SEC. 32. Gross Income.

-
(A) General Definition. - Except when otherwise provided in this Title, gross income means all
income derived from whatever source, including (but not limited to) the following items:
(4) Interests;

SEC. 24. Income Tax Rates.

(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%)
is hereby imposed upon the amount of interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements;
royalties, except on books, as well as other literary works and musical compositions, which shall be
imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos
(P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other
winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within
the Philippines: Provided, however, That interest income received by an individual taxpayer (except
a nonresident individual) from a depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of
such interest income: Provided, further, That interest income from long-term deposit or investment
in the form of savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by certificates in such form prescribed by
the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection:
Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment
before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of the long-term deposit or investment certificate
based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%

SEC. 22. Definitions - When used in this Title:

(Y) The term 'deposit substitutes' shall mean an alternative from of obtaining funds from the public
(the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any
one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments
for the borrowers own account, for the purpose of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent or dealer. These instruments
may include, but need not be limited to bankers' acceptances, promissory notes, repurchase
agreements, including reverse repurchase agreements entered into by and between the Bangko
Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation
and similar instruments with recourse: Provided, however, That debt instruments issued for
interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves
against deposit liabilities, including those between or among banks and quasi-banks, shall not be
considered as deposit substitute debt instruments.

(FF) The term 'long-term deposit or investment certificates' shall refer to certificate of time
deposit or investment in the form of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments with a maturity period of not less than five
(5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued
by banks only (not by nonbank financial intermediaries and finance companies) to individuals in
denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by
the BSP.

SEC. 27. Rates of Income tax on Domestic Corporations.

(D) Rates of Tax on Certain Passive Incomes.
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived
by a depository bank under the expanded foreign currency deposit system from foreign currency
transactions with local commercial banks, including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency
depository system units and other depository banks under the expanded foreign currency deposit
system, including interest income from foreign currency loans granted by such depository banks
under said expanded foreign currency deposit system to residents, shall be subject to a final income
tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations
(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income
derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with offshore banking units, including any interest income derived from foreign currency
loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of
such income.
Any income of nonresidents, whether individuals or corporations, from transactions with said
offshore banking units shall be exempt from income tax.

(B) Tax on Nonresident Foreign Corporation.

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -
(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby
imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;

REVENUE REGULATIONS NO. 10-98

A final withholding tax of seven and a half percent (7-1/2%) is imposed on interest income which is
actually or constructively received by a resident from a foreign currency deposit. This tax applies to
such deposits accepted and held by an OBU or FCDU in the regular course of business.

No tax is imposed on interest income received by a non-resident from foreign currency bank
deposits.

DIVIDENDS DEFINED

A. Kinds of Dividends

a. Cash Dividend
b. Stock Dividend
c. Property Dividend
d. Liquidating Dividend

SEC. 24. Income Tax Rates.

(B) Rate of Tax on Certain Passive Income.
(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the
cash and/or property dividends actually or constructively received by an individual from a domestic
corporation or from a joint stock company, insurance or mutual fund companies and regional
operating headquarters of multinational companies, or on the share of an individual in the
distributable net income after tax of a partnership (except a general professional partnership) of
which he is a partner, or on the share of an individual in the net income after tax of an association, a
joint account, or a joint venture or consortium taxable as a corporation of which he is a member or
co-venturer:
Six percent (6%) beginning January 1, 1998;
Eight percent (8%) beginning January 1, 1999;
Ten percent (10% beginning January 1, 2000.
Provided, however, That the tax on dividends shall apply only on income earned on or after January
1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared
or distributed on or after January 1, 1998, be subject to this tax.

SEC. 25. Tax on Nonresident Alien Individual. -

(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or
Insurance or Mutual Fund Company or Regional Operating Headquarter or Multinational Company,
or Share in the Distributable Net Income of a Partnership (Except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests,
Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic
corporation, or from a joint stock company, or from an insurance or mutual fund company or from a
regional operating headquarter of multinational company, or the share of a nonresident alien
individual in the distributable net income after tax of a partnership (except a general professional
partnership) of which he is a partner, or the share of a nonresident alien individual in the net income
after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a
member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to
Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of
Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be
subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however,
that royalties on books as well as other literary works, and royalties on musical compositions shall be
subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That
cinematographic films and similar works shall be subject to the tax provided under Section 28 of this
Code: Provided, furthermore, That interest income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed by the Bangko
Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided,
finally, that should the holder of the certificate pre-terminate the deposit or investment before the
fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld
by the depository bank from the proceeds of the long-term deposit or investment certificate based on
the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There
shall be levied, collected and paid for each taxable year upon the entire income received from all
sources within the Philippines by every nonresident alien individual not engaged in trade or business
within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums,
annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or
periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent
(25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade
or business in the Philippines from the sale of shares of stock in any domestic corporation and real
property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

SEC. 28. Rates of Income Tax on Foreign Corporations.

