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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
There is double taxation when the same taxpayer is taxed twice when he should be taxed only once for the same purpose by the same taxing authority within the same jurisdiction during the same taxing period, and the taxes are of the same kind or character. (Nursery Care Corporation vs. Anthony Acevedo, G.R. No. 180651, July 30, 2014)
Q: Is double taxation prohibited in the Philippines?
A: At all events, there is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the requirement that taxes must be uniform. (Eusebio Villanueva, et. al., vs. City of Iloilo, G.R. No. L-26521, December 28, 1968)
Q: What are the types of double taxation?
A: The two types of double taxation are: (1) Direct Double Taxation [Strict Sense], and (2) Indirect Double Taxation [Broad Sense].
Q: What is direct double taxation (in a strict sense)?
A: Double taxation means taxing the same property twice when it should be taxed only once; that is, “taxing the same person twice by the same jurisdiction for the same thing.” It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as “direct duplicate taxation,” the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character. (Nursery Care Corporation vs. Anthony Acevedo, G.R. No. 180651, July 30, 2014)
For double taxation to be deemed as such in the strictest sense, all the aforementioned elements must be present.
Q: What is indirect double taxation (in a broad sense)?
A: Indirect double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. (Cargill Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 203346, September 9, 2020)
Indirect double taxation occurs when certain elements of direct double taxation are missing. Put simply, indirect double taxation (in a broader context) is considered permissible double taxation.
Q: How to eliminate indirect double taxation?
A: The Supreme Court further explained that to eliminate double taxation, a tax treaty resorts to two methods: first, by allocating the right to tax between the contracting states; and second, where the state of source is assigned the right to tax, by requiring the state of residence to grant a tax relief either through exemption or tax credit. (Ibid.)
Q: What is the first method in eliminating double taxation?
A: In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. (Ibid.)
Q: What is the second method for eliminating double taxation?
A: The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. (Ibid.)
Q: What are the two methods of relief?
A: There are two methods of relief — the exemption method and the credit method.
Q: What is the exemption method of relief?
A: In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer’s remaining income or capital. (Ibid.)
Q: What is the credit method of relief?
A: On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. (Ibid.)
Q: What is the difference between the two exemption methods?
A: The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. (Ibid.)
IN SUMMARY:
- Double taxation in the Philippines occurs when the same taxpayer is subjected to taxation twice for the same purpose by the same taxing authority within the same jurisdiction and taxing period, with the taxes being of the same kind or character.
- While there is no explicit constitutional prohibition against double taxation, it is generally disfavored but permissible, provided it does not violate other constitutional requirements such as tax uniformity.
- There are two types of double taxation: direct double taxation and indirect double taxation.
- Direct double taxation involves the imposition of two taxes on the same subject matter, meeting specific criteria.
- Indirect double taxation, on the other hand, arises when some elements of direct double taxation are absent, often necessitating methods for elimination through tax treaties.
- These treaties typically allocate taxing rights between contracting states and provide relief through either the exemption method or the credit method.
Read also: Tax Deficiency vs. Tax Delinquency
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding taxation and taxpayer’s remedies, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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