Publishing the Amendments Effected by Presidential Decree No. 1457 to Title II. — Income Tax of the National Internal Revenue Code of 1977, as Amended

August 15, 1978 REVENUE MEMORANDUM CIRCULAR NO. 080-78 SUBJECT : Publishing the Amendments Effected by Presidential Decree No. 1 457 to Title II. Income Tax of the National Internal Revenue Co de of 1977, as Amended TO : All Internal Revenue Officers and Others Concerned For the information and guidance of all concerned, there is published below certain Sections of Title II, Income Tax of the National Internal Revenue Code of 1977, as amended by Presidential Decree No. 1457. aisa dc TITLE II . INCOME TAX "SECTION 1. Paragraph (e) of Section 20 of the National Internal Revenue Code is hereby amended to read as follows: '(e) (1) The term 'nonresident citizen' means one who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. '(2) A citizen leaving the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a more or less permanent basis and contract workers whose contract of employment are renewed from time to time within or during the taxable year under such circumstances as to require them to be physically present abroad most of the time during the taxable year, shall be considered as a nonresident citizen for such taxable year with respect to the income he derived from foreign sources from the date he actually departed from the Philippines. '(3) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. '(4) The taxpayer shall submit proof to the Commissioner of Internal Revenue to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purposes of this section.'" "SEC. 2. Paragraph (a) of Section 24 of the National Internal Revenue Code is hereby amended to read as follows: 'Sec. 24. Rates of tax on corporations . (a) Tax on domestic corporations . . . . 'xxx xxx xxx 'Private educational institutions, whether stock or non-stock, shall pay a tax of ten per cent 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: Provided , however , that dividends received by a private educational institution, whether stock or non-stock, from a domestic corporation shall be subject to the inter-corporate dividends tax under subsection (c) hereof.' "SEC. 3. Subparagraph (1) of paragraph (b) of Section 24 of the Tax Code is hereby amended to read as follows: '(b) Tax on foreign corporations (1) Nonresident corporations . A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five per cent of the gross income received during each taxable year from all sources within the Philippines as interest, dividends, rents, royalties (including remunerations for technical services), salaries, premiums, annuities, emoluments or other fixed or determinable annual, periodical or casual gains, profits and income, and capital gains: Provided , however , That '(i) . . . '(ii) . . . '(iii) . . . '(iv) . . . '(v) . . . '(vi) . . . '(vii) Rentals, charter and other fees payable to non-resident lessors of aircraft, machineries and other equipments shall be subject to a final tax not less than five per cent (5%) but not more than ten per cent (10%) to be fixed and determined by the President upon recommendation of the Secretary of Finance: Provided , however , that the rate of seven and one-half per cent (7-1/2%) shall be imposed on such rentals, charter and other fees until such time as the President shall have prescribed the rates appropriate for each category of property. The return and payment of the final tax shall be made in accordance with Sections 53 and 54 of this Code.' "SEC. 4 Section 27, paragraph (e) is hereby amended by deleting the second paragraph therefrom and transposing the same after paragraph (1) of the same section, to read as follows: 'Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organization from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to the tax imposed under this Code.' "SEC. 5. Paragraph (a) of Section 30 is hereby amended to read as follows: 'SECTION 30. Deductions from gross income . In computing net income there shall be allowed as deductions '(a) Expenses . (1) Business expenses . (A) In general . All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; travelling expenses while away from home in the pursuit of a trade or business, rentals or other payments required to be made as a condition to the continued use or possession, for the purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. '(B) Entertainment expenses for individuals . In the case of an individual who derives compensation income, the maximum amount of ordinary and necessary trade or business entertainment expenses deductible from such compensation income shall not exceed ten percent (10%) of such compensation income. For purposes of this paragraph, the term 'compensation income', means all remunerations for services performed by an employee for his employer, including the cash value of all remunerations paid in any medium other than cash, unless specifically excluded from gross income under existing laws. The name by which the remuneration for services is designated is immaterial. Thus, salaries, fees, bonuses, commissions, profit-sharing, pensions, retirement pay, allowances in connection with his employment, and all forms of benefits given to the employee in consideration of services rendered to his employer constitute compensation income. '(C) Substantiation requirements for entertainment , amusement or recreation . No deductions otherwise allowable under this paragraph shall be allowed for any item '(i) Activity . With respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, unless the taxpayer establishes that the item was directly related to, or, in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that such item was associated with, the active conduct of the taxpayer's trade or business, or '(ii) Facility . With respect to a facility used in connection with an activity referred to in sub-paragraph (A), unless the taxpayer establishes that the facility was used primarily for the furtherance of the taxpayer's trade or business and that the item was directly related to the active conduct of such trade or business. 