Tax I Digests

7/30/2019 Tax I Digests

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ALLAREY, CELSO, DEINLA, GARCIA, MADARIETA, PULTA, SANTIAGO, TIU |

TAX ON CORPORATIONS: BASES AND RATES

Resident Foreign Corporations

N.V. Reederij Amsterdam and Royal Interocean Lines v. CIRGancayco, J.| 23 Jun 88

Facts:Amsterdam, owner of the vessels M.V. Amstelmeer and Amstelkroon had the two ships in the Philippineports to load cargo for foreign detinations each for the years 1963 and 1964. Royal acted as itshusbanding agent. CIRs examiners filed the ITR of Amsterdam and applied Sec. 24 (b) (1) and treatedAmsterdam as a non-resident foreign corporation not engaged in trade or business in the Phils.Amsterdam protested stating that it is a non-resident foreign corporation engaged in trade or business inthe Phils.

Issue: W/N Amsterdam is a non- resident foreign corporation engaged or not engaged in trade or businessin the Phils.

Held/Ratio:

Amsterdam is a foreign corporation NOT engaged in trade or business in the Phils.A corporation is classified either as a (1) domestic corporation or a (2) foreign corporation. A foreigncorporation is further classified either as (a) resident foreign corp and (b) non-resident foreign corp. Aresident foreign corporation is a foreign corporation engaged in trade or business within the Philippines orhaving an office or place of business therein (Sec. 84(g), Tax Code) while a non- resident foreigncorporation is a foreign corporation not engaged in trade or business within the Philippines and nothaving any office or place of business therein. (Sec. 84(h), Tax Code.) A domestic corporation is taxed onits income from sources within and without the Philippines, but a foreign corporation is taxed only on itsincome from sources within the Philippines. (Sec. 24(a), Tax Code; Sec. 16, Rev. Regs. No. 2.) However,while a foreign corporation doing business in the Philippines is taxable on income solely from sources

within the Philippines, it is permitted to deductions from gross income but only to the extent connectedwith income earned in the Philippines. (Secs. 24(b) (2) and 37, Tax Code.) On the other hand, foreigncorporations not doing business in the Philippines are taxable on income from all sources within thePhilippines, as interest, dividends, rents, salaries, wages, premiums, annuities Compensations,remunerations, emoluments, or other fixed or determinable annual or periodical or casual gains, profitsand income and capital gains" The tax is 30% (now 35%) of such gross income. (Sec. 24 (b) (1), TaxCode.)

In the present case, Amsterdam is a non-resident foreign corporation organized and doing business in theNetherlands it is therefore taxable on income from all sources within the Philippines, as interest,dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, orother fixed or determinable annual or periodical or casual gains, profits and income and capital gains, and

the tax is equal to thirtyper centum of such amount, under Section 24(b) (1) of the Tax Code. The accentis on the words of--`such amount." Accordingly, petitioner N. V. Reederij "Amsterdam" being a non-resident foreign corporation, its taxable income for purposes of our income tax law consists of its grossincome from all sources within the Philippines.

Bank of America vs. CA and CIRVitug, J.| July 21, 1994

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FactsBank of America is a foreign corporation with Philippine branch office in Metro Manila. It paid 15%branch profit remittance tax on profit from its operations. The tax was based on net profits after incometax without deducting the amount corresponding to the 15% tax. Bank of America filed a claim for refundwith the BIR of that portion of the payment which corresponds to the 15% branch profit remittance tax.

Bank of America argues that the 15% branch profit remittance tax should be assessed on the amountactually remitted abroad, which is to say that the 15% profit remittance tax itself should not form part ofthe tax base. CIR, contending otherwise, holds the position that, in computing the 15% remittance tax, thetax should be inclusive of the sum deemed remitted. CTA upheld Bank of America bank in its claim forrefund. CIR filed a timely appeal to the SC which referred it to the CA. The CA reversed the decision ofthe CTA.

Issue/HeldWhether the 15% branch profit remittance tax should be assessed on the amount actually remitted abroad

No. It should be assessed on the amount before the remittance. There is absolutely nothing in the TaxCode which indicates that the 15% tax on branch profit remittance is on the total amount of profit to beremitted abroad. The statute employs, Any profit remitted abroad by a branch to its head office shall be

subject to a tax of 15%, without more. Nowhere is there said of base on the total amount actuallyapplied for by the branch with the Central Bank of the Philippines as profit to be remitted abroad. Wherethe law does not qualify that the tax is imposed and collected at source based on profit to be remittedabroad, that qualification should not be read into the law. And to our mind, the term any profit remittedabroad can only mean such profit as is forwarded, sent, or transmitted abroad as the word remitted iscommonly and popularly accepted and understood. To say therefore that the tax on branch profitremittance is imposed and collected at source and necessarily the tax base should be the amount actuallyapplied for the branch with the Central Bank as profit to be remitted abroad is to ignore the unmistakablemeaning of plain words.

In the 15% remittance tax, the law specifies its own tax base to be on the profit remitted abroad. There isabsolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the

amount sent abroad, and the law calls for nothing further. The taxpayer is a single entity, and it should beunderstandable if, such as in this case, it is the local branch of the corporation, using its own local funds,which remits the tax to the Philippine Government.

The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporationsmaintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domesticcorporations where at least a majority of all the latter's shares of stock are owned by such foreigncorporations. The written claim for refund of the excess tax payment filed, within the two-yearprescriptive period, with the CTA has been lawfully made.

MARUBENI vs. CIR

C.J. Fernan | September 14, 1989

Facts: Petitioner Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the firstand third quarter of 1981, AG&P declared and paid cash dividends to petitioner and withheld thecorresponding 10% final dividend tax thereon. AG&P directly remitted the cash dividends to petitioner'shead 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%.

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Petitioner sought a ruling from the BIR on whether or not the dividends petitioner received from AG&Pare effectively connected with its conduct or business in the Philippines as to be considered branch profitssubject to the 15% profit remittance tax imposed under Section 24 (b) (2) of NIRC. In reply, ActingCommissioner Ruben Ancheta ruled that only profits remitted abroad by a branch office to its head officewhich are effectively connected with its trade or business in the Philippines are subject to the 15% profitremittance tax.

Petitioner claimed for the refund or issuance of a tax credit representing profit tax remittance erroneouslypaid on the dividends remitted by AG&P to the head office in Tokyo. Respondent CIR denied petitioner'sclaim for refund/credit on the ground that as a non-resident foreign corporation, it is subject to the specialtax rate of 25% under the Tax Treaty between the Philippines and Japan. Upon appeal, the CTA sustainedthe CIR decision. In this petition for review, petitioner argues that following the principal-agentrelationship theory, Marubeni Japan is likewise a resident foreign corporation subject only to the 10%intercorporate final tax on dividends received from a domestic corporation.

Issues:

1) WON Marubeni Japan is a non-resident foreign corporation;

2) WON the dividends received by Marubeni Japan were subject to the 15% profit remittance tax and the10% intercorporate dividend tax

Held:

1) YES. Petitioner contends that precisely because it is engaged in business in the Philippines through itsPhilippine branch that it must be considered as a resident foreign corporation. Petitioner reasons that sincethe Philippine branch and the Tokyo head office are one and the same entity, whoever made theinvestment in AG&P, Manila does not matter at all. The Solicitor General has adequately refuted thispetitioner's argument: the general rule that a foreign corporation is the same juridical entity as its branch

office in the Philippines is inapplicable in this case. Following the principal-agent relationship theory, it isunderstood that the branch becomes its agent here, so that when the foreign corporation transacts businessin the Philippines independently of its branch, the principal-agent relationship is set aside. The transactionbecomes one of the foreign corporation, not of the branch. Thus, petitioner, having made an independentinvestment attributable only to the head office, cannot now claim the increments as ordinaryconsequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10 %.

2) NO. It is subject, however, to a discounted rate of 15% on dividends received from a domesticcorporatio (AG&P), on the condition that its domicile state (Japan) extends in favor of petitioner, a taxcredit of not less than 20 % of the dividends received.

The public respondents correctly concluded that the dividends in dispute were neither subject to the 15 %

profit remittance tax nor to the 10 % intercorporate dividend tax, Marubeni being a non-residentstockholder. However, they grossly erred in holding that no refund was forthcoming because the taxesthus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article10 (2) (b). To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxationthat each tax has a different tax basis. While the tax on dividends is directly levied on the dividendsreceived, the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actuallyremitted abroad.

