Future work - Agreement for Co-tutelle of PhD Thesis Leading to the award of a Dual doctoral D

V. Conclusion

3. Future work

1. The Tax Code has included under the term “corporation”

partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997]

2. In Evangelista v. Collector, 102 Phil.

140, the Supreme Court held citing Mertens that the term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on.

3. Certain business

organizations do not fall under the category of “corporations” under the Tax Code, and therefore not subject to tax as corporations, include:

a. General professional partnerships;

b. Joint venture or consortium formed for the purpose of undertaking construction projects engaging in petroleum, coal, geothermal, and other energy operations, pursuant to an operation or consortium agreement under a service contract with the Government. [1^st sentence, Sec. 22 (B), BIRC of 1997]

4. Co-heirs who own inherited properties which produce income should not automatically be considered as partners of an unregistered corporation subject to income tax for the following reasons:

a. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. There must be an unmistakable intention to form a partnership or joint venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436)

b. There is no contribution or investment of additional capital to increase or expand the inherited properties, merely continuing the dedication of the property to the use to which it had been put by their forebears. (Ibid.)

c. Persons who contribute property or funds to a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock capital, and no community of interest as principal proprietors in the business itself from which the proceeds were derived.

(Elements of the Law of Partnership by Floyd R.

Mechem, 2^nd Ed., Sec. 83, p. 74 cited in Pascual v.

Commissioner of Internal Revenue, 166 SCRA 560)

5. The common ownership of property does not itself create a partnership between the owners, though they may use it for purpose of making gains, and they may, without becoming partners, are among themselves as to the management and use of such property and the application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v.

Commissioner of Internal Revenue, 166 SCRA 560)

6. The income from the rental of the house, bought from the earnings of co-owned properties, shall be treated as the income of an unregistered partnership to be taxable as a corporation because of the clear intention of the brothers to join together in a venture for making money out of rentals.

7. Income is gain derived and severed from capital, from labor or from both combined. For example, to tax a stock dividend would be to tax a capital increase rather than the income. (Commissioner of Internal Revenue v.

Court of Appeals, et al., G.R. No. 108576, January 20, 1999)

8. The term taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997)

9. The cancellation and forgiveness of indebtedness may amount to (a) payment of income; (b) gift; or to a (c) capital transaction depending upon the circumstances.

10. If an individual performs services for a creditor who, in consideration thereof, cancels the debt, it is income to the extent of the amount realized by the debtor as compensation for his services.

11. An insolvent debtor does not realize taxable income from the cancellation or forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA 10^th)

12. The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness when he becomes solvent. (Lakeland Grocery Co., v.

Commissioner 36 BTA (F) 289)

13. If a creditor merely desires to benefit a debtor and without any consideration therefor cancels the amount of the debt it is a gift from the

creditor to the debtor and need not be included in the latter’s income.

14. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of payment of a dividend. (Sec. 50, Rev. Regs. No. 2)

15. Members of cooperatives not subject to tax on the interest earned from their deposits with the cooperative. No less than our Constitution guarantees the protection of cooperatives. Section 15, Article XII of the Constitution considers cooperatives as instruments for social justice and economic development. At the same time, Section 10 of Article II of the Constitution declares that it is a policy of the State to promote social justice in all phases of national development.

In relation thereto, Section 2 of Article XIII of the Constitution states that the promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance. Bearing in mind the foregoing provisions, we find that an interpretation exempting the members of cooperatives from the imposition of the final tax under Section 24(B)(1) of the NIRC (tax on interest earned by deposits) is more in keeping with the letter and spirit of our Constitution. (Dumaguete Cathedral Credit Coopertive [DCCC)] etc., v. Commissioner of Internal Revenue, G. R. No. 182722, January 22, 2010)

In closing, cooperatives, including their members, deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice. Thus, although taxes are the lifeblood of the government, the State’s power to tax must give way to foster the creation and growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: “The power of taxation, while indispensable, is not absolute and may be subordinated to the demands of social justice.” (Ibid., citing Commissioner of Internal Revenue v. American Express International, Inc.

(Philippine Branch), 500 Phil. 586 (2005).

16. The Global system of income taxation is a system employed where the tax system views indifferently the tax base and generally treats in common all categories of taxable income of the individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)

17. The Schedular system of income taxation is a system employed where the income tax treatment varies and is made to

depend on the kind or category of taxable income of the taxpayer. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)

18. Under the National Internal Revenue Code the global system is applicable to taxable corporations and the schedular to individuals.

