Returns and Payment of Taxes

Income tax return a sworn instrument in w/c the TP discloses the nature & extent of his tax liability by formally making a report of his income & allowable deductions for the taxable yr in the prescribed tax form

CLASSES of ITRs

1. Individual ITR

2. Corporation ITR

3. ITR of GPPs

4. Fiduciary ITR

5. Miscellaneaous Returns

Individual Return

SEC. 51. Individual Return. -

(A) Requirements. -

(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return:

(a) Every Filipino citizen residing in the Philippines;

(b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines;

(c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and

(d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.

Who are required to file?

1. Resident citizen, on income within and without the Philippines

2. Non-resident citizen, on income within only

3. Resident alien, on income within only

4. Non-resident alien (engaged in biz here), on income within only

(2) The following individuals shall not be required to file an income tax return;

(a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross income;

(b) An individual with respect to pure compensation income, as defined in Section 32(A)(1), derived from such sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return;

(c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and

(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special.

(3) The forgoing notwithstanding, any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

Who are not required to file?

1. Those whose gross income does not exceed his total personal and additional exemptions

But those engaged in biz or practices a profession must file, regardless of the amount of gross income

2. Those who earn pure compensation income and the income tax on which has already been correctly withheld (substituted filing, done by employer)

an individual deriving compensation concurrently from 2 or or more employers at any time during the table year shall file an income tax return

3. The following are not required to file, regardless of income amount (final withholding taxed already)

a. Those whose income consists solely of royalties, interests, prizes, winnings, dividends, etc and the share in a partnership or association, joint venture, or consortium taxable as a corp

b. Aliens employed by ROH Qs with respect to their compensation income

c. Aliens employed by OBUs with respect to their compensation income

d. Aliens employed by foreign service contractors and subcontractors engaged in petroleum exploration, with respect to their compensation income

4. Minimum wage earners

5. ? Those exempted by the Tax code and other special laws

(4) The income tax return shall be filed in duplicate by the following persons:

(a) A resident citizen - on his income from all sources;

(b) A nonresident citizen - on his income derived from sources within the Philippines;

(c) A resident alien - on his income derived from sources within the Philippines; and

(d) A nonresident alien engaged in trade or business in the Philippines - on his income derived from sources within the Philippines.

Where and when to file

(B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner.

(C) When to File. -

(1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year.

(2) Individuals subject to tax on capital gains;

(a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(c) shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; and

(b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition.

(D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year.

(E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from properly received from a living parent shall be included in the return of the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from donor's tax. (F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns. (G) Signature Presumed Correct. - The fact that an individual's name is signed to a filed return shall be prima facie evidence for all purposes that the return was actually signed by him.

Where to file?

1. Authorized agent bank

2. Revenue district officer

3. Collection agent

4. Duly authorized city treasurer where he is legally residing

5. Office of the commissioner

When to file?

On or before April 15 of each year

Who shall file?

What if husband and wife?

Those married individuals who do not derive income purely from compensation shall file a return to include income from both spouses. But if impractical, then they may file separate returns (returns so filed shall be consolidated by the BIR for verification).

It is now mandatory for the H&W to compute separately their respective total taxable incomes. If any income cannot be definitely attributed to either, the same shall be divided equally between them. In any case, both should file only 1 consolidated return. The total income tax payable is the sum of their total income tax determined separately.

What about persons with disability?

If the TP is unable to make his own return the return may be made by his duly authorized agent/rep or by the guardian, who, in assuming the responsibility of making the return, shall incur penalties for erroneous, false or fraudulent returns.

How about parents and kids?

Parents must include the income of unmarried minors derived from property received from a living parent.

EXCEPT

i. When the donors tax has already been paid on such property

ii. When the transfer of such property is exempt from donors tax

SUBSTITUTED FILING of ITRs

Those Qualified: Individual TPs who are (3 conditions must concur):

1. receiving purely compensation income, regardless of amount,

2. from only one ER in the PH for the calendar yr

3. the income tax of w/c has been withheld correctly by said ER (tax due = tax withheld)

EEs spouse must also comply w/ all 3 conditions.

Those NOT qualified: Individuals:

1. Deriving compensation from 2 or more ERs concurrently or successively at anytime during the taxable year;

2. EEs deriving compensation income, regardless of amount, whether from single or several ER/s during the calendar yr, the income tax of w/c has NOT been withheld correctly resulting to collectible or refundable return;

3. EEs whose monthly gross compensation income does NOT EXCEED

a. P5k or

b. the statutory minimum wage, whichever is higher,

& opted for non-withholding of tax on said income

4. Deriving other non-business, non-profession-related income in addition to compensation income not otherwise subject to final tax;

5. Receiving purely compensation income from a single ER, although the income of w/c has been correctly withheld, but whose SPOUSE is NOT entitled to substituted filing under 1/2/3/4 above &

6. NRAE deriving

a. purely compensation income or

b. compensation income & other non-business, non-profession-related income.

Returns to be filed in case of death of an Individual

1. An ITR covering the income & deduction of the decedent from Jan 1 to the date of his death shall be filed

2. If the settlement of the estate of the decedent is the object of judicial testamentary or intestate proceedings:

a. An ITR for the ESTATE shall be filed by the executor or administrator covering the period from the date immediately following the death of the decedent, to the end of the calendar year. Thereafter, an ITR shall be filled annually until the estate is terminated;

b. An individual return for each of the

i. Spouses

ii. Heirs or beneficiaries

covering their respective income & deductions for the period from the date immediately following the death of the decedent to the end of the calendar year w/c shall include the income received by them from the estate.

