Reviewer Tax Finals.docx

Calansanz vs CIR Facts: Ursula Calasanz inherited from her father an agricultural land. Improvements were introduced to make such land saleable and later in it was sold to the public at a profit. The Revenue examiner adjudged Ursula and her spouse as engaged in business as real estate dealers and required them to pay the real estate dealer’s tax. Issue: Whether or not the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains taxable at capital gain rates Ruling: They are taxable as ordinary income. The activities of Calasanz are indistinguishable from those invariably employed by one engaged in the business of selling real estate. One strong factor is the business element of development which is very much in evidence. They did not sell the land in the condition in which they acquired it. Inherited land which an heir subdivides and makes improvements several times higher than the original cost of the land is not a capital asset but an ordinary asses. Thus, in the course of selling the subdivided lots, they engaged in the real estate business and accordingly the gains from the sale of the lots are ordinary income taxable in full.

PICOP vs CA Facts: Paper Industries Corporation of the Philippines (PICOP) is a Philippine corporation registered with the Board of Investments (BOI) as a preferred pioneer enterprise with respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and veneer mills. Petitioner received from the Commissioner of Internal Revenue (CIR) two (2) letters of assessment and demand (a) one for deficiency transaction tax and for documentary and science stamp tax; and (b) the other for deficiency income tax for 1977, for an aggregate amount of PhP88,763,255.00. PICOP protested the assessment of deficiency transaction tax , the documentary and science stamp taxes, and the deficiency income tax assessment. CIR did not formally act upon these protests, but issued a warrant of distraint on personal property and a warrant of levy on real property against PICOP, to enforce collection of the contested assessments, thereby denying PICOP's protests. Thereupon, PICOP went before (CTA) appealing the assessments. On 15 August 1989, CTA rendered a decision, modifying the CIR’s findings and holding PICOP liable for the reduced aggregate amount of P20,133,762.33. Both parties went to the Supreme Court, which referred the case to the Court of Appeals (CA).

CA denied the appeal of the CIR and modified the judgment against PICOP holding it liable for transaction tax and absolved it from payment of documentary and science stamp tax and compromise penalty. It also held PICOP liable for deficiency of income tax. Issues: 1.

Whether PICOP is liable for transaction tax

2.

Whether PICOP is liable for documentary and science stamp tax

3.

Whether PICOP is liable for deficiency income tax

Held: 1. YES. PICOP reiterates that it is exempt from the payment of the transaction tax by virtue of its tax exemption under R.A. No. 5186, as amended, known as the Investment Incentives Act, which in the form it existed in 1977-1978, read in relevant part as follows: "SECTION 8. Incentives to a Pioneer Enterprise. — In addition to the incentives provided in the preceding section, pioneer enterprises shall be granted the following incentive benefits: (a) Tax Exemption. Exemption from all taxes under the National Internal Revenue Code, except income tax, from the date of investment is included in the Investment Priorities Plan x x x”. The Supreme Court holds that that PICOP's tax exemption under R.A. No. 5186, as amended, does not include exemption from the thirty-five percent (35%) transaction tax. In the first place, the thirty-five percent (35%) transaction tax is an income tax, a tax on the interest income of the lenders or creditors as held by the Supreme Court in the case of Western Minolco Corporation v. Commissioner of Internal Revenue. The 35% transaction tax is an income tax on interest earnings to the lenders or placers. The latter are actually the taxpayers. Therefore, the tax cannot be a tax imposed upon the petitioner. In other words, the petitioner who borrowed funds from several financial institutions by issuing commercial papers merely withheld the 35% transaction tax before paying to the financial institutions the interest earned by them and later remitted the same to the respondent CIR. The tax could have been collected by a different procedure but the statute chose this method. Whatever collecting procedure is adopted does not change the nature of the tax. It is thus clear that the transaction tax is an income tax and as such, in any event, falls outside the scope of the tax exemption granted to registered pioneer enterprises by Section 8 of R.A. No. 5186, as amended. PICOP was the withholding agent, obliged to withhold thirty-five percent (35%) of the interest payable to its lenders and to remit the amounts so withheld to the Bureau of Internal Revenue ("BIR"). As a withholding, agent, PICOP is made personally liable for the thirty-five percent (35%) transaction tax 10 and if it did not actually withhold thirty-five percent (35%) of the interest monies it had paid to its lenders, PICOP had only itself to blame.

