Corporate Income Taxation Philippine Charity Sweepstakes Office (PCSO), and the

Philippine Amusement and Gaming Corporation

PAGCOR vs BIR (PAGCOR), shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations
PAGCOR was created pursuant to PD 1067-A on January 1977 or associations engaged in similar business, industry, or
- Simultaneous to its creation, PD 106-B was issued exempting activity.
PAGCOR from the payment of any type of tax, - Enactment of RA 9337 on 2005, certain sections of NIRC were
o EXCEPT a franchise tax of 5% on gross income. amended which in particular, is already excluding PAGCOR from
o June 2, 1978 PD 1399 was ssued expanding the scope of the enumeration of GOCC’s that are exempt from payment of
PAGCOR’s exemptions including : corporate income tax.
 (2) Income and other taxes. — (a) Franchise
Holder: No tax of any kind or form, income or ISSUE :
otherwise, as well as fees, charges, or levies of
whatever nature, whether National or Local, Whether or not PAGCOR is still exempt from corporate income tax and VAT
shall be assessed and collected under this with the enactment of R.A. No. 9337
Franchise from the Corporation; nor shall any
form of tax or charge attach in any way to the
earnings of the Corporation, except a HELD :
Franchise Tax of ve percent (5%)of the gross
revenue or earnings derived by the
Corporation from its operation under this In our Decision dated March 15, 2011, we have already declared petitioner's
Franchise. Such tax shall be due and payable income tax liability in view of the withdrawal of its tax privilege under R.A.
quarterly to the National Government and No. 9337. However, we made no distinction as to which income is subject to
shall be in lieu of all kinds of taxes, levies, fees corporate income tax, considering that the issue raised therein was only the
or assessments of any kind, nature or constitutionality of Section 1 of R.A. No. 9337, which excluded petitioner
description, levied, established, or collected by from the enumeration of GOCCs exempted from corporate income tax.
any municipal, provincial or national
government authority. For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCOR's
- The exemption was removed but it was restored again. income is classified into two: (1) income from its operations conducted under
- 1998- NIRC took effect which provided that GOCC’s shall pay its Franchise, pursuant to Section 13 (2) (b) thereof (income from gaming
corporate income tax EXCEPT PAGCOR, GSIS, SSS, and operations) ; and (2) income from its operation of necessary and related
PHILHEALTH and PCSO services under Section 14 (5) thereof (income from other related services). In
o (c) Government-owned or Controlled Corporations, RMC No. 33-2013, respondent further classified the aforesaid income as
Agencies or Instrumentalities. — The provisions of follows:
existing special general laws to the contrary
notwithstanding, all corporations, agencies or 1. PAGCOR's income from its operations and licensing of gambling
instrumentalities owned and controlled by the casinos, gaming clubs and other similar recreation or amusement places,
Government,except the Government Service and Insurance gaming pools, includes, among others:
Corporation (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), the
(a) Income from its casino operations; Section 13 Exemption : No tax of any kind or form, income or otherwise, as
(b) Income from dollar pit operations; well as fees, charges or levies of whatever nature, whether National or
(c) Income from regular bingo operations; and Local, shall be assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any way to the
(d) Income from mobile bingo operations operated by it, with agents on earnings of the Corporation, except a Franchise Tax of five (5%) percent
commission basis. Provided, however, that the agents' commission income of the gross revenue or earnings derived by the Corporation from its
shall be subject to regular income tax, and consequently, to withholding tax operation under this Franchise.
under existing regulations.
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the
2.Incomefrom"otherrelatedoperations" includes,butisnotlimitedto: person or entity involved is subject to tax. This is the most sound and logical
interpretation because petitioner could not have been exempted from paying
taxes which it was not liable to pay in the first place. This is clear from the
(a) Income from licensed private casinos covered by authorities to operate
issued to private operators; wordings of P.D. 1869, as amended, imposing a franchise tax of five percent
(5%) on its gross revenue or earnings derived by petitioner from its operation
under the Franchise in lieu of all taxes of any kind or form, as well as fees,
(b)Income from traditional bingo, electronic bingo and other bingo variations charges or levies of whatever nature, which necessarily include corporate
covered by authorities to operate issued to private operators; income tax.

(c) Income from private internet casino gaming, internet sports betting and Second. Every effort must be exerted to avoid a conflict between statutes; so
private mobile gaming operations; DSATCI that if reasonable construction is possible, the laws must be reconciled in that
manner.
(d) Income from private poker operations;
Third. Even assuming that an inconsistency exists, P.D. 1869, as amended,
(e) Income from junket operations; which expressly provides the tax treatment of petitioner's income prevails
over R.A. No. 9337, which is a general law. It is a canon of statutory
(f) Income from SM demo units; and construction that a special law prevails over a general law — regardless of
their dates of passage — and the special is to be considered as remaining an
(g)Income from other necessary and related services, shows and exception to the general.
entertainment.
Creba vs Romulo

Creba (Chamber of Real Estate and Builder’s Associations, Inc.)