3. In case the settlement of an estate of a decedent is NOT the object of judicial testamentary or intestate proceedings, the INCOME of the PROPERTIES left by the decedent is taxable directly to the HEIRs or beneficiaries. Each heir or beneficiary must include in his ITR his DISTRIBUTIVE SHARE of the net income of the estate or co-ownership.

The personal & additional exemptions shall be allowed in full for the decedent & for the heirs or beneficiaries & the estate is likewise entitled to exemptions provided in Sec 55.

When to pay (applies to both individuals and corporations)

SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation. -

(A) Payment of Tax. -

(1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due.

(2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties.

(3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required : Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption.

In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment shall be paid within (30) days from the receipt of such payments.

No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid.

(B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner.

As used in this Chapter, in respect of a tax imposed by this Title, the term "deficiency" means:

(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or (2) If no amount is shown as the tax by the taxpayer upon this return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, credited returned or otherwise repaid in respect of such tax.

It is pay-as-you-file and pay-where-you-file

A person may pay in installments if the tax due exceeds P2,000.

Filing of Return Covering Capital Gains

Sale or exchange of stock NOT traded thru the local stock exchange

Within 30 days after each transaction & final consolidated return on or before Apr 15

Sale or disposition of real property

Within 30 days following each sale or other disposition

Gains received by installment

Within 30 days from receipt of each installment

Corporate returns

SEC. 52. Corporation Returns. -

(A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.

(B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code.

(C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.

(D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. - Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days after each transactions and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.

SEC. 53. Extension of Time to File Returns. - The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in case of corporations), subject to the provisions of Section 56 of this Code.

All corporations, except (NRFC) foreign corporation not engaged in trade or biz in Philippines (because theyre subject to final withholding tax already), are required to file:

Quarterly income tax return, on a cumulative basis for the preceding quarters (within 60 days following the close of each quarter)

A final or adjustment return, on or before April 15

A corporation may use either calendar year or fiscal eyar basis for filing

Corporations Required to File Returns

1. Corporations subject to tax having an existence during any taxable yr:

The return must be filed notwithstanding that it had no income or it had no business transactions during the year;

However, a corp w/c has received a charter but has never perfected its org & w/c has transacted no business & had no income is not required to file

2. Corporations in process of liquidation or under receivership

3. Insurance companies transacting business in the PH or deriving income from sources therein; &

4. Foreign corps having income from sources within the PH

Filing of return covering capital gains from shares of stock

Sec 52 (D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. - Every corporation deriving capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days after each transactions and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.

For sale of exchange of stock not traded thru local stock exchanges, within 30 days after each transaction and a final consolidated return of ALL transactions during the year

Return of corporations contemplating dissolution/reorganization

Sec 52(C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.

After the corp adopts a plan or resolution for its dissolution, it must submit to the BIR, within 30 days, a return specifying the terms of the resolution and other information. It must secure a tax clearance certificate from the BIR which it will submit to the SEC before its dissolution. (Sec 244, RR 2)

They have to submit to the BIR:

A copy of the resolution

Balance sheet at the date of dissolution and the income statement covering the beginning of the year to the date of dissolution

Names and addresses of the shareholders and their holdings

Value and a description of the assets received in liquidation by each shareholder (Sec 244, RR 2)

The approval of the SEC of liquidation is the starting point.

Return of General Professional Partnerships

SEC. 55. Returns of General Professional Partnerships. - Every general professional partnership shall file, in duplicate, a return of its income, except income exempt under Section 32 (B) of this Title, setting forth the items of gross income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the partners

General professional partnerships and joint ventures for construction, and other exempt corporations are STILL REQUIRED to file their tax return, which should specify:

The items of gross income,

The deductions allowed, and

The names, TIN, addresses and shares of each partner

Fiduciary Returns

Guardians, trustees, executors, administrator, receivers, conservators & all persons/corporations acting in any fiduciary capacity, shall render, in duplicate, a return of the income of the person, trust, or estate for whom or w/c they act, & be subject to all the provisions in the Tax Code w/c apply to individuals in case such person, estate, or trus has a GI of P20k or over during the taxable yr.

when acting for a corporation, a RECEIVER is NOT treated as a fiduciary, & in such case the return shall be made as if by the corporation itself.

Miscellaneous Returns

1. Returns of withholding agents

2. Returns of information at source as to income payments other than payment described in Sec 69

3. Returns of information of brokers

4. Returns as to information, etc of foreign corps

5. Returns of ERs covering tax withheld on wages

6. CGT Returns on stock transactions

7. CGT Returns on disposition of real property

Withholding Tax

Since the amount of the tax withheld constitutes income earned by the TP, then that amount manifestly forms part of the TPs gross receipts.

Kinds of Withholding Income Taxes

1. WT at source (57-59)

2. WT on quarterly individual & corporate income (74-76)

3. WT on wages (78-83)

4. Withholding of VAT (114,C)

5. Withholding of percentage tax (116-118)

Requisites for Withholding Tax

An income payment is subject to WT if:

1. Payment is subj to income tax;

2. Income is fixed or determinable at the time of payment;

3. It is one of the income payments subj to WT

4. PAYEE is a resident liable to pay IT

5. PAYOR (withholding agent) is also a PH resident.

Final Withholding Tax at Source (57-59)

SEC. 57. Withholding of Tax at Source. -

(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.