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Petitioner, being a non-resident foreign corporation with respect to the transaction in question, theapplicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-JapanTreaty of 1980. Said section provides:

(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On dividendsreceived from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the

dividends received, which shall be collected and paid as provided in Section 53 (d) of this Code,subject to the condition that the country in which the non-resident foreign corporation isdomiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxesdeemed to have been paid in the Philippines equivalent to 20 % which represents the differencebetween the regular tax (35 %) on corporations and the tax (15 %) on dividends as provided inthis Section; ....

Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreigncorporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines.[Section 24 (b) (1)]. However, a discounted rate of 15% is given to petitioner. This 20 % represents thedifference between the regular tax of 35 % on non-resident foreign corporations which petitioner wouldhave ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation.

COMPAIA GENERAL DE TABACOS DE FILIPINAS (Philippine Offices) vs. THECOMMISSIONER OF INTERNAL REVENUE

C.T.A. CASE NO. 4451. August 23, 1993.

Facts:

Petitioner is a foreign corporation duly licensed by Philippine laws to engage in business through itsBranch Office.

Petitioner paid the 15% branch profit remittance tax for the years 1985 (partial) and 1986. Later,

petitioner filed a claim for refund with respondent in the amount of P593,948.61, representing allegedoverpaid branch profit remittance taxes.

Petitioner contends that the 15% Branch Profit Remittance Tax should be based on the profits actuallyremitted abroad. Petitioner cited as authority Section 24(b)(2)(ii) of the NIRC; BIR Ruling dated January21, 1980; and the case of Commissioner of Internal Revenue v. Burroughs Limited and the Court of TaxAppeals, G.R. No. L-66653, June 19, 1986, 142 SCRA 324, where the Supreme Court held that "the taxbase upon which the 15% branch profit remittance tax shall be imposed on the profit actually remittedabroad and not on the total branch profits out of which the remittance is to be made."

Issue/Held:

Whether or not the branch profits tax are computed based on the profits actually remitted abroad. YES

Ratio:

Section 24(b)(2) of the 1977 NIRC and Section 24(b)(2)(ii) of the 1986 NIRC both provides for a 15%branch profit remittance tax on any profit remitted by a branch to its mother company or head office. InBIR Ruling No. 016-79 dated April 18, 1979 anent the 15% branch profit remittance tax as an income taximposed under Section 24(b)(2), National Internal Revenue Code of 1977, as amended, this Office ruled

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that ". . . the 15% branch profit remittance tax should be based on the amount of P1,504,330.43representing profit derived from the disposition of the shares, 15% of which is P225,649.57."

It will be noted that the basis of computation in accordance with the ruling is profit without deduction forthe 15% tax.

On January 21, 1980, this Office, in another ruling issued in answer to a query as to the tax base uponwhich the 15% branch profit remittance tax should be imposed held that "the 15% branch profitremittance tax shall be imposed on the profit actually remitted abroad and not on the total branch profitout of which the remittance is to be made."

As the latter ruling seems to have given rise to some misconception that it modified BIR Ruling No. 016-79 with respect to the manner of computation of the 15% branch profit remittance tax, this Office issued aclarificatory ruling on October 23, 1981 explaining

The above ruling (of January 21, 1980) merely emphasized the distinction between the totalbranch profit which is remittable and that portion of the branch profit actually remitted withoutdeduction on account of the tax to be paid.

The phrase 'any profit remitted abroad' should be construed to mean the profit to be remitted.Hence, there must be an actual remittance, as distinguished from profit which is remittable.

To give an example: If the total branch profit is P115,000.00 but the amount to be remitted isP100,000.00, then the tax base should be P100,000.00.

Moreover, the 15% profit remittance tax imposed by Section 24(b)(2) of the Tax Code is anincome tax, it is therefore clear that the same is non-deductible from the gross (profit) income.Inasmuch as the tax is an exaction on profit realized for remittance abroad, the deduction thereofas an expense is not sustained by law nowhere in Section 30 of the Tax Code is it provided thatthe same is deductible. Besides deductions from gross income are matters of legislative grace,

what is not expressly granted by the law is deemed withheld."

Considering that the 15% branch profit remittance tax is imposed and collected at source,necessarily the tax base should be the amount actually applied for by the branch with the CentralBank of the Philippines as profit to be remitted abroad.

It is desired that this Circular be given as wide publicity as possible.

(Sgd.) RUBEN B. ANCHETAActing Commissioner

Thus, in view of the fact that petitioner's branch profit remittance tax for 1985 (partial) and 1986 were

paid on May 3, 1988, after the effectivity of Revenue Memorandum Circular No. 6-82 (March 17, 1982),then what should apply as taxable base in computing the 15% branch profit remittance tax is the amountapplied for with the Central Bank as profit to be remitted abroad and not the total amount of branchprofits.

Disposition:

CIR ordered to refund in favor of petitioner overpaid 15% branch profit remittance tax on interest and

dividends received.

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Non-resident Foreign Corporation

COMMISSIONER OF INTERNAL REVENUE V. PROCTER AND GAMBLE PHILIPPINEMANUFACTURING CORPORATION

160 SCRA 560

FACTS: Procter and Gamble Philippines, a domestic corporation wholly owned by Procter and GambleUSA, invokes the tax-sparing credit provision in Section 24(b) and seeks a refund or tax credit of the 20percentage-point portion of the 35 percentage-point whole tax on dividends that it had previously paid tothe Bureau of Internal Revenue.

ISSUE: WON Procter & Gamble Philippines is entitled to the preferential 15% tax rate on dividendsdeclared and remitted to its parent corporation.

HELD:NO. Procter and Gamble Philippines failed to meet certain conditions necessary in order that thedividends received by the non-resident parent company in the US may be subject to the preferential 15%tax instead of 35%, among which are, (1) To show the actual amount credited by the US governmentagainst the income tax due from Procter and Gamble USA; (2) To present the income tax return of its

mother company for the years the dividends were received; and (3) To submit any duly authenticateddocument showing that the US government credited the 20% tax deemed paid in the Philippines.

CIR v. PROCTER AND GAMBLEFeliciano, J. | December 2, 1991

Facts: For 1974 and 1975, Procter and Gamble Philippine Manufacturing Corporation (P&G-Phil)declared dividends to its parent company and sole stockholder, Procter and Gamble Co., Inc.(P&G-USA) amounting to PhP 24,164,946.30, from which dividends the amount of PhP8,457,731.21 representing the thirty-five percent (35%) withholding tax at source was deducted. In1977,P&G-Phil filed a claim for refund or tax credit in the amount of PhP 4,832,989.26 with theCommissioner of Internal Revenue (CIR) claiming thatpursuant to Section 24 (b) (1) of the

NIRC, as amended by P.D. No. 369, the applicable rate of withholding tax on the dividendsremitted was only 15% and not 35% of the dividends. CIR gave no response so P&G-Phil filed apetition for tax refund/credit at the CTA which granted the tax refund/credit in the amount ofPhP 4,832,989.00. CIR (upheld by SC): (a) P&G-USA, and not P&G-Phil., was the proper party toclaim the refund or tax credit involved; (b) nothing in Section 902 or other provisions of the US TaxCode allows a credit against the US tax due from P&G-USA of taxes deemed to have been paid inthe RP equivalent to 20% which represents the difference between the regular tax of 35% oncorporations and the tax of 15% on dividends; and (c) Phil failed to meet certain conditionsnecessary in order that "the dividends received by its non-resident parent company in the US(P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%."

Issue: regular 35% rate or reduced 15% rate?