2. NO. The CIR assessed documentary and science stamp taxes, amounting to PhP300,000.00, on the issuance of PICOP's debenture bonds. Tax exemptions are, to be sure, to be "strictly construed," that is, they are not to be extended beyond the ordinary and reasonable intendment of the language actually

used by the legislative authority in granting the exemption. The issuance of debenture bonds is certainly conceptually distinct from pulping and paper manufacturing operations. But no one contends that issuance of bonds was a principal or regular business activity of PICOP; only banks or other financial institutions are in the regular business of raising money by issuing bonds or other instruments to the general public. The actual dedication of the proceeds of the bonds to the carrying out of PICOP's registered operations constituted a sufficient nexus with such registered operations so as to exempt PICOP from taxes ordinarily imposed upon or in connection with issuance of such bonds. The Supreme Court agrees with the Court of Appeals on this matter that the CTA and the CIR had erred in rejecting PICOP's claim for exemption from stamp taxes.

3. YES. PICOP did not deny the existence of discrepancy in their Income Tax Return and Books of Account owing to their procedure of recording its export sales (reckoned in U.S. dollars) on the basis of a fixed rate, day to day and month to month, regardless of the actual exchange rate and without waiting when the actual proceeds are received. In other words, PICOP recorded its export sales at a predetermined fixed exchange rate. That pre-determined rate was decided upon at the beginning of the year and continued to be used throughout the year. Because of this, the CIR has made out at least a prima facie case that PICOP had understated its sales and overstated its cost of sales as set out in its Income Tax Return. For the CIR has a right to assume that PICOP's Books of Accounts speak the truth in this case since, as already noted, they embody what must appear to be admissions against PICOP's own interest.

Dispositive: WHEREFORE, for all the foregoing, the Decision of the Court of Appeals is hereby MODIFIED and Picop is hereby ORDERED to pay the CIR the aggregate amount of P43,794,252.51 itemized as follows: (1)

Thirty-five percent (35%) transaction tax

P

(2)

Total Deficiency Income Tax Due

P

3,578,543.51 40,215,709.00

(B) Interest.- (1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax: Forty-one percent (41%) beginning January 1, 1998; Thirty-nine percent (39%) beginning January 1, 1999; and Thirty-eight percent (38%) beginning January 1, 2000;

CIR V. Isabela Cultural Corp FACTS: BIR disallowed Isabela Cultural Corp. deductible expenses for services which were rendered in 1984 and 1985 but only billed, paid and claimed as a deduction on 1986. After CA sent its demand letters, Isabela protested. CTA found it proper to be claimed in 1986 and affirmed by CA ISSUE: W/N Isabela who uses accrual method can claim on 1986 only

HELD: case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability under Assessment Notice No. FAS-1-86-90-000680.

NO The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services, are: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; - qualified by Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon the basis of which the net income is computed (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment.

The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something less than an exact or completely accurate amount. The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in connection with ICC’s tax problems for the year 1984. As testified by the Treasurer of ICC, the firm has been its counsel since the 1960’s. - failed to prove the burden Esso Standard Eastern Inc. vs CIR FACTS: Esso deducted from its gross income, as part of its ordinary and necessary business expenses, margin fees it had paid to the Central Bank on its profit remittances to its New York Office. The CIR disallowed the claimed deduction. ESSO appealed to the CTA but was denied. Hence, this petition.

ISSUE: Whether the margin fees were deductible from gross income either as a (1) tax or (2) ordinary and necessary business expense RULING:

(1) No, it is not a tax. A tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our country’s international reserves. Thus the margin fee was imposed by the State in the exercise of its police power ant not the power of taxation.

(2) No. ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. This is error. The public respondent is correct when it asserts that the paramount rule is that claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations... The taxpayer in every instance has the burden of justifying the allowance of any deduction claimed. deutsche bank ag manila branch Facts: Pursuant to the National Internal Revenue Code of 1997, on October 21, 2003, the petitioner remitted to the respondent the amount of Php 67,688,553.51, representing fifteen (15) percent of the branch profit remittance tax (BPRT) on its regular banking unit (RBU) net income remitted to the Deutsche Bank of Germany (DB Germany) for 2002 and prior taxable years.

Believing that they made an overpayment of the BPRT, on October 4, 2005, the petitioner filed with the BIR Large Taxpayers Assessment and Investigation Division an administrative claim for refund or a tax credit certificate representing the alleged excess BPRT paid (amount of Php 22,562,851.17). The petitioners also requested from the International Tax Affairs Division (ITAD) for a confirmation of its entitlement to a preferential tax rate of 10% under the RP-Germany Tax Treaty.

