Tax Rev

E. Specific Items of Income

E2. Royalties

 Iconic Beverage Inc. vs. CIR

Facts: According to respondent's findings in the FDDA, petitioner reported royalty income in the total
amount of P856,063,257 .00 in its Annual Income Tax Return (ITR) for the taxable year 2009 as non-
taxable income. Verification of the said royalties allegedly disclosed that P855, 902,703.30 represents
royalty income derived from SMBI's use of certain Domestic IP Rights of petitioner, and P160,553. 70
represents royalty income derived from MPLI's use of petitioner's Licensed Marks under the brand name
"My Philippines" t-shirts which are in accordance with the primary purpose of petitioner; and that the
royalty income was subjected to 20°/o final withholding tax by the payor and subjected to twelve
percent (12°/o) value-added tax (VAT) by petitioner.

As stated in the FDDA and based on the BIR ruling cited therein, respondent asserts that "to be subject
to the 20°/o final withholding tax, the royalties must be in the nature of passive income." Respondent
points out that "the payment received by" petitioner "from the active conduct of trade or business is
considered ordinary business income subject to the 30°/o regular corporate income tax pursuant to
Section 27 (A) of the Tax Code".

Issue: Whether petitioner's royalty income is subject to 20°/o final withholding tax.

Held: Passive income is "income generated by the taxpayer's assets. These assets can be in the form of
real properties that return rental income, shares of stock in a corporation that earn dividends or interest
income received from savings".

The definition of gross income is broad enough to include all passive incomes subject to specific rates or
final taxes. 32 Thus, if the income is not part of the passive income subject to specific rates or final taxes,
the same will still be part of the taxpayer's gross income subject to normal corporate income tax as
provided in Section 27(A) of the NIRC of 1997, as amended.

On this matter, let it be noted that the rates of tax provided under Section 27(D) of the NIRC of 1997, as
amended, pertains to certain passive income. As previously mentioned, if the income is generated in
the active pursuit and performance of the corporation's primary purposes, the same is not passive
income. In view of the Supreme Court's pronouncement as regards the definition of passive income, the
determination as to whether the royalty income is passive income is necessary before the tax rates
provided in Section 27(D) of the NIRC of 1997, as amended, may apply to the said royalty income. Thus,
the Court finds petitioner's argument bereft of merit.

All the foregoing only leads the Court to conclude that petitioner's income from licensing out its IP rights
is income generated in active pursuit and performance of petitioner's primary purpose and thus, is not
passive income.
E3. Interest

1. BDO vs. Republic (2015)

Facts: The case involves the proper tax treatment of the discount or interest income arising from the
₱35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on October
18, 2001 (denominated as the Poverty Eradication and Alleviation Certificates or the PEA Ce Bonds by
the Caucus of Development NGO Networks).

On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-2011 (2011 BIR
Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final
withholding tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to
withhold a 20% final tax from the face value of the PEACe Bonds upon their payment at maturity on
October 18, 2011.

Issue: Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final withholding tax
under the 1997 National Internal Revenue Code. Related to this question is the interpretation of the
phrase "borrowing from twenty (20) or more individual or corporate lenders at any one time" under
Section 22(Y) of the 1997 National Internal Revenue Code, particularly on whether the reckoning of the
20 lenders includes trading of the bonds in the secondary market;

Held: The definition of deposit substitutes was amended under the 1997 National Internal Revenue
Code with the addition of the qualifying phrase for public – borrowing from 20 or more individual or
corporate lenders at any one time. Under Section 22(Y), deposit substitute is defined thus: SEC. 22.
Definitions- When used in this Title:

(Y) The term ‘deposit substitutes’ shall mean an alternative form 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 borrower’s 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.

Under the 1997 National Internal Revenue Code, Congress specifically defined "public" to mean "twenty
(20) or more individual or corporate lenders at any one time." Hence, the number of lenders is
determinative of whether a debt instrument should be considered a deposit substitute and
consequently subject to the 20% final withholding tax.

For debt instruments that are not deposit substitutes, regular income tax applies.

It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under
the 1997 National Internal Revenue Code are subject to the regular income tax.
Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller
isrequired to withhold the 20% final income tax on the imputed interest income from the bonds.

--------------------

The interest income earned from bonds is not synonymous with the "gains" contemplated under Section
32(B)(7)(g) of the 1997 National Internal Revenue Code, which exempts gains derived from trading,
redemption, or retirement of long-term securities from ordinary income tax.

The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents forbearance
for the use of money. Gains from sale or exchange or retirement of bonds or other certificate of
indebtedness fall within the general category of "gains derived from dealings in property" under Section
32(A)(3), while interest from bonds or other certificate of indebtedness falls within the category of
"interests" under Section 32(A)(4). The use of the term "gains from sale" in Section 32(B)(7)(g) shows the
intent of Congress not to include interest as referred under Sections 24, 25, 27, and 28 in the exemption.

Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of
the bonds before their maturity date, which is the difference between the selling price of the bonds in
the secondary market and the price at which the bonds were purchased by the seller; and (2) gain
realized by the last holder of the bonds when the bonds are redeemed at maturity, which is the
difference between the proceeds from the retirement of the bonds and the price at which such last
holder acquired the bonds. For discounted instruments, like the zero-coupon bonds, the trading gain
shall be the excess of the selling price over the book value or accreted value (original issue price plus
accumulated discount from the time of purchase up to the time of sale) of the instruments.

--------------------------

Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are
deemed deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue
Code and RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the
interest or discount from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on the
corresponding interest from the PEACe Bonds would likewise be required of any lender/investor had the
latter turnedaround and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more
lenders or investors.

We note, however, that under Section 24 of the 1997 National Internal Revenue Code, interest income
received by individuals from long-term deposits or investments with a holding period of not less than
five (5) years is exempt from the final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper
procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to the bondholders
and for the Bureau of Internal Revenue to collect the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, or any lender or investor if such be the case, as the withholding agents.

It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the PEACe
Bonds were issued at the time of origination. However, a reading of the underwriting agreement and
RCBC term sheet reveals that the settlement dates for the sale and distribution by RCBC Capital (as
underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of
approximately ₱11.996 would fall on the same day, October 18, 2001, when the PEACe Bonds were
supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire ₱10.2 billion borrowing received
by the Bureau of Treasury in exchange for the ₱35 billion worth of PEACe Bonds was sourced directly
from the undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe
Bonds — all at the time of origination or issuance. At this point, however, we do not know as to how
many investors the PEACe Bonds were sold to by RCBC Capital.

-----------

Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and pay to the bondholders
the amount corresponding-to the 20% final withholding tax that it withheld on October 18, 2011.

1b. BDO vs. Republic (2016)

Issue: Assuming the PEACe Bonds are considered "deposit substitutes," whether government or the
Bureau of Internal Revenue is estopped from imposing and/or collecting the 20% final withholding tax
from the face value of these Bonds.

Held: An investor in bonds may derive two (2) types of income:

First, the interest or the amount paid by the borrower to the lender/investor for the use of the lender’s
money. For interest-bearing bonds, interest is normally earned at the coupon date. In zero-coupon
bonds, the discount is an interest amortized up to maturity.

Second, the gain, if any, that is earned when the bonds are traded before maturity date or when
redeemed at maturity.

The 20% final withholding tax imposed on interest income or yield from deposit substitute does not
apply to the gains derived from trading, retirement, or redemption of the instrument.

It must be stressed that interest income, derived by individuals from long-term deposits or placements
made with banks in the form of deposit substitutes, is exempt from income tax. Consequently, it is
likewise exempt from the final withholding tax under Sections 24(B)(l) and 25(A)(2) of the National
Internal Revenue Code. However, when it is pre-terminated by the individual investor, graduated rates
of 5%, 12%, or 20%, depending on the remaining maturity of the instrument, will apply on the entire
income, to be deducted and withheld by the depository bank.

Thus, trading gains, or gains realized from the sale or transfer of bonds (i.e., those with a maturity of
more than five years) in the secondary market, are exempt from income tax. These "gains" refer to the
difference between the selling price of the bonds in the secondary market and the price at which the
bonds were purchased by the seller. For discounted instruments such as the zero-coupon bonds, the
trading gain is the excess of the selling price over the book value or accreted value (original issue price
plus accumulated discount from the time of purchase up to the time of sale) of the instruments.106
Section 32(B)(7)(g) also includes gains realized by the last holder of the bonds when the bonds are
redeemed at maturity, which is the difference between the proceeds from the retirement of the bonds
and the price at which the last holder acquired the bonds.

On the other hand, gains realized from the trading of short-term bonds (i.e., those with a maturity of
less than five years) in the secondary market are subject to regular income tax rates (ranging from 5% to
32% for individuals, and 30% for corporations) under Section 32 of the National Internal Revenue Code.

-------

In view of this, the successful GSED-bidder, as agent of the Bureau of Treasury, has the primary
responsibility to withhold the 20% final withholding tax on the interest valued at present value, when its
sale and distribution of the government securities constitutes a deposit substitute transaction. The 20%
final tax is deducted by the buyer from the discount of the bonds and included in the remittance of the
purchase price.

2b. CIR vs. Filinvest

Facts: In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTA’s finding that theoretical
interests can be imputed on the advances Filinvest Development Corporation (FDC) extended to its
affiliates in 1996 and 1997 considering that, for said purpose, FDC resorted to interest-bearing fund
borrowings from commercial banks. Since considerable interest expenses were deducted by FDC when
said funds were borrowed, the CIR theorizes that interest income should likewise be declared when the
same funds were sourced for the advances FDC extended to its affiliates. Invoking Section 43 of the
1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the CIR maintains that it is vested
with the power to allocate, distribute or apportion income or deductions between or among controlled
organizations, trades or businesses even in the absence of fraud, since said power is intended "to
prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or
businesses." In addition, the CIR asseverates that the CA should have accorded weight and respect to
the findings of the CTA which, as the specialized court dedicated to the study and consideration of tax
matters, can take judicial notice of US income tax laws and regulations.