Held: Reduced 15% tax rate is applicable. In order to determine whether US tax law complieswith the requirements for applicability of the reduced or preferential 15% dividend tax rate under Section24 (b) (1), NIRC, it is necessary:

(a) to determine the amount of the 20 percentage points dividend tax waived by the Philippinegovernment under Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;

--> Using the formula under the NIRC, the amount of dividend tax waived by the Phil Govt isPhP 13.00 for every PhP 100.00 of pre-tax net income earned by P&G-Phil. It is also the

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minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USAis to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

(b) to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA

--> Under the US Tax Law, the amount of the "deemed paid" tax credit which US Tax Law allowsunder Section 902, Tax Code is PhP 55.25. Thus, for every P55.25 of dividends actually

remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a taxcredit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate incometax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary

(c) to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal tothe amount of the dividend tax waived by the Philippine Government

-->P29.75 is much higher than P13.00 (the amount of dividend tax waived by the PhilGovt), Section 902, US Tax Code, specifically and clearly complies with the requirementsof Section 24 (b) (1), NIRC

Thus, P&G-Phil, is entitled to the tax refund or tax credit which it seeks. The concept of "deemed paid"tax credit, which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid" taxcredit found in our NIRC and which Philippine tax law allows to Philippine corporations which

have operations abroad (say, in the United States) and which, therefore, pay income taxes to the USgovernment. Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippinecorporation for taxes actually paid by it to the US governmente.g., for taxes collected by the USgovernment on dividend remittances to the Philippine corporation. This Section of the NIRC is theequivalent of Section 901 of the US Tax Code. Clearly, the "deemed paid" tax credit which, under Section24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax creditthat Philippine law allows to a Philippine corporation with a wholly- or majority-owned subsidiaryin (for instance) the US.

Section 24(b)(1), NIRC, seeks to promote the in-flow of foreign equity investment in thePhilippines by reducing the tax cost of earning profits here and thereby increasing the netdividends 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 fromdouble taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P.tax" income to subject to its own taxing power) by allowing the investor additional taxcredits which would be applicable against the tax payable to such home country.Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary country to give theinvestor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20)percentage points of dividend tax foregone by the Philippines, in the assumption that apositive incentive effect would thereby be felt by the investor.

-->close examination of the US Tax Law shows that it grants P&G-USA a tax credit forthe amount of the dividend tax actually paid (i.e., withheld) from the dividend remittances toP&G-USA; US law grants to P&G-USA a "deemed paid' tax credit for a proportionate part ofthe corporate income tax actually paid to the Philippines by P&G-Phil. The parent-

corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporateincome tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not byP&G-USA.--> "deemed paid" concept merely reflects economic reality, since the Philippine corporateincome tax was in fact paid and deducted from revenues earned in the Philippines, thusreducing the amount remittable as dividends to P&G-USA. US tax law treats the Philippinecorporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of theeconomic cost of carrying on business operations in the Philippines through the medium ofP&G-Phil. and here earning profits.

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CIR v WANDER PHILIPPINESBidin J. | April 15, 1988

Facts:

Wander Philippines is a domestic corporation wholly owned subsidiary of the Glaro SA LTD. For theyear 1976 and 1977 it filed its withholding tax return for the second quarter, wherein they paid 35%withholding tax for the dividends it had remitted to its parent company Glaro.In 1977, Wander filed a claim for refund or tax credit of the withholding tax it paid stating that it shouldonly liable for 15% instead of 35% withholding tax in accordance with Sec 24 (B)1 of the Tax Code withthe Appellate Division of the Internal Revenue. When it went unheeded, Wander filed the case with theCourt of tax Appeals. CTA granted the refund. Thus the CIR appealed to the SC to reverse the decision.

Petitioners Argument:Switzerland did not impose any tax on the dividends received by Glaro. Thus full credit must granted andnot merely credit equivalent to 20%.

Issue:Whether or not private respondent wander is entitled to the preferential rate of 15% withholding tax ondividends declared and remitted to its parent corporation, Glaro.

Held/ Ratio: YesSec 24 B (1) provides that as regards the dividends received from a domestic corporation liable to tax,the tax shall be 15% of the dividends received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-residentforeign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which representsthe difference between the regular tax (35%) on corporations and the tax (15%) dividends.

Since the Swiss Government does not impose any tax on the dividends to be received by the said parent

corporation in the Philippines, the condition imposed under the above-mentioned section is satisfied.Accordingly, the withholding tax rate of 15% is hereby affirmed. To deny them such would run counter tothe very spirit and intent of said law and definitely will adversely affect foreign corporations" interesthere and discourage them from investing capital in our country.

MARUBENI vs. CIRC.J. Fernan | September 14, 1989

Facts: Petitioner Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the firstand third quarter of 1981, AG&P declared and paid cash dividends to petitioner and withheld thecorresponding 10% final dividend tax thereon. AG&P directly remitted the cash dividends to petitioner's

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%.

Petitioner sought a ruling from the BIR on whether or not the dividends petitioner received from AG&Pare effectively connected with its conduct or business in the Philippines as to be considered branch profitssubject to the 15% profit remittance tax imposed under Section 24 (b) (2) of NIRC. In reply, ActingCommissioner Ruben Ancheta ruled that only profits remitted abroad by a branch office to its head officewhich are effectively connected with its trade or business in the Philippines are subject to the 15% profitremittance tax.

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Petitioner claimed for the refund or issuance of a tax credit representing profit tax remittance erroneouslypaid on the dividends remitted by AG&P to the head office in Tokyo. Respondent CIR denied petitioner'sclaim for refund/credit on the ground that as a non-resident foreign corporation, it is subject to the specialtax rate of 25% under the Tax Treaty between the Philippines and Japan. Upon appeal, the CTA sustainedthe CIR decision. In this petition for review, petitioner argues that following the principal-agentrelationship theory, Marubeni Japan is likewise a resident foreign corporation subject only to the 10%

intercorporate final tax on dividends received from a domestic corporation.

Issues:

1) WON Marubeni Japan is a non-resident foreign corporation;

2) WON the dividends received by Marubeni Japan were subject to the 15% profit remittance tax and the10% intercorporate dividend tax

Held:

1) YES. Petitioner contends that precisely because it is engaged in business in the Philippines through itsPhilippine branch that it must be considered as a resident foreign corporation. Petitioner reasons that sincethe Philippine branch and the Tokyo head office are one and the same entity, whoever made theinvestment in AG&P, Manila does not matter at all. The Solicitor General has adequately refuted thispetitioner's argument: the general rule that a foreign corporation is the same juridical entity as its branchoffice in the Philippines is inapplicable in this case. Following the principal-agent relationship theory, it isunderstood that the branch becomes its agent here, so that when the foreign corporation transacts businessin the Philippines independently of its branch, the principal-agent relationship is set aside. The transactionbecomes one of the foreign corporation, not of the branch. Thus, petitioner, having made an independentinvestment attributable only to the head office, cannot now claim the increments as ordinaryconsequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10 %.

2) NO. It is subject, however, to a discounted rate of 15% on dividends received from a domesticcorporatio (AG&P), on the condition that its domicile state (Japan) extends in favor of petitioner, a taxcredit of not less than 20 % of the dividends received.

The public respondents correctly concluded that the dividends in dispute were neither subject to the 15 %profit remittance tax nor to the 10 % intercorporate dividend tax, Marubeni being a non-residentstockholder. However, they grossly erred in holding that no refund was forthcoming because the taxesthus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention pursuant to Article10 (2) (b). To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxationthat each tax has a different tax basis. While the tax on dividends is directly levied on the dividendsreceived, the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actuallyremitted abroad.

Petitioner, being a non-resident foreign corporation with respect to the transaction in question, theapplicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-JapanTreaty of 1980. Said section provides:

(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On dividendsreceived from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of thedividends received, which shall be collected and paid as provided in Section 53 (d) of this Code,subject to the condition that the country in which the non-resident foreign corporation is

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domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxesdeemed to have been paid in the Philippines equivalent to 20 % which represents the differencebetween the regular tax (35 %) on corporations and the tax (15 %) on dividends as provided inthis Section; ....

Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign

corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines.[Section 24 (b) (1)]. However, a discounted rate of 15% is given to petitioner. This 20 % represents thedifference between the regular tax of 35 % on non-resident foreign corporations which petitioner wouldhave ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation.

Special CorporationsInternational Carriers

COMMISSIONER OF INTERNAL REVENUE,petitioner, vs. BRITISH OVERSEAS AIRWAYSCORPORATION and COURT OF TAX APPEALS, respondents.

