9520, Thus, to encourage the formation of
not required to withhold the corresponding tax cooperatives and to create an atmosphere
on the interest from savings and time deposits conducive to their growth and development,
of their members. the State extends all forms of assistance to
them, one of which is providing cooperatives a
In BIR Ruling [DA-591-2006] dated preferential tax treatment.
October 5, 2006 the BIR opined that:
The legislative intent to give cooperatives a
xxxx preferential tax treatment is apparent in Articles 61
and 62 of RA 6938, which read:
3. Exemption of interest income on members deposit
(over and above the share capital holdings) from the ART. 61. Tax Treatment of Cooperatives. Duly
20% Final Withholding Tax. registered cooperatives under this Code which do
not transact any business with non-members or the
The National Internal Revenue Code states general public shall not be subject to any
that a final tax at the rate of twenty percent (20%) is government taxes and fees imposed under the
hereby imposed upon the amount of interest on Internal Revenue Laws and other tax laws.
currency bank deposit and yield or any other Cooperatives not falling under this article shall be
monetary benefit from the deposit substitutes and governed by the succeeding section.
from trust funds and similar arrangement x x x for
individuals under Section 24(B)(1) and for domestic ART. 62. Tax and Other Exemptions. Cooperatives
corporations under Section 27(D)(1). Considering transacting business with both members and
the members deposits with the cooperatives are not nonmembers shall not be subject to tax on their
currency bank deposits nor deposit substitutes, transactions to members. Notwithstanding the
Section 24(B)(1) and Section 27(D)(1), therefore, do provision of any law or regulation to the contrary,
not apply to members of cooperatives and to such cooperatives dealing with nonmembers shall
deposits of primaries with federations, respectively. enjoy the following tax exemptions; x x x.
In this case, BIR Ruling No. 551-888 and This exemption extends to members of
BIR Ruling [DA-591-2006] are in perfect cooperatives. It must be emphasized that
harmony with the Constitution and the laws cooperatives exist for the benefit of their
they seek to implement. Accordingly, the members. In fact, the primary objective of every
interpretation in BIR Ruling No. 551-888 that cooperative is to provide goods and services to its
cooperatives are not required to withhold the members to enable them to attain increased
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income, savings, investments and productivity. Caucus of Development NGO Networks (CODE-
Therefore, limiting the application of the tax NGO) and won the bid.
exemption to cooperatives would go against the
very purpose of a credit cooperative. Extending the
exemption to members of cooperatives, on the Thus, bonds were issued to RCBC, who, as
other hand, would be consistent with the intent of appointed issue manager and lead underwriter
the legislature. Thus, although the tax exemption of CODE-NGO, then sold and distributed said
only mentions cooperatives, this should be government bonds to petitioner-banks.
construed to include the members, pursuant to
Article 126 of RA 6938, which provides:
On October 7, 2011, barely 11 days before
maturity of the PEACe Bonds, the BIR issued the
ART. 126. Interpretation and Construction. In case of
following:
doubt as to the meaning of any provision of this
Code or the regulations issued in pursuance
thereof, the same shall be resolved liberally in favor BIR Ruling No. 370- 201119 declaring that the
of the cooperatives and their members. PEACe Bonds, being deposit substitutes, were
subject to 20% final withholding tax . Under
All told, we hold that petitioner is not liable this, DOF directed BTr to withhold 20% final tax
to pay the assessed deficiency withholding taxes on from the face value of the PEACe Bonds. BIR
interest from the savings and time deposits of its Ruling No. DA 378-201157 clarified that the final
members, as well as the delinquency interest of 20% withholding tax should be imposed and
per annum. withheld not only on RCBC/CODE NGO but also
on all subsequent holders of the Bonds.
In closing, cooperatives, including their members,
deserve a preferential tax treatment because of the
vital role they play in the attainment of economic Banco de Oro, et al. thus filed a petition for
development and social justice. Thus, although taxes Certiorari, Prohibition and Mandamus under
are the lifeblood of the government, the States Rule 65 to the Supreme Court contending the
power to tax must give way to foster the creation assailed 2011 BIR Ruling, with urgent
and growth of cooperatives. To borrow the words of application of TRO and/or writ of Preliminary
Justice Isagani A. Cruz: The power of taxation, while Injuction.
indispensable, is not absolute and may be
subordinated to the demands of social justice.