Held: Despite the broad parameters provided, however, we find that the CIR's powers of distribution,
apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and
Section 179 of Revenue Regulation No. 2 does not include the power to impute "theoretical interests" to
the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC, after all, the term "gross
income" is understood to mean all income from whatever source derived, including, but not limited to
the following items: compensation for services, including fees, commissions, and similar items; gross
income derived from business; gains derived from dealings in property;" interest; rents; royalties;
dividends; annuities; prizes and winnings; pensions; and partner’s distributive share of the gross income
of general professional partnership. While it has been held that the phrase "from whatever source
derived" indicates a legislative policy to include all income not expressly exempted within the class of
taxable income under our laws, the term "income" has been variously interpreted to mean "cash
received or its equivalent", "the amount of money coming to a person within a specific time" or
"something distinct from principal or capital." Otherwise stated, there must be proof of the actual or, at
the very least, probable receipt or realization by the controlled taxpayer of the item of gross income
sought to be distributed, apportioned or allocated by the CIR.

Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC had
deducted substantial interest expense from its gross income, there would still be no factual basis for the
imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon.
More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no
interest shall be due unless it has been expressly stipulated in writing. Considering that taxes, being
burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares, the
rule is likewise settled that tax statutes must be construed strictly against the government and liberally
in favor of the taxpayer. Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be
extended by implication. While it is true that taxes are the lifeblood of the government, it has been held
that their assessment and collection should be in accordance with law as any arbitrariness will negate
the very reason for government itself.

 RR. no. 1-2011

OCW refers to Filipino Citizens employed in foreign countries, commonly referred to as OFWs, who are
physically present in a foreign country as a consequence of their employment thereat. Their salaries and
wages are paid by an employer abroad and is not borne by any entity or person in the Philippines. To be
considered OCW or OFW, they must be duly registered as such with the POEA with a valid Overseas
Employment Certificate (OEC).

A. Income Taxes

An OCW or OFW’s income arising from his overseas employment is exempt from income tax.

If an OCW or OFW has income earnings from business activities or properties within the Philippines,
such income shall be subject to Philippine income tax as follows:

A. Regular Income [Section 24 (A)] – Tax rate of 5-32% of taxable income.

B. Passive Income [Section 24(B)]

i. 20% Final Tax on Interest Income from any currency bank deposit and yield or any monetary benefit
from deposit substitutes and from trust funds and similar arrangements;

ix. 5%/ 12%/ 20% Final Tax on interest income from long term deposits or investments 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 BSP which was pre-
terminated by the stock holder before the 5th year.
E4. Dividends

A. Stock Dividends

1a. CIR vs. Manning

Held: PURCHASE OF HOLDING RESULTING IN DISTRIBUTION OF EARNINGS TAXABLE. — Where by the

use of a trust instrument as a convenient technical device, respondents bestowed unto themselves the
full worth and value of a deceased stockholder’s corporate holding acquired with the very earnings of
the companies, such package device which obviously is not designed to carry out the usual stock
dividend purpose of corporate expansion reinvestment, e.g., the acquisition of additional facilities and
other capital budget items, but exclusively for expanding the capital base of the surviving stockholders in
the company, cannot be allowed to deflect the latter’s responsibilities toward our income tax laws. The
conclusion is ineluctable that whenever the company parted with a portion of its earnings "to buy" the
corporate holdings of the deceased stockholders, it was in ultimate effect and result making a
distribution of such earnings to the surviving stockholders. All these amounts are consequently subject
to income tax as being, in truth and in fact, a flow of cash benefits to the surviving stockholders.

COMMISSIONER ASSESSMENT BASED ON THE TOTAL ACQUISITION COST OF THE ALLEGED TREASURY
STOCK DIVIDENDS, ERROR. — Where the surviving stockholders, by resolution, partitioned among
themselves, as treasury stock dividends, the deceased stockholder’s interest, and earnings of the
corporation over a period of years were used to gradually wipe out the holdings therein of said
deceased stockholder, the earnings (which in effect have been distributed to the surviving stockholders
when they appropriated among themselves the deceased stockholder’s interest), should be taxed for
each of the corresponding years when payments were made to the deceased’s estate on account of his
shares.

In other words, the Tax Commissioner may not asses the surviving stockholders, for income tax
purposes, the total acquisition cost of the alleged treasury stock dividends in one lump sum. However,
with regard to payment made with the corporation’s earnings before the passage of the resolution
declaring as stock dividends the deceased stockholder’s interest (while indeed those earnings were
utilized in those years to gradually pay off the value of the deceased stockholder’s holdings), the
surviving stockholders should be liable (in the absence of evidence that prior to the passage of the
stockholder’s resolution the contributed of each of the surviving stockholder rose corresponding), for
income tax purposes, to the extent of the aggregate amount paid by the corporation (prior to such
resolution) to buy off the deceased stockholder’s shares. The reason is that it was only by virtue of the
authority contained in said resolution that the surviving stockholders actually, albeit illegally,
appropriated and petitioned among themselves the stockholders equity representing the deceased
stockholder’s interest.