Income subject to final tax refers to income wherein the tax due is fully collected through the withholding tax system, wherein the payor of the income withholds the tax and then remits it to the government.

Once full payment has been withheld and remitted, there is no more tax obligation.

The withholding agent is entitled to refund or tax credit. (CIR v Wander)

Principles of Final Withholding Tax (Section 2.57 (A), RR 2-98)

The amount of tax withheld is full and final.

The liability for payment of the tax rests primarily on the withholding agent as payor.

i. In case he fails to withhold, he will be liable for the deficiency.

The payee is not required to file an ITR for the particular income.

The finality of the withheld tax is limited on that particular income and will not extend to the payees other tax liability on said income.

i. For example a bank received income subject to final withholding tax, the same income can still be subject to a percentage tax.

Basically, items under passive income are subject to FINAL TAX. And then you have other FINAL TAXES here and there (like the FBT, BPRT, Capital Gains Tax, etc).

Kinds of WT at SOURCE:

1. Final Withholding Tax (FWT)

the amount of IT withheld by the withholding agent is constituted as a FULL & FINAL payment of the IT due from the PAYEE on the said income.

The liability of payment of the tax rests primarily on the PAYOR as the withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor.

The payee is not required to file an ITR for the particular income.

2. Creditable Withholding Tax

Taxes withheld on certain income payments are intended to equal or at least approximate the tax due from the payee on said income.

The income recipient is still required to file an ITR, to report the income and/or pay the difference bet the tax withheld & the tax due on the income.

Taxes withheld on income payments covered by the EWT & compensation income are creditable in nature.

Cases When FWT @ Source Required:

1. @ 20% - passive income such as interest, royalties, dividends, prizes & other winnings

2. @ of 1% - CG presumed to have been realized from the sale/exchange of shares of stock listed & traded through a local stock exchange

3. @ 6% - CG presumed to have been realized from the sale/exchange/other disposition of real property

4. @ 25% - GI of NRAN

5. @ 15% - Gross compensation income received by aliens employed by RAH Qor ROH Qof multinational corps, OBUs, & foreign petroleum service sub/contractors engaged in petroleum operations in the PH

6. @ 30% - in the case of:

a. interests upon bonds, obligations or securities issued by domestic or RFCs

b. containing the so-called TAX FREE COVENANT clause (the obligor agrees to pay any portion of the IT imposed upon the obligee, or to reimburse the obligee for any portion of the tax, or to pay the interest without deduction for any tax w/c the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the PH or any country),

c. payable either to citizens/aliens, residents/nonresidents

d. whether the interest or other payments upon those bonds, mortgages, deeds of trust or other obligations are payable annually or at shorter or longer periods, & whether the bonds, securities or obligations had been or will be issued or marketed & the interest or other payment thereon paid, within or outside the PH (57C)

7. @ 15% - in the case of branch profits remittances by a branch to its head office except those activities under PEZA

8. @ 30% - GI of NRFC

9. @ 20% - interest on foreign loans contracted on/after Aug 1, 1986

10. @ 15% - dividends received by a NRFC from a domestic corp, liable to tax on corporations, subject to the condition that the country in w/c the NRFC is domiciled shall allow a credit against the tax due paid in the PH equivalent to 15% w/c represents the difference bet the regular tax 30% on corps & the tax 15% on dividends to be withheld by the corp

11. @ 25% - GI of NR Cinematographer film owners, lessors or distributors

12. @ 4.5% - rentals, lease & charter fees payable to NR owners or lessors of vessels chartered by Ph nationals, to be withheld by the charterer, the withheld tax being a final tax

13. @ not less than 7.5% - rentals, charter & other fees payable to NR lessors of aircraft, machineries, & other equipment

14. @ 10% - interest income derived from foreign currency loans granted to residents OBUs, or local commercial banks, including local branches of foreign banks authorized by the BSP to transact business w/ OBUs

15. @ 10% - interest income derived from foreign currency loan granted by a depository bank under the FCDS to residents OBUs in the Ph or other depository banks under the said expanded system

16. @ not less than 1% but not more than 32% - the Sec of Finance may, upon the recommendation of the CIR, require also the withholding of tax on items of income payable to natural or juridical persons residing in the PH, by payoer-corporations or persons as provided for by law w/c shall be credited against the IT liability of the TP for the taxable yr (Sec 57B)

17. @ 32% - fringe benefit furnished or granted to the EE rank &file) by the ER, the final tax being imposed on the grossed-up monetary value of the benefit

18. @ 10% - informers reward to persons instrumental to the discovery of violations of the tax laws, based on the amt of revenues, surcharges or fees recovered and/or fine or penalty imposed & collected, or the FMV of the smuggled/confiscated goods, or 1M per case, whichever is lower.

Creditable Withholding Tax

(B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.

Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income.

Creditable tax must be withheld AT SOURCE, but should still be included in the tax return of the recipient.

1. Any excess shall be refunded and any deficiency shall be paid by the taxpayer.

The liability to withhold tax arises upon the accrual, not upon actual remittance. The purpose of the withholding tax is to compel the agent to withhold under all circumstances.

1. Thus, it is when the right to receive income arises that determines when to include that income as gross income, and when to apply withholding tax. (Filipinas Synthetic v CA)

Creditable withholding tax intends to approximate the tax on the payee.

