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Taxation One Addendum

Income Test of Source of Income

Interest income Residence of DEBTOR
Dividend Income:
1)From domestic corp Income within
2) from foreign corp Income within, if 50% or more of the gross
income of the foreign company (for the past 3
years) was derived from sources within the
Philippines
Income without, if less than 50% of the gross
income of the foreign company (for the past 3
years) was derived from sources within the
Philippines
Service Income Place of performance
Rent income Location of property
Royalty income Place of use of intangible
Gain on sale of real property Location of property
Gain on sale of personal property Place of sale
Gain on sale of domestic shares of stock Income within

Add to page 82

Add to page 100

 Difference between creditable withholding tax from final withholding tax
o Income subject to creditable withholding tax shall form part of the gross income to be
reported in the ITR.
 Tax already withheld shall then be claimed as a tax credit, i.e. to be deducted from
the amount of income tax computed according to the graduated income tax rates.
o Final withholding tax shall no longer form part of the gross income to be reported in the
ITR.
 The tax withheld, being a final tax, represents the true and actual tax due on the
income.
 Passive income taxes are final taxes.

Add to 73
 GR: Net capital gain shall be reported in the ITR subject to the graduated income tax rates in
addition to the net income from other sources
o EXCEPT:
 Capital gains from the sale of real property (subject to final tax)
 Capital gains from sale of shares of stock that are not listed and traded at the
stock exchange (subject to final tax)
 Percentage tax on the sale or exchange of shares of stock that are listed and
traded at the stock exchange (based on gross selling price)
 Percentage tax on the sale or exchange though IPO at the stock exchange
 These exceptions have their own special tax returns.

Mickey Ingles
4C Ateneo Law 2012
Atty Montero/Atty Salvador/Sources: Co Untian book/Mamalateo
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Taxation One Addendum

Add to 22, in relation to capital gains discussion (73)

 Implications on shares of stock listed and traded in the stock exchange from those that are not:
o Those listed and traded is subject to the final percentage tax of ½ of 1% on the GROSS
SELLING PRICE.
 Hence, imposed whether there was a gain or not.
o Those NOT listed and traded, the net capital gain is subject to the final capital gains tax
rates of 5/10%.
 Subject to tax only if it results into a gain.
 Final percentage tax on sale or exchange of shares of stock through IPO:
o Gross selling price or gross value in money in proportion of the shares of stock sold or
exchanged to the total outstanding shares of stock after the listing at the stock exchange:
 Up to 25%: 4%
 Over 25% but not over 33 1/3%: 2%
 Over 33 1/3%: 1%

Add to 74
 Examples of properties classified as capital assets:
o Personal property not used in trade or business
 Movables in one’s residence, vehicles, appliances, furniture, jewelry
o Real property not used in trade or business
 Residential house and lot, idle land not used in business operations
 Limitations on the capital asset transactions of corporations:
o Holding period rules not applicable, always 100%
o Capital losses are allowed only to the extent of capital gains
o Net capital loss carry-over is not applicable.
 Transactions considered capital transactions even if there is no sale of capital asset, hence
resulting into capital gains or losses:
o Worthless shares of stock
o Worthless bonds
o Retirement of bonds with interest coupons or in registered form
o Option gains and losses
o Liquidating dividends
o Liquidation of partnership
o Short sales
 Computation of gain or loss of a partner when partnership is dissolved:
o Take note of the holding period k.
 Return on investment upon liquidation
 Less: investment on partnership
 Less: share in undistributed net income
 Equals: Gain (loss) on partnership liquidation
o See problem in p 104 of Co Untian.
 Following sales or exchanges result into taxable gain but NO LOSS recognition:
o Sales or exchanges between related parties
o Wash sales, except those made by dealers in securities
o Exchanges NOT solely in kind in mergers and consolidations
o Illegal transactions
o Sales or exchanges in general which are NOT at arm’s length