TAXATION; INCOME TAX; ASSESSMENT OF FRAUD PENALTY AND IMPOSITION OF INTEREST CHARGES IN
ACCORDANCE WITH LAW DESPITE NULLITY OF RESOLUTION AUTHORIZING DISTRIBUTION OF EARNINGS.
— The fact that the resolution authorizing the distribution of earnings is null and void is of no moment.
Under the National Internal Revenue Code, income tax is assessed on income received from any
property, activity or service that produces income. The Tax Code stands as an indifferent, neutral party
on the matter of where the income comes from. The action taken by the Commissioner of assessing
fraud penalty and imposing interest charges pursuant to the provisions of the Tax Code is in accordance
with law.
2a. CIR vs. CA & A. Soriano Corp.

Facts: On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares
from the Don Andres' estate. By November 1968, the Board further increased ANSCOR's capital stock to
P75M divided into 150,000 preferred shares and 600,000 common shares. About a year later, ANSCOR
again redeemed 80,000 common shares from the Don Andres' estate, further reducing the latter's
common shareholdings to 19,727. As stated in the Board Resolutions, ANSCOR's business purpose for
both redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the
company's foreign exchange remittances in case cash dividends are declared.

In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a report
proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53
and 54 of the 1939 Revenue Code, for the year 1968 and the second quarter of 1969 based on the
transactions of exchange 31 and redemption of stocks.

ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and
exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling, after finding sufficient
evidence to overcome the prima facie correctness of the questioned assessments. In a petition for
review the CA as mentioned, affirmed the ruling of the CTA.

Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section 83(b)
making the proceeds thereof taxable. It also argues that the Section applies to stock dividends which is
the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that under the "net effect test,"
the estate of Don Andres gained from the redemption. Accordingly, it was the duty of ANSCOR to
withhold the tax-at-source arising from the two transactions, pursuant to Secs. 53 and 54 of the 1939
Revenue Act.

Issue: Whether ANSCOR's redemption of stocks from its stockholder as well as the exchange of common
with preferred shares can be considered as "essentially equivalent to the distribution of taxable
dividend" making the proceeds thereof taxable under Sec. 83(b) 1939 Revenue Act. (now 73(b))

Held: Stock dividends, strictly speaking, represent capital and do not constitute income to its
recipient. So that the mere issuance thereof is not yet subject to income tax as they are nothing but an
"enrichment through increase in value of capital investment.”

As capital, the stock dividends postpone the realization of profits because the "fund represented by the
new stock has been transferred from surplus to capital and no longer available for actual
distribution." Income in tax law is "an amount of money coming to a person within a specified time,
whether as payment for services, interest, or profit from investment." It means cash or its equivalent. It
is gain derived and severed from capital, from labor or from both combined — so that to tax a stock
dividend would be to tax a capital increase rather than the income.

In a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot
be subjected to income tax until that gain has been realized. Before the realization, stock dividends are
nothing but a representation of an interest in the corporate properties. As capital, it is not yet subject to
income tax. It should be noted that capital and income are different. Capital is wealth or fund; whereas
income is profit or gain or the flow of wealth. The determining factor for the imposition of income tax is
whether any gain or profit was derived from a transaction.

As qualified by the phrase "such time and in such manner," the exception was not intended to
characterize as taxable dividend every distribution of earnings arising from the redemption of stock
dividend. So that, whether the amount distributed in the redemption should be treated as the
equivalent of a "taxable dividend" is a question of fact, which is determinable on "the basis of the
particular facts of the transaction in question. No decisive test can be used to determine the application
of the exemption under Section 83(b).

Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange
for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially,
the corporation gets back some of its stock, distributes cash or property to the shareholder in payment
for the stock, and continues in business as before. The redemption of stock dividends previously issued
is used as a veil for the constructive distribution of cash dividends.

In the instant case, there is no dispute that ANSCOR redeemed shares of stocks from a stockholder (Don
Andres) twice (28,000 and 80,000 common shares). But where did the shares redeemed come from? If
its source is the original capital subscriptions upon establishment of the corporation or from initial
capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may
not invite the application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return of
capital. On the contrary, if the redeemed shares are from stock dividend declarations other than as
initial capital investment, the proceeds of the redemption is additional wealth, for it is not merely a
return of capital but a gain thereon.