First. Under P.D. 1869, as amended, petitioner is subject to income tax
only with respect to its operation of related services. Accordingly, the Petitioner – an association of real estate developers and builders in the
income tax exemption ordained under Section 27 (c) of R.A. No. 8424 Philippines.
clearly pertains only to petitioner's income from operation of related
services. Such income tax exemption could not have been applicable to - It is impleaded former executive Secretary Alberto Romulo, then
petitioner's income from gaming operations as it is already exempt acting Sec of Finance Amatong and Parayno.
therefrom under P.D. 1869, as amended, to wit:
 - Assails the validity of the imposition of MCIT on corporations and The MCIT is imposed on gross income which is arrived at by
CWT on sales of real properties classified as ordinary assets. deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods 48 and other direct expenses from gross
Section 27 € of RA 8424 provides for MCIT on domestic corporations and is sales. Clearly, the capital is not being taxed.
implemented by RR – 9 -98. Furthermore, the MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the normal
Petitioner argues income tax is suspiciously low. The MCIT merely approximates the
MCIT violates the due process amount of net income tax due from a corporation, pegging the rate at a
clause because it levies income tax very much reduced 2% and uses as the base the corporation's gross
even if there is no realized gain income.
Sec of finance has no authority to
Besides, there is no legal objection to a broader tax base or
collect CWT
taxable income by eliminating all deductible items and at the same time
It ignores the different tax treatment reducing the applicable tax rate.
by RA 8424 of orfinary assets and
capital assets
Wrong to base CWT on the gross
selling price or FMV of real 2. Yes.
properties classified as ordinary
assets Respondent Secretary has the authority to require the withholding of a
tax on items of income payable to any person, national or juridical,
Petitioner’s argument (1) residing in the Philippines. Such authority is derived from Section 57
(B) of RA 8424 which provides: ICTDEa
gross income as defined under said provision only considers the cost of goods 3. SEC. 57. Withholding of Tax at Source. —
sold and other direct expenses; other major expenditures, such as 4. xxx xxx xxx
administrative and interest expenses which are equally necessary to produce 5. (B) Withholding of Creditable Tax at Source. The
gross income, were not taken into account. 31 Thus, pegging the tax base of [Secretary] may, upon the recommendation of the [CIR],
the MCIT to a corporation's gross income is tantamount to a confiscation of require the withholding of a tax on the items of income
capital because gross income, unlike net income, is not "realized gain. payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for
Issue/s : Is it violative of due process? by law, at the rate of not less than one percent (1%) but not
Does the Sec of finance have authority to collect CWT? more than thirty-two percent (32%) thereof, which shall be
Is it wrong to base CWT on FMV of real properties credited against the income tax liability of the taxpayer for
the taxable year.
1. No. 6. The questioned provisions of RR 2-98, as amended, are well
within the authority given by Section 57(B) to the
Certainly, an income tax is arbitrary and confiscatory if it taxes capital Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-
because capital is not income. In other words, it is income, not capital, 32% range; the withholding tax is imposed on the income payable
which is subject to income tax. However, the MCIT is not a tax on and the tax is creditable against the income tax liability of the
capital. taxpayer for the taxable year.
 consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c)
or 25(A)(1) of the Code, as the case may be, based on net taxable income.
3. NO.

