BASILAN ESTATES, INC. v. CIRG.R. No. L-22492 September 5, 1967

Doctrine:The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law.

Facts:Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted from gross income the value of depreciation computed on the reappraised value.CIR disallowed the deductions claimed by petitioner, consequently assessing the latter of deficiency income taxes.

Issue:Whether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assets

Held:Yes. The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated:(1)In general. — A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade, or out of its not being used: Provided, That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer . . . no further allowance shall be made. . . .

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law [Gutierrez v. Collector of Internal Revenue, L-19537, May 20, 1965].

Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. It commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement.

The recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation.

Fernandez Hermanos, Inc. VS. CIR- Allowable Tax Deductions

Income TaxationThat the circumstances are such that the method does not reflect the taxpayer ’ s income with reasonable accuracy and certainty and proper and just additions of personal expenses and other non-deductible expenditures were made and correct , fair and equitable credit adjustments were given by way of eliminating non- taxable items.

FACTS:

Four cases involve two decisions of the Court of Tax Appeal s determining the taxpayer ' s income tax liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the Commissioner of Internal Revenue, as petitioner and respondent in the cases a quo respectively, appealed from the Tax Court's decisions , insofar as their respective contentions on particular tax items were therein resolved against them. Since the issues raised are inter related, the Court resolves the four appeals in this joint decision.

The taxpayer , Fernandez Hermanos, Inc. , is a domestic corporation organized for the principal purpose of engaging in business as an " investment company " wi th main office at Manila.

Upon verification of the taxpayer's income tax returns for the period in quest ion, the Commissioner of Internal Revenue assessed against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged deficiency income taxes for the year s 1950, 1951, 1952, 1953 and 1954, respectively. Said assessments were the result of alleged discrepancies found upon the examination and verification of the taxpayer's income tax returns for the said years, summarized by the Tax Court in its decision of June 10, 1963 in CTA Case No. 787, as follows: ISSUE: The correctness of the Tax Court's rulings with respect to the disputed items of disallowances enumerated in the Tax Court's summary reproduced

HELD:That the circumstances are such that the method does not reflect the taxpayer’s income with reasonable accuracy and certainty and proper and just additions of personal expenses and other non-deductible expenditures were made and correct , fair and equitable credit adjustments were given by way of eliminating non-taxable items.

Proper adjustments to conform to the income tax laws. Proper adjustments for non-deductible items must be made. The following non-deductibles , as the case may be, must beadded to the increase of decrease in the net worth:

1. Personal living or family expenses2. Premiums paid on any life insurance policy

3. Losses from sales or exchanges of property between members of the family4. Income taxes paid5. Other non-deductible taxes6. Election expenses and other expense against public policy7. Non-deductible contributions8. Gifts to others9. Estate inheritance and gift taxes10. Net Capital Loss

On the other hand, non- taxable items should be deducted therefrom. These items are necessary adjustments to avoid the inclusion of what otherwise are non-taxable receipts. They are:1. inheritance gifts and bequests received2. non- taxable gains3. compensation for injuries or sickness4. proceeds of life insurance policies5. sweepstakes6. winnings7. interest on government securities and increase in net worth are not taxable if they are shown not to be the result of unreported income but to be the result of the correction of errors in the taxpayer’s entries in the books relating to indebtedness

MADRIGAL VS. RAFFERTY- Difference Between Capital and Income

Income TaxationThe essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth.

FACTS:Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The marriage was contracted under the provisions of law concerning conjugal partnership

On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of P296,302.73

Vicente Madrigal was contending that the said declared income does not represent his income for the year 1914 as it was the income of his conjugal partnership with Paterno. He said that in computing for his additional income tax, the amount declared should be divided by 2.

The revenue officer was not satisfied with Madrigal’s explanation and ultimately, the United States Commissioner of Internal Revenue decided against the claim of Madrigal.

Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08 alleged to have been wrongfully and illegally assessed and collected by the CIR.

ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided into 2 in computing for the additional income tax.

HELD:No! The point of view of the CIR is that the Income Tax Law, as the name implies, taxes upon income and not upon capital and property.

The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth.

As Paterno has no estate and income, actually and legally vested in her and entirely distinct from her husband’s property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax.

To recapitulate, Vicente wants to half his declared income in computing for his tax since he is arguing that he has a conjugal partnership with his wife. However, the court ruled that the one that should be taxed is the income which is the flow of the capital, thus it should not be divided into 2.

MARUBENI CORPORATION V. COMMISSIONER OF INTERNAL REVENUE- Income Tax

The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not income arising from the business activity in which Marubeni Corporation is engaged. Accordingly, said dividends if remitted abroad are not considered branch profits subject to Branch Profit Remittance Tax.