The subsequent remittal does not remove the burden on the income recipient. He still has to file for the credit.

The payor withholds, and the payee gets credit. This is done so that the payor has expenses that can be deducted, according to Section 34 (k)

Three types of creditable withholding taxes:

1. Expanded withholding tax on certain income payments made by private persons to resident taxpayers

2. Withholding tax on compensation income done in the Philippines

3. Withholding tax on money payments of the government

When expanded withholding tax will apply:

1. Expense is paid by the taxpayer, which is income to the recipient thereof subject to income tax

2. Income is fixed or determinable at the time of payment

3. Income is one of the income payments listed in the regulations

4. Income recipient is a resident of the Philippines liable to income tax

i. What if the recipient is a non-resident taxpayer?

Then income payment subject to final withholding tax, not creditable.

5. Payor-withholding agent is also a resident of the Philippines

i. So foreign embassies in the Philippines and nonresident foreign corps cannot be compelled to act as withholding agents (since government cannot enforce its tax laws on them)

EXEMPTION from WITHHOLDING: The withholding of creditable withholding tax shall not apply to income payments made to the following:

1. National government and its instrumentalities and public municipal corporations

i. EXCEPT GOCCs

2. Those enjoying exemption from payment of income taxes pursuant to law

i. sales of real property by a corp registered w/ HLURB as engaged in socialized housing project where the selling price of the house & lot does not exceed P180k in MM & P150k in other areas

ii. corps duly registered w/ BOI, PEZA, & SBMA

iii. Corps exempt from income tax such as the GSIS, SSS, PHIC, PCSO, PAGCOR

income payments arising from any activity w/c is conducted for profit or income derived form real or personal property shall be subject to WT

iv. GPPs

v. Joint ventures or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal &other energy operations pursuant to an operating or consortium agreement under a service contract w/ the govt.

Who are required to deduct and withhold for the creditable withholding taxes? (RR 2-98)

1. Any juridical person, whether or not engaged in trade or business

2. An individual, with respect to payments made in connection with his trade or business

i. But for the disposition of real property, even those not engaged in trade or business are withholding agents

3. All government offices including government-owned or controlled corporations, as well as provincial, city and municipal governments.

Some Income Subject to CREDITABLE Withholding Tax (Section 2.57B & 2.57.2, RR 2-98)

professional fees, talent fees, rendered by individuals and athletes

gross income exceeds P720,000

gross income does not exceed P720,000

15%

10%

Professional fees, talent fees for services but rendered by juridical persons

10%

Rentals for continued use or possession of real properties used in biz, which the payor has not taken title

Also applies to rentals of personal property, billboards, transmission facilities

5%

cinematorgraphic film rentals and other payments

5%

Income payments to certain contractors, general engineering, general building, specialty and other contractors

1%

Income distributed to the beneficiaries of estates & trusts (except if already subject to final withhold or tax-exempt)

15%

Income payment to certain brokers & agents, customs, insurance, real estate & commercial brokers & fees of agents of pro entertainers

5%

Pro fees paid to medical practitioners by hospitals or clinics or by patients (see RR 12-98 below)

10%

Real property which are NOT capital assets sold by a person engaged in the real estate biz

If NOT engaged in real estate biz (see p. 9)

1.5%/3%/5%

7.5%

On additional payments by importers, shipping & airline companies to government personnel for overtime services

15%

On the amount paid by any credit card company to any biz entity representing the sale of goods, services made by them to cardholders

.5%

Payments made by any of the top 5,000 corporations to their local supplier of goods

1%

Payments by the government to local supplier of goods (except if below P10,000)

1%

If the service by a medical practitioner was thru a pro partnership of the medical profession (RR 12-98)

The hospital/clinic must withhold the tax

No withholding tax applies if there is proof that no professional fee has been charged

5%

If the payor is a LARGE TAXPAYER, all payments are subject to withholding tax of

1% if engaged in goods or

2% if engaged in services, if no specific rates under 2-98.

So that a payor can be exempt from withholding tax, the payee should also be exempt.

Tax-free Covenant Bonds

C. Tax-free Covenant Bonds in any case where

a. bonds,

b. mortgages,

c. deeds of trust or

d. other similar obligations of

1. Domestic

2. RFCs

contain a CONTRACT or PROVISION by w/c the OBLIGOR agrees:

a. To PAY any portion of the tax imposed in this Title upon the obligee or

b. To REIMBURSE the obligee for any portion of the tax, or

c. To PAY the INTEREST w/o deduction for any tax w/c the obligor may be required or permitted to pay thereon

d. To RETAIN therefrom under any law of the PH, OR any state or country,

the OBLIGOR shall DEDUCT & WITHHOLD a tax equal to 30% of the interest & other payments upon those bonds, mortgages, deeds of trust or other obligations, whether the interests or other payments are payable annually or at shorter or longer periods, & whether the bonds, securities or obligations had been or will be issued or marketed, & the interest or other payment thereon paid, within or outside the PH, IF the interest or other payment is payable to a NRA or to a Citizen or Resident of the PH.

In some contracts, especially, with non-resident foreign corporations and entities, a provision on taxes is almost always included. This provision normally mentions who among the parties would shoulder the applicable taxes in the Philippines. Some scenario on such contracts and agreements would provide that any and all applicable taxes in the Philippines shall be shouldered by the Philippine company or entity. This would mean that the foreign party will receive the agreed consideration, net of applicable taxes. This is what we call as tax free covenant or tax-free provision in the agreement or contract in the Philippines.

