Allowed Double Taxation
Allowed Double Taxation
by Victor Lorenzo T Francisco
Republic Act ("RA") No. 11232 or the "Revised Corporation Code of the Philippines" or “RCC” was signed into law by President Rodrigo Roa-Duterte on February 20, 2019. The Act, which is a consolidation of Senate Bill No. 1280 and House Bill No. 8374, seeks to make doing business in the Philippines easier for Filipinos and foreigners alike by repealing in its entirety the old Corporation Code, and introducing various reforms to govern the existence of private corporations. It is to be remembered that the old Code, Batas Pambansa Blg. 68, has been in full force and effect for the past 38 years – i.e., since its effectivity back in May 1, 1980 – and, as of late, has been a subject of criticism for its essentially obsolete provisions by modern business standards. By way of example, whereas the RCC provides that directors or members who cannot physically attend or vote at board meetings may do so through remote communication methods, the old Code absolutely required the physical presence of the directors or members in said meetings to be allowed participation. SEC Chairperson Emilio B. Aquino declared that there will be no implementing rules and regulations on the RCC but there will be memorandum circulars on certain provisions.
One of the more interesting amendments is the newly-conferred express power of corporations to enter into partnerships and joint ventures with natural and juridical persons under Section 35(h) of the RCC. Previously, it was considered outside of the powers (“ultra vires”) of a corporation to enter into a partnership or joint venture whether with natural or with juridical persons, adopting the rule found in American Jurisprudence that a corporation shall manage its own affairs separately and exclusively. However, it has also long been a subject of debate whether a corporation is truly without power to enter into a partnership or joint venture: in the case of Tuason v. Bolanos (G.R. No. L-4935), the Supreme Court (“SC”) ruled that “though a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter.” Reading this in conjunction with Aurbach et. al., v. Sanitary Wares Manufacturing Corporation (G.R. No. 75875) where the SC provided that “a joint venture is a form of partnership and should thus be governed by the law of partnerships,” it can be seen that although corporations are without power to become partners under the old Code, in some instances, they were effectively allowed to become such. Meanwhile, the Securities and Exchange Commission (“SEC”) has also long opined that corporations may enter into joint venture agreements if the nature of the joint venture is consistent with the business authorized in their charter (SEC-OGC Opinion No. 22-16, citing SEC Opinions dated January 26, 1961; February 29, 1980; November 11, 1981; and April 29, 1985). Consistent with the well-settled rule that corporations, being artificial persons, cannot acquire personal qualifications such as education and skills necessary to the practice of a profession, it has been retained that individuals, partnerships and associations empowered to a practice professions are precluded from putting up a corporation for such conduct. By way of implication, corporations are still not empowered to become partners in general professional partnerships ("GPP") – i.e., a partnership engaged in the exercise of a profession.
Incident to this new development is the question of taxability of shares of profit received by a domestic corporation (“DC”) or a resident foreign corporation (“RFC”) as a partner or a joint venturer: what tax is imposed on the same? One argument is that such shares of income are representative of flow of wealth other than a mere return of capital, and as any other increase in net worth, the same should be taxed using the 30% regular corporate income tax (“RCIT”) under Sections 27(A) or 28(A) of the Tax Code, as applicable. However, it is to be remembered that since business partnerships and joint ventures, except those formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations, are already taxed akin to domestic corporations, the further imposition of RCIT on the particular source of income may be construed as an instance of double taxation, which may be avoided if they are to be grouped with intercorporate dividends, which are exempt from tax pursuant to Sections 27(D)(4) or 28(A)(7)(d) of the Tax Code, as applicable. The second argument, however, may be refuted by the fact that share in profits of partnerships does not fall under the definition of ‘dividends’ provided under Section 73(A) of the Tax Code, which refers to the latter as distributions of income to shareholders exclusively. Moreover, in relation to nonresident foreign corporations (“NRFC”), Section 28(B)(5)(b) of the Tax Code imposes, in general, a 30% final withholding tax (“FWT”) on intercorporate dividends, or a lower rate of 15% subject to the condition that the country in which the NRFC is domiciled shall allow a credit against the tax due from the NRFC taxes deemed to have been paid in the Philippines. There may also be a question as to whether the same rule is applicable to shares in net income of partnerships and joint ventures received by NRFCs.
As regards individual taxpayers, the taxability of shares in net income of ordinary partnerships is fairly straightforward as the Tax Code, as amended, imposes an FWT on the same under Section 24(B)(2) or Section 25(A)(2), whichever is applicable. It is worth inquiring into the wisdom of the foregoing provisions as they practically put shares in net income of ordinary partnership in the same place and under the same taxability as dividends received by individual taxpayers from domestic corporations. In light of this, it may be logical to argue that the source of income should be grouped in the same manner across the board and, accordingly, exempted from tax if received by DCs and RFCs. However, the flaw in this logic lies in that tax exemptions are construed strictissimi juris (Latin for “the strictest letter of the law”) against the taxpayer and liberally in favor of the government. In simpler terms, a taxpayer cannot successfully invoke an exemption unless the same is expressly provided by the Law. However, the imposition of tax on the same may be construed as double taxation since the same income will effectively be subjected to tax at two points: first, at the instance of the partnership, and second, at the instance of the receiving corporation.
To this end, without any amendment to the pertinent provisions of the Tax Code or regulations clarifying the tax treatment of the particular income source, there is effectively no exemption on the same source of income. It should additionally be noted that while double taxation is generally frowned upon in the Philippines by the State and taxpayers alike, the same is not entirely illegal and prohibited except if under a particular circumstance, such double taxation is violative of any Constitutional limitations of the power to tax.
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