MELENCIO-HERRERA,J. | April 30, 1987;

FACTS: BOAC is a 100% British Government-owned corporation organized and existing under the lawsof the United Kingdom It is engaged in the international airline business and is a member-signatory of theInterline Air Transport Association (IATA). As such it operates air transportation service and sellstransportation tickets over the routes of the other airline members. During the periods covered by thedisputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in thePhilippines, and was not granted a Certificate of public convenience and necessity to operate in thePhilippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 andpartly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did notcarry passengers and/or cargo to or from the Philippines, although during the period covered by theassessments, it maintained a general sales agent in the Philippines Wamer Barnes and Company, Ltd.,

and later Qantas Airways which was responsible for selling BOAC tickets covering passengers andcargoes.

The CIR assessed BOAC deficiency income taxes, which were paid under protest by BOAC.

The Tax Court held that the proceeds of sales of BOAC passage tickets in the Philippines by WarnerBarnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not constituteBOAC income from Philippine sources "since no service of carriage of passengers or freight wasperformed by BOAC within the Philippines" and, therefore, said income is not subject to Philippineincome tax. The CTA position was that income from transportation is income from services so that theplace where services are rendered determines the source. Thus, in the dispositive portion of its Decision,the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the

deficiency income tax assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.

ISSUE: WON the income of BOAC from ticket sales is considered income within the Philippines thus,taxable

HELD: YES.

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The source of an income is the property, activity or service that produced the income. For the source ofincome to be considered as coming from the Philippines, it is sufficient that the income is derived fromactivity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity thatproduces the income. The tickets exchanged hands here and payments for fares were also made here inPhilippine currency. The site of the source of payments is the Philippines. The flow of wealth proceededfrom, 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 supportingthe government.

The absence of flight operations to and from the Philippines is not determinative of the source of incomeor the site of income taxation. Admittedly, BOAC was an off-line international airline at the timepertinent to this case. The test of taxability is the "source"; and the source of an income is that activity ...which produced the income. 11 Unquestionably, the passage documentations in these cases were sold inthe Philippines and the revenue therefrom was derived from a activity regularly pursued within thePhilippines. business a And even if the BOAC tickets sold covered the "transport of passengers and cargoto and from foreign cities", it cannot alter the fact that income from the sale of tickets was derived fromthe Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the incomeherein is the Philippines.

It should be pointed out, however, that the assessments upheld herein apply only to the fiscal yearscovered by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972,international carriers are now taxed as follows:

... Provided, however, That international carriers shall pay a tax of 2- per cent on theircross Philippine billings. (Sec. 24[b] [21, Tax Code).

Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term"gross Philippine billings," thus:

... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere inthe world by any international carrier doing business in the Philippines of passagedocuments sold therein, whether for passenger, excess baggage or mail provided thecargo or mail originates from the Philippines. ...

The foregoing provision ensures that international airlines are taxed on their income from Philippinesources. The 2- % tax on gross Philippine billings is an income tax. If it had been intended as an exciseor percentage tax it would have been place under Title V of the Tax Code covering Taxes on Business.

Petroleum Service Contractor and Subcontractor

Zapata Marine Service Ltd., S.A. v. CIR, CTA Case No. 338430 March 1988

In the case of technical services related to petroleum operations, Sec. 1 PD No.1354 applies. It providesthat every subcontractor, whether domestic or foreign, that enters into a contract with a service contractorengaged in petroleum operations in the Philippines is liable for a final income tax equivalent of 8% of itsgross income derived from the contract. The 8% final tax is in lieu of all national and local taxes. Apetroleum subcontractor provides the means necessary for the service contractor to pursue its petroleumoperations .

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Improperly Accumulated Earnings Tax

Cyanamid Philippines vs. CA, CTA, and CIRQuisumbing, J. | January 20, 2000

FactsCyanamid Phils. is a corporation organized under Philippine laws. It is a wholly owned subsidiary ofAmerican Cyanamid based in the USA. It is engaged in the manufacture of pharmaceutical products andchemicals, a wholesaler of imported finished goods, and an importer.

The CIR sent an assessment letter to Cyanamid Phils. and demanded the payment of deficiency in cometax for taxable year 1981 which Cyanamid Phils. protested: (a) 25% surtax assessment; (b) deficiencyincome tax; (c) deficiency percentage assessment. CIR refused to allow the cancellation of the assessmentnotices.

During the pendency of the case on appeal to the CTA, both parties agreed to compromise by reduction

the deficiency income assessment. But the surtax on improperly accumulated profits remainedunresolved. Cyanamid Phils. claimed that the assessment representing the 25% surtax had no legal basisfor the following reasons: (a) petitioner accumulated its earnings and profits for reasonable businessrequirements to meet working capital needs and retirement of indebtedness, (b) petitioner is whollyowned subsidiary of American Cyanamid, a corporation organized under the laws of USA, whose sharesof stock are listed and traded in New York Stock Exchange. This being the case, no individualshareholder of petitioner could have evaded or prevented the imposition of individual income taxes byCyanamid Phils. accumulation of earnings and profits, instead contribution of the same.

CTA denied said petition.

Issue/Held

Whether Cyanamid Phils. is liable for the accumulated earnings tax for the year 1981 Yes.

PD 1739 amended the NIRC and enumerated the corporations exempt from the imposition of improperlyaccumulated tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance companies; and (d)corporations organized primarily and authorized by the Central Bank to hold shares of stocks of banks.Cyanamid Phils. does not fall among those exempt classes. Besides, the laws granting exemption form taxare construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation isthe rule and exemption is the exception. The burden of proof rests upon the party claiming the exemptionto prove that it is, in fact, covered by the exemption so claimed. This is a burden which Cyanamid Phils.has failed to discharge.

Unless rebutted, all presumptions are generally indulged in favor of the correctness of the CIRs

assessment and against the taxpayer. With Cyanamid Phils. failure to prove the CIR incorrect, clearlyand conclusively, this court is constrained to uphold the correctness of tax courts ruling as affirmed bythe CA.

CIR VS. ANTONIO TUASON, INC.

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J. Grio-Aquino | May 15, 1989

Facts: Petitioner CIR assessed Antonio Tuason, Inc. with deficiency tax as well as 25% surtax onallegedly unreasonable accumulation of surplus for the years 1975-1978. Private respondent protested theassessment on a 25% surtax on the ground that the accumulation of surplus profits during the years inquestion was solely for the purpose of expanding its business operations as real estate broker. No

investigation was conducted nor a decision rendered on Antonio Tuazon Inc.'s protest. Meantime, the CIRissued warrants of distraint and levy to enforce collection of the total amount originally assessedincluding the amounts already paid.

The private respondent filed a petition for review in the CTA, which set aside the CIRs assessment.

Issue: WON the alleged surplus constituted an unreasonable accumulation of profits subject to the 25%surtax

Held: YES. The touchstone of liability is the purpose behind the accumulation of the income and not theconsequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of using theundistributed earnings and profits for the reasonable needs of the business, that purpose would not fallwithin the interdiction of the statute.

The CTA conceded that the CIRs determination that Antonio was a mere holding or investmentcompany, was presumptively correct, for the corporation did not involve itself in the development ofsubdivisions but merely subdivided its own lots and sold them for bigger profits. It derived its incomemostly from interest, dividends and rental realized from the sale of realty. Another circumstancesupporting that presumption is that 99.99% in value of the outstanding stock of Antonio Tuason, Inc., isowned by Antonio Tuason himself. The CIR conclusively presumed that when the corporationaccumulated (instead of distributing to the shareholders) a surplus of over P3 million fron its earnings in1975 up to 1978, the purpose was to avoid the imposition of the progressive income tax on itsshareholders.

However, while the investments for expansion as alleged by private respondent were actually made, thecorporation did not use up its surplus profits. The enormous discrepancy between the alleged investmentcost and the declared market value of two pieces of real estate purchased by the corporation was notdenied nor explained.

It is plain to see that the company's failure to distribute dividends to its stockholders in 1975-1978 was forreasons other than the reasonable needs of the business, thereby falling within the interdiction of Section25 of the Tax Code of 1977. Since the company as of the time of the assessment in 1981, had invested inits business operations only P 773,720 out of its accumulated surplus profits of P3,263,305.88 for 1975-1978, its remaining accumulated surplus profits of P2,489,858.88 are subject to the 25% surtax.