It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable
dividends. Here, it is undisputed that at the time of the last redemption, the original common shares
owned by the estate were only 25,247.5 This means that from the total of 108,000 shares redeemed
from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock dividends.
Besides, in the absence of evidence to the contrary, the Tax Code presumes that every distribution of
corporate property, in whole or in part, is made out of corporate profits such as stock dividends. The
capital cannot be distributed in the form of redemption of stock dividends without violating the trust
fund doctrine — wherein the capital stock, property and other assets of the corporation are regarded as
equity in trust for the payment of the corporate creditors. Once capital, it is always capital. That doctrine
was intended for the protection of corporate creditors.

As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income
was realized through the redemption of stock dividends. The redemption converts into money the stock
dividends which become a realized profit or gain and consequently, the stockholder's separate
property. Profits derived from the capital invested cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be reached by income taxation regardless of the
existence of any business purpose for the redemption.
B. Cash and/or Property Dividends/ Tax Sparing Rule

B1. Marubeni vs. CIR

Facts: AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only
of the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but also
of the withheld 15% profit remittance tax based on the remittable amount after deducting the final
withholding tax of 10%. A schedule of dividends declared and paid by AG&P to its stockholder Marubeni
Corporation of Japan, the 10% final intercorporate dividend tax and the 15% branch profit remittance
tax paid thereon. Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly
organized and existing under the laws of Japan and duly licensed to engage in business under Philippine
laws with branch office at Intramuros, Manila seeks the reversal of the decision of the Court of Tax
Appeals dated February 12, 1986 denying its claim for refund or tax credit in the amount of P229,424.40
representing alleged overpayment of branch profit remittance tax withheld from dividends by Atlantic
Gulf and Pacific Co. of Manila (AG&P).

Held: In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to
the head office in Japan which is a separate and distinct income taxpayer from the branch in the
Philippines. There can be no other logical conclusion considering the undisputed fact that the
investment (totalling 283.260 shares including that of nominee) was made for purposes peculiarly
germane to the conduct of the corporate affairs of Marubeni Japan, but certainly not of the branch in
the Philippines. It is thus clear that petitioner, having made this independent investment attributable
only to the head office, cannot now claim the increments as ordinary consequences of its trade or
business in the Philippines and avail itself of the lower tax rate of 10 %.

But while 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, the recipient being a non-
resident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner
because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention.

To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that
each tax has a different tax basis. While the tax on dividends is directly levied on the dividends received,
"the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted
abroad."

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.

However, a discounted rate of 15% is given to petitioner on dividends received from a domestic
corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax
credit of not less than 20 % of the dividends received. This 20 % represents the difference between the
regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily paid,
and the 15 % special rate on dividends received from a domestic corporation.
It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident
stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum
ceiling of 25 % of the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax Treaty.

B2. CIR vs. Goodyear Philippines

Facts: In 2003, the authorized capital stock of respondent Goodyear was increased from
P400,000,000.00 divided into 4,000,000 shares with a par value of P100.00 each, to P1,731,863,000.00
divided into 4,000,000 common shares and 13,318,630 preferred shares with a par value of P100.00
each. Consequently, all the preferred shares were solely and exclusively subscribed by Goodyear Tire
and Rubber Company (GTRC), which was a foreign company organized and existing under the laws of
the State of Ohio, United States of America (US) and is unregistered in the Philippines. In 2008, the
Board of Directors of respondent authorized the redemption of GTRC's 3,729,216 preferred shares on
October 15, 2008 at the redemption price of P470,653,914.00, broken down as follows:
P372,921,600.00 representing the aggregate par value and P97,732,314.00, representing accrued and
unpaid dividends.

In 2008, respondent filed an application for relief from double taxation before the International Tax
Affairs Division of the BIR to confirm that the redemption was not subject to Philippine income tax,
pursuant to the Republic of the Philippines (RP) - US Tax Treaty. On October 21, 2010, respondent filed
an administrative claim for refund or issuance of TCC, representing 15% FWT in the sum of
P14,659,847.10 before the BIR. Thereafter, or on November 3, 2010, it filed a judicial claim, by way of
petition for review, before the CTA.

Citing the RP-US Tax Treaty, the CTA Division noted that dividend income shall be determined by the law
of the state in which the distributing corporation is a resident, which in the Philippines' case, would be
Section 73 (A) of the Tax Code, defining dividends for income tax purposes as distributions to
shareholders arising out of its earnings or profits. Accordingly, the CTA Division held that the net capital
gain of GTRC could not be regarded as "dividends," considering that it did not come from respondent's
unrestricted earnings or profits, as the records would show that it did not have any unrestricted
earnings from the years 2003-2009 to cover any dividend pay-outs. In sum, the CTA Division ruled that
absent any law which specifically treats the gain derived by GTRC as dividends, the same could not be
subjected to 15% FWT under Section 28 (B) (5) (b). CTA en banc affirmed.

Issue: Whether the CTA En Banc correctly ruled that the gain derived by GTRC was not subject to 15%
FWT on dividends.