Because of the alleged inaction of the BIR on the administrative claim, on October 18, 2005, the petitioner filed a petition for review with the Court of Tax Appeals (CTA), reiterating its claim for refund or tax credit certificate representing the alleged excess BPRT paid. The claim was denied on the ground that application for tax treaty relief was not filed with ITAD prior to the payment of BPRT, thereby violating the fifteen-day period mandated under Section III, paragraph 2 of the Revenue Memorandum Order No. 1-2000. Also, the CTA Second Division relied on an en banc decision of the CTA that before the benefits of a tax treaty may be extended to a foreign corporation, the latter should first invoke the provisions of the tax treaty and prove that they indeed apply to the corporation (Mirant Operations Corporation v Commissioner of Internal Revenue).

Hence this petition.

Issue: Whether or not the failure to strictly comply with the provisions of RMO No. 1-2000 will deprive persons or corporations the benefit of a tax treaty.

Ruling: No. The constitution provides for the adherence to the general principles of international law as part of the law of the land (Article II, Section 2). Every treaty is binding upon the parties, and obligations must be performed (Article 26, Vienna Convention on the Law on Treaties). There is nothing in RMO 1-2000 indicating a deprivation of entitlement to a tax treaty for failure to comply with the fifteen-day period. The denial of availment of tax relief for the failure to apply within the prescribed period (under the administrative issuance) would impair the value of the tax treaty. Also, the obligation to comply with the tax treaty must take precedence over the objective of RMO 1-2000 because the non-compliance with tax treaties would have negative implications on international affairs and would discourage foreign investments.

Dispositive: The petition was granted, the CTA en banc decision was set aside and reversed. The respondent was ordered to refund or issue a tax credit certificate (the amount of Php 22,562,851.17) in favor of the petitioner.

Air Canada vs CIR Air Canada is a foreign corporation organized and existing under the laws of Canada. On April 24, 2000, it was granted an authority to operate as an offline carrier by the Civil Aeronautics Board, subject to certain conditions, which authority would expire on April 24, 2005. As an off-line carrier, Air Canada does not have flights originating from or coming to the Philippines and does not operate any airplane in the Philippines.

On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the Philippines. Aerotel sells Air Canada’s passage documents in the Philippines.

For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross Philippine Billings in the total amount of ₱5,185,676.77.

On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income taxes amounting to ₱5,185,676.77 before the Bureau of Internal Revenue (BIR). It’s basis was found in the revised definition of Gross Philippine Billings under Section 28(A)(3)(a) of the 1997 National Internal Revenue Code (NIRC) .

To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the Court of Tax Appeals (CTA).

The CTA denied the petition. It found that Air Canada was engaged in business in the Philippines through a local agent that sells airline tickets on its behalf. As such, it held that while Air Canada was not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it was nevertheless liable to pay the 32% corporate income tax on income derived from the sale of airline tickets within the Philippines pursuant to Section 28(A)(1). On appeal, the CTA En Banc affirmed the ruling of the CTA First Division.

ISSUES & HELD: 1) Whether Air Canada is subject to the 2½% tax on Gross Philippine Billings pursuant to Section 28(A)(3).

NO. Air Canada is not is not liable to tax on Gross Philippine Billings under Section 28(A)(3). The tax attaches only when the carriage of persons, excess baggage, cargo, and mail originated from the Philippines in a continuous and uninterrupted flight, regardless of where the passage documents were sold. Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine Billings tax.

2) If not, whether Air Canada is a resident foreign corporation engaged in trade or business and thus, can be subject to the regular corporate income tax of 32% pursuant to Section 28(A)(1);

YES. Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1) , thus, it may be subject to 32% tax on its taxable income.

The Court in Commissioner of Internal Revenue v. British Overseas Airways Corporation declared British Overseas Airways Corporation, an international air carrier with no landing rights in the Philippines, as a resident foreign corporation engaged in business in the Philippines through its local sales agent that sold and issued tickets for the airline company. According to said case, there is no specific criterion as to what constitutes “doing” or “engaging in” or “transacting” business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization.

An offline carrier is “any foreign air carrier not certificated by the Civil Aeronautics Board, but who maintains office or who has designated or appointed agents or employees in the Philippines, who sells or offers for sale any air transportation in behalf of said foreign air carrier and/or others, or negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such transportation.”