THE MANILA WINE MERCHANTS, INC. vs. THE COMMISSIONER OF INTERNALREVENUE

Guerrero, J. | February 20, 1984.

Facts:

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The Commissioner of Internal Revenue found the Manila Wine Merchants, Inc. of having unreasonablyaccumulated surplus of P428,934.32 for the calendar year 1947 to 1957, in excess of the reasonable needsof the business subject to the 25% surtax imposed by Section 25 of the Tax Code. Thus, the CIRdemanded upon the petitioner payment of P126,536.12 as 25% surtax and interest on the latter'sunreasonable accumulation of profits and surplus for the year 1957.

Respondent found that the accumulated surplus in question were invested to 'unrelated business' whichwere not considered in the 'immediate needs' of the Company such that the 25% surtax be imposedtherefrom." Petitioner appealed to the Court of Tax Appeals.

With regards to the alleged substantial investment of surplus or profits in unrelated business, the Court ofTax Appeals held that the investment of petitioner with Acme Commercial Co., Inc., Union InsuranceSociety of Canton and with the Wack Wack Golf and Country Club are harmless accumulation of surplusand, therefore, not subject to the 25% surtax provided in Section 25 of the Tax Code.

As to the U.S.A. Treasury Bonds amounting to P347,217.50, the Court of Tax Appeals ruled that itspurchase was in no way related to petitioner's business of importing and selling wines, whisky, liquorsand distilled spirits. Respondent Court was convinced that the surplus of P347,217.50 which was invested

in the U.S.A. Treasury Bonds was availed of by petitioner for the purpose of preventing the imposition ofthe surtax upon petitioner's shareholders by permitting its earnings and profits to accumulate beyond thereasonable needs of business.

Issue/Held:

(1) Whether the purchase of the U.S.A. Treasury bonds by petitioner in 1951 can be construed as aninvestment to an unrelated business and hence, such was availed of by petitioner for the purposeof preventing the imposition of the surtax upon petitioner's shareholders by permitting itsearnings and profits to accumulate beyond the reasonable needs of the business. YES

(2) Whether the penalty tax of twenty-five percent (25%) can be imposed on such improperaccumulation in 1957 despite the fact that the accumulation occurred in 1951. YES

Ratio:

An accumulation of earnings or profits (including undistributed earnings or profits of prior years) isunreasonable if it is not required for the purpose of the business, considering all the circumstances of thecase. 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 heldthat 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 orsecurities of an unrelated business usually indicates an accumulation beyond the reasonable needs of the

business.

The purchase of the U.S.A. Treasury bonds were in no way related to petitioner's business of importingand selling wines whisky, liquors and distilled spirits, and thus construed as an investment beyond thereasonable needs of the business.

The records further reveal that from May 1951 when petitioner purchased the U.S.A. Treasury shares,until 1962 when it finally liquidated the same, it (petitioner) never had the occasion to use the said sharesin aiding or financing its importation. This militates against the purpose enunciated earlier by petitioner

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that the shares were purchased to finance its importation business. To justify an accumulation of earningsand profits for the reasonably anticipated future needs, such accumulation must be used within areasonable time after the close of the taxable year.

In order to determine whether profits are accumulated for the reasonable needs of the business as to avoidthe surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the

time of accumulation not subsequently declared intentions which are merely the product of afterthought.A speculative and indefinite purpose will not suffice. The mere recognition of a future problem and thediscussion of possible and alternative solutions is not sufficient. Definiteness of plan coupled with actiontaken towards its consummation are essential.

Viewed on the foregoing analysis and tested under the "immediacy doctrine," We are convinced that theCourt of Tax Appeals is correct in finding that the investment made by petitioner in the U.S.A. Treasuryshares in 1951 was an accumulation of profits in excess of the reasonable needs of petitioner's business.

As to the contention that that the surtax of 25% should be based on the surplus accumulated in 1951 andnot in 1957, the rule is now settled in Our jurisprudence that undistributed earnings or profits of prioryears are taken into consideration in determining unreasonable accumulation for purposes of the 25%

surtax.

Disposition:

Decision of the Court of Tax Appeals AFFIRMED.

ORDINARY ASSETS AND CAPITAL ASSETS

Capital Asset v. Ordinary Asset

ANTONIO TUASON, JR., vs. JOSE B. LINGAD, as Commissioner of Internal RevenueCastro, J. | July 31, 1974

FACTS: In 1948 the petitioner inherited from his mother several tracts of land, among which were twocontiguous parcels situated on Pureza and Sta. Mesa streets in Manila. When the petitioner's mother wasyet alive she had these two parcels subdivided into twenty-nine lots. Twenty-eight were allocated to theirthen occupants who had lease contracts with the petitioner's predecessor, which contracts expired onDecember 31, 1953. The 29th lot was not leased to any person because of its low elevation. The petitionertook possession of the mentioned parcels in 1950, at which time he instructed his attorney-in-fact, J.Antonio Araneta, to sell them. No difficulty was encountered in selling the 28 lots, which eventuallypassed to their respective occupants, but Lot 29 was not sold immediately, as its low elevationnecessitated filling. Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdividedinto small lots and paved. The small lots were then sold over the years on a uniform 10-year annual

amortization basis. Araneta did not employ any broker nor did he put up advertisements for the sale.In 1953 and 1954 the petitioner reported his income from the sale of the small lots as long-term

capital gains. The revenue examiner ruled against petitioner's treatment of his gains from the sales, butthis was overruled by the Collector of Internal Revenue in an Opinion in 1957, and the revenue examinersubsequently approved such treatment. In 1963, however, the Commissioner reversed himself andconsidered the petitioner's profits from the sales of the mentioned lots as ordinary gains. The petitionerwas thus advised by the Bureau to pay deficiency income tax for 1957. He moved for reconsideration,was denied, and went up to the Court of Tax Appeals, which however rejected his posture and ordered

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him, in addition, to pay a 5% Surcharge and 1% monthly interest "pursuant to Sec. 51(e) of the RevenueCode."

ISSUE: WON his subsequent sales of the mentioned lots should be recognized as ordinary gains and notgains from the sale of capital assets under section 34(1) of the National Internal Revenue Code, orwhether the inherited lots were capital assets

HELD: The petitioner's sales of the lots forming part of his rental business are sales of non-capital assets,and the profit from the sales is ordinary income.

The petitioner argues that as he was engaged in the business of leasing the lots he inherited fromhis mother as well other real properties, thus his subsequent sales of the mentioned lots cannot berecognized as sales of capital assets but of "real property used in trade or business of the taxpayer." Thepetitioner argues that (1) he was not the one who leased the lots in question; (2) the lots were residential,not commercial; and (3) before the leases on the lots expired he was powerless to eject the lesseestherefrom.

As thus defined by law, the term "capital assets" includes all the properties of a taxpayer whetheror not connected with his trade or business, except: (1) stock in trade or other property included in thetaxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his trade or

business; (3) property used in the trade or business of the taxpayer and subject to depreciation allowance;and (4) real property used in trade or business.

If the taxpayer sells or exchanges any of the properties above-enumerated, any gain or lossrelative thereto is an ordinary gain or an ordinary loss. The gain or loss from the sale or exchange of allother properties of the taxpayer is a capital gain or a capital loss.

The Tax Code's provision on long-term capital gains is a statute of partial exemption. Since therule is that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor ofthe taxing authority, the field of application of the term "capital assets" is necessarily narrow, while itsexclusions must be interpreted broadly. It is therefore the taxpayer's burden to bring himself squarelywithin the terms of a tax-exemption, otherwise, all doubts will be resolved against him. Nonetheless, inthe determination of whether a piece of property is a capital asset or an ordinary asset, a carefulexamination and weighing of the circumstances must be made.

When the petitioner obtained by inheritance the parcels in question, what was transferred to himwas not merely the duty to respect the terms of any contract thereon, but the correlative right to receiveand enjoy the fruits of the business and property. The record discloses that the petitioner owned other realproperties which he putt out for rent from which he derived a substantial income, and for which he had topay the real estate dealer's tax. In fact, even in 1957 the petitioner was receiving rental payments from the28 lots, even if the leases executed by his mother had expired in 1953.