Facts:Marubeni Corporation is a Japanese corporation licensed to engage in business in the Philippines. When the profits on Marubeni’s investments in Atlantic Gulf and Pacific Co. of Manila were declared, a 10% final dividend tax was withheld from it, and another 15% profit remittance tax based on the remittable amount after the final 10% withholding tax were paid to the Bureau of Internal Revenue. Marubeni Corp. now claims for a refund or tax credit for the amount which it has allegedly overpaid the BIR.

Issues and Ruling:1. Whether or not the dividends Marubeni Corporation received from Atlantic Gulf and Pacific Co. are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to 15% profit remittance tax imposed under Section 24(b)(2) of the National Internal Revenue Code.

NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit remittance tax. The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific Co. are not income arising from the business activity in which Marubeni Corporation is engaged. Accordingly, said dividends if remitted abroad are not considered branch profits for purposes of the 15% profit remittance tax imposed by Section 24(b)(2) of the Tax Code, as amended.

2. Whether Marubeni Corporation is a resident or non-resident foreign corporation.

Marubeni Corporation is a non-resident foreign corporation, with respect to the transaction. Marubeni Corporation’s head office in Japan is a separate and distinct income taxpayer from the branch in the Philippines. The investment on Atlantic Gulf and Pacific Co. was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Corporation in Japan, but certainly not of the branch in the Philippines.

3. At what rate should Marubeni be taxed?

15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in conjunction with the Philippine-Japan Tax Treaty of 1980. As a general rule, it is taxed 35% of its gross income from all sources within the Philippines. However, a discounted rate of 15% is given to Marubeni Corporation on dividends received from Atlantic Gulf and Pacific Co. on the condition that Japan, its domicile state, extends in favor of Marubeni Corporation a tax credit of not less than 20% of the dividends received. This 15% tax rate imposed on the dividends received 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.

Note: Each tax has a different tax basis.Under the Philippine-Japan Tax Convention, the 25% rate fixed is the maximum rate, as reflected in the phrase “shall not exceed.” This means that any tax imposable by the contracting state concerned should not exceed the 25% limitation and said rate would apply only if the tax imposed by our laws exceeds the same.

CIR VS PROCTER AND GAMBLE PHILIPPINE MANUFACTURING CORPORATION (204 SCRA 377)Income Taxation NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY 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. However, such tax credit for “taxes deemed paid in the Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points

FACTS:Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only 15%.

MAIN ISSUE:Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:YES. P&G Philippines is entitled.Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF he 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. However, such tax credit for “taxes deemed paid in the Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for ”taxes deemed paid in the Philippines” applicable against the US taxes of P&G USA, and such tax credit must reach at least 20 percentage points. Requirements were met.

NOTES: Breakdown:a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic corporation (owning 10% of remitting foreign corporation) shall be deemed to have paid a proportionate extent of taxes paid by such foreign corporation upon its remittance of dividends to domestic corporation.

b) 20 percentage points requirement: (computation is as follows)P 100.00 -- corporate income earned by P&G Philsx 35% -- Philippine income tax rateP 35.00 -- paid by P&G Phil as corporate income tax

P 100.00- 35.0065. 00 -- available for remittance

P 65. 00x 35% -- Regular Philippine dividend tax rateP 22.75 -- regular dividend tax

P 65.0ox 15% -- Reduced dividend tax rateP 9.75 -- reduced dividend tax

P 65.00 -- dividends remittable- 9.75 -- dividend tax withheld at reduced rateP 55.25 -- dividends actually remitted to P&G USA

Dividends actuallyremitted by P&G Phil = P 55.25---------------------------------- ------------- x P35 = P29.75Amount of accumulated P 65.00profits earned

P35 is the income tax paid.P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income tax ‘deemed paid’ by the parent company. Since P29.75 is much higher than P13, Sec 902 US Tax Code complies with the requirements of sec 24 NIRC. (I did not understand why these were divided and multiplied. Point is, requirements were met)

Reason behind the law:Since the US Congress desires to avoid or reduce double taxation of the same income stream, it allows a tax credit of both (i) the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Philippines but “deemed paid” by P&G USA.

Moreover, under the Philippines-United States Convention “With Respect to Taxes on Income,” the Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of he gross amount of dividends paid to US parent corporations, and established a treaty obligation on the part of the United States that it “shall allow” to a US parent corporation receiving dividends from its Philippine subsidiary “a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary].

Note:The NIRC does not require that the US tax law deem the parent corporation to have paid the 20 percentage points of dividend tax waived by the Philippines. It only requires that the US “shall allow” P&G-USA a “deemed paid” tax credit in an amount equivalent to the 20 percentage points waived by the Philippines. Section 24(b)(1) does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.

Section 24(b)(1) of the 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 by allowing the investor additional tax credits which would be applicable against the tax payable to such home country. Accordingly Section 24(b)(1) of the NIRC requires the home or domiciliary country to give the investor corporation a “deemed paid” tax credit at least equal in amount to the 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.