DAY 2 (PM) Taxation Law Flashcards
I
KM Corporation, doing business in the City of Kalookan, has been a distributor and retailer of clothing and household materials. It has been paying the City of Kalookan local taxes based on Sections 15 (Tax on Wholesalers, Distributors or Dealers) and 17 (Tax on Retailers) of the Revenue Code of Kalookan City (Code). Subsequently, the Sangguniang Panlungsod enacted an ordinance amending the Code by inserting Section 21 which imposes a tax on “Businesses Subject to Excise, Value-Added and Percentage Taxes under the National Internal Revenue Code (NIRC),” at the rate of 50% of 1 % per annum on the gross sales and receipts on persons “who sell goods and services in the course of trade or business.” KM Corporation paid the taxes due under Section 21 under protest, claiming that (a) local government units could not impose a tax on businesses already taxed under the NIRC and (b) this would amount to double taxation, since its business was already taxed under Sections 15 and 17 of the Code.
(a) May local government units impose a tax on businesses already subjected to tax under the NIRC?
Yes. Section 143 in relation to Section 151 of the Local Government Code (LGC) provides for the power of cities to impose a local business tax, and one of those which may be subjected to such tax are those businesses that are subject to “excise tax, value-added tax, or percentage tax” under the NIRC, other than those specifically enumerated by the same provision. The tax to be imposed by the city shall not exceed 2% of gross sales or gross receipts of the preceding calendar year. (Sec. 143(h), in relation to Sec. 151, LGC)
I
KM Corporation, doing business in the City of Kalookan, has been a distributor and retailer of clothing and household materials. It has been paying the City of Kalookan local taxes based on Sections 15 (Tax on Wholesalers, Distributors or Dealers) and 17 (Tax on Retailers) of the Revenue Code of Kalookan City (Code). Subsequently, the Sangguniang Panlungsod enacted an ordinance amending the Code by inserting Section 21 which imposes a tax on “Businesses Subject to Excise, Value-Added and Percentage Taxes under the National Internal Revenue Code (NIRC),” at the rate of 50% of 1 % per annum on the gross sales and receipts on persons “who sell goods and services in the course of trade or business.” KM Corporation paid the taxes due under Section 21 under protest, claiming that (a) local government units could not impose a tax on businesses already taxed under the NIRC and (b) this would amount to double taxation, since its business was already taxed under Sections 15 and 17 of the Code.
(b) Does this amount to double taxation?
Yes. The three taxes are all in the nature of local business taxes on wholesalers, retailers, and service providers which are imposed by the same taxing authority on the same subject matter for the same tax period; hence, the elements of double taxation are present.
Nursery Care Corporation vs. Anthony Acevedo, GR 180651, July 30, 2014
I
KM Corporation, doing business in the City of Kalookan, has been a distributor and retailer of clothing and household materials. It has been paying the City of Kalookan local taxes based on Sections 15 (Tax on Wholesalers, Distributors or Dealers) and 17 (Tax on Retailers) of the Revenue Code of Kalookan City (Code). Subsequently, the Sangguniang Panlungsod enacted an ordinance amending the Code by inserting Section 21 which imposes a tax on “Businesses Subject to Excise, Value-Added and Percentage Taxes under the National Internal Revenue Code (NIRC),” at the rate of 50% of 1 % per annum on the gross sales and receipts on persons “who sell goods and services in the course of trade or business.” KM Corporation paid the taxes due under Section 21 under protest, claiming that (a) local government units could not impose a tax on businesses already taxed under the NIRC and (b) this would amount to double taxation, since its business was already taxed under Sections 15 and 17 of the Code.
(b) Does this amount to double taxation?
Alternative Answer
Yes. Double taxation means taxing the same property twice when it should be taxed only once; that is, “taxing the same person twice by the same jurisdiction for the same thing”.
It is obnoxious when the taxpayer is taxed twice, when it should be only once. In double taxation, which is otherwise described as “direct duplicate taxation”, the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period, and the taxes must be of the same kind or character.
Using the aforementioned test, there is indeed, double taxation since KM Corporation is subjected to the taxes under Sections 15 (Tax on Wholesalers, Distributors, or Dealers), 17 (Tax on Retailers), and 21 (Tax on Businesses Subject to Excise, Value-Added, and Percentage Taxes under the NIRC). of the Revenue Code of Kalookan City. These taxes are being imposed:
(1) on the same subject matter - the privilege of doing business in Kalookan City;
(2) for the same purpose - to make persons conducting businesses within Kalookan City contribute to city revenues;
(3) by the same taxing authority - Kalookan City;
(4) within the same taxing jurisdiction - within the territorial jurisdiction of Kalookan City;
(5) for the same taxing periods - per calendar year; and
(6) of the same kind or character - a local business tax imposed on gross sales or receipts of the business.