19. Compensation income is considered as having been earned in the place where the service was rendered and not considered as sourced from the place of origin of the money.

20. Payment for services, other than compensation income, is considered as having been earned at the place where the activity or service was performed.

21. A non-resident alien, who has stayed in the Philippines for an aggregate period of more than 180 days during any calendar year, shall be considered as a non-resident alien doing business in the Philippines. Consequently, he shall be subject to income tax on his income derived from sources from within the Philippines. [Sec. 25 (A) (1), NIRC]

He is allowed to avail of the itemized deductions including the personal and additional exemptions subject to the rule on reciprocity.

22. What are considered as de minimis benefits not subject to withholding tax on compensation income of both managerial and rank and file employees ?

SUGGESTED ANSWER:

a. Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year;

b. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month;

c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00;

d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;

e. Actual yearly medical benefits not exceeding P10,000.00 per annum;

f. Laundry allowance not exceeding P300 per month;

g. Employees achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible persona property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by an employee under an established written plan which does not discriminate in favor of highly paid employees;

h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;

i. Flowers, fruits, books, or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and

j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage.

The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000 ceiling of “other benefits” provided under Section 32 (B)(7)(e) of the Code. However, if the employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30,000.00 ceiling, provided, further, that any amount given by the employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall constitute as deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev.

Regs. 2-98 as amended by Rev. Regs. No. 8-2000]

23. Income subject to “final tax”

refers to an income collected through the withholding tax system. The payor of the income withholds the tax and remits it to the government as a final settlement of the income tax as a final settlement of the income tax due on said income. The recipient is no longer required to include the income subjected to a final tax as part of his gross income in his income tax return.

24. Distinguish exclusions from deductions.

SUGGESTED ANSWER:

a. Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayer’s taxable income, due to the following reasons: (1) It is exempted by the

fundamental law; (2) It is exempted by statute;

and (3) It does not come within the definition of income (Sec. 61, Rev. Regs. No. 2) WHILE deductions are the amounts which the law allows to be subtracted from gross income in order to arrive at net income.

b. Exclusions pertain to the computation of gross income WHILE deductions pertain to the computation of net income.

c. Exclusions are something received or earned by the taxpayer which do not form part of gross income WHILE deductions are something spent or paid in earning gross income.

An example of an exclusion from gross income are life insurance proceeds, and an example of a deduction are losses.

25. What are excluded from gross income ?

SUGGESTED ANSWER:

a. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured whether in a single sum or otherwise.

b. Amounts received by the insured as a return of premiums paid by him under life insurance, endowment or annuity contracts either during the term, or at maturity of the term mentioned in the contract, or upon surrender of the contract.

c. Value of property acquired by gift, bequest, devise, or descent.

d. Amounts received, through accident or health insurance or Workmen’s Compensation Acts as compensation for personal injuries or sickness, plus the amounts of any damages received on whether by suit or agreement on account of such injuries or sickness.

e. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines.

f. Retirement benefits received under Republic Act No. 7641. Retirement received from reasonable private benefit plan after compliance with certain conditions. Amounts received for beyond control separation. Foreign social security, retirement gratuities, pensions, etc.

USVA benefits, SSS benefits and GSIS benefits.

26. What are the conditions for excluding retirement benefits from gross income, hence tax-exempt ?

SUGGESTED ANSWER:

a. Retirement benefits received under Republic Act No. 7641 and those received by

officials and employees of private firms, whether individual or corporate, in accordance with the employer’s reasonable private benefit plan approved by the BIR.

b. Retiring official or employee

1) In the service of the same employer for at least ten (10) years;

2) Not less than fifty (50) years of age at time of retirement;

3) Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of 1997] The retiring official or employee should not have previously availed of the privilege under the retirement plan of the same or another employer. [1^st par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98]

27. What kind of separation (retirement) pay is excluded from gross income, hence tax-exempt ?

SUGGESTED ANSWER:

a. Any amount received by an official, employee or by his heirs,

b. From the employer

c. As a consequence of separation of such official or employee from the service of the employer because of

1) Death, sickness or other physical disability; or

2) For any cause beyond the control of said official or employee [Sec.

32 (B) (6) (b), NIRC of 1997], such as retrenchment, redundancy and cessation of business. [1^st par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98]

28. What are the Itemized deductions from gross income and who may avail of them ?

a. Ordinary and necessary trade, business or professional expenses.

b. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s profession, trade or business.

Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.