SC then issued a TRO enjoining the
implementation of the BIR ruling, subject to the
2. BDO VS. RP G.R. NO. 198756, 1-13-15 condition that 20% FWT be delivered to the
FACTS banks to be placed in escrow. SC Decision
The Bureau of Treasury (BTr) in a notice promulgated January 13, 2015, SC granted
announced the auction of 10- year Zero-Coupon petition and ruled that the number of lenders/
Bonds denominated as the Poverty Eradication investors at every transaction determines
and Alleviation Certificates or the PEACE Bonds whether a debt instrument is a deposit
on October 16, 2001, which the BTr states shall substitute subject to 20% FWT. When at any
not be subject to 20% final withholding tax since transaction, funds are simultaneously obtained
the issue is limited to 19 buyers/lenders. from 20 or more lenders/investors, there is
deemed to be public borrowing and bonds are
deemed deposit substitutes. Hence, seller is
At the auction, Rizal Commercial Banking required to withhold 20% FWT on the imputed
Corporation (RCBC) participated on behalf of interest income from the bonds.
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The two BIR Rulings is void for disregarding the The definition of deposit substitutes in Section
20-lender rule provided in Section 22 (Y) of the 22(Y) specifically defined “public” to mean
Tax Code. BTr reprimanded for its continued “twenty (20) or more individual or corporate
retention of the amount corresponding to 20% lenders at any one time.” Hence, if there are 20
FWT. Separate Motions for Reconsideration and or more lenders, the debt instrument is
clarification were filed both by BDO, et al and considered a deposit substitute which is subject
the Republic, et al. to the 20% FWT.
“The reckoning of the phrase “20 or more
lenders” should be at the time when the
ISSUES petitioner-intervenor RCBC Capital sold the
PEACe bonds to investors. Should the number
of investor to whom petitioner-intervenor RCBC
1. Does CTA have jurisdiction to determine the
Capital distributes the PEACe bonds, therefore,
constitutionality or validity of tax laws, rules
be found to be 20 or more, the PEACe Bonds
and regulations, and other administrative
are considered deposit substitutes subject to
issuances of CIR?
20% final withholding tax. Petitioner-
2. May the 20-lender rule apply to PEACe Bonds?
intervenors RCBC/CODE-NGO and RCBC Capital,
3. Assuming the PEACe Bonds are considered
as well as the final bondholders who have
“deposit substitutes,” whether government or
recourse to government upon maturity are
the Bureau of Internal Revenue is estopped
liable to pay the 20% final withholding tax.”
from imposing and/or collecting the 20% final
withholding tax from the face value of these
Bonds? #3
4. Whether BTr is liable to pay 6% legal interest YES. The Bureau of Internal Revenue is
rate? estopped from imposing and/or collecting the
20% final withholding tax from the face value of
these Bonds
HELD
#1
YES. CTA has jurisdiction and may take The Supreme Court interpretation in its January
cognizance of cases directly challenging 2015 decision of the phrase “at any one time”
constitutionality or validity of a tax law, to determine the phrase “20 or more lenders”
regulation or administrative issuance such as to include both the primary and secondary
revenue order, revenue memorandum circular, market cannot be applied to the PEACe Bonds
and ruling. and should be applied prospectively.
RA 9282: appeals from the decisions of quasi- RCBC and the rest of the investors relied in
judicial agencies on tax-related problems must good faith on the BIR Rulings which provide that
be brought exclusively to the CTA PEACe Bonds are not treated as deposit
substitutes and are subject to the 20% final
withholding tax.
#2
YES. The 20-lender rule may apply to PEACe
Bonds, depending on the number of lenders “at HELD
any one time” #4
YES. BTr may be held liable.
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The BTr made no effort to release the amount 134,659 shares as stock dividend declarations.
corresponding to the 20% FWT which is an utter Correspondingly, one-half of that shareholdings
disregard and defiance of the order of the Court or 92,577 shares were transferred to his wife,
Doña Carmen Soriano, as her conjugal share.
The offer half formed part of his estate.
BTr is ordered to immediately release and pay
the bondholders the amount of A day after Don Andres died, ANSCOR increased
P4,966,207,796.41, representing the 20% final its capital stock to P20M and in 1966 further
withholding tax on the PEACe Bonds, with legal increased it to P30M. In the same year
interest of 6% per annum from October 19, (December 1966), stock dividends worth 46,290
2011 until full payment. and 46,287 shares were respectively received
by the Don Andres estate and Doña Carmen
from ANSCOR. Hence, increasing their
3. CIR VS. CA GR. NO. 108576, 1-20-1999 accumulated shareholdings to 138,867 and
138,864 common shares each.
Facts: Sometime in the 1930’s, Don Andres
On December 28, 1967, Doña Carmen
Soriano, a citizen and resident of the United
requested a ruling from the United States
States, formed the corporation “A. Soriano Y
Internal Revenue Service (IRS), inquiring if an
Cia”, predecessor of ANSCOR with a
exchange of common with preferred shares
1,000,000.00 capitalization divided into 10,000
may be considered as a tax avoidance scheme.
common shares at a par value of P100/share.