Held: Under Article 11 (5) of the RP-US Tax Treaty, the term "dividends" should be understood according
to the taxation law of the State in which the corporation making the distribution is a resident, which, in
this case, pertains to respondent, a resident of the Philippines. Accordingly, attention should be drawn
to the statutory definition of what constitutes "dividends," pursuant to Section 73 (A) of the Tax Code
which provides that "[t]he term 'dividends' x x x 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."

In light of the foregoing, the Court therefore holds that the redemption price representing the amount
of P97,732,314.00 received by GTRC could not be treated as accumulated dividends in arrears that could
be subjected to 15% FWT. Verily, respondent's AFS covering the years 2003 to 2009 show that it did not
have unrestricted retained earnings, and in fact, operated from a position of deficit. Thus, absent the
availability of unrestricted retained earnings, the board of directors of respondent had no power to
issue dividends. Consistent with Section 73 (A) of the Tax Code, this rule on dividend declaration –
i.e., that it is dependent upon the availability of unrestricted retained earnings – was further edified in
Section 43 of The Corporation Code.

It is also worth mentioning that one of the primary features of an ordinary dividend is that the
distribution should be in the nature of a recurring return on stock which, however, does not obtain in
this case. As aptly pointed out by the CTA En Banc, the amount of P97,732,314.00 received by GTRC did
not represent a periodic distribution of dividend, but rather a payment by respondent for the
redemption of GTRC's 3,729,216 preferred shares.

B3. CIR vs. Wander Philippines

Facts: On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June 30,
1975 and remitted to its parent company, Glaro dividends in the amount of P222,000.00, on which 35%
withholding tax thereof in the amount of P77,700.00 was withheld and paid to the Bureau of Internal
Revenue. Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending
June 30, 1976 on the dividends it remitted to Glaro amounting to P355,200.00, on wich 35% tax in the
amount of P124,320.00 was withheld and paid to the Bureau of Internal Revenue.

On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund
and/or tax credit in the amount of P115,400.00, contending that it is liable only to 15% withholding tax
in accordance with Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos. 369 and
778, and not on the basis of 35% which was withheld and paid to and collected by the government.

Held: Sec 24 (b)(1), 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 equivalent to 20% which represents the
difference between the regular tax (35%) on corporations and the tax (15%) dividends.

In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Accordingly,
Wander claims that full credit is granted and not merely credit equivalent to 20%. Petitioner, on the
other hand, avers the tax sparing credit is applicable only if the country of the parent corporation allows
a foreign tax credit not only for the 15 percentage-point portion actually paid but also for the equivalent
twenty percentage point portion spared, waived or otherwise deemed as if paid in the Philippines; that
private respondent does not cite anywhere a Swiss law to the effect that in case where a foreign tax,
such as the Philippine 35% dividend tax, is spared waived or otherwise considered as if paid in whole or
in part by the foreign country, a Swiss foreign-tax credit would be allowed for the whole or for the part,
as the case may be, of the foreign tax so spared or waived or considered as if paid by the foreign
country.
While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the
fact that Switzerland did not impose any tax or the dividends received by Glaro from the Philippines
should be considered as a full satisfaction of the given condition. For, as aptly stated by respondent
Court, to deny private respondent the privilege to withhold only 15% tax provided for under Presidential
Decree 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 from investing capital in our country.

B4. CIR vs. Procter and Gamble

Facts: For the taxable years 1974 and 1975 private respondent Procter and Gamble Philippine
Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole
stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which
dividends the amount of P8,457,731.21 representing the 35% withholding tax at source was deducted.
In 1977, private respondent P&G-Phil. filed with petitioner Commissioner a claim for refund or tax credit
in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1) of the
NIRC, the applicable rate of withholding tax on the dividends remitted was only 15% (and 35%) of the
dividends. There being no responsive action on the part of the Commissioner, P&G-Phil., filed a petition
for review with public respondent CTA. The CTA rendered a decision ordering petitioner Commissioner
to refund or grant the tax credit in the amount of P4,832,989.00. CTA 2nd Division reversed.

Held: The ordinary 35% tax rate applicable to dividend remittances to non-resident corporate
stockholders of a Philippine corporation, goes down to 15% if the country of domicile of the foreign
stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the
Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder
corporation. In other words, in the instant case, the reduced 15% dividend tax rate is applicable if the
USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against
the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the
Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which
represents the difference between the regular 35% dividend tax rate and the preferred 15% dividend tax
rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed
paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making
applicable the preferred divided tax rate of 15%. In other words, our NIRC does not require that the US
tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax
waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed
paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines.

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 tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine
corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine
government), Section 902, US Tax Code, specifically and clearly complies with the requirements of
Section 24 (b) (1), NIRC.
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in
the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends
remittable to the investor. The foreign investor, however, would not benefit from the reduction of the
Philippine dividend tax rate unless its home country gives it some relief from double taxation (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 tax credits 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 the investor 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
a positive incentive effect would thereby be felt by the investor.