The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deservea different characterization for tax purposes. Circumstances show that he was engaged in the real estatebusiness: (1) the parcels of land involved an area large enough to be transformed into a subdivision, andlocated in the heart of Metropolitan Manila; (2) they were subdivided into small lots and then sold oninstallment basis, which manner of selling is one of the basic earmarks of a real estate business; (3)valuable improvements were introduced to the lots for the obvious purpose of making the lots more

saleable, and not just for liquidation; (4) the employment of Araneta indicates the existence of owner-realty broker relationship; (5) the sales were made with frequency and continuity, and from these thepetitioner consequently received substantial income periodically; (6) the annual sales volume of thepetitioner from the said lots was considerable; and (7) the petitioner, by his own tax returns, was not astranger to the real estate business. Under the circumstances, this Court finds that the income of thepetitioner from the sales of the lots in question should be considered as ordinary income.

This Court notes, however, that in ordering the petitioner to pay the deficiency income tax, theTax Court also required him to pay a 5% surcharge plus 1% monthly interest. This should be eliminatedbecause the petitioner relied in good faith upon the Opinions rendered by the highest officials of the

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Bureau of Internal Revenue, including the Commissioner himself. The Court of Tax Appeals is affirmed,except as to its imposition of the 5% surcharge and 1% monthly interest, which is set aside. No costs.

CALASANZ v. COMMISSIONER OF INTERNAL REVENUEFernan, J.| October 9, 1986

Facts: Ursula Calasanz inherited from her father an agricultural land. In order to liquidate her inheritance,she had the land surveyed and subdivided into lots. Improvements were introduced to make the lotssaleable. The lots were then sold to the public for profit. In their income tax return for the year 1957, thespouses Calasanz declared the profits they realized from the sale of the subdivided lots as taxable capitalgains. The Commissioner of Internal Revenue, upon review of the ITR, concluded that the profits fromthe sale of the lots should betreated as ordinary income, not as capital gains. CIR, affirmed by CTA, assessed the spouses deficiencyincome tax on said profits.

Issue: Were the gains realized from the sale of the lots (a)taxable in full as ordinary income, or (b)capitalgains taxable at capital gain rates.

Held: Ordinary income taxable in full. The assets of a taxpayer are classified into ordinary assets andcapital assets. Sec 34 (a) (1) of the Tax Code broadly defines capital assets as property held by thetaxpayer[except] property held by the taxpayer primarily for sale to customers in the ordinarycourse of his trade or business. Properties falling under the exception just mentioned are ordinaryassets. Any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gaindepending on the kind of asset involved in the transaction. A property which is a capital asset may bereclassified as an ordinary asset if it is shown that the activity in which it is used is in furtherance of or inthe course of the taxpayers trade or business.

--> In this case, the inherited property was substantially improved and very actively sold. Thus,the property may be treated as held primary for sale to customers in the ordinary course of theheirs business. The property is an ordinary asset. Gains from its sale are ordinary income taxable

in full.

Ferrer v CollectorRegala, J. | August 31, 1962

Facts: Ferrer was the owner of La Suiza bakery from October 16, 1951 until September 15, 1955 whenhe sold the same to Juan Pons for P100,000. He filed his income tax return in February 1956 whichshowed that he had a net profit of P19678.09 from the sale of the bakery From this amount, he paidP2439 ass income tax.

Later, petitioner sought a refund of P2039 arguing that the bakery was a capital asset which he had heldfor more than twelve months, so that the profit from its sale was a long term capital gain, and therefore,only 50 per cent of it was taxable under the National Internal Revenue Code.

Issue: Whether or not the sale of the La Suiza Bakery was a sale of a capital asset so that the profitsderived from the sale is taxable up to 50 per cent only or comminuted into its component parts, each partto be tested against the definition of a capital assets in the tax code.

Held/ Ratio:The court cited the case ofWilliams v Mcgowen wherein it was held that generally, all property is capitalasset, for which there are only three exceptions: first is stock in trade or other property of a kind which

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would properly be included in the inventory, second, property primarily for sale to customers; and finallyproperty used in the trade or business of a character which is subject to allowance for depreciation.The La Suiza Bakery was a sale not of a single asset but of individual assets that made up the business.Since petitioner failed to point out what part of the price he had received could be fairly attributed to eachasset, the tax court correctly denied his claim

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf andas judicial co-guardians of JOSE ROXAS, petitioners, vs. COURT OF TAX APPEALS and

COMMISSIONER OF INTERNAL REVENUE, respondents.BENGZON, J.P.,J. | April 26, 1968

FACTS: Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildrenby hereditary succession the following properties:(1) Agricultural lands with a total area of 19,000hectares, situated in the municipality of Nasugbu, Batangas province; (2) A residential house and lotlocated at Wright St., Malate, Manila; and (3) Shares of stocks in different corporations.

To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and

Jose Roxas, formed a partnership called Roxas y Compania.

At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbufor generations expressed their desire to purchase from Roxas y Cia the parcels which they actuallyoccupied. For its part, the Government, in consonance with the constitutional mandate to acquire biglanded estates and apportion them among landless tenants-farmers, persuaded the Roxas brothers to partwith their landholdings. It turned out however that the Government did not have funds to cover thepurchase price, and so a special arrangement was made for the Rehabilitation Finance Corporation toadvance to Roxas y Cia the amount of P1,500,000.00 as loan. Collateral for such loan were the landsproposed to be sold to the farmers. Under the arrangement, Roxas y Cia allowed the farmers to buy thelands for the same price but by installment, and contracted with the Rehabilitation Finance Corporation topay its loan from the proceeds of the yearly amortizations paid by the farmers.

In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 andP29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale ofcapital asset held for more than one year pursuant to Section 34 of the Tax Code.

On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment ofreal estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for latepayment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for latepayment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia received houserentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of areal estate who derives a yearly rental income therefrom in the amount of P3,000.00 or more is considereda real estate dealer and is liable to pay the corresponding fixed tax.

The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securitiesagainst Roxas y Cia., on the fact that said partnership made profits from the purchase and sale ofsecurities.

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia of the unreported 50%of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, andthe disallowance of deductions from gross income of various business expenses and contributions claimed

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by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia subdivided its Nasugbu farmlands and sold them to the farmers on installment, the Commissioner considered the partnership asengaged in the business of real estate, hence, 100% of the profits derived therefrom was taxed.

ISSUE: Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100%taxable?

HELD: NO.

It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them forgenerations was not only in consonance with, but more in obedience to the request and pursuant to thepolicy of our Government to allocate lands to the landless. It was the bounden duty of the Government topay the agreed compensation after it had persuaded Roxas y Cia to sell its haciendas, and to subsequentlysubdivide them among the farmers at very reasonable terms and prices. However, the Government couldnot comply with its duty for lack of funds. Obligingly, Roxas y Cia shouldered the Government's burden,went out of its way and sold lands directly to the farmers in the same way and under the same terms aswould have been the case had the Government done it itself. For this magnanimous act, the municipalcouncil of Nasugbu passed a resolution expressing the people's gratitude.

In fine, Roxas y Cia cannot be considered a real estate dealer for the sale in question. Hence, pursuant toSection 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from thesale thereof is capital gain, taxable only to the extent of 50%.

Treatment of Sale or Exchange of Capital Assets which are not Real Property

CALASANZ v. COMMISSIONER OF INTERNAL REVENUEFernan, J. | October 9, 1986

Facts: Ursula Calasanz inherited from her father an agricultural land. In order to liquidate her inheritance,she had the land surveyed and subdivided into lots. Improvements were introduced to make the lotssaleable. The lots were then sold to the public for profit. In their income tax return for the year 1957, thespouses Calasanz declared the profits they realized from the sale of the subdivided lots as taxable capitalgains. The Commissioner of Internal Revenue, upon review of the ITR, concluded that the profits fromthe sale of the lots should betreated as ordinary income, not as capital gains. CIR, affirmed by CTA, assessed the spouses deficiencyincome tax on said profits.

Issue: Were the gains realized from the sale of the lots (a)taxable in full as ordinary income, or (b)capitalgains taxable at capital gain rates.