'For purposes of applying this subparagraph, dues or fees paid to any social, athletic or sporting club or organization shall be treated as items with respect to facilities. 'In no case shall an entertainment, amusement or recreational expense which is contrary to public policy or for immoral purposes be allowed as a deduction.' "SEC. 6. Subparagraph (1) of paragraph (b) of Section 30 of the National Internal Revenue Code is hereby amended to read as follows: '1. In general . The amount of interest paid or accrued within a taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations the interest upon which is exempt from taxation as income under this Title: Provided , however , that interest on deposits paid by authorized agent banks of the Central Bank of the Philippines to depositors shall be allowed as a deduction only if it is shown that the tax on such interest was withheld and paid in accordance with the provisions of Sections 53 and 54 of this Code.' "SEC. 7. Paragraph (b) of Section 30 is hereby amended by adding a new subparagraph (3) to read as follows: '(3) No deduction shall be allowed in respect of interest of otherwise deductible under the preceding subparagraphs '(A) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided , however , that such interest shall be allowed as a deduction in the year the indebtedness is paid: And Provided , further , That if the indebtedness payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. '(B) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified within any one of the paragraphs of sub-section (b) of Section 31. "SEC. 8 Section 30(c)(3)(C) of the National Internal Revenue Code is hereby amended to read as follows: '(C) Partnerships and estates . In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trusts, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or accrued during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title.' "SEC. 9. Subparagraph (4) of paragraph (a) of Section 37 of the National Internal Revenue Code is hereby amended to read as follows: '(4) Rentals and royalties . Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for '(A) the use of, or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; '(B) the use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; '(C) the supply of scientific, technical, industrial or commercial knowledge or information; '(D) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property, or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); or '(E) the supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from, such nonresident person; '(F) any other amounts paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and '(G) the use of or the right to use '(i) motion picture films; '(ii) films or video tapes for use in connection with television; or '(iii) tapes for use in connection with radio broadcasting.' "SEC. 10. The last sentence of paragraph (e) of Section 37 of the National Internal Revenue Code is hereby amended to read as follows: '. . . Gains, profits, and income derived from the purchase of personal property within and its sale without the Philippines or from the purchase of personal property without and its sale within the Philippines, shall be treated as derived entirely from sources within the country in which sold: Provided , however , That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its books unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer or, (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred to advise the transferee of this requirement. "SEC. 11. Paragraph (a) of Section 65 of the National Internal Revenue Code is hereby amended to read as follows: '(a) Dividends, interest (other than interest constituting rent as defined in subsection (g) hereof), royalties (other than mineral, oil, or gas royalties), and annuities. The term 'royalties', as herein used, includes income from copyrights, patents, and other similar revenues.'" aisa dc FEATURES OF THE AMENDMENTS Amendment to Section 20 . Meaning of nonresident citizen The requirement that a citizen should be physically present abroad for an uninterrupted period of at least one calendar year in order to qualify as a nonresident citizen was abandoned. Now, to qualify as a nonresident citizen, it is sufficient to establish a definite intention to reside abroad. A citizen departing from the Philippines during the year to reside abroad as immigrant or for employment on a more or less permanent or regular basis, or a citizen who had been a resident abroad but arrived in the Philippines at any time during the year to reside permanently in the Philippines, will be considered as a nonresident citizen with respect to his foreign source income while he was abroad during the portion of the taxable year. Amendment to Section 24 . 