BIR Ruling

August 12, 1976 MEMORANDUM FOR: Mr. Lauro D. Abrahan Assistant Commissioner In connection with your Memorandum dated August 6, 1976 bearing on the queries on income and business taxes submitted by Mr. Ladislao S. Jimenez, Assistant Chief, Manufacturing Division, stated hereunder are said queries and their corresponding answers: aisa dc INCOME TAX 1. Query : "Are step children entitled to the additional personal exemptions for dependents?" Answer : Step children are entitled to the additional personal exemptions. In BIR Ruling No. 235 dated July 18, 1961, this Office ruled "that taxpayer can claim additional exemptions for his four minor step children considering the conjugal status of his income and considering further that said children are wholly independent upon him and his wife for their chief support". There is no valid reason to revoke this ruling. 2. Query : "Are non-resident aliens engaged in trade or business in the Philippines entitled to personal and additional exemptions on the basis of reciprocity? The law makes mention of personal exemptions only. (Sec. 23-(e)". Answer : Yes. A non-resident alien engaged in trade or business in the Philippines is entitled to personal and additional exemptions on the basis of reciprocity. Section 23(e) of the Tax Code provides: "(e) Personal exemptions allowable to a non-resident alien individual. A non-resident alien individual engaged in trade or business in the Philippines shall be entitled to personal exemption in an amount equal to the exemptions allowed by the income tax law in the country of which he is a subject of citizen to citizens of the Philippines not residing in such country, but not to exceed the amount fixed in this section as exemption for citizens or residents of the Philippines not residing in such country, but not to exceed the amount fixed in this section as exemption for citizens or residents of the Philippines: Provided, That said nonresident alien file a true and accurate return of the total income received by him for all sources in the Philippines, as required by this Title." Although the above-quoted provision mentions only "personal exemptions" said term should not be restricted only to the personal exemptions allowable to a single individual, married person or a head of the family. It should include, in fact includes, the additional exemptions allowable to the dependents. This is so because the whole Section 23 speaks of "personal exemptions" which includes the additional exemptions for dependents under sub-section (c) thereof. However, this is on condition that the income tax law in the country of which the non-resident alien is a citizen grants additional exemptions in favor of dependents of Filipino citizens. If such foreign law merely grants personal exemptions without any additional exemption for dependents, then on the basis of reciprocity, the non-resident citizens of said country engaging in trade or business in the Philippines are entitled to the personal exemption as married individual or head of family. 3. Query : "A husband and wife, both receiving salaries of P12,000.00 per annum, own apartments and real estate from which they derived income of about P10,000.00 per annum. If the husband dies on June 15th of the taxable year, how many returns will the wife be required to file? Assume further that they have no children." Answer : The third paragraph of Section 23(d) of the Tax Code provides: "(d) . . . "xxx xxx xxx "If the spouse of any of the dependents should die or become twenty-one years old during the taxable year, the taxpayer may still claim the same exemptions as if they died or as if such dependents became twenty-one years old at the close of such year." Since under the above-quoted provision, the wife may still claim the personal and additional exemptions, as if the husband died at the end of the taxable year, it follows that the wife shall be required to file only one (1) income tax return for said taxable year. 4. Query : "P.D. 369 January 9, 1974 '(d) Rate of tax on certain dividends Dividends received by a domestic or a resident foreign corporation from a domestic corporation liable to tax under this chapter shall be subject to tax at 8.75% on the total amount thereof, which shall be collected and paid as provided in Sections 53 and 54 of this Code." "P.D. 402 March 1, 1974 '(d) Rate of tax on certain dividends Dividends received by a domestic or resident foreign corporation from a domestic corporation liable to tax under this Code shall be subject to tax at 8.75% on the total amount thereof, which shall be collected and paid as provided in Sections 53 and 54 of this Code.' "(1) Shall we enforce that provision of P.D. 369 relating to 'tax under this chapter' for the 2-month intervening period between January 9, 1974 and March 1, 1974? "(2) Is a franchise tax paid under a franchise granted by a municipal government considered a tax under this