Held: Ordinary income taxable in full. The assets of a taxpayer are classified into ordinary assets andcapital assets. Sec 34 (a) (1) of the Tax Code broadly defines capital assets as property held by thetaxpayer[except] property held by the taxpayer primarily for sale to customers in the ordinarycourse of his trade or business. Properties falling under the exception just mentioned are ordinaryassets. Any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gaindepending on the kind of asset involved in the transaction. A property which is a capital asset may bereclassified as an ordinary asset if it is shown that the activity in which it is used is in furtherance of or inthe course of the taxpayers trade or business.

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--> In this case, the inherited property was substantially improved and very actively sold. Thus,the property may be treated as held primary for sale to customers in the ordinary course of theheirs business. The property is an ordinary asset. Gains from its sale are ordinary income taxablein full.

TAX-FREE EXCHANGES AND OTHER TAX-EXEMPT TRANSACTIONS

In General

W. C. OGAN AND BOHOL LAND TRANSPORTATION CO v. BIBIANO L. MEER, Collector ofInternal Revenue

Perfecto, J. | 30 May 49

Facts:On 5 May 36, Ogan and BLT owned 100 and 200 shares of stock, respectively, of the Central MotorSupply Co. which had no other assets from that acquired from Motor Services Inc. In 1935, Centralowned shares of stock worth Php 304, 600 of Motor and in Feb of 1926, purchased further shares of thelatter.

The 5 board of directors of Motor were the same as the 5 board of directors of Central. On May 5, 1936, itwas resolved at the stockholders' meeting of the Central Motor Supply Co., Inc., that the 2,995 shares ofstock which it acquired from the Motor Service Co., Inc., should be transferred to the stockholders of theCentral Motor Supply Co., Inc., in exchange for an equipment number of shares of the stock of hiscorporation, while the remaining five shares of the Central Motor Company, Inc., would be retained andheld by its directors.

By such transfer, the CIR valued that from the transaction of PHP. 166.66 of share to each holder,because the stock value of Motor was then Php 100.00, each of them derived an income of Php. 66.66.

The companies contend that the value of Php 66.66 cannot be classified as income because (1) thecompanies shares were valued the same and so no gain materialized and that (2) the transaction was asimple company transaction as Central owned all of Motor.

Issue: W/N a gain was realized by the 5 May 36 transaction.

Held/ Ratio: YES.

Section 2 (c), paragraph 3 of Act No. 2833 as amended by Act No. 2926, referring to taxable income inrelation with section 2 (a) of said Act are involved in the litigation. Said pertinent provisions of law readas follows:

SEC. 2 (c) The gain or loss sustained from the sale or other disposition of property, real or personal ormixed, shall be determined in accordance with the following schedule:

(3) In the case of the exchange of one piece of property for another, the property received in exchangeshall be considered as equivalent of money in a sum equal to its market value on the date of which theexchange was made.

SEC. 2 (a). Subject only to such exemptions and deductions as are hereinafter allowed, the taxable netincome of a person shall include gains, profits, and income derived from salaries and wages, or

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compensation for personal service of whatever kind and in whatever from paid, or from professions,vocations, business, trade, commerce, sales or dealings in property, whether real or personal, growing outof the ownership or use of or interest, rent, dividends, securities, or the transaction of any business carriedon for gain or profits, or gains, profits and income derived from any source whatever.

The central argument of the companies was that because Central is the principal of Motor, no gain could

have realized. This cannot be given credence because the two companies are distinct and operateindependently of one another and as evidenced by the testimonies of the parties, the value of the marketvalue of stock then was Php 100, and as the transfer gained them Php66.66, the difference between themarket value per share of the Motor Service Supply Company, Inc., to its stockholders.

Merger or Consolidation

CIR vs. Rufino et al. and CTACruz, J. | February 27, 1987

FactsThe corporation is engaged in the theater/amusement business. The old corporations charter was about to

end. The new corporation was formed to absorb the assets of the first and continue its operations. Becauseof a prohibition in the old Corporation Law, it was necessary for the Old and New Corporations to enterinto a merger that involved a Deed of Assignment that mandated transfer of assets of the Old Corporationto the New Corporation in exchange for New Corporation stocks to be issued to the shareholders of theOld Corporation. Actual transfer of property was not made on the date of the merger. BIR questions theseries of transactions leading to the merger claiming that it was not undertaken for bona fide businesspurposes but merely to avoid liability for the capital gains tax on the exchange of the old for the newshares of stock.

Issue/HeldWhether or not the merger was formed to evade the capital gains tax No.

No taxable gain was derived by Rufino et al. from the questioned transaction. There was a valid mergeralthough the actual transfer of the properties subject of the Deed of Assignment was not made on the dateof the merger. In the nature of things, this was not possible. It was necessary for the Old Corporation tosurrender its net assets first to the New Corporation.

The Court finds no impediment to the exchange of property for stock between the two corporations beingconsidered to have been effected on the date of the merger. The certificates of stock subsequentlydelivered by the New Corporation to the private respondents were only evidence of the ownership of suchstocks. Although these certificates could be issued to them only after the approval by the SEC of theincrease in capitalization of the New Corporation, the title thereto, legally speaking was transferred tothem on the date the merger took effect, in accordance with the Deed of Assignment.

The basic consideration of course, is the purpose of the merger, as this would determine whether theexchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laiddown by the law is that the merger must be undertaken for a bona fide business purpose and not solely forthe purpose of escaping the burden of taxation. It has been suggested that one certain indication of ascheme to evade the capital gains tax is the subsequent dissolution of the New Corporation after thetransfer to it of the properties of the Old Corporation.

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We see no such furtive intention in this case. It is clear, in fact, that the purpose of the merger was tocontinue the business of the Old Corporation, whose corporate life was about to expire, through the NewCorporation to which all the assets and obligations of the former had been transferred. What arguesstrongly for the New Corporation is that it was not dissolved after the merger. On the contrary, itcontinued to operate the places of amusement originally owned by the Old Corporation. The merger inquestion involved a pooling of resources aimed at the continuation and expansion of business. It comes

under the NIRC exemption from the capital gains tax of property affected under lawful corporatecombinations.

Exchange of Property for Shares of Stock

LIDDELL & CO, INC. VS. CIRC. J. Bengzon | June 30, 1961

Facts: From 1946 to 1948, the purpose clause of the Articles of Incorporation of Liddell & Co. Inc. wasamended so as to limit its business activities to importations of automobiles and trucks, Liddell & Co. wasengaged in business as an importer and at the same time retailer of Oldsmobile and Chevrolet passengercars and GMC and Chevrolet trucks. On December 20, 1948, the Liddell Motors, Inc. was organized andregistered with the Securities and Exchange Commission with an authorized capital stock of P100,000 ofwhich P20,000 was subscribed and paid for as follows: Irene Liddell wife of Frank Liddell 19,996 sharesand Messrs. Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva, 1 share each..Beginning January 1949, Liddell & Co. stopped retailing cars and trucks; it conveyed them instead toLiddell Motors, Inc. which in turn sold the vehicles to the public with a steep mark-up. Since then,Liddell & Co. paid sales taxes on the basis of its sales to Liddell Motors Inc. considering said sales as itsoriginal sales. Upon review of the transactions between Liddell & Co. and Liddell Motors, Inc. the CIRdetermined that the latter was but an alter ego of Liddell & Co. He concluded that for sales tax purposes,those sales made by Liddell Motors, Inc. to the public were considered as the original sales of Liddell &Co., therefore assessing against Liddell & Co. a sales tax deficiency. In the computation, the gross sellingprice of Liddell Motors, Inc. to the general public from January 1, 1949 to September 15, 1950, was madethe basis without deducting from the selling price, the taxes already paid by Liddell & Co. in its sales tothe Liddell Motors Inc. The CTA upheld the position of the CIR.

Issues:

1) WON Liddell Motors, Inc. is an alter ego of Liddell & Co.;

2) WON Liddell & Co. is liable for the sales tax deficiency

Held:

1) YES. The mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and controlledby Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of the separatecorporate identity of one from the other. There is, however, in this instant case, a peculiar consequence ofthe organization and activities of Liddell Motors, Inc. The bulk of the business of Liddell & Co. waschanneled through Liddell Motors, Inc. On the other hand, Liddell Motors, Inc. pursued no activitiesexcept to secure cars, trucks, and spare parts from Liddell & Co. Inc. and then sell them to the generalpublic. These sales of vehicles by Liddell & Co. to Liddell Motors, Inc. for the most part were shown tohave taken place on the same day that Liddell Motors, Inc. sold such vehicles to the public. During the

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first six months of 1949, Liddell & Co. issued ten (10) checks payable to Frank Liddell which weredeposited by Frank Liddell in his personal account with the PNB. During this time also, he issued in favorof Liddell Motors, Inc. six (6) checks drawn against his personal account with the same bank. The checksissued by Frank Liddell to the Liddell Motors, Inc. were significantly for the most part issued on the sameday when Liddell & Co. Inc. issued the checks for Frank Liddell and for the same amounts.

