March 19, 1998
BIR RULING NO. 029-98
34 (C)-000-00-029-98
Chairman Neptali S. Franco
Energy Regulatory Board
PHILCOMCEN Bldg.
Ortigas Avenue
Pasig City
Dear Chairman Franco :
This refers to your letter dated March 5, 1998 requesting for comments on some issues in
relation to ERB Case No. 93-118 (CA-G.R. No. 46888) entitled "Manila Electric Company vs.
Energy Regulatory Board, et al." now pending before the Court of Appeals, viz:
1. Whether income tax payments may be included as part of operating
expense in the determination of fair rate of return;
2. Whether the inclusion of income tax as operating expense in the
computation of return-on-rate-base (RORB) is illegal per se;
3. Whether the usage of the present value of property as capital is
appropriate in the computation of the private electric utilities; RORB;
LexLib
4. Whether the appraisal increase of property, plant and equipment of
electric utilities is taxable;
5. Whether American Laws on taxation may be applied in the Philippine
setting and if possible, can you give us a sample of how much is the
rate of corporate tax;
6. Taxes on stockholders' dividends pursuant to Executive Order No. 37;
7. Computation of franchise tax for purposes of computing RORB; and
8. MERALCO's Petition for Review.
In reply, please be informed as follows: prLL
1. Question Nos. 1, 2, 3, 7 and 8 are all sub judice insofar as the rate-fixing issue is
concerned considering that these are the same issues raised for resolution in the case at
hand now pending before the Court of Appeals. Thus, we are prohibited from issuing
further comments in order not to prejudge or pre-empt the decision of the court. However,
insofar as your question as to whether or not income tax may be considered as an
operating expense of an electric utility, please be informed that then Section 29(c)(1) of
the Tax Code of 1977, as amended (now Sec. 34(C)(1) of the Tax Code of 1997) provides
that, in general, taxes paid or accrued (now incurred) within the taxable year in connection
with the taxpayer's trade or business shall be allowed as deduction, except, among others,
the income tax provided for in the Tax Code. Hence, for purposes of computing a
corporation's taxable income, the income tax paid or accrued (now incurred) by it within
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the taxable year shall not be allowed as deduction from its gross income.
2. Regarding your Question No. 4, as a general rule, in this jurisdiction, mere increase in the
value of property without actual realization, either through sale or other disposition, is not
taxable, the only exception being that even without sale or other disposition, if by reason of
appraisal, the cost basis of property is increased and the resultant basis is used as the
new tax base for purposes of computing the allowable depreciation expense, the net
difference between the original cost basis and new basis due to appraisal is taxable under
the economic-benefit principle. dctai
3. Regarding your Question No. 5 as to whether American laws on taxation may be applied
in the Philippine setting, please be informed that we have already not been following the
American Tax System strictly because we have our own tax laws, including our own rules
and regulations implementing our tax laws. However, it is worthwhile mentioning that
under the doctrine of precedent, a court MAY, BUT NEED NOT APPLY American laws or
court decisions when deciding a case before it because they have some persuasive
authority. Persuasive authorities include decisions of courts of equal or lesser standing,
the opinions of eminent textbook writers, and obiter dictum (meaning something said by a
judge while giving judgment that was not essential to the decision in the case and which
does not form part of the radio decidendi of the case and therefore creates no binding
precedent, but may be cited as persuasive authority in later cases).
4. Regarding your Question No. 6, the amendments introduced by Executive Order No. 37
dated July 31, 1988 to the Section 21(c)(2) of Tax Code of 1977 provides that "dividends
received by a citizen or a resident alien from a domestic corporation is subject to income
tax at the rate of : LLjur
15% in 1986;
10% effective January 1, 1987;
5% effective January 1, 1988; and
0% effective January 1, 1989.
On the other hand, Sec. 22(a) and (b) of the same Code, as amended by E.O. No. 37
provides, among others, that "dividends received by a non-resident alien individual, whether
engaged or not engaged in trade or business in the Philippines, from a domestic
corporation is subject to the final withholding tax of 30% of such dividend income."
Moreover, it should be noted that under Secs. 24(e)(4) and 25(a)(6)(D) of the same Code,
as amended by E.O. No. 37, "intercorporate dividends received by a domestic or resident
foreign corporation from another domestic corporation are not subject to income tax".
However, pursuant to Sec. 25(b)(5)(B) of the same Code, "dividends received by a non-
resident foreign corporation from a domestic corporation is subject to the tax of 15% of
the dividends received, subject to the condition that the country in which the non-resident
foreign corporation is domiciled shall allow a credit against the tax due from the non-
resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent
to 20% which represents the difference between the regular tax (35%) on corporations and
the tax (15%) on dividends." dctai
5. For purposes, however, of computing the taxable income of domestic corporations
derived from within and without the Philippines, the allowable deductions are limited to
those provided for under the following Sections of the Tax Code, viz:
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For taxable year 1997 and prior years — Section 29 of the Tax Code of 1977, as
amended; and
For taxable year 1998 — Section 34 of the Tax Code of 1997.
6. Finally, pursuant to then Sec. 117 of the Tax Code of 1977, as amended by R.A. No.
8241, the 2% franchise tax of electric, gas and water utilities is based on "gross receipts"
derived from the business covered by the law granting the franchise. For this purpose, the
term "gross receipts" means the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount charged
for materials supplied with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services performed or to be
performed for another person. cdll
Very truly yours,
(SGD.) LIWAYWAY VINZONS-CHATO
Commissioner of Internal Revenue
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