1.
The definition of taxable income no longer includes personal and additional
exemptions
NIRC TRAIN LAW
SECTION 31. Taxable Income Defined. — The SECTION 8. Section 31 of the NIRC, as
term 'taxable income' means the pertinent items of amended, is hereby further amended to read as
gross income specified in this Code, less the follows:
deductions and/or personal and additional
exemptions, if any, authorized for such types of "SEC. 31. Taxable Income Defined. — The
income by this Code or other special laws term 'taxable income' means the pertinent
items of gross income specified in this
Code, less deductions, if any, authorized
for such types of income by this Code or
other special laws."
In the old law, taxable income is subject to personal and additional exemptions, depending on the type of
income. However, the TRAIN law repealed Sec. 35 which provides for the list of the above mentioned
exemptions.
Sample case:
COMMISSIONER OF INTERNAL REVENUE, petitioner vs. PHILIPPINE AIRLINES,
INC. respondent. G.R. No. 160528, October 9, 2006; Panganiban, J.
The case involves the application of the tax provision in PAL’s franchise defining its liability for taxes.
P.D. 1590, the legislative franchise of PAL granted it an option to pay the lower of two alternatives: (1) the
basic corporate income tax based on PAL’s annual net taxable income computed in accordance with the
provisions of the NIRC, or (2) a franchise tax of two percent of gross revenues. Availment of either of these
two alternatives shall exempt the airline from the payment of “all other taxes”. On this basis, a claim for refund
of the 20% final withholding tax on its interest income with various banks was instituted.
Issue: Will the “in lieu of all other taxes” provision in PAL’s franchise relieve it from paying the 20% final
withholding tax on its interest on bank deposits even if there were in fact no taxes paid?
The SC ruled that the “in lieu of all other taxes” provision in PAL’s franchise is broad enough to cover
the 20% final withholding tax, thereby making it exempt from its imposition. The SC explained that for the
year involved, PAL chose to be subjected to the basic corporate income “computed in accordance with the provisions
of the National Internal Revenue Code”. The computation of the income tax is anchored on the definition of taxable
income. Section 31 of the NIRC provides: “Taxable income means the pertinent items of gross income specifies
in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for these
types of income”. Section 32 enumerated the items of gross income to include interest and other passive
income. However, since these passive incomes are already subject to different rates and taxed finally at source,
they are no longer included in the computation of the gross income, which determines taxable income. The SC
concluded as follows: “Clearly, then, the basic corporate income tax identified in the franchise relates to the general rate of 35%
as stipulated in Section 27 of the Tax Code. The final 20% taxes disputed in the present case are not covered under Section 13(a)
of PAL’s franchise; thus, a refund is in order.”
Even if PAL chooses the corporate income tax because it results to a Zero liability the fact remains
that the income tax contemplated under the franchise is not the ordinary meaning we place on it – a tax of the
privilege of earning an income – but it is still in the imposed in consideration of the franchise, the incomes tax
if chosen is a tax on the privilege of engaging in the franchised activity and not a tax on the privilege of earning
an income. The two options given to PAL give it only a computational discretion on how much franchise tax
to pay. The tax paid in any of the two alternatives is in lieu of all other taxes including the 20% final withholding
tax.
2.
