Chapter III – Double Taxation and Tax Exemptions
1. There can be no double taxation where the State merely
DOUBLE TAXATION – Taxing the same property twice
when it should be taxed but once.
Taxing the same person twice by the same
jurisdiction over the same thing.
Taxing the same person twice by the same
jurisdiction for the same thing or purpose.
There is no constitutional prohibition against double taxation in the
Philippines according to the Supreme Court in the case of Villanueva
v. City of Iloilo. (L-26521, Dec. 25, 1968)
It is something not favored, but is nevertheless permissible.
It is not forbidden by our fundamental law.
The Philippine has not adopted the injunction against double
taxation found in the Constitution of the US and in some states of the
American Union.
KINDS OF DOUBLE TAXATION
Double Taxation- Duplicate Taxation.
Duplicate Taxation: 1. Direct; 2. Indirect
Direct Duplicate Taxation – Double Taxation in the
objectionable or prohibited sense (obnoxious).
Means that the same property is taxed twice when it
should be taxed only once.
Both taxes are imposed on the same property or
subject matter for the same purpose, by the same
State, Government or taxing authority within the same
jurisdiction or taxing district during the same taxing
period and covering the same kind or character of tax.
Indirect Duplicate Taxation – it is not legally objectionable
Where the absence of the elements of direct duplicate taxation, double
imposition levied on a particular subject of taxation may be justified.
Instances:
imposes a tax on every separate and distinct business in
which a person is engaged.
2. The State may collect an ad valorem tax on property used
in a calling and at the same time impose a license tax on
that. The imposition of license tax being in no sense a
double tax.
3. Both a license fee and a tax maybe imposed on the same
business or occupation for selling the same article and this
is not in violation of the rules against double taxation.
4. License Tax – constitutes a regulatory measure which is
imposed in the exercises of the State’s Police Power.
5. A tax imposed on both on the occupation of fishing and on
the fishpond itself does not constitute double taxation. The
subjects of taxation are different from each other.
6. No Double Taxation- Local Ordinance imposes a tax on
the storage of copra where it appears that the finished
products manufactured out of the copra are subject to sales
tax.
7. No Double Taxation – Where a tax of 1% is imposed
under Sec. 249 of the Tax Code for bank reserve
deficiency while a penalty of 1/10 of 1% a day is also
imposed as a penalty as a consequence of such reserve
deficiency under the Central Bank Act.
8. The Tax on Income is different from the tax on the
dividends received by said companies.
MEANS EMPLOYED TO AVOID DOUBLE TAXATION.
These tax reliefs or schemes are sometimes embodied in tax
treaties or agreements with foreign countries while others are
imbedded in statutory provisions found under our existing
laws.
Example:
1. The burden of double taxation on the same dividend
income earned in the Philippines by a non-resident foreign
corporation(tax in the Phils and another tax in domicillary
country) is reduced by the imposition of 15% in lieu of
35% , 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 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% on dividends.
Common Tax Reliefs: 1. Tax Deductions; 2. Tax credits.
Example of Tax Deductions: Estate Tax Law – provides
vanishing deduction- in order to mitigate the burdensome
effects of double taxation on the same property that is the
subject of 2 or more transfers pertaining to 2 or more
decedents.
Example of Tax Credits: VAT; The tax on inputs or items that
go into the manufacture of finished products may be credited
against or deducted from the output tax or tax on the finished
product.
Income Taxation: Tax Credit scheme is present.
e.g. A resident citizen or domestic corporation whose income
from sources within a foreign country is also taxable under
Phil. Law.
The Tax paid to such foreign country may, under
certain limitations be claimed as a credit against the Philippine
Tax on the same income.
Case: X Corp. domestic corp.
Taxable Income from Foreign Country: 2,000,000.00
Taxable Income in Ph: 8, 000, 000.00
Step 1: To get the maximum allowable foreign tax credit
under the Ph Law.
Taxable Income (Foreign Source X PH Tax on the =
Total Taxable Income (Ph and Foreign) Total Income Limit
of Foreign Tax Credit
2,0000,000.00 /10 x (10,000,000.00*.35) = 700,000.00
Step 2: To credit foreign tax against Philippine tax, deduct
the limit of the foreign tax credit from the Philippine Tax
or the Foreign Tax actually paid whichever is lesser.
Phil. Tax: 3,500,000.00
Less: Foreign Tax Credit Allowable: 700,000.00
Tax Due After Credit : 2, 800,000.00
.
The Foreign Tax Credit method, as a means of minimizing
double taxation, applies also to resident aliens, provided that
the reciprocity requirement in the law is satisfied and subject to
the allocation rule as established in the Tax Code.
In the case of non-resident Filipinos, since their
foreign-sourced income is subject to 2 taxes levied under 2
different jurisdictions; the tax relief comes in the form of a
deduction of the foreign nation income tax from the foreign
sourced income itself. The tax credit scheme in this instance is
not available.
Sec. 23 of the 1997 Tax Code, general principles of
income taxation in the Philippines, a non-resident citizen is
taxable only in income derived from sources within the
Philippines.
An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources
within the Philippines. A foreign corporation, whether engaged
or not in trade or business in the Philippines is taxable only on
income derived from sources within the Philippines.
The benefit of credit against income tax for taxes of foreign
countries shall be allowed to a citizen of the Philippines and a
domestic corporation if the taxpayer so signifies in his return;
but such benefit shall not be allowed to an alien individual and
a foreign corporation.
Example of tax treaties for relief from or avoidance of
double taxation :
1. RP-US Tax Treaty;
2. RP-West Germany Tax Treaty
TAX EXEMPTIONS
- An exemption from taxation may be defines as a
grant of immunity, express, implied to particular
persons or corporations from the obligation to pay
taxes.
KINDS OF TAX EXEMPTIONS
1. Constitutional – which originate from the Constitution.
2. Statutory – emanates from legislation.
3. Express- expressly granted by organic or statue law.
4. Implied – exist whenever particular persons, properties, or
exercises are deemed exempt as they fall outside the scope
of the taxing provision itself.
5. Total – absolute immunity.
6. Partial – collection of a part of the tax is dispensed with.
PRINCIPLES GOVERNING TAX EXEMPTIONS
1. Exemptions from taxation are highly disfavored in law,
and he who claims an exemption must be able to justify his
claim by the clearest grant of organic or statute law.
“Taxation is the rule, tax exemption is the exception”
2. He who claims an exemption from his share of the
common burden in taxation must justify his claim by
showing that the legislature intended to exempt him by too
plain to be mistaken.
3. He who claims exemption should prove by convincing
proof that he is exempted.
4. Tax exemption must be strictly construed such that the
exemption will not be held to be conferred unless the terms
under which it is granted clearly and distinctly show that
such was the intention of the parties.
Tax exemptions are not presumed.
5. Constitutional grants of tax exemptions are self –
executing. It does not need a legislative enactment to put it
into effect.
6. Taxes are personal, Tax exemptions are likewise personal.
LGU Regulations, exemptions from local taxes are
obtained through the issuance of a tax exemption
certificate and the regulations provide that the same shall
be non-transferrable.
7. Deductions for income tax purposes partake of the nature
of the tax exemptions; if tax exemptions are to be strictly
construed, then it follows that deductions must also be
construed.
8. The rule of strict construction of tax exemptions should
not, for obvious reasons, be applied to organizations
performing strictly religious, charitable, and educational
functions.
It also does not apply in cases of exemptions granted
in favor of a government political subdivision or
instrumentality like public corporations.
9. A claim of exemption from tax payments must be clearly
shown and based on language in the law too plain to be
mistaken.