code ?" Answer : (1) Yes. But the intervening period is between January 1, 1974 (the date of effectivity of P.D. 369) and March 1, 1974 (date of effectivity of P.D. 402). (2) Yes. The first paragraph of Section 259 of the Tax Code, as amended by R.A. No. 6110, provides: "SEC. 259. Tax on franchises . There shall be collected in respect to all franchises, upon the gross receipts from the business covered by the law granting the franchise, a tax of five per centum or such taxes, charges, and percentages as are specified in the special charters of the grantees, upon whom such franchises are conferred, whichever is higher, unless the provisions thereof preclude the imposition of a higher tax. For the purpose of facilitating the assessment of this tax, reports shall be made by the respective holders of the franchises in such form and at such times, as shall be required by the regulations of the Department of Finance." Under the above-quoted provision, the franchise tax provided therein refers not only to the tax imposed in said section but also to the taxes, charges and percentages prescribed in the special charters under which holders of franchise operate. (Panay Electric Co., Inc. vs. Collector, G.R. No. L-10574, May 28, 1958). Consequently, the franchise tax prescribed in a franchise granted by a municipal council is considered a franchise tax imposed in Section 259 of the Tax Code. Therefore, said tax is considered a tax under the Tax Code. 5. Query : "A stock Educational Institution has a fiscal period from September 1, 1973 to August 31, 1974, What rate of income tax should apply? Is it the 25-35% or a combination thereon: "Before July 1, 1974 10% other income 25-35% on net income "After July 1, 1974 10% per P.D. 305" Answer : The stock educational institution is subject to the special income tax rate of 10% for the fiscal year September 1, 1973 to August 31, 1974. Prior to P.D. 305 stock private educational institutions were subject to the special income tax rate of 10%. P.D. which imposed income tax upon stock and non-stock educational institutions at the rate of 10% of their net taxable income derived from school activities and passive income, took effect beginning the calendar year 1974 and fiscal year beginning July 1, 1974. This means that P.D. 305 applies to said educational institutions whose fiscal year began July 1, 1974. This means that P.D. 305 applies to said educational institutions whose fiscal year began July 1, 1974. Hence, a fiscal year non-stock educational institution whose fiscal year is from June 1, 1974 and ends May 31, 1975 remained exempt under Section 27(e) of the Tax Code as it stood before the amendment. (Ruling dated January 8, 1975). Similarly, a stock private educational institution having the same fiscal period was subject to the special income tax rate of 10% of its net taxable income in accordance with Section 24 of the Tax Code before its amendment by P.D. 305. 6. Query : "An Educational Institution has Rental Income on lease of store and canteen spaces. Is it subject to 25-35% or to 10% on its net income on the lease business?" Answer : Rental income derived by an educational institution on the lease of store and canteen spaces is not subject to the 10% income tax on its net taxable income but to the 25-35% rate. Section 24 of the Tax Code, as amended by P.D. 305, provides that "private educational institutions, whether stock or non-stock, shall pay a tax of ten percent of their taxable net income from the operation of the school, related school activities, and on their passive investment income consisting of interest dividends, royalties and the like". There is no question that rental derived from leasing of store and canteen spaces is not considered income from the operations of the school. Neither is it considered passive investment income. The remaining question, therefore, is whether said rental is considered income derived from related school activities. Merten's Vol. 6, Chapter 34, Page 54 quoting a portion of the U.S. Income Tax Regulation states that "ordinarily, a trade or business is substantially related to the activities for which an organization is granted exemption if the principal purpose of such trade or business is to further (other than through the production of income) the purpose of which the organization is granted exemption". Applying this rule in the present situation, an activity producing the income of an educational institution is considered a related school activity if the same is in furtherance of the educational purpose for which the institution is organized. It is believed that leasing store and canteen spaces is not in furtherance of the educational purpose of the institution. BUSINESS TAX 1. Query : "If the fixed tax is not paid on time, it is subject to 25% surcharge and interest of 14% p.a. from the due date to the date of payment. Is the interest computed on the amount of fixed tax