Under such scenario, the critical part is the determination of the taxable base because some taxes are chargeable to the payee (the non-resident or foreign party), while some are chargeable to the (resident of Filipino party).

To illustrate the tax-free covenant above, let us assume that foreign party (say, A Co. Ltd.) bills the equivalent of PhP1.5M for the lease of a specific machinery for use of a Philippine local company (say, PhilCoy) under the contract. If the contract would provide that the PhP1.5M PhilCoy will pay A Co. Ltd. is net of taxes, then, the above tax free covenant rule would apply. Under the rules, lease of machinery by a non-resident foreign lessor is subject to a final tax of 7.5% (Section 28(B)(4) of the Tax Code, as amended) so the final withholding tax (FWT) on such lease payments may be applied as follows:

Amount remittable to A Co., Ltd PhP1,500,000.00

Divided by equivalent percentage (100% less 7.5%) 92.5%

Grossed-up amount PhP1,621,621.62

Multiply by FWT rate 7.5%

FWT due to BIR PhP 121,621.62

Return and Payment of Tax

SEC. 58. Returns and Payment of Taxes Withheld at Source. -

(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers.

The return for FWT shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for CWT shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government.

(B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not later than the twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year.

(C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the income payments.

The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection.

(D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of Section 56.

All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent.

(E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section 40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code.

Withholding agents must file a return and pay to:

An authorized agent bank

Revenue district officer

Collection agent

Duly authorized treasurer of the city or municipality where he resides or has his place of bizness; if withholding agent is a corporation where its principal office is located

These taxes must be maintained in a separate account and NOT co-mingled with any other funds of the withhol[footnoteRef:1]ding agent [1: ]

When to file and pay

For FINAL withholding tax, within 25 days from the close of each calendar quarter

For CREDITABLE withholding tax, not later than the last day of the month following the close of the quarter which withholding was made

If there is any excess, it shall be either credited or refunded.

If there is deficiency, then it shall be paid by the taxpayer.

Tax deemed paid on dividends: see discussion on inter-corporate dividends to non-resident foreign corporations (page 31)

In Marubeni v CIR (1990), Marubeni, a Japanese corporation licensed to do business here, received dividends from a local corporation. The SC said that the usual gross income rate of 35% was not applicable since there was a tax treaty with Japan. The treaty, read with the NIRC provision on dividends, allowed Marubeni a discounted rate of 15% on the dividends received from the local corporation since Japan extended in favor of Marubeni a tax credit of not less than 20% of the dividends it received. This was within the max ceiling of 25% of the gross amount of dividends as prescribed by the tax treaty. (Didnt really understand what I just wrote.)

Withholding on Wages

Applies to ALL EMPLOYED individuals whether citizens or aliens deriving income from compensation for services rendered in the Phil

Estates and Trusts

SEC. 60. Imposition of Tax. -

(A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust, including:

(1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;

(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;

(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and

(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.

(C) Computation and Payment. -

(1) In General. - The tax shall be computed upon the taxable income of the estate or trust and shall be paid by the fiduciary, except as provided in Section 63 (relating to revocable trusts) and Section 64 (relating to income for the benefit of the grantor). (2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax provided in this Section computed on such consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the trust administered by him bears to the consolidated income of the several trusts.

SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that:

(A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable year.

(B) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary.

(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries.

SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax provided for in this Title, there shall be allowed an exemption of Twenty thousand pesos (P20,000) from the income of the estate or trust.

SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested (1) in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor.

SEC. 64. Income for Benefit of Grantor.-

(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or (2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor, or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor.

(B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.

SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators, receivers, conservators and all persons or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the income of the person, trust or estate for whom or which they act, and be subject to all the provisions of this Title, which apply to individuals in case such person, estate or trust has a gross income of Twenty thousand pesos (P20,000) or over during the taxable year. Such fiduciary or person filing the return for him or it, shall take oath that he has sufficient knowledge of the affairs of such person, trust or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and correct, and be subject to all the provisions of this Title which apply to individuals: Provided, That a return made by or for one or two or more joint fiduciaries filed in the province where such fiduciaries reside; under such rules and regulations as the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this Section.

SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees, executors, administrators and other fiduciaries are indemnified against the claims or demands of every beneficiary for all payments of taxes which they shall be required to make under the provisions of this Title, and they shall have credit for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or other fiduciaries.

A trust is a legal arrangement where the owner of the property (trustor) transfers ownership to a person (trustee) to hold and control the property for the benefit of another person (beneficiary)

An estate is created by operation of law when an individual dies, leaving properties to heirs.

Taxable estates and trusts are taxed in the same manner and on the same basis as in the case of an individual.

The following are allowed deductions for the estate and trust:

amount distributed to the beneficiaries, or

amount collected by a guardian of an infant which is to be held or distributed as the court may direct

in both these cases, the amount allowed shall be included in computing the taxable income of the beneficiaries whether distributed to them or not

Rule for income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income, which may be either distributed to the beneficiary or accumulated: the amount paid or credited to any legatee, heir or beneficiary shall be allowed as a deduction

Provided that the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary

Trusts and estates are entitled to a personal exemption equivalent to a single individual of P20,000.