2) YES. Where a corporation is a dummy, is unreal or a sham and serves no business purpose and isintended only as a blind, the corporate form may be ignored for the law cannot countenance a form that isbald and a mischievous fiction (Higgins vs. Smith). To allow a taxpayer to deny tax liability on the groundthat the sales were made through an other and distinct corporation when it is proved that the latter isvirtually owned by the former or that they are practically one and the same is to sanction a circumventionof our tax laws.

ACCOUNTING PERIODS AND METHODS

Recognition of Income

CONSOLIDATED MINES, INC. vs. COURT OF TAX APPEALS and COMMISSIONER OFINTERNAL REVENUE

MAKALINTAL, C.J. | August 29, 1974

Facts:

The Consolidated Mines, Inc. (Company) has certain mining claims located in Masinloc, Zambales.Because it wanted to relieve itself of the work and expense necessary for developing the claims, theCompany entered into an agreement with Benguet Consolidated Mines, whereby the latter undertook to

"explore, develop, mine, concentrate and market" the pay ore in said mining claims.

The Company filed its income tax returns for 1951, 1952, 1953 and 1956. In 1957 examiners of theBureau of Internal Revenue investigated the income tax returns filed by the Company because its auditorclaimed the refund of the sum of P107,472.00 representing alleged overpayments of income taxes for theyear 1951. After the investigation the examiners reported that (A) for the years 1951 to 1954 (1) theCompany had not accrued as an expense the share in the company profits of Benguet as operator of theCompany's mines, although for income tax purposes the Company had reported income and expenses onthe accrual basis; (2) depletion and depreciation expenses had been overcharged; and (3) the claims foraudit and legal fees and miscellaneous expenses for 1953 and 1954 had not been properly substantiated;and that (B) for the year 1956 (1) the Company had overstated its claim for depletion; and (2) certainclaims for miscellaneous expenses were not duly supported by evidence.

A deficiency income tax assessment was sent to the Company. The Company requested a reconsiderationof the assessment, but the Commissioner refused to reconsider, hence the Company appealed to the Courtof Tax Appeals.

The Tax Court rendered judgment ordering the Company to pay deficiency income taxes for the years1953, 1954 and 1956. The Tax Court subscribed to the theory of the Company that Benguet had no rightto share in "Accounts Receivable," hence one-half thereof may not be accrued as an expense of theCompany for a given year.

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Issue:

WON the Company used a hybrid method of accounting in the preparation of its income tax returns. NO

Held/Ratio:

The Commissioner questions what he characterizes as the "hybrid" or "mixed" method of accountingutilized by the Company, and approved by the Tax Court, in treating the share of Benguet in the netprofits from the operation of the mines in connection with its income tax returns.

It is said that accounting methods for tax purposes comprise a set of rules for determining when and howto report income and deductions. The U.S. Internal Revenue Codeallows each taxpayer to adopt theaccounting method most suitable to his business, and requires only that taxable income generally be basedon the method of accounting regularly employed in keeping the taxpayer's books, provided that themethod clearly reflects income.

Here we have to distinguish between (1) the method of accountingused by the Company in determining

its net income for tax purposes; and (2) the method of computation agreed upon between the Companyand Benguetin determining the amount of compensation that was to be paid by the former to the latter.The parties, being free to do so, had contracted that in the method of computing compensation the basiswere "cash receipts" and "cash payments." Once determined in accordance with the stipulated bases andprocedure, then the amount due Benguet for each month accruedat the end of that month, whether theCompany had made payment or not. To make the Company deduct as an expense one-half of the"Accounts Receivable" would, in effect, be equivalent to giving Benguet a right which it did not haveunder the contract, and to substitute for the parties' choice a mode of computation of compensation notcontemplated by them.

Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct in notaccruing said one-half as a deduction. The Company was not using a hybrid method of accounting, but

was consistent in its use of the accrual method of accounting.

Disposition:

Decision modified.

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G.R. Nos. L-44501-05 July 19, 1990

JOHN L. GARRISON, FRANK ROBERTSON, ROBERT H. CATHEY, JAMES W.ROBERTSON, FELICITAS DE GUZMAN and EDWARD McGURKvs. COURT OF APPEALSand REPUBLIC OF THE PHILIPPINES

NARVASA, J.:

Facts:

All the petitioners are United States citizens, entered this country under Section 9 (a) of the PhilippineImmigration Act of 1940, as amended, and presently employed in the United States Naval Base,Olongapo City. For the year 1969 John L. Garrison earned $15,288.00; Frank Robertson, $12,045.84;Robert H. Cathey, $9,855.20; James W. Robertson, $14,985.54; Felicitas de Guzman, $ 8,502.40; andEdward McGurk $12,407.99 . . .

Petitioners "received separate notices from the District Revenue Officer stationed at Olongapo City,informing them that they had not filed their respective income tax returns for the year 1969, as required

by Section 45 of the National Internal Revenue Code, and directing them to file the said returns within tendays from receipt of the notice. But the accused refused to file their income tax returns, claiming that theyare not resident aliens but only special temporary visitors, having entered this country under Section 9 (a)of the Philippine Immigration Act of 1940, as amended. The accused also claimed exemption from filingthe return in the Philippines by virtue of the provisions of Article XII, paragraph 2 of the US-RP MilitaryBases Agreement."

The Court of First Instance of Zambales at Olongapo City convicted the petitioners "of violation ofSection 45 (a) (1) (b) of the National Internal Revenue Code, as amended, by not filing their respectiveincome tax returns for the year 1969" and sentencing "each of them to pay a fine of P2,000.00, withsubsidiary imprisonment in case of insolvency, and to pay the costs proportionately. The Court ofAppeals affirmed.

Issue/Held:

WON petitioners are required to file income tax returns. YES

Ratio:

The provision under which the petitioners claim exemption, on the other hand, is contained in the MilitaryBases Agreement between the Philippines and the United States, reading as follows:

2. No national of the United States serving in or employed in the Philippines inconnection with construction, maintenance, operation or defense of the bases and reside

in the Philippines by reason only of such employment, or his spouse and minor childrenand dependents, parents or her spouse, shall be liable to pay income tax in the Philippinesexcept in regard to income derived from Philippine sources or sources other than the USsources.

There is no question (1) that the petitioners are U.S. nationals serving or employed in the Philippines; (2)that their employment is "in connection with construction, maintenance, operation or defense" of a base,Subic Bay Naval Base; (3) they reside in the Philippines by reason only of such employment since, as isundisputed, they all intend to depart from the country on termination of their employment; and (4) they

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earn no income from Philippine sources or sources other than the U.S. sources. Therefore, by the explicitterms of the Bases Agreement, none of them "shall be liable to pay income tax in the Philippines . . ."Indeed, the petitioners' claim for exemption pursuant to this Agreement had been sustained by the Courtof Tax Appeals and affirmed by the Supreme Court, which set aside and cancelled the assessments madeagainst said petitioners by the BIR for deficiency income taxes for the taxable years 1969-1972.

Each of the petitioners does indeed fall within the letter of the codal precept that an "alien residing in thePhilippines" is obliged "to file an income tax return." None of them may be considered a non-residentalien, "a mere transient or sojourner," who is not under any legal duty to file an income tax return underthe Philippine Tax Code. This is made clear by Revenue Relations No. 2 of the Department of Finance ofFebruary 10, 1940, which lays down the relevant standards on the matter:

An alien actually present in the Philippines who is not a mere transient or sojourner is aresident of the Philippines for purposes of income tax. Whether he is a transient or not isdetermined by his intentions with regards to the length and nature of his stay. A merefloating intention indefinite as to time, to return to another country is not sufficient toconstitute him as transient. If he lives in the Philippines and h

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