Cyanamid vs CA

The use of the GSP/FMV as basis to determine the withholding taxes is On February 7, 1985, the Commissioner of Internal Revenue (CIR)
evidently for purposes of practicality and convenience. Obviously, the sent an assessment letter to petitioner Cyanamid Philippines, Inc. for taxable
withholding agent/buyer who is obligated to withhold the tax does not year 1981. On March 4, 1985 petitioner protested the assessment particularly,
know, nor is he privy to, how much the taxpayer/seller will have as its (1) the 25% Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency
net income at the end of the taxable year. Instead, said withholding Income Assessment of P119,817.00; and (3) 1981 Deficiency Percentage
agent's knowledge and privity are limited only to the particular Assessment of P8,846.72. Petitioner, through its external accountant, Sycip,
transaction in which he is a party. In such a case, his basis can only be Gorres, Velayo & Co., claimed, among others, that the surtax for the undue
the GSP or FMV as these are the only factors reasonably known or accumulation of earnings was not proper because the said profits were
knowable by him in connection with the performance of his duties as a retained to increase petitioner's working capital and it could be used for
withholding agent.||| reasonable business needs of the company. Petitioner contended further that
it availed of the tax amnesty under Executive Order No. 41, hence, it enjoyed
amnesty from civil and criminal prosecution granted by law. In reply, the CIR
Under RR 2-98, the tax base of the income tax from the sale of real refused to allow the cancellation of the assessment notices on the ground that
property classified as ordinary assets remains to be the entity's net the availment of the tax amnesty under Executive Order No. 41, as amended,
income imposed under Section 24 (resident individuals) or Section 27 is sufficient basis, in appropriate cases, for the cancellation of the assessment
(domestic corporations) in relation to Section 31 of RA 8424, i.e. gross issued after August 21, 1986 only. Petitioner appealed to the Court of Tax
income less allowable deductions. The CWT is to be deducted from the Appeals (CTA). During the pendency of the case, however, both parties
net income tax payable by the taxpayer at the end of the taxable agreed to compromise the 1981 deficiency income tax assessment and the
year. 71 Precisely, Section 4 (a) (ii) and (c) (ii) of RR 7-2003 reiterate petitioner paid the reduced amount. With regards to the surtax on improperly
that the tax base for the sale of real property classified as ordinary assets accumulated profits, the CTA denied the petition by ruling that there was no
remains to be the net taxable income: need for petitioner to set aside a portion of its retained earnings as working
Section 4. Applicable taxes on sale, exchange capital reserve as it claims since it had considerable liquid funds. On appeal,
or other disposition of real property. — Gains/Income the Court of Appeals affirmed the CTA decision.
derived from sale, exchange, or other disposition of real In this petition, the Court ruled that the Tax Court opted to determine
properties shall unless otherwise exempt, be subject to the working capital sufficiency by using the ratio between current assets to
applicable taxes imposed under the Code, depending on current liabilities. The working capital needs of a business depend upon the
whether the subject properties are classified as capital nature of the business, its credit policies, the amount of inventories, the rate
assets or ordinary assets; of turnover, the amount of accounts receivable, the collection rate, the
(ii) The sale of real property located in the Philippines, classified as ordinary availability of credit to the business, and similar factors. Petitioner, by
assets, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR adhering to the "Bardahl" formula, failed to impress the tax court with the
2-98], as amended, based on the [GSP] or current [FMV] as determined in required definiteness envisioned by the statute. The Court agreed with the tax
accordance with Section 6(E) of the Code, whichever is higher, and court that the burden of proof to establish that the profits accumulated were
not beyond the reasonable needs of the company, remained on the taxpayer.
The Court will not set aside lightly the conclusion reached by the Court of TAX ON CORPORATIONS; TAX ON IMPROPER ACCUMULATION
Tax Appeals which, by the very nature of its function, is dedicated OF SURPLUS; A PENALTY TAX DESIGNED TO COMPEL
exclusively to the consideration of tax problems and has necessarily CORPORATIONS TO DISTRIBUTE EARNINGS. — Section 25 of the
developed an expertise on the subject, unless there has been an abuse or National Internal Revenue Code discouraged tax avoidance through
improvident exercise of authority. Unless rebutted, all presumptions corporate surplus accumulation. When corporations do not declare dividends,
generally are indulged in favor of the correctness of the CIR's assessment income taxes are not paid on the undeclared dividends received by the
against the taxpayer. With petitioner's failure to prove the CIR incorrect, shareholders. The tax on improper accumulation of surplus is essentially a
clearly and conclusively, this Court was constrained to uphold the correctness penalty tax designed to compel corporations to distribute earnings so that the
of tax court's ruling, as affirmed by the Court of Appeals said earnings by shareholders could, in turn, be taxed.|||

HELD :

TAXATION; TAX ON CORPORATIONS; SURTAX ON IMPROPER

ACCUMULATED PROFITS; "BARDAHL" FORMULA; ELUCIDATED.
— The "Bardahl" formula was developed to measure corporate liquidity. The
formula requires an examination of whether the taxpayer has sufficient liquid
assets to pay all of its current liabilities and any extraordinary
expenses reasonably anticipated, plus enough to operate the business during
one operating cycle. Operating cycle is the period of time it takes to convert
cash into raw materials, raw materials into inventory, and inventory into
sales, including the time it takes to collect payment for the sales.|||

ACCUMULATED EARNINGS TAX; NOT LIMITED TO CLOSELY

HELD CORPORATIONS. — A review of American taxation history on
accumulated earnings tax will show that the application of the accumulated
earnings tax to publicly held corporations has been problematic. Initially, the
Tax Court and the Court of Claims held that the accumulated earnings tax
applies to publicly held corporations. Then, the Ninth Circuit Court of
Appeals ruled in Golconda that the accumulated earnings tax could only
apply to closely held corporations. Despite Golconda, the Internal Revenue
Service asserted that the tax could be imposed on widely held corporations
including those not controlled by a few shareholders or groups of
shareholders. The Service indicated it would not follow the Ninth Circuit
regarding publicly held corporations. In 1984, American legislation nullified
the Ninth Circuit's Golconda ruling and made it clear that the accumulated
earnings tax is not limited to closely held corporations. Clearly, Golconda is
no longer a reliable precedent.|||