Petitioner is undoubtedly “doing business” or “engaged in trade or business” in the Philippines. In the case at hand, Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits to petitioner. Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline carrier in the Philippines for a period of five years. Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources within the Philippines.

3)

Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

YES. While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) on its taxable income from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1½% of gross revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a “foreign corporation organized and existing under the laws of Canada.”

The second paragraph of Article VIII states that “profits from sources within a Contracting State derived by an enterprise of the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed the lesser of a) one and one-half per cent of the gross revenues derived from sources in that State; and b) the lowest rate of Philippine tax imposed on such profits derived by an enterprise of a third State.”

“By reason of our bilateral negotiations with Canada, we have agreed to have our right to tax limited to a certain extent.” Thus, we are bound to extend to a Canadian air carrier doing business in the Philippines through a local sales agent the benefit of a lower tax equivalent to 1½% on business profits derived from sale of international air transportation.

Our Constitution provides for adherence to the general principles of international law as part of the law of the land. The time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must be performed by them in good faith. More importantly, treaties have the force and effect of law in this jurisdiction. (Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue).

4) Whether the appointment of a local general sales agent in the Philippines falls under the definition of “permanent establishment” under Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty;

Article V of the Republic of the Philippines-Canada Tax Treaty defines “permanent establishment” as a “fixed place of business in which the business of the enterprise is wholly or partly carried on.” Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that “a person acting in a Contracting State on behalf of an enterprise of the other Contracting State shall be deemed to be a permanent establishment in the first-mentioned State if . . . he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for that enterprise.”

Section 3 of The Civil Aeronautics Act of the Philippines, defines a general sales agent as “a person, not a bonafide employee of an air carrier, who pursuant to an authority from an airline, by itself or through an agent, sells or offers for sale any air transportation, or negotiates for, or holds himself out by solicitation, advertisement or otherwise as one who sells, provides, furnishes, contracts or arranges for, such air transportation.”

Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a “permanent establishment” in the Philippines as defined under the Republic of the Philippines-Canada Tax Treaty. Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales Agency Agreement executed between the parties. It has the authority or power to conclude contracts or bind petitioner to contracts entered into in the Philippines. A third-party liability on contracts of Aerotel is to petitioner as the principal, and not to Aerotel, and liability to such third party is enforceable against petitioner. While Aerotel maintains a certain independence and its activities may not be devoted wholly to petitioner, nonetheless, when representing petitioner pursuant to the Agreement, it must carry out its functions solely for the benefit of petitioner and according to the latter’s Manual and written instructions. Aerotel is required to submit its annual sales plan for petitioner’s approval.

In essence, Aerotel extends to the Philippines the transportation business of petitioner. It is a conduit or outlet through which petitioner’s airline tickets are sold.

Under Article VII of the Republic of the Philippines-Canada Tax Treaty, the “business profits” of an enterprise of a Contracting State is “taxable only in that State, unless the enterprise carries on business in the other Contracting State through a permanent establishment.” Thus, income attributable to Aerotel or from business activities effected by petitioner through Aerotel may be taxed in the Philippines.

5)

Whether petitioner Air Canada is entitled to the refund.

NO. As discussed in South African Airways, the grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund.

In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of 1 ½% of its gross revenues amounting to P345,711,806.08149 from the third quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(l) of the 1997 NIRC 32% of taxable income, that is, gross income less deductions will exceed the maximum ceiling of 1

½% of gross revenues as decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming. (B) The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government "General professional partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business cralaw (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person (D) Capital Gains from Sale of Real Property. - (1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer.

(2) Exception - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax.

For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.

SEC. 39. Capital Gains and Losses. -

(A) Definitions.chanrobles virtual law library - As used in this Title -

(1) Capital Assets. - The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. (2) Net Capital Gain. - The term "net capital gain" means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.

(3) Net Capital Loss. - The term "net capital loss" means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.

(B) Percentage Taken Into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: (1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and (2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;(C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges.

If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision

thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses.

(D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twelve (12) months.

(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof) with interest coupons or in registered form, shall be considered as amounts received in exchange therefor. cralaw

(F) Gains or Losses From Short Sales, Etc. - For purposes of this Title -

(1) Gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets; and (2) Gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as capital gains or losses. (B) Interest.- (1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax: Forty-one percent (41%) beginning January 1, 1998; Thirty-nine percent (39%) beginning January 1, 1999; and Thirty-eight percent (38%) beginning January 1, 2000; (2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed a a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year; (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or (c)If the indebtedness is incurred to finance petroleum exploration.