*City of Manila v. Coca-Cola Bottlers Philippines, Inc., GR 181845, August 4, 2009 & GR 167283, February 10, 2010
*Swedish Match Philippines, Inc. v. The Treasurer of the City of Manila, GR 181277, July 3, 2013
*Nursery Care Corporation v. Acevedo, GR 180651, July 30, 2014
II
Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural design, engineering, and construction work. Its principal office is located in Makati City, but it has various infrastructure projects in the country and abroad. Thus, KKI employs both local and foreign workers. The company has adopted a policy that the employees’ salaries are paid in the currency of the country where they are assigned or detailed.
Below is an employee of KKI. Determine whether the compensation s/he received from KKI in 2017 is taxable under Philippine laws and whether s/he is required to file tax returns with the Bureau of Internal Revenue (BIR).
(a) Kris Konejero, a Filipino accountant in KKl’s Tax Department in the Makati office, and married to a Filipino engineer also working in KKI.
Taxable (Secs. 23 and 24(A), NIRC). Kris must file tax returns with the BIR, unless she qualifies for substituted filing of income tax returns because the tax was correctly withheld by the employer (Sec. 51(A)(2)(b), NIRC).
II
Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural design, engineering, and construction work. Its principal office is located in Makati City, but it has various infrastructure projects in the country and abroad. Thus, KKI employs both local and foreign workers. The company has adopted a policy that the employees’ salaries are paid in the currency of the country where they are assigned or detailed.
Below is an employee of KKI. Determine whether the compensation s/he received from KKI in 2017 is taxable under Philippine laws and whether s/he is required to file tax returns with the Bureau of Internal Revenue (BIR).
(b) Klaus Kloner, a German national who heads KKl’s Design Department in its Makati office.
Taxable, being income earned by a resident alien from Philippine sources (Secs. 23 and 24(A), NIRC. Klaus is required to file a tax return, unless the compensation income from KKI is his only returnable income and the withholding tax thereon was correctly withheld by his employer (Sec. 51(A)(2)(b), NIRC).
II
Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural design, engineering, and construction work. Its principal office is located in Makati City, but it has various infrastructure projects in the country and abroad. Thus, KKI employs both local and foreign workers. The company has adopted a policy that the employees’ salaries are paid in the currency of the country where they are assigned or detailed.
Below is an employee of KKI. Determine whether the compensation s/he received from KKI in 2017 is taxable under Philippine laws and whether s/he is required to file tax returns with the Bureau of Internal Revenue (BIR).
(c) Krisanto Konde, a Filipino engineer in KKl’s Design Department who was hired to work at the principal office last January 2017. In April 2017, he was assigned and detailed in the company’s project in Jakarta, Indonesia, which project is expected to be completed in April 2019.
His compensation from January 1 up to the the time he left the Philippines is taxable and he must file tax returns, unless the compensation income is his only returnable income and the withholding tax thereon was correctly withheld by KKI (Sec. 51(A)(2)(b), NIRC). The compensation for his services abroad from the date of his actual assignment thereat up to the time of the completion of the project is tax-exempt being income from without earned by a non-resident citizen (Secs. 23 and 42, NIRC). He is not required to file a return for this income derived from without, because said income is not subject to income tax in the Philippines (Sec. 23, NIRC).
II
Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural design, engineering, and construction work. Its principal office is located in Makati City, but it has various infrastructure projects in the country and abroad. Thus, KKI employs both local and foreign workers. The company has adopted a policy that the employees’ salaries are paid in the currency of the country where they are assigned or detailed.
Below is an employee of KKI. Determine whether the compensation s/he received from KKI in 2017 is taxable under Philippine laws and whether s/he is required to file tax returns with the Bureau of Internal Revenue (BIR).
(d) Kamilo Konde, Krisanto’s brother, also an engineer assigned to KKl’s project in Taipei, Taiwan. Since KKI provides for housing and other basic needs, Kamila requested that all his salaries, paid in Taiwanese dollars, be paid to his wife in Manila in its Philippine Peso equivalent.
Not taxable and no need to file tax returns. Kamilo is a non-resident citizen who is taxable only on income from within. Compensation for services rendered outside of the Philippines is income from without which is not subject to the Philippine income tax (Secs. 23 and 42, NIRC).
II
Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural design, engineering, and construction work. Its principal office is located in Makati City, but it has various infrastructure projects in the country and abroad. Thus, KKI employs both local and foreign workers. The company has adopted a policy that the employees’ salaries are paid in the currency of the country where they are assigned or detailed.