1. Intercorporate dividend income of an educational institution Under the amendment, only the dividend income received by an educational institution from a domestic corporation shall be subject to the 10% final intercorporate dividends tax. 2. Tax on foreign corporations A new paragraph was also incorporated in Section 24 of the Tax Code under which rentals, charter and other fees payable to nonresident lessors of aircraft, machineries and other equipment were made subject to a final tax of not less than five per cent (5%) but not more than ten per cent (10%) to be fixed and determined by the President upon recommendation of the Secretary of Finance. Meanwhile that the President has not prescribed the tax rates appropriate for each category of property, the tax applicable shall be at the rate of seven and one-half per cent (7-1/2%) on such rentals, charter and other fees. Amendment to Section 27 . Tax exempt organizations Under the amendment, all the organizations enumerated under paragraphs (a) to (1) of Section 27 of the Tax Code shall continue to enjoy exemption from income tax, except that when they derive income of whatever kind and character from any of their properties, real or personal, or from any activity conducted for profit, such income shall be subject to the regular income tax, regardless of the disposition made of such income. Amendment to Section 30. 1. Deduction by an individual of entertainment expenses . The provision that an individual may deduct ordinary and necessary entertainment expenses, notwithstanding that he has no receipts to prove his expenditures, so long as the deduction is not more than P1,000 or 5% of his gross income, whichever is lesser, was repealed. Likewise, the right of an individual to deduct ordinary and necessary entertainment expenses has been further restricted, if such individual derives his income from employment. Under the amendment, such individual may deduct from his gross income ordinary and necessary entertainment expenses, provided, however, that his deduction is not more than 10% of his employment income or gross compensation income as defined in Section 30(a)(1)(B) of the Tax Code, as amended by Presidential Decree No. 1457, or his actual entertainment expenses, whichever is lesser. Illustration Mr. "X" derived the following items of gross income during the taxable year 19__: Salaries - Company "A" P20,000 Allowances - Company "A" 40,000 Bonuses - Company "A" 10,000 Gross compensation income P70,000 Add: Other income Dividend income 50,000 Interest income 5,000 GROSS INCOME P125,000 ======== His actual ordinary and necessary entertainment expenses during the taxable year amounted to P40,000. Mr. "X" will be entitled to deduct from his gross income only the amount of P7,000 as ordinary and necessary entertainment expenses, notwithstanding that he actually spent P40,000 because the amount allowable to him is limited to 10% of his gross compensation income amounting to P70,000. The dividend and interest, not being income from his employment, are not includible in computing his gross compensation income. 2. Deduction of interest expense . A proviso was also made that, if an individual taxpayer reporting income on the cash basis , incurs an indebtedness on which the interest is paid in advance through discount or otherwise, such interest is deductible only in the year the indebtedness is paid. However, if such indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the taxable year shall be allowed as deduction in such taxable year. Likewise, interest paid to certain persons who are closely related to the taxpayer as contemplated in Section 31(b) of the Tax Code, shall not anymore be allowed as deduction from gross income. 3. Deduction of taxes paid to a foreign country . The right of an individual partner to deduct from his gross income his proportionate share of the taxes paid to a foreign country by the partnership in which he is a member, has been limited only to partner of a general professional partnership. Amendment to Section 37 . 1. Concept of royalty as income from Philippine source . The concept of royalty was broadened. Now, royalty refers not only to amounts paid for the use in the Philippines of intangible personal property rights such as copyrights, patents, design or model, secret formula or process, goodwill, trademark, trade brand or other like property, but also includes the supply of technical, scientific or other information, assistance, service or advice which is ancillary to the use of property or installations of equipment, machinery, etc. 2. Disposition of shares of stock in a domestic corporation . The gain or loss from the sale or disposition of shares of stock in a domestic corporation is now treated as arising from sources within the Philippines, regardless of the country where the sale or disposition was actually consummated. However, if the sales takes place in the Philippines, such transaction is subject to the pertinent provisions of the stock transaction tax law, pertinent portion of which is embodied in Section 210 of the Tax Code, as amended by Presidential Decree No. 1457. Amendment to Section 65 . Dividend is now a personal holding company income . The dividend received by a corporation is now treated as personal holding company income for purposes of the gross income requirement which is a requisite in determining whether a corporation is to be treated a personal holding company subject to additional 45% tax under Section 63 of the Tax Code, notwithstanding that such dividend was previously subjected to the 10% final intercorporate dividends tax. EFFECTIVITY All the amendments to Title II of the National Internal Revenue Code under Presidential Decree No. 1457 became effective on August 5, 1978, the date of the publication of the decree in the newspapers. ENFORCEMENT All internal revenue officers and others concerned are enjoined to be guided accordingly and to give this circular as wide a publicity as possible. aisa dc EFREN I. PLANA Acting Commissioner