(B) Losses from Sales or Exchanges of Property.chanrobles virtual law library - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly - (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (4) Between the grantor and a fiduciary of any trust; or (5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or (6) Between a fiduciary of a trust and beneficiary of such trust. (3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. Gross Profit- Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross Sale- Gross sales are the grand total of all sale transactions reported in a period, without any deductions included within the figure. Net sales are defined as gross sales minus the following three deductions: Sales allowances. A reduction in the price paid by a customer, due to minor product defects. Gross Receipt- Gross receipts and gross sales both define the total amount of money that your business has received in a given period, such as a year or quarter. The primary difference is that gross sales refers specifically to sales income, while gross receipts includes income from non-sales sources, such as interest, dividends or donations.

Carry over rule: exceptions, enumerations SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that:

(A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant

which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiaries, whether distributed to them or not.

Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable year. cralaw

(B) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary. cralaw

(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries. Cralaw

PAGCOR vs BIR FACTS: • On April 17, 2006, petitioner filed a Petition for Review on Certiorari and Prohibition seeking the declaration of nullity of Section 1 of RA 9337 insofar as it amends Section 27(c) of RA 8424, otherwise known as the NIRC by excluding petitioner from the enumeration of government-owned or controlled corporations (GOCCs) exempted from liability for corporate income tax. • On March 15, 2011, SC partly granted the petition insofar as it held that the BIR Revenue Regulation No. 16-2005 which subjects PAGCOR to 10% VAT is null and void for being contrary to the NIRC. It also held that Section 1 of RA 9337 is valid and constitutional. • BIR issued RMC No. 33-2013 on April 17, 2013 pursuant to the decision which clarifies the “Income Tax and Franchise Tax Due from PAGCOR, its Contractees and Licensees.” It now subjects the income from PAGCOR’s operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools, and other related operations, to corporate income tax under the NIRC.

• PAGCOR filed a Motion for Clarification in the case entitled PAGCOR vs The Bureau of Internal Revenue, et al., which was promulgated on March 15, 2011 which also prays for the issuance of a TRO and/or writ of Preliminary Injunction against BIR in the implementation of BIR Revenue Memorandum Circular No. 33-2013 dated April 17, 2013. PAGCOR alleges that said RMC is an erroneous interpretation and application of the aforesaid decision.

ISSUE: 1.

Whether PAGCOR’s gaming income is subject to both 5% franchise tax and income tax?

2. Whether PAGCOR’s income from operation of related services is subject to both income tax and 5% franchise tax.

HELD: 1.

Gaming Income: Franchise Tax – YES; Income Tax - NO

Under PD 1869, as amended, petitioner is subject to income tax only with respect to its operations of related services. Accordingly, the income tax exemption ordained under Section 27(c) of RA 8424 clearly pertains only to petitioner’s income from operation of related services. Such income tax exemption could not have been applicable to petitioner’s income from gaming operations as it is already exempt therefrom under PD 1869.

There was no need for Congress to grant tax exemption to petitioner with respect to its income from gaming operating as the same is already exempted from all taxes of any kind or form, income or otherwise, whether national or local, under its Charter, save only for the five percent (5%) franchise tax. The exemption attached to the income from gaming operations exists independently would be downright ridiculous, if not deleterious, since petitioner would be in a worse position if the exemption was granted (then withdrawn) then when it was not granted at all in the first place.

2.

Income from Operation of related services: Income tax - YES ; Franchise tax - NO

Petitioner’s Charter is not deemed repealed or amended by RA 9337; petitioner’s income derived from gaming operation is subject only to the five percent (5%) franchise tax, in accordance with PD 1869, as amended. With respect to petitioner’s income from operation of other related services, the same is

subject to income tax only. The five percent (5%) franchise tax finds no application with respect to petitioner’s income from other related services, in view of the express provision of Section 14(5) of PD 1869, as amended.

Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from other related services without basis therefor.

SC granted the petition and ordered the respondent to cease and desist the implementation of RMC No. 33-2013 insofar as it imposes corporate income tax on petitioner’s income derived from its gaming operations; and franchise tax on petitioner’s income from other related services. Capital gain from sale of shares of stock p51 book (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings. (D) Capital Gains from Sale of Real Property. - (1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer. Production test