C. Liquidating Dividends

RR. 6-2008:

SEC. 8. TAXATION OF SURRENDER OF SHARES BY THE INVESTOR UPON DISSOLUTION OF THE

CORPORATION AND LIQUIDATION OF ASSETS AND LIABILITIES OF SAID CORPORATION. - Upon surrender
by the investor of the shares in exchange for cash and property distributed by the issuing corporation
upon its dissolution and liquidation of all assets and liabilities, the investor shall recognize either capital
gain or capital loss upon such surrender of shares computed by comparing the cash and fair market
value of property received against the cost of the investment in shares. The difference between the sum
of the cash and the fair market value of property received and the cost of the investment in shares shall
represent the capital gain or capital loss from the investment, whichever is applicable. If the investor is
an individual, the rule on holding period shall apply and the percentage of taxable capital gain or
deductible capital loss shall depend on the number of months or years the shares are held by the
investor. Section 39 of the Tax Code, as amended, shall herein apply in all possible situations. The capital
gain or loss derived therefrom shall be subject to the regular income tax rates imposed under the Tax
Code, as amended, on individual taxpayers or to the corporate income tax rate, in case of corporations.

C1. Wise & CO vs. Meer

Facts: That on August 19, 1937, at a special general meeting of the shareholders of the Manila Wine
Merchants Ltd. (Hongkong Company), the stockholders by proper resolution directed that the company
be voluntarily liquidated and its capital distributed among the stockholders; that the stockholders at
such meeting appointed a liquidator duly paid off the remaining debts of the Hongkong Company and
distributed its capital among the stockholders including plaintiffs; that the liquidator duly filed his
accounting on January 12, 1938, and in accordance with the provisions of Hongkong Law, the Hongkong
Company was duly dissolved at the expiration of three moths from that date.

Held: The first distribution made after June 1, 1937, of what plaintiffs call ordinary dividends but what
defendant denominates liquidating dividends was declared and paid on June 8, 1937. It will be recalled
that the recommendation of the Board of Directors of the Hongkong Company, at their meeting on May
27, 1937, was first of all "that the company should be wound up voluntarily by the members”, and in
pursuance of that purpose, it was further recommended that the Company's business be sold as a going
concern to the Manila Company. Complying with the Companies Ordinance 1932 for companies
registered in Hongkong for the voluntary winding up by members, a Declaration of Solvency was drawn
up duly signed before the British Consul-General in Manila by the same directors, and said declaration
was returned to Hongkong for filing with the Registrar of Companies. Both recommendations were in
due course approved and ratified. The later execution of the formal deed of sale and the successive
distributions of the amounts in question among the stockholders of the Hongkong Company were
obviously other steps in its complete liquidation. And they leave no room for doubt in the mind of the
court that said distributions were not in the ordinary course of business and with intent to maintain the
corporation as a going concern — in which case they would have been distributions of ordinary
dividends — but after the liquidation of the business had been decided upon, which makes them
payments for the surrender and relinquishment of the stockholders' interest in the corporation, or so-
called liquidating dividends.

E5. Sales of Shares of Stock

A. Unlisted Shares (Secs. 24 to 28, NIRC)

B. Net Capital Gain

1a. Jardine Davies vs. CIR

Facts: On February 17, 1998, Petitioner filed with the BIR a final consolidated return in which Petitioner
reported all of its stock transactions during the taxable year 1997 and which indicated an overpayment
by Petitioner of capital gains tax on its capital gains derived during the said taxable year from its sale or
exchange of shares of stock not traded through local stock exchange in the amount of P17,815,615.96

Respondent did not issue a Certification/Tax Clearance to allow the registration by the corporate
secretary of Jardine CMG Life Insurance, Inc. of the transfer of the shares in the name of the buyer
thereof. Respondent refused to issue the said Certification/Tax Clearance alleging that Petitioner may
not deduct from the capital gain it derived from the sale of its shares of stock in Jardine CMG Life
Insurance Co. Inc. the capital losses it sustained during the taxable year when it sold its shares of stock in
Cargoswift, Inc., Aerotel Ltd. Corp. and Jardine Davies Transport Services, Inc.

As a consequence of the said disallowance, Respondent demanded payment by Petitioner of the

amount ofP3, 790,607.00 as deficiency capital gains tax, 25% surcharge in the amount of P947,651.75,
interest in the amount of P141,200.11 and compromise penalty in the amount of P25, 000.00, or a total
deficiency capital gains tax in the amount of P4,904,458.86.

Issue: Whether capital losses sustained during the taxable year from sales or exchange of shares of stock
classified as capital assets may be deducted currently (as opposed to year-end) from capital gains
derived during the same taxable year from sales or exchange of shares of stock classified as capital
assets.

Held: The term "net capital gain" and "net capital loss" are defined under Sees. 33(a)(2) and (3) of the
Tax Code, as amended [now Sees. 39(A)(2) & (3) of the Tax Code of 1997].