(A) Tax on Resident Foreign Corporations. -
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation.
(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic
corporation liable to tax under this Code shall not be subject to tax under this Title.

(B) Tax on Nonresident Foreign Corporation. -

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -
(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby
imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;

SEC. 73. Distribution of dividends or Assets by Corporations. -

(A) Definition of Dividends. - The term 'dividends' when used in this Title means any distribution
made by a corporation to its shareholders out of its earnings or profits and payable to its
shareholders, whether in money or in other property. Where a corporation distributes all of its assets
in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether
individual or corporate, is a taxable income or a deductible loss, as the case may be.
(B) Stock Dividend. - A stock dividend representing the transfer of surplus to capital account shall
not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such
time and in such manner as to make the distribution and cancellation or redemption, in whole or in
part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the extent that it
represents a distribution of earnings or profits.
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any
distribution made to the shareholders or members of a corporation shall be deemed to have been
made form the most recently accumulated profits or surplus, and shall constitute a part of the annual
income of the distributee for the year in which received.
(D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable
income declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of
this Code, after deducting the corporate income tax imposed therein, shall be deemed to have been
actually or constructively received by the partners in the same taxable year and shall be taxed to
them in their individual capacity, whether actually distributed or not.

COMMISSIONER OF INTERNAL REVENUE, PETITIONER VS. WANDER PHILIPPINES, INC., AND

THE COURT OF TAX APPEALS, RESPONDENTS

FACTS:

Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized under
Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss corporation not
engaged in trade for business in the Philippines.

Wander filed it's witholding tax return for 1975 and 1976 and remitted to its parent company Glaro
dividends from which 35% withholding tax was withheld and paid to the BIR.

In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for reimbursement,
contending that it is liable only to 15% withholding tax in accordance with sec. 24 (b) (1) of the Tax
code, as amended by PD nos. 369 and 778, and not on the basis of 35% which was withheld ad paid
to and collected by the government. petitioner failed to act on the said claim for refund, hence
Wander filed a petition with Court of Tax Appeals who in turn ordered to grant a refund and/or tax
credit. CIR's petition for reconsideration was denied hence the instant petition to the Supreme Court.

ISSUE:

Whether or not Wander is entitled to the preferential rate of 15% withholding tax on dividends
declared and to remitted to its parent corporation.

HELD:

Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved in this case,
reads:
Sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is hreby further
amended to read as follows:
(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation not engaged in trade or business in the
Philippines, including a foreign life insurance company not engaged in life insurance business in the Philippines, shall pay a tax
equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as interest (except
interest on a foreign loans which shall be subject to 15% tax), dividends, premiums, annuities, compensation, remuneration
for technical services or otherwise emolument, or other fixed determinable annual, periodical ot casual gains, profits and
income, and capital gains: xxx Provided, still further that on dividends received 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 sec 53 (d) of this
code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit
against tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to
20% which represents the difference between the regular tax (35%) on corporation and the tax (15%) dividends as provided
in this section: xxx."

From the above-quoted provision, 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-
resident foreign corporation taxes deemed to have been paid in the Philippines equivakent to
20% which represents the difference betqween the regular tax (35%) on corpoorations and the tax
(15%) on dividends.

While it may be true that claims for refund construed strictly against the claimant, nevertheless, the
fact that Switzerland did not impose any tax on the dividends received by Glaro from the Philippines
should be considered as a full satisfaction if the given condition. For, as aptly stated by respondent
Court, to deny private respondent the privilege to withhold only 15% tax provided for under PD No.
369 amending section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of
said law and definitely will adversely affect foreign corporations interest here and discourage them
for investing capital in our country.

