d. Double Taxation

7. Double Taxation

a. Direct Duplicate Taxation b. Indirect Duplicate Taxation c. Mitigants i. Tax Exemption ii. Tax Credit iii. Tax Deduction iv. Tax Discount v. Reciprocity Principle

a. Direct Double Taxation (Strict sense)

Direct double taxation occurs when the same taxpayer is taxed twice on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction and period, and by taxes of the same kind or character.

Both taxes must be imposed:

• On the same taxpayer;
• On the same property or subject matter;
• For the same purpose;
• By the same taxing authority;
• Within the same jurisdiction or taxing district and during the same period; and
• They must be of the same kind or character of tax. (Villanueva v. City of Iloilo, G.R. No. L-26521, 27 May 1955)¹)

b. Indirect Double taxation (Broad sense)

It means indirect duplicate taxation. It extends to all cases in which there are two or more pecuniary impositions. The Constitution does not prohibit the imposition of double taxation in the broad sense.

Constitutionality of Double Taxation

The SC held that there is no constitutional prohibition against double taxation in the Philippines. (Villanueva v. City of Iloilo)² Therefore, it may not be a valid defense against the validity of a tax measure. (Pepsi-Cola Bottling Company of the Philippines, Inc. v. Municipality of Tanauan, G.R. No. L-31156, 27 February 1976)³ Direct double taxation is disfavored, but it is not, by itself, constitutionally prohibited. A particular imposition may be challenged under applicable constitutional or statutory limitations.

There is no direct double taxation in the following cases:

• By taxing corporate income and stockholders’ dividends from the same corporation;
• Tax imposed by the State and the local government upon the same occupation, calling or activity;
• Real estate tax and income tax collected on the same real estate property leased for earning purposes (Villanueva v. City of Iloilo); and
• Taxes are imposed on taxpayer’s final product and the storage of raw materials used in the production of the final product (Procter & Gamble Philippine Manufacturing Corporation v. Municipality of Jagna, G.R. No. L-24265, 28 December 1979)⁴.

Example:

Spouses are American citizens residing in the Philippines, hence, they pay income taxes in the Philippines and federal income taxes in the US. The Court held that double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity. In this case, while the taxpayers would have to pay two taxes on the same income, the Philippine government only receives the proceeds of one tax. (Commissioner of Internal Revenue v. Lednicky, G.R. No. L-18169)⁵

c. Tax treaties as relief from double taxation

Modes of eliminating Double Taxation

• Provide for exemptions or allowance of deduction or tax credit for foreign taxes;
• Enter into treaties with other states (e.g., former PhilAm Military Bases Agreements as to income tax); or
• Apply the principle of reciprocity

In the case of CIR v. S.c. Johnson and Son, Inc., G.R. No. 127105, 25 June 1999⁶, International Juridical Double Taxation is defined as an imposition of comparable taxes in two or more States on the same taxpayer in respect of the same subject matter and for identical periods. In order to eliminate double taxation, a tax treaty is entered into by the two contracting States. The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies.