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Taxation One Addendum

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 !inal 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.
"assi#e income taxes are final taxes.

Add to 73
$R% &et 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 '()'"T%
)apital gains from the sale of real property *subject to final tax+
)apital gains from sale of shares of stoc, that are not listed and traded at the
stoc, exchange *subject to final tax+
"ercentage tax on the sale or exchange of shares of stoc, that are listed and
traded at the stoc, exchange *based on gross selling price+
"ercentage tax on the sale or exchange though I"O at the stoc, exchange
These exceptions ha#e their own special tax returns.
-ic,ey Ingles
.) Ateneo /aw 0120
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Income Test of 4ource of Income
Interest income Residence of D'6TOR
Di#idend Income%
2+!rom domestic corp
0+ from foreign corp
Income within
Income within if 718 or more of the gross
income of the foreign company *for the past 9
years+ was deri#ed from sources within the
"hilippines
Income without if less than 718 of the gross
income of the foreign company *for the past 9
years+ was deri#ed from sources within the
"hilippines
4er#ice Income "lace of performance
Rent income /ocation of property
Royalty income "lace of use of intangible
$ain on sale of real property /ocation of property
$ain on sale of personal property "lace of sale
$ain on sale of domestic shares of stoc, Income within
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Taxation One Addendum
Add to 22, in relation to capital gains discussion (73)
Implications on shares of stoc, listed and traded in the stoc, exchange from those that are not%
o Those listed and traded is subject to the final percentage tax of : of 28 on the $RO44
4'//I&$ "RI)'.
;ence imposed whether there was a gain or not.
o Those &OT listed and traded the net capital gain is subject to the final capital gains tax
rates of 73218.
4ubject to tax only if it results into a gain.
!inal percentage tax on sale or exchange of shares of stoc, through I"O%
o $ross selling price or gross #alue in money in proportion of the shares of stoc, sold or
exchanged to the total outstanding shares of stoc, after the listing at the stoc, exchange%
5p to 078% .8
O#er 078 but not o#er 99 2398% 08
O#er 99 2398% 28
Add to 74
'xamples of properties classified as capital assets%
o "ersonal property not used in trade or business
-o#ables in one<s residence #ehicles appliances furniture jewelry
o Real property not used in trade or business
Residential house and lot idle land not used in business operations
/imitations on the capital asset transactions of corporations%
o ;olding period rules not applicable always 2118
o )apital losses are allowed only to the extent of capital gains
o &et capital loss carry=o#er is not applicable.
Transactions considered capital transactions e#en if there is no sale of capital asset hence
resulting into capital gains or losses%
o >orthless shares of stoc,
o >orthless bonds
o Retirement of bonds with interest coupons or in registered form
o Option gains and losses
o /i?uidating di#idends
o /i?uidation of partnership
o 4hort sales
)omputation of gain or loss of a partner when partnership is dissol#ed%
o Ta,e note of the holding period ,.
Return on in#estment upon li?uidation
/ess% in#estment on partnership
/ess% share in undistributed net income
'?uals% $ain *loss+ on partnership li?uidation
o 4ee problem in p 21. of )o 5ntian.
!ollowing sales or exchanges result into taxable gain but &O /O44 recognition%
o 4ales or exchanges between related parties
o >ash sales except those made by dealers in securities
o 'xchanges &OT solely in ,ind in mergers and consolidations
o Illegal transactions
o 4ales or exchanges in general which are &OT at arm<s length
&ote% businessman sold building where he opened his supermar,et.
o Ordinary asset yan so get the capital gains3loss.
o &ot liable for @AT since @AT only applies to real properties held primarily for 4A/' or
/'A4'. *210 )o+
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.) Ateneo /aw 0120
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Taxation One Addendum
Add to 80
'xplain an exchange not solely in ,ind in a merger or consolidation
o One that in#ol#es an exchange of property &OT solely for stoc,s.
o In other words the absorbed corporation recei#es stoc,s "/54 other property *cash or
non=cash+ in exchange for its property.
o In a merger ( )orp transfers all its property costing 21m in fa#or of A )orp *absorbing+ in
exchange for the latter<s shares of stoc, worth "21m plus "2m cash.
The "2m gain resulting from the merger is taxable.
65 if the plan of merger or consolidation expressly pro#ides that the
amount shall be distributed to the shareholders of ( )orp the gain shall
not be subject to income tax.
>hat if instead of "21m stoc, plus "2m cash ( corp is gi#en "7m stoc, plus "7m
cashB
&o gain since brea, e#en only. *"roblem in p 217 of )o+
Add to 91
4ummariCe the ,inds of sale that may be reported in installments%
o The I&)O-' deri#ed from the following sales may be reported using the installment
method%
4ale of personal property by a dealer
&o need for the 078 re?uirement
Thin, appliance stores who sell T@s etc
)asual sale of personal property pro#ided%
4elling price exceeds "2111
Initial payments do &OT exceed 078 of the selling price and
The property sold is &OT of a ,ind which would be includible in the
in#entory on hand at the close of the year
4ale of R'A/ property pro#ided that the initial payments do &OT exceed 078 of
the selling price
The following !I&A/ capital gains taxes may be paid in installments%
o !inal capital gains tax on the sale of real property *capital asset+D pro#ided that the initial
payments do &OT exceed 078 of the selling price
o !inal tax on net capital gain from the sale in installments of shares of stoc, &OT listed and
traded at the stoc, exchangeD pro#ided that the initial payments do &OT exceed 078 of
the selling price
o !ormula for both%
!inal tax due E *installments recei#ed3contract price+ x final tax
>hat<s a deferred=payment saleB
o >herein payments recei#ed in cash or property OT;'R than e#idences of indebtedness of
the purchaser during the taxable year in which the sale is made '()''D 078 of the
selling price.
o If that<s the case the tax shall be paid in full in the year of the sale.