e. Disguised Dividend
RR 02-40

SECTION 250. Dividends. Dividends, for the purpose of the law, comprise any distribution whether
in cash or other property, in the ordinary course of business, even though extraordinary in amount,
made by a domestic or resident foreign corporation, joint-stock company, partnership, joint account
(cuentas en participacion), association, or insurance company to the shareholders or members out of
its earnings or profits accumulated since March 1, 1913.
Although interest on certain Government bonds and other similar obligations is not taxable when
received by a corporation, upon amalgamation with the other funds of the corporation, such income
loses its identity and when distributed to shareholders, is taxable to the same extent as other
dividend.
A taxable distribution made by a corporation to individual stockholders or members shall be
included is the gross income of the distributees when the cash of other property is unqualifiedly
made subject to their demand. Dividends, in cash or other property received by an individual, are
subject to tax in his hands in the same manner another income.
Dividends, whether in cash or other property, received by a domestic or resident foreign corporation
from a domestic corporation are taxable only to the extent of 25 per cent thereof in accordance with
Section 24 of the Code. Dividends received by a domestic corporation from a foreign corporation,
whether resident or nonresident, are taxable to the extent that they constitute income from sources
within the Philippines, as provided in Section 37 (a) (2) (b) ofthe Code. Dividends paid by the
domestic corporation to a nonresident foreign corporation are taxable in full. (For definition of the
different classes of corporations, see Section 84 of the Code).
SECTION 251. Dividends paid in property. Dividends paid in securities or other property (other
than its own stock), in which the earnings of a corporation have been invested, are income to the
recipients to the amount of the full market value of such property when receivable by individual
stockholders. When receivable by corporations, the amount of such dividends includible for purposes
of the tax on corporations are specified in Section 24 of the Code. (See also Section 250 of these
regulations). A dividend paid in stock of another corporation is not a stock dividend, even though the
stock distributed was acquired through the transfer by the corporation declaring the dividends of
property to the corporation the stock of which is distributed as a dividend. Where a corporation
declares a dividend payable in a stock of another corporation, setting aside the stock to be so
distributed and notifying the stockholders of its action, the income arising to the recipients of such
stock is its market value at the time the dividend becomes payable. Scrip dividends are subject to tax
in the year in which the warrants are issued.
SECTION 252.Stock dividends. A stock dividend which represents the transfer of surplus to capital
account is not subject to income tax. However a dividend in stock may constitute taxable income to
the recipients thereof notwithstanding the fact that the officers or directors of the corporation (as
defined in Section 84) choose to call such distribution as a stock dividend. The distinction between a
stock dividend which does not, and one which does, constitute income taxable to the shareholder is
the distinction between a stock dividend which works no change in the corporate entity, the same
interest in the same corporation being represented after the distribution by more shares of precisely
the same character, and a stock dividend where there either has been a change of corporate identity
or a change in the nature of the shares issued as dividends whereby the proportional interest of the
shareholders after the distribution is essentially different from his former interests. A stock dividend
constitutes income if it gives the shareholder an interest different from that which his former stock
holdings represented. A stock dividend does not constitute income if the new shares confer no
different rights or interests than did the old the new certificates plus the old representing the
same proportionate interest in the net assets of the corporation as did the old.
SECTION 253.Sale of stock received as dividends. Stock issued by a corporation, as a dividend,
does not constitute taxable income to a stockholder in such corporation, but gain may be derived or
loss sustained by the stockholder, whether individual or corporate, from the sale of such stock,
which gain or loss will be treated as arising from the sale or exchange of a capital asset. (See Section
34 of the Code.) The amount of gain derived or loss sustained from the sale of such stock, or from the
sale of the stack with respect to which it is issued, shall be determined in accordance with the
following rules:
(a) Where the stock issued as dividend is all or substantially the same character or preference as the
stock upon which the stock dividend is paid, the cost of each share (or when acquired prior to March
1, 1913, the fair market value as of such date) will be the quotient of the cost (or such fair market
value) of the old shares of stock divided by the total number of the old and new shares.(b) Where
the stock issued as a dividend is in whole or in part of a character or preference materially different
from the stock upon which the stock dividend is paid, the cost (and when acquired prior to March 1,
1913, the fair market value as of such date) of the old shares of stock shall be divided between such
old stock and the new stock, in proportion, as nearly as may be, to the respective value of each class
of stock, old and new, at the time the new shares of stock are issued, and the cost (or when acquired
prior to March 1, 1913, the fair market value as of such date) of each share of stock will be the
quotient of the cost (or such fair market value as of March 1, 1913) of the class to which such share
belongs divided by the number of shares in that class. (c) Where the stock with respect to which a
stock dividend is issued was purchased at different times and at different prices and the identity of
the lots can. not be determined, any sale of the original stock, will be charged to the earliest
purchases of such stock, and any sale of dividend stock issued with respect to such stock will be
presumed to have been made from the stock issued with respect to the earliest purchased stock, to
the amount of the dividend chargeable to such stock.(d) Where the stock with respect to which a
stock dividend is declared was purchased at different times and at different prices, and the dividend
stock issued with respect to such stock can not be identified as having been issued with respect to
any particular lot of such stock, then any sale of such dividend stock will be presumed to have been
made from the stock issued with respect to the earliest purchased stock, to the amount of the stock
dividend chargeable to such stock.