The income of a trust will be taxed to the:

Trustor, if revocable trust

Trustee, if irrevocable trust

When this provision will NOT apply: The income tax is NOT imposed on employees' trust which forms part of a pension, stock bonus or profit sharing plan of an employer for the benefit of some or all of his employees

if contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan; and

if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for part of the corpus or income to (within the taxable year or thereafter) be used for, or diverted to, purposes other than for the exclusive benefit of the employees.

Any amount, however, actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.

Income for the benefit of the grantor:

Rules on revocable trust will apply for income for the benefit of the grantor.

The following will be included in the taxable income of the grantor:

Where any part of the income of a trust is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income

may be held or accumulated for future distribution to the grantor; or

may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or

is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of the premiums upon policies of insurance on the life of the grantor

ESTATES & TRUST (de leon)

Sec 60. Imposition of Tax

(A) Application of Tax

The items of GI of Estates & Trusts are the SAME items of GI of individuals & INCLUDE:

1. Income accumulated in trust for the benefit of UNBORN or UNASCERTAINED person/s with CONTINGENT INTERESTS, &

Income accumulated or held for FUTURE distribution under the terms of the will or trust; (taxed to the estate or trust)

2. Income w/c is to be distributed currently by the fiduciary to the beneficiaries, &

Income collected by a GUARDIAN of an INFANT w/c is to be held or distributed as the court may direct; (taxed to the beneficiary, whether distributed or not & is usually deductible by the fiduciary)

3. Income received by ESTATES of deceased persons during the period of administration or settlement of the estate; &

4. Income w/c, in the DISCRETION of the FIDUCIARY, may be either

a. distributed to the beneficiaries or

b. accumulated.

*3 & 4 taxed to the fiduciary or beneficiary depending on the amounts w/c are properly paid or credited to the beneficiary

(B) EXCEPTION (EEs trust income)

This provision shall not apply to income of an EEs trust w/c forms part of a pension, stock bonus or profit-sharing plan of an ER for the benefit of some/all of his EEs: PROVIDED, the ff conditions are satisfied:

1. contributions made to the trust by the ER, EEs or both, for the purpose of distributing to such EEs the earnings & principal of the fund accumulated;

2. trust instruments make it impossible at any time prior to the satisfaction of all liabilities w/ respect to the EEs under the trust, for part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to other purposes (than for the exclusive benefit of its EEs).

HOWEVER, any amount actually distributed to any EE or distribute shall be TAXABLE to the extent that it exceeds the amount contributed by such EE or distributee.

IF the amount is received by the EE or his heirs from his ER as a consequence of his SEPARATION from the service for any cause BEYOND his CONTROL exempt from tax regardless of age or length of service.

*Any excess in the retirement fund after paying all liabilities & claims against the fund w/c will revert to the company or employer is subject to income tax.

(C)Computation & Payment

(1) In General

Basis: taxable income of the estate or trust

Rate: same as individual under 24 A

Personal Exemption: P20k

Taxable yr: Calendar Yr

GI

less:Deductions

=Net Income

less:Exemption (P20k)

=Taxable Income

xTax rate in 24A

=Amt of Tax

(2) Consolidation of Income of 2 or more Trusts

When 2 or more trusts are created by the same grantor & same beneficiary

the taxable income of all the trusts shall be consolidated & the tax computed on such consolidated income. Such proportion of the tax shall be assessed & from each trustee, w/c the taxableincome of the trust is administered by him bears to the consolidated income of the several trusts.

*Only one personal exemption is allowed.

Total tax on Net inc (before exemption) ofTax to be paid

Consolidated xtrust administered by trustee=by each trustee

Net IncomeConsolidated Net inc (before

exemption) of several trusts

Sec 61. TAXABLE INCOME of ESTATES & TRUSTS

(A & B) The taxable income of an estate or trust is computed in the same manner & on the same basis as in the case of an individual.

In addition, the FF are DEDUCTIBLE in computing the net income:

1. the amount of income of the E&T for the taxable yr w/c is to be DISTRIBUTED CURRENTLY by the FIDUCIARY to the BENEFICIARIES;

2. the amount of income COLLECTED by a GUARDIAN of an INFANT w/c is to be held or distributed as the court may direct;

3. (B) the amount of income RECEIVED by ESTATES during the period of administration or settlement, properly paid or credited during the taxable year to any legatee or heir; &

4. the amount of the income of the TRUSTS, w/c in the DISCRETION of the FIDUCIARY may be either

a. distributed to the beneficiary, or

b. accumulated,

properly paid or credited during the taxable year to the beneficiary.

(C) Trust Administered in a Foreign Country

In the case of trusts administered in a foreign country, the deductions mentioned above (A&B) are NOT ALLOWED.

The taxable income of the trusts undiminished by any amounts distributed, paid or credited to the beneficiaries will be taxed to the TRUSTEES..

However, the income included in the return of the trustees

is NOT included in computing the income of the beneficiaries.

To whom income of estates & trusts taxable:

1. GR: to the estate or trust treated as a separate taxable entity, to the beneficiaries, partly to the estate or trust & partly to the beneficiaries, depending upon the disposition of the income under the will or deed of trust, or to the grantor

2. To the Beneficiary: in the ff cases:

a. Income of trust is to be distributed annually or regularly

b. An estate of a decedent the settlement of w/c is not the object of judicial testamentary or intestate proceedings

c. Properties held under co-ownership

3. To the Grantor: In the case of:

a. Revocable trust, the income from such part of the trust estate title to w/c may be revested in the grantor

b. Trust, the income of w/c may be held or distributed for the benefit of the grantor, that part of the income w/c may be held or distributed for the benefit of the grantor.

Sec 62. EXEMPTION ALLOWED TO ESTATES & TRUSTS

An estate or trust is allowed a personal exemption f P20k.

Each beneficiary is entitled to only one personal exemption, no matter from how many trusts he may receive income.

Income Received by Estates

The income received by estates of deceased persons during the period of administration or settlement is taxable to the FIDUCIARY. Estates during such period have but one beneficiary and that is the estate.

No taxable income is realized from the passage of property to the executor or administrator on the death of the decedent.

No income is realized in the event of delivery of property to a legatee or distribute.

Where property of the estate is sold by the executor or prior to the settlement for more than the appraised value placed upon it at the time of decdents death the excess is income taxable to the estate.

When it is sold by the heir, devisee or legatee, after the settlement of the estate at a price greater than the appraised value placed upon it at the time he inherited the same he is taxable individually on any profit derived.

An allowance paid a widow or heir out of the corpus of the state is not deductible from gross income.

REVOCABLE TRUSTS

SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested

(1) in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or

(2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor

Revocable trust one where, under the trust instrument, the power to revest in the grantor title to the property transferred to the trust or any part of the corpus of such trust is vested

1. In the GRANTOR, either alone or in conjunction with any person not having substantial adverse interest in the disposition of such part of the corpus, or the income therefrom; or

2. In ANY PERSON not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom.

*The income of the trust shall be included in computing the taxable income of the grantor who still retains for himself control over the trust.

INCOME for BENEFIT of GRANTOR

SEC. 64. Income for Benefit of Grantor.-

(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or (2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor, or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor.

(B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question

Income of a trust is held or distributed for the benefit of the grantor where any part of the income

1. Is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or

2. May, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income be distributed to the grantor, or

3. Is, or in the discretion of the grantor of any person not having a substantial interest in the disposition of such part of the income, may be applied to the payment of premiums upon policies of insurance on the life of the grantor.

*Such part of the income of the trust shall be included in computing the taxable income of the grantor.

in the discretion of the grantor in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.

Sec 64 is designed to prevent the TP from escaping the progressive tax rates on individuals by the trust device where he retains control over the trust income.

FIDUCIARY RETURNS

SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators, receivers, conservators and all persons or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the income of the person, trust or estate for whom or which they act, and be subject to all the provisions of this Title, which apply to individuals in case such person, estate or trust has a gross income of Twenty thousand pesos (P20,000) or over during the taxable year. Such fiduciary or person filing the return for him or it, shall take oath that he has sufficient knowledge of the affairs of such person, trust or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and correct, and be subject to all the provisions of this Title which apply to individuals: Provided, That a return made by or for one or two or more joint fiduciaries filed in the province where such fiduciaries reside; under such rules and regulations as the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this Section.

SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees, executors, administrators and other fiduciaries are indemnified against the claims or demands of every beneficiary for all payments of taxes which they shall be required to make under the provisions of this Title, and they shall have credit for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or other fiduciaries.

Fiduciary Returns:

1. Guardians, trustees, executors, administrators, receivers, conservators, and all persons or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the income of the person, trust, or estate for whom or which they act, and be subject to all the provisions of the Tax Code w/c apply to individuals in case of such person, estate, or trust has a GI of P20,000 or over during the taxable yr.

2. Such fiduciary or person filing the return for him or it, shall take OATH that he has sufficient knowledge of the affairs of such person, trust, or estate to enable him to make such return & that the same is, to the best of his knowledge & belief, true & correct & be subject to all the provisions w/c apply to individuals.

3. A return made by or for one or to or more fiduciaries in the form prescribed filed in the municipality or city in w/c such fiduciary resides shall be sufficient compliance w/ the requirement of fiduciary returns.

4. A fiduciary acting as a guardian of a minor or other incap person must make a return for such minor or incap person & pay the tax unless such minor or incap person himself makes a return or cause it to be made. The parent is held to be the natural guardian of a minor child.

*When acting for a corporation, a RECEIVER is not treated as a fiduciary, & in such case the return shall be made as if by the corporation itself.

Returns in Case of 2 or More Trusts

1. Where, in the case of more than 1 trust, w/ the same creator and the same trustee, but for different beneficiaries the TRUSTEE should make a SEPARATE return for each of the trusts in his hands.

2. Where a trustee holds trusts, by different creators for the benefit of the same beneficiary he should also make a return for each trust SEPARATEly.

3. Where a person creates 2 or more trusts in favor of the same beneficiary appointing 2 or more trustees, trustees should each make a SEPARATE return for each trust but in such case, the CIR will consolidate the net incomes of the different trusts & compute the tax on such consolidated income, allowing only one absolute exemption of P6,000.

Sec 73. DISTRIBUTION of DIVIDENDS or ASSETS by CORPORATIONS

(A) DEFINITION of DIVIDENDS (when used in this Title) any distribution made by a corporation to its shareholders out of its earnings or profits & payable to its shareholders whether in money or in other property.

Where a corporation distributes ALL of its ASSETS in complete LI QUIDATION or dissolution

the GAIN realized by the SH (indiv or corporate) TAXABLE INCOME

the LOSS sustained by the SH (indiv or corporate) DEDUCTIBLE LOSS

(B) STOCK DIVIDEND

A stock dividend representing the TRANSFER of SURPLUS to CAPITAL account

shall NOT be subject to tax.

However, if a corporation CANCELS or REDEEMS stock issued as dividend at such TIME & in such MANNER as to make the distribution & cancellation or redemption essentially E QUIVALENT to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as TAXABLE income to the extent that it represents a distribution of earnings or profits.

(C) DIVIDENDS DISTRIBUTED are DEEMED MADE from MOST RECENTLY ACCUMULATED PROFITS.

Any distribution made to the shareholders or members of a corporation shall be

1. deemed to have been made from the MOST RECENTLY ACUMULATED profits or surplus &

2. shall constitute a part of the ANNUAL INCOME of the DISTRIBUTEE for the year in w/c received.

(D) NET INCOME of a PARTNERSHIP DEEMED CONSTRUCTIVELY RECEIVED by PARTNERS

The taxable income DECLARED by a partnership for a taxable yr w/c is subject to tax under 27A, after deducting the corporate income tax imposed therein,

shall be deemed to have been ACTUALLY or CONSTRUCTIVELY received by the partners in the same taxable yr & shall be TAXED to them in their INDIVIDUAL CAPACITY, whether actually distributed or not.

Distribution in liquidation treated as a SALE or EXCHANGE rather than as ordinary dividends

Complete li quidation any one of a series of distribution made by a corp in complete cancellation or redemption of all its stock in accordance w/ a bona fide plan of liquidation, to be completed w/in 1 yr from the time of such first distribution.

If liquidating dividends consist of REAL PROPERTY current FMV has to be determined. The GAIN = FMV

adjusted cost to the SH of his shareholdings subj to ordinary income tax.

PARTIAL LI QUIDATION

TRANSFER not considered a sale of assets. Corporation in liquidation does not realize any gain or loss.

RECEIPT of liquidating dividends by the SH TAXABLE gain or DEDUCTIBE loss.

Liquidating Gain or Loss = FMV of properties received

SHs cost basis of the shares subj to ordinary income tax

* in case of INDIVIDUAL who held the shares for MORE than 12 monts only 50% of the capital gain is reportable

If corp did NOT do business the transfer of its REAL properties as liquidating dividends to its sole stockholder (another corp) is NOT subj to corporate income tax because the sale is not a sale resulting in gain or loss but a mere return of capital.

Dividends Received by MEMBERS of a non-stock non-profit corp as a result of dissolution not subj to income tax.

TAX TREATMENT of STOCK DIVIDEND

a. If the new shares confer no different rights or interest that did the old NOT TAXABLE

b. If it gives the SH a greater proportional interest in the corporation after its distribution TAXABLE

TAX on STOCK DIVIDENDS

GR: The PROPORTIONATE TEST: A stock dividend representing transfer of surplus to capital account shall NOT be subj to tax.

They represent capital & not income.

They are considered unrealized gain & cannot be subjected to income tax until that gain has been realized.

EXCEPTION: 73 B in view of corporations employing devious means by distributing corporate earnings under the guise of initial capitalization by declaring stock divs previously issued & later redeem said divs by paying cash to the SH.

CRITERIA:

1. The presence or absence of REAL BUSINESS PURPOSE

2. AMOUNT of EARNINGS & profits available for the declaration of a regular dividend & the corporations PAST RECORD w/ respect to declaration of dividends;

3. EFFECT of the distribution as compared w/ the declaration of regular dividend;

4. LAPSE of TIME bet issuance & redemption

5. Presence of SUBSTANTIAL SURPLUS & generous supply of CASH w/c invites suspicion as does a meager policy in relation both to current earnings & accumulated surplus.

RE QUISITES for APPLICATION of the EXEMPTING CLAUSE (73B):

1. There is REDEMPTION or CANCELLATION

2. Transaction involves STOCK DIVs

3. TIME & MANNER of transaction makes it ESSENTIALLY E QUIVALENT to a distribution of taxable dividends. (most important).

*It is not the stock divs but the PROCEEDS of their redemption that may be deemed as taxable dividends.

Test of Taxability under the Exempting Clause :W/N the redemption RESULTED into a flow of wealth.

TAXATION of INTERCORPORATE DIVIDENDS

a. Received by a domestic or RFC from a domestic corp exempt

b. Received by a NRFC FWT of 15% on the condition that the country in w/c the NRFC is domiciled allows a tax credit against the taxes deemed to have been in the PH

Real Property Dividends expemt from the 6% CGT.

Sale of Real property received as dividends taxed at 6% on the Gross selling price or FMV whichever is higher.

Sale of Shares of Stock received as property dividend

a. subj to percentage tax of 1% based on the gross selling price or gross value in money if listed & traded thru LSE

b. 5% & 10% if not listed & traded

(D) SHARES of PARTNERS in NET INCOME of PARTNERSHIP

subj to 6% or 8% or 10%.

a. 20% on the total amount if recipient is NRAE

b. 25% if recipient is NRAN

Distribution of liquidating dividends

A corp is NOT liable for income tax on its receipt of the surrendered shares or its transfer of the distributed assets as liquidating dividends since a liquidating corp does NOT realize gain or loss during complete or partial liquidatin.

However, the SH of a corp may realize gain or loss on their receipt of liquidating dividends from the dissolving corp. The gain or loss is = DIFFERENCE bet the FMV of the liquidating dividends & the adjusted cost to the SH of their respective shareholdings in said corp.