It is clear from the statute that what is being taxed is only the "net capital gains" realized from the sale
or exchange or other disposition of shares of stock not traded through a local stock exchange. If the
legislature had intended to impose the tax on "capital gains", it would not have added he word "net"
before "capital gains" in then Section 24(e)(2) of the Tax Code, as amended.

Conformably, Petitioner's capital losses sustained during the taxable year from sales of shares of stock
may be deducted currently from its capital gains derived during the same taxable year. As a
consequence thereof, We hold that Petitioner erred in disallowing Petitioner's offsetting of its capital
losses incurred from its sales of shares of stock and in subjecting Petitioner to deficiency capital gains
tax.

RR. 6-2008

SEC. 9. TAXATION OF SHARES REDEEMED FOR CANCELLATION OR RETIREMENT. - When preferred shares
are redeemed at a time when the issuing corporation is still in its “going-concern” and is not
contemplating in dissolving or liquidating its assets and liabilities, capital gain or capital loss upon
redemption shall be recognized on the basis of the difference between the amount/value received at
the time of redemption and the cost of the preferred shares.

Similarly, the capital gain or loss derived shall be subject to the regular income tax rates imposed under
the Tax Code, as amended, on individual taxpayers or to the corporate income tax rate, in case of
corporations.

This section, however, does not cover situations where a corporation voluntarily buys back its own
shares, in which it becomes treasury shares. In such cases, the stock transaction tax under Sec. 127(A) of
the Tax Code shall apply if the shares are listed and executed through the trading system and/or
facilities of the Local Stock Exchange. Otherwise, if the shares are not listed and traded through the
Local Stock Exchange, it is subject to the 5% and 10% net capital gains tax.

D. Foreclosure sale

SECTION 3. Capital Gains Tax. — (1) In case the mortgagor exercises his right of redemption within one
year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital
gains has been derived by the mortgagor and no sale or transfer of real property was realized. A
certification to that effect or the deed of redemption shall be filed with the Revenue District Office
having jurisdiction over the place where the property is located which certification or deed shall likewise
be filed with the Register of Deeds and a brief memorandum thereof shall be made by the Register of
Deeds on the Certificate of Title of the mortgagor.

(2) In case of non-redemption, the capital gains tax on the foreclosure sale imposed under Secs. 24(D)(1)
and 27(D)(5) of the Tax Code of 1997 shall become due based on the bid price of the highest bidder but
only upon the expiration of the one-year period of redemption provided for under Sec. 6 of Act No.
3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration of the
said one-year redemption period.
D. Foreclosure Sales

RMC. 58-2008

Under the foregoing circumstances, the mortgagee banks, quasi-banks, and trust companies, are
considered the statutory sellers in the foreclosure sales of these foreclosed real properties, and are thus,
expected to have paid the aforesaid taxes, within the period provided therefor, once the redemption
period thereon has expired, hence, without need to further wait for another or subsequent buyer
before taxes on said foreclosed property shall be paid. Generally, the venue for the filing of the returns
and payment of taxes on foreclosure sales, except the VAT, shall be at the place where the real property
foreclosed is located. The VAT, if applicable, must in all cases involving foreclosure sale of real property,
be paid by the VAT-registered mortgagor through the filing of the required return in the Revenue
District Office (RDO) where the said mortgagor is registered.

RR. No. 9-2012

SECTION 2. Taxability of Owner's/Mortgagor's Failure to Redeem His Foreclosed/Auctioned Off

Property/ies within the Applicable Statutory Redemption Period. — In case of non-redemption of
properties sold during involuntary sales, regardless of the type of proceedings and personality of
mortgagees/selling persons or entities, the Capital Gains Tax (CGT) imposed under Sections 24 (D) (1)
and 27 (D) (5) of the Tax Code, in relation to Section 57 of the Tax Code and RR 2-98, as amended, if the
property is a capital asset; or the Creditable Withholding Tax (CWT) imposed under Section 57 and RR 2-
98, as amended, if the property is an ordinary asset; the Value-Added Tax (VAT) imposed under Section
106 of the Tax Code and RR 16-2005, as amended; and the Documentary Stamp Tax (DST) imposed
under Section 196 of the Tax Code shall become due.

The buyer of the subject property, who is deemed to have withheld the CGT or CWT due from the sale,
shall then file the CGT return and remit the said tax to the Bureau within thirty (30) days from the
expiration of the applicable statutory redemption period; or file the CWT return and remit the said tax
to the Bureau within ten (10) days following the end of the month after expiration of the applicable
statutory redemption period, provided that, for taxes withheld in December, the CWT return shall be
filed and the taxes remitted to the Bureau on or before January 15 of the following year.

If the property sold through involuntary sale is under the circumstances which warrant the imposition of
VAT, the said tax must be paid to the Bureau by the VAT-registered owner/mortgagor on or before the
20th day or 25th day, whichever is applicable, of the month following the month when the right of
redemption prescribes.