Below is an employee of KKI. Determine whether the compensation s/he received from KKI in 2017 is taxable under Philippine laws and whether s/he is required to file tax returns with the Bureau of Internal Revenue (BIR).
(e) Karen Karenina, a Filipino architect in KKl’s Design Department who reported back to KKl’s Makati office in June 2017 after KKl’s project in Kuala Lumpur, Malaysia was completed.
Compensation from January 1 up to the time of her return in June 2017 is income from without which is not taxable if received by a non-resident citizen (Secs. 23 and 42, NIRC). Compensation from June 2017 to December 31, 2017 is income from within and taxable to Karen who is taxable on worldwide income from the time she regained the status of a resident citizen and, accordingly, must file returns to pay for the tax, unless she is purely compensation income earner for which the withholding tax on wages was correctly withheld by KKKI (Sec. 51(A)(2)(b), NIRC).
III
Kim, a Filipino national, worked with K-Square, Inc. (KSI), and was seconded to various KSI-affiliated corporations:
1) from 1999 to 2004 as Vice-President of K-Gold Inc.;
2) from 2004 to 2007 as Vice-President of KPB Bank;
3) from 2007 to 2011 as CEO of K-Com Inc.; and
4) from 2011 to 2017 as CEO of K-Water Corporation, where Kim served as CEO for seven years until his retirement last December 12, 2017 upon reaching the compulsory retirement age of 60 years.
All the corporations mentioned are majority-owned in common by the Koh family and covered by a BIR-qualified multi-employer-employee retirement plan (MEERP), under which the employees may be moved around within the controlled group (i.e., from one KSI subsidiary or affiliate to another) without loss of seniority rights or break in the tenure. Kim was well-loved by his employer and colleagues, so upon retirement, and on his last day in office, KSI gave him a Mercedes Benz car with Php 5 million as a surprise, with a streamer that read: “You will be missed. Good luck, Sir Kim.”
(a) Are the retirement benefits paid to Kim pursuant to the MEERP taxable?
No. The recipient having served the group of companies covered by the BIR-Qualified Retirement Plan for at least 10 years, not less than 50 years of age at the time of retirement, and availing of the benefit only once, will receive his retirement benefits tax-free (Sec. 32(B)(6)(a), NIRC).
III
Kim, a Filipino national, worked with K-Square, Inc. (KSI), and was seconded to various KSI-affiliated corporations:
1) from 1999 to 2004 as Vice-President of K-Gold Inc.;
2) from 2004 to 2007 as Vice-President of KPB Bank;
3) from 2007 to 2011 as CEO of K-Com Inc.; and
4) from 2011 to 2017 as CEO of K-Water Corporation, where Kim served as CEO for seven years until his retirement last December 12, 2017 upon reaching the compulsory retirement age of 60 years.
All the corporations mentioned are majority-owned in common by the Koh family and covered by a BIR-qualified multi-employer-employee retirement plan (MEERP), under which the employees may be moved around within the controlled group (i.e., from one KSI subsidiary or affiliate to another) without loss of seniority rights or break in the tenure. Kim was well-loved by his employer and colleagues, so upon retirement, and on his last day in office, KSI gave him a Mercedes Benz car with Php 5 million as a surprise, with a streamer that read: “You will be missed. Good luck, Sir Kim.”
(b) Which internal revenue tax, if any, will apply to the grant of the car to Kim by the company?
It is subject to income tax. The value of the Mercedes Benz car is income to Kim. It is in the nature of a compensatory gift which is considered as income for the recipient. The car is in reality a recompense for Kim’s past services. Compensation for services in whatever form paid is part of gross income (Sec. 32(A)(1), NIRC; Commissioner vs. Duberstein, 363 US 278 (1960)).
III
Kim, a Filipino national, worked with K-Square, Inc. (KSI), and was seconded to various KSI-affiliated corporations:
1) from 1999 to 2004 as Vice-President of K-Gold Inc.;
2) from 2004 to 2007 as Vice-President of KPB Bank;
3) from 2007 to 2011 as CEO of K-Com Inc.; and
4) from 2011 to 2017 as CEO of K-Water Corporation, where Kim served as CEO for seven years until his retirement last December 12, 2017 upon reaching the compulsory retirement age of 60 years.
All the corporations mentioned are majority-owned in common by the Koh family and covered by a BIR-qualified multi-employer-employee retirement plan (MEERP), under which the employees may be moved around within the controlled group (i.e., from one KSI subsidiary or affiliate to another) without loss of seniority rights or break in the tenure. Kim was well-loved by his employer and colleagues, so upon retirement, and on his last day in office, KSI gave him a Mercedes Benz car with Php 5 million as a surprise, with a streamer that read: “You will be missed. Good luck, Sir Kim.”