By January 2, 1968, ANSCOR reclassified its
ANSCOR is wholly owned and controlled by the
existing 300,000 common shares into 150,000
family of Don Andres, who are all non-resident
common and 150,000 preferred shares.
aliens. In 1937, Don Andres subscribed to 4,963
shares of the 5,000 shares originally issued.
In a letter-reply dated February 1968, the IRS
opined that the exchange is only a
On September 12, 1945, ANSCOR’s authorized
recapitalization scheme and not tax avoidance.
capital stock was increased to P2,500,000.00
Consequently, on March 31, 1968 Doña Carmen
divided into 25,000 common shares with the
exchanged her whole 138,864 common shares
same par value. Of the additional 15,000 shares,
for 138,860 of the preferred shares. The estate
only 10,000 was issued which were all
of Don Andres in turn exchanged 11,140 of its
subscribed by Don Andres, after the other
common shares for the remaining 11,140
stockholders waived in favor of the former their
preferred shares.
pre-emptive rights to subscribe to the new
issues. This increased his subscription to 14,963
In 1973, after examining ANSCOR’s books of
common shares. A month later, Don Andres
account and record Revenue examiners issued a
transferred 1,250 shares each to his two sons,
report proposing that ANSCOR be assessed for
Jose and Andres Jr., as their initial investments
deficiency withholding tax-at-source, for the
in ANSCOR. Both sons are foreigners.
year 1968 and the 2nd quarter of 1969 based
on the transaction of exchange and redemption
By 1947, ANSCOR declared stock dividends.
of stocks. BIR made the corresponding
Other stock dividend declarations were made
assessments. ANSCOR’s subsequent protest on
between 1949 and December 20, 1963. On
the assessments was denied in 1983 by
December 30, 1964 Don Andres died. As of that
petitioner. ANSCOR filed a petition for review
date, the records revealed that he has a total
with the CTA, the Tax Court reversed petitioners
shareholdings of 185,154 shares. 50,495 of
ruling. CA affirmed the ruling of the CTA. Hence
which are original issues and the balance of
this position.
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Note:
Dividends actually
The NIRC does not require that the US tax law
remitted by P&G Phil = P 55.25
deem the parent corporation to have paid the
---------------------------------- ------------- x P35 =
20 percentage points of dividend tax waived by
P29.75
the Philippines. It only requires that the US
Amount of accumulated P 65.00
“shall allow” P&G-USA a “deemed paid” tax
profits earned
credit in an amount equivalent to the 20
percentage points waived by the Philippines.
P35 is the income tax paid. Section 24(b)(1) does not create a tax
P29.75 is the tax credit allowed by Sec 902 of US exemption nor does it provide a tax credit; it is a
Tax Code for Phil corporate income tax ‘deemed provision which specifies when a particular
paid’ by the parent company. Since P29.75 is (reduced) tax rate is legally applicable.
much higher than P13, Sec 902 US Tax Code
complies with the requirements of sec 24 NIRC.
Section 24(b)(1) of the NIRC seeks to promote
(I did not understand why these were divided
the in-flow of foreign equity investment in the
and multiplied. Point is, requirements were
Philippines by reducing the tax cost of earning
met)
profits here and thereby increasing the net
dividends remittable to the investor. The
foreign investor, however, would not benefit
from the reduction of the Philippine dividend
tax rate unless its home country gives it some
relief from double taxation by allowing the
investor additional tax credits which would be
Reason behind the law: applicable against the tax payable to such home
country. Accordingly Section 24(b)(1) of the
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NIRC requires the home or domiciliary country Section 228 of the Tax Code only required that
to give the investor corporation a “deemed an administrative claim be first filed. It bears
paid” tax credit at least equal in amount to the stressing that respondent could not be faulted
20 percentage points of dividend tax foregone for resorting to court action considering that
by the Philippines, in the assumption that a the prescriptive period stated therein was about
positive incentive effect would thereby be felt to expire. Had respondent awaited the action of
by the investor. petitioner knowing fully well that the
prescriptive period was about to lapse, it would
6.CIR VS. GOOD YEAR PHIL/ GR NO. have resultantly forfeited its right to seek a
216130/ 8-3-2016 judicial review of its claim, thereby suffering
Facts: irreparable damage.
On 15 October 2008, respondent filed an
application for relief from double taxation
before the International Tax Affairs division of
the BIR to confirm that the redemption of
respondent’s preferred shares owned by an
American company was not subject to
Philippine income tax.
Issue:
Whether respondent correctly and timely
sought judicial redress, notwithstanding that its
administrative and judicial claims were filed
only 13 days apart.
Held:
YES. Section 229 of the Tax Code does not mean
that the taxpayer must await the final
resolution of its administrative claim for refund,
since doing so would be tantamount to the
taxpayer’s forfeiture of its right to seek judicial
recourse should the two-year prescriptive
period expire without the appropriate judicial
claim being filed.
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