due only or on the sum of the fixed tax and the 25% surcharge?" Answer : The 14% interest per annum prescribed by Section 180-A of the Tax Code is based on the total amount which include the unpaid amount of fixed tax and the 25% surcharge added thereto. Section 180 and 180-A of the Tax Code provides: "SEC. 180. Time for payment of fixed taxes . All fixed taxes shall be payable annually, on or before the thirty-first day of January. Any person first beginning a business or occupation must pay the tax before engaging therein. "If the privilege tax is not paid within the time specified, the amount of the tax shall be increased by twenty-five per centum , the increment to be part of the tax." "SEC. 180-A. Interest on delinquency . Where the amount of the tax imposed under Section one hundred and eighty-two, or any part of such amount, is not paid on the due date of the tax, there shall be collected, as part of the tax, interest upon such unpaid amount at the rate of fourteen per centum per annum from the due date until it is paid." It will be noted that the 25% surcharge is an "increment to be part of the tax". Upon failure to pay the tax on time, the taxpayer pays not only the fixed tax but also the 25% surcharge. The 25% surcharge accrues immediately upon failure to pay the fixed tax on time. The total amount (fixed tax and 25% surcharge) constitutes the unpaid amount which is subject to the 14% interest per annum. In the case of the percentage tax, the entire unpaid amount likewise subject to 14% interest per annum consists of the unpaid percentage tax and the 25% surcharge. "SEC. 183. Payment of percentage taxes . . . . "xxx xxx xxx "If the percentage tax in any business is not paid within the time specified above, the amount of the tax shall be increased by twenty-five per centum the increment to be a part of the tax and the entire unpaid amount shall be subject to interest at the rate of fourteen per centum per annum . Revenue Memorandum Circular No. 5-73 states that the 14% interest shall apply to the amount corresponding to the taxpayer and the surcharges added thereto. It is believed that the same interpretation should be given in the case of late payment of the fixed tax. This is so because the imposition of interest in case of late payment of the fixed and percentage taxes was provided for the first time in P.D. 69 by the addition of Section 180-A and the amendment to Section 183 both of the Tax Code. These provisions prescribing the imposition of interest should be harmoniously interpreted so as to arrive at a single purpose which undoubtedly is to impose the 14% interest per annum based on the total amount consisting of the tax and the 25% surcharge. "The practical inquiry in litigation is usually to determine what a particular provision, clause, or word means. To answer it one must proceed as he would with any other composition construe it with reference to the leading idea or purpose of the whole instrument. A statute is passed as a whole and not in part or sections and is animated by one general purpose and intent. Consequently, each part or section should be construed in connection with every other part or section so as to produce a harmonious whole. Thus it is not proper to confine interpretation to the one section to be construed." (Sutherland Statutory Construction, 3rd Ed., Vol. 2, pp. 336-337). 2. Query : "Percentage taxes are paid quarterly. When the examiner computes the deficiency percentage tax, from what date will reckon the computation of the 14% interest per annum? Is it on the due date of the tax for the 4th or last quarter or from the due dates of the previous 3 quarters?" Answer : When the percentage tax is not paid on time, the computation of the 14% interest per annum shall be reckoned from the due date of all the quarters upon which there were late payments. Section 183 of the Tax Code provides that "it shall be the duty of every person conducting a business on which a percentage tax is imposed under this Title, to make a true and complete return of the amount of his, her or its gross quarterly sales, receipts or earnings or gross value of output actually removed from the factory or mill warehouse and within twenty days after the end of each quarter pay the tax due thereon: . . ." In other words, a person subject to percentage tax pays such tax on or before the 20th day of the month after the end of each quarter e.i., the 1st, 2nd, 3rd and 4th quarters. Consequently, if the taxpayer fails to pay the percentage tax within 20 days after the end of each quarter, he is subject to the payment not only of the percentage tax, but also the 25% surcharge due thereon. The total amount which includes the tax and the surcharge shall then be subject to the 14% interest computed from the due date of the tax for each of the corresponding quarter. Respectfully submitted: PRISCILLA R. GONZALES Revenue Service Chief (Legal) TAN-1258-814-1