Mickey Ingles
4C Ateneo Law 2012
Atty Montero/Atty Salvador/Sources: Co Untian book/Mamalateo
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Taxation One Addendum

 Note: businessman sold building where he opened his supermarket.

o Ordinary asset yan, so get the capital gains/loss.
o Not liable for VAT, since VAT only applies to real properties held primarily for SALE or
LEASE. (102, Co)

Add to 80
 Explain an exchange not solely in kind in a merger or consolidation
o One that involves an exchange of property NOT solely for stocks.
o In other words, the absorbed corporation receives stocks PLUS other property (cash or
non-cash) in exchange for its property.
o In a merger, X Corp transfers all its property costing 10m in favor of Y Corp (absorbing) in
exchange for the latter’s shares of stock worth P10m plus P1m cash.
 The P1m gain resulting from the merger is taxable.
 BU if the plan of merger or consolidation expressly provides that the
amount shall be distributed to the shareholders of X Corp, the gain shall
not be subject to income tax.
 What if instead of P10m stock plus P1m cash, X corp is given P5m stock plus P5m
cash?
 No gain, since break even only. (Problem in p 105 of Co)

Add to 91
 Summarize the kinds of sale that may be reported in installments:
o The INCOME derived from the following sales may be reported using the installment
method:
 Sale of personal property by a dealer
 No need for the 25% requirement
 Think appliance stores who sell TVs, etc
 Casual sale of personal property, provided:
 Selling price exceeds P1,000
 Initial payments do NOT exceed 25% of the selling price, and
 The property sold is NOT of a kind which would be includible in the
inventory on hand at the close of the year
 Sale of REAL property, provided that the initial payments do NOT exceed 25% of
the selling price
 The following FINAL capital gains taxes may be paid in installments:
o Final capital gains tax on the sale of real property (capital asset); provided that the initial
payments do NOT exceed 25% of the selling price
o Final tax on net capital gain from the sale in installments of shares of stock NOT listed and
traded at the stock exchange; provided, that the initial payments do NOT exceed 25% of
the selling price
o Formula for both:
 Final tax due = (installments received/contract price) x final tax
 What’s a deferred-payment sale?
o Wherein payments received in cash or property OTHER than evidences of indebtedness of
the purchaser during the taxable year in which the sale is made EXCEED 25% of the
selling price.
o If that’s the case, the tax shall be paid in full in the year of the sale.
 “Initial payments” means:
o payments received in cash or property OTHER than evidences of indebtedness of the
purchaser during the taxable period (year) in which the sale or other disposition is made.
 Does the holding period rule apply to installment sales?

Mickey Ingles
4C Ateneo Law 2012
Atty Montero/Atty Salvador/Sources: Co Untian book/Mamalateo
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Taxation One Addendum

o Yes.
 But it does NOT apply to capital assets that are subject to final capital gains tax,
since the holding period applies only to those capital gains and losses that are
returnable (those reported in the ITR).

Add to 17 (on partnerships)

 Two kinds of partnership, for income tax purposes:
o Partnerships NOT subject to income tax, ie
 General professional partnership
 Joint venture or consortium agreement formed for the purpose of
 undertaking construction projects
 engaging in petroleum, coal, geothermal and other energy operations
o pursuant to an operating or consortium agreement under a service
contract with the government
o Partnerships subject to tax
 Usually, those whose income is derived from trade or business
 Differences
NON TAXABLE TAXABLE business partnership
 With regard to DISTRIBUTIVE SHARE
o Distributive share is a partner’s computed and ascertained share in the net profits
of the partnership,
 Whether actually distributed to the partners or not

 will form part of partner’s gross income in Partner’s distributive share in the net income
the ITR subject to the graduated income is subject to a final tax of 10% (resident
tax rates citizens, non-resident citizens, OCWs, or
 will be subjected to a creditable resident aliens) or 20% (for NRAETB)
withholding tax of 15% (if income
payments exceed P720,000 for the
current year) or 10% (if income
payments do NOT exceed P720,000 for
the current year) to be withheld and paid
by the partnership to the BIR