(b) Which internal revenue tax, if any, will apply to the grant of the car to Kim by the company?
Alternative Answer
The car was given on account of merit and the services he rendered to KSI, which do not constitute a demandable debt, is remuneratory donation, and based on the generosity of KSI. It is a gift subject to donor’s tax, provided Kim accepts the car (Article 726, New Civil Code of the Philippines).
IV
Years ago, Krisanto bought a parcel of land in Muntinlupa for only PhP65,000. He donated the land to his son, Kornelio, in 1980 when the property had a fair market value of PhP75,000, and paid the corresponding donor’s tax.
Kornelio, in turn, sold the property in 2000 to Katrina for PhP 6.5 million and paid the capital gains tax, documentary stamp tax, local transfer tax, and other fees and charges. Katrina, in turn, donated the land to Klaret School last August 30, 2017 to be used as the site for additional classrooms. No donor’s tax was paid, because Katrina claimed that the donation was exempt from taxation. At the time of the donation to Klaret School, the land had a fair market value of PhP 65 million.
(a) Is Katrina liable for donor’s tax?
IV
Years ago, Krisanto bought a parcel of land in Muntinlupa for only PhP65,000. He donated the land to his son, Kornelio, in 1980 when the property had a fair market value of PhP75,000, and paid the corresponding donor’s tax.
Kornelio, in turn, sold the property in 2000 to Katrina for PhP 6.5 million and paid the capital gains tax, documentary stamp tax, local transfer tax, and other fees and charges. Katrina, in turn, donated the land to Klaret School last August 30, 2017 to be used as the site for additional classrooms. No donor’s tax was paid, because Katrina claimed that the donation was exempt from taxation. At the time of the donation to Klaret School, the land had a fair market value of PhP 65 million.
(b) How much in deduction from gross income may Katrina claim on account of the said donation?
V
Spouses Konstantino and Karina are Filipino citizens and are principal shareholders of a restaurant chain, Karina’s, Inc. The restaurant’s principal office is in Makati City, Philippines.
Korina’s became so popular as a Filipino restaurant that the owners decided to expand its operations overseas. During the period 2010-2015 alone, it opened ten (10) stores throughout North America and five (5) stores in various parts of Europe where there were large Filipino communities. Each store abroad was in the name of a corporation organized under the laws of the state or country in which the store was located. All stores had identical capital structures: 60% of the outstanding capital stock was owned by Karina’s, Inc., while the remaining 40% was owned directly by the spouses Konstantino and Korina.
Beginning 2017, in light of the immigration policy enunciated by US President Donald Trump, many Filipinos have since returned to the Philippines and the number of Filipino immigrants in the US dropped significantly. On account of these developments, Konstantino and Karina decided to sell their shares of stock in the five (5) US corporations that were doing poorly in gross sales. The spouses’ lawyer-friend advised them that they will be taxed 5% on the first PhP100,000 net capital gain, and 10% on the net capital gain in excess of PhP100,000.
Is the lawyer correct? If not, how should the spouses Konstantino and Karina be taxed on the sale of their shares?
VI
Kria, Inc., a Korean corporation engaged in the business of manufacturing electric vehicles, established a branch office in the Philippines in 2010. The Philippine branch constructed a manufacturing plant in Kabuyao, Laguna, and the construction lasted three (3) years. Commercial operations in the Laguna plant began in 2014.
In just two (2) years of operation, the Philippine branch had remittable profits in an amount exceeding 175% of its capital. However, the head office in Korea instructed the branch not to remit the profits to the Korean head office until instructed otherwise. The branch chief finance officer is concerned that the BIR might hold the Philippine branch liable for the 10% improperly accumulated earnings tax (IAET) for permitting its profits to accumulate beyond reasonable business needs.
(a) Is the Philippine branch of Kria subject to the 10% IAET under the circumstances stated above?
VI
Kria, Inc., a Korean corporation engaged in the business of manufacturing electric vehicles, established a branch office in the Philippines in 2010. The Philippine branch constructed a manufacturing plant in Kabuyao, Laguna, and the construction lasted three (3) years. Commercial operations in the Laguna plant began in 2014.
In just two (2) years of operation, the Philippine branch had remittable profits in an amount exceeding 175% of its capital. However, the head office in Korea instructed the branch not to remit the profits to the Korean head office until instructed otherwise. The branch chief finance officer is concerned that the BIR might hold the Philippine branch liable for the 10% improperly accumulated earnings tax (IAET) for permitting its profits to accumulate beyond reasonable business needs.
(b) Is it subject to 15% branch profit remittance tax (BPRT)?