FInitial paymentsG means%
o payments recei#ed in cash or property OT;'R than e#idences 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 salesB
o Aes.
6ut it does &OT 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+.
-ic,ey Ingles
.) Ateneo /aw 0120
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Taxation One Addendum
Add to 17 (on partnerships)
Two ,inds of partnership for income tax purposes%
o "artnerships &OT subject to income tax ie
$eneral professional partnership
Hoint #enture or consortium agreement formed for the purpose of
underta,ing construction projects
engaging in petroleum coal geothermal and other energy operations
o pursuant to an operating or consortium agreement under a ser#ice
contract with the go#ernment
o "artnerships subject to tax
5sually those whose income is deri#ed from trade or business
Differences
&O& TA(A6/' TA(A6/' business partnership
>ith regard to DI4TRI65TI@' 4;AR'
o Distributi#e share is a partner<s computed and ascertained share in the net profits
of the partnership
>hether actually distributed to the partners or not
will form part of partner<s gross income in
the ITR subject to the graduated income
tax rates
will be subjected to a creditable
withholding tax of 278 *if income
payments exceed "I01111 for the
current year+ or 218 *if income
payments do &OT exceed "I01111 for
the current year+ to be withheld and paid
by the partnership to the 6IR
"artner<s distributi#e share in the net
income is subject to a final tax of 218
*resident citiCens non=resident citiCens
O)>s or resident aliens+ or 018 *for
&RA'T6+
>ith regard to "ART&'R<4 4;AR' I& &'T /O44 O! T;' "ART&'R4;I"
-ay be claim as a deductible expense in
his personal income tax return
&ot deductible since subject to final tax
>ith regard to ;O> T;' "ART&'R4;I" is TA('D
4till re?uired to file an annual
information return on their incomes and
expenses for the purpose of
ascertaining the partners< taxable
shares
Deemed and treated as corporations subject
to the corporate income tax rate
>hen co=ownership becomes taxable%
o Income of the co=ownership is in#ested in other income=producing properties or income=
producing acti#ities
o >hen there is &O attempt to di#ide the inherited property for more than 21 years and the
said property was not under any administration proceedings nor held in trust *thus
deemed an unregistered partnership+
-ic,ey Ingles
.) Ateneo /aw 0120
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Taxation One Addendum
Add to 91
'state Trust
Definition -ass of property rights and
obligations left behind by the
decedent upon his death.
!or purposes of income tax an
estate may be under judicial
administration or one that is
not.
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%
incomeJ
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
'xempt taxable trust% Femployee<s
trustG
>ho files
the ITR
pertaining
to the
taxable
income of
an estate
If under judicial admin%
executor or admin shall file the
return and pay the tax on the
net income of the estate
If &OT under judicial admin%
heirs shall include in their
respecti#e returns their
distributi#e shares in the net
income of the estate
If irre#ocable trust% trustee
*fiduciary+ is the one who will file
the return and pay the tax thereon
for a trust
If re#ocable trust% income of such
part of the trust shall be included in
computing the taxable income of
the $RA&TOR
Re#ocable trust is one where at any
time the power to re#est in the
grantor title to any part of the
corpus of the trust is #ested%
a+ In the grantor alone or in
conjunction with a person not
ha#ing substantial ad#erse interest
on the corpus
b+ In any person not ha#ing a
substantial ad#erse interest in the
disposition of such part of the
corpus or the income therefrom
>hat gross "ractically the same as that of an indi#idual taxpayer
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.) Ateneo /aw 0120
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Taxation One Addendum
income
consists of
Deductible
expenses
a+ 4ame to an indi#idual
taxpayer
b+ Amount of income of the
estate that is paid or credited
to any legatee heir or
beneficiary
&ote% cash ad#ances gi#en to
sur#i#ing spouse or heir &OT
deductible
a+ 4ame to an indi#idual taxpayer
b+ Amount of income of the trust
which is to be distributed currently
to the beneficiaries
c+ Amount of the income collected by
the guardian of an infant which is
to be held or distributed as the
court may direct
&ote% cash ad#ances gi#en to
sur#i#ing spouse or heir &OT
deductible
'xemption "01111
Accounting
period
)alendar year
-iscellaneou
s notes
'xcess of sales proceeds o#er
the appraised #alue of the
property is recogniCed as
taxable gain
If two or more trusts are created
by the 4A-' grantor in fa#or of the
4A-' beneficiary the taxable
income of all trusts shall be
)O&4O/IDAT'D for the prupose of
computing the income tax thereon
and each trustee shall
proportionately bear the taxes.
In this case the personal
exemption of "01111 shall be
a#ailed of O&/A O&)' by being
deducted from the consolidated net
income.
-ic,ey Ingles
.) Ateneo /aw 0120
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