With regard to PARTNER’S SHARE IN NET LOSS OF THE PARTNERSHIP

May be claim as a deductible expense in his Not deductible since subject to final tax
personal income tax return
With regard to HOW THE PARTNERSHIP is TAXED
Still required to file an annual information Deemed and treated as corporations subject to
return on their incomes and expenses for the corporate income tax rate
the purpose of ascertaining the partners’
taxable shares

 When co-ownership becomes taxable:

o Income of the co-ownership is invested in other income-producing properties or income-
producing activities
o When there is NO attempt to divide the inherited property for more than 10 years and the
said property was not under any administration proceedings nor held in trust (thus
deemed an unregistered partnership)

Mickey Ingles
4C Ateneo Law 2012
Atty Montero/Atty Salvador/Sources: Co Untian book/Mamalateo
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Taxation One Addendum
Add to 91
Estate
Definition Mass of property, rights, and
obligations left behind by the
decedent upon his death.
For purposes of income tax, an
estate may be under judicial
administration or one that is not.
Who files the If under judicial admin: executor
ITR pertaining or admin shall file the return and
to the taxable pay the tax on the net income of
income of an the estate
estate
If NOT under judicial admin: heirs
shall include in their respective
returns their distributive shares in
the net income of the estate
Mickey Ingles
4C Ateneo Law 2012
Atty Montero/Atty Salvador/Sources: Co Untian book/Mamalateo
Trust
Arrangement whereby the trustor
grants the control of certain property in
the person of the trustee for the benefit
of the beneficiary.
Trusts subject to income tax: income…
a) accumulated for the benefit of
unborn or unascertained person or
persons with contingent interest
b) accumulated or held for future
distribution under the terms of the
trust
c) is to be distributed currently by the
fiduciary to the beneficiaries
d) collected by a guardian of an infant
is held or distributed as the court
may direct
e) income, in the discretion of the
fiduciary, may either be distributed
to the beneficiaries or accumulated
Exempt taxable trust: “employee’s
trust”
If irrevocable trust: trustee (fiduciary)
is the one who will file the return and
pay the tax thereon for a trust
If revocable trust: income of such part
of the trust shall be included in
computing the taxable income of the
GRANTOR
Revocable trust is one where at any
time the power to revest in the grantor
title to any part of the corpus of the
trust is vested:
a) In the grantor alone or in
conjunction with a person not having
substantial adverse interest on the
corpus
b) In any person not having a
substantial adverse interest in the
disposition of such part of the corpus or
the income therefrom
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Taxation One Addendum

What gross Practically the same as that of an individual taxpayer

income consists
of
Deductible a) Same to an individual a) Same to an individual taxpayer
expenses taxpayer b) Amount of income of the trust
b) Amount of income of the which is to be distributed currently
estate that is paid or credited to the beneficiaries
to any legatee, heir, or c) Amount of the income collected by
beneficiary the guardian of an infant which is
to be held or distributed as the
Note: cash advances given to court may direct
surviving spouse or heir NOT
deductible Note: cash advances given to surviving
spouse or heir NOT deductible
Exemption P20,000
Accounting Calendar year
period
Miscellaneous Excess of sales proceeds over the If two or more trusts are created by
notes appraised value of the property is the SAME grantor in favor of the SAME
recognized as taxable gain beneficiary, the taxable income of all
trusts shall be CONSOLIDATED for the
prupose of computing the income tax
thereon and each trustee shall
proportionately bear the taxes.
In this case, the personal exemption of
P20,000 shall be availed of ONLY ONCE
by being deducted from the
consolidated net income.

Mickey Ingles
4C Ateneo Law 2012
Atty Montero/Atty Salvador/Sources: Co Untian book/Mamalateo