Chapter 2 Flashcards
(146 cards)
1
Q
By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.
A
Partnership
2
Q
Treated as an artificial being created by operation of law with a legal personality separate and distinct from the partners thereof. It proceeds from the concept that persons may be allowed to pool their resources and funds to engage in the pursuit of a common business objective without necessarily organizing themselves into a corporation
A
Partnership
3
Q
Partnership are required to register with the Securities and Exchange Commission [SEC).
A
4
Q
Registration is done by filing the Articles of Partnership
A
- A law firm where all partners are lawyers.
- An architectural firm formed by licensed architects
- An accounting firm composed of Certified Public Accountants (CPAs)
5
Q
Set forth all the terms and conditions mutually agreed by the partners thereto.
A
Articles of Partnership
6
Q
What are the two types of partnership
A
A. General Professional Partnership (GPP)
B. General co-Partnership
7
Q
Are partnerships not engaged in trade, business, or commercial activities. It is formed by professionals for the purpose of practicing their profession.
A
General Professional Partnership (GPP)
8
Q
The requirements to qualify as General Professional Partnership (GPP) are as follows:
A
- All partners must be licensed professionals engaged in the same field or related fields of practice
- It must be organized solely to provide professional services. Thus, it cannot engage in commercial activities like selling goods or operating a business unrelated to the practice of the profession.
- All profits are distributed directly to the partners.
9
Q
A
10
Q
They shall not be subject to income tax, As an entity, they are exempt from income tax.
A
GPP
11
Q
GPP is required to file a tax return for its income for purpose of furnishing information as to the distributive share in the profits that each partner shall include in his individual tax return
A
12
Q
General Professional Partnership is considered like a Corporation but not subject to regular corporate income taxes. Thus, GPP is an exempt entity
A
13
Q
Withholding tax on Payments to GPP:
A
Since GPP is not subject to RCIT, it follows that it is also not subject to EWT on its clients’ payments. Therefore, GPP’s clients are not required to deduct withholding tax from their payments to GPP.
14
Q
Each partner in a GPP shall be liable for income tax only in their separate and individual capacities.
> Thus, each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.”
A
15
Q
Partners in GPP cannot claim itemized deductions or OSD against their share in net income from GPP.
> However, the partners can only claim these deductions (itemized or OSD) against THEIR OWN sales or gross receipts earned from their separate businesses or professions.
> Partners are only prohibited from claiming OSD against THEIR SHARE IN NET INCOME from GPP.
A
16
Q
For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation.
A
17
Q
GPP may claim either:
A
18
Q
- Itemized deductions or
- Optional Standard Deduction (OSD) at a rate of 40% of gross income.
A
19
Q
CWT if income payments to partner is 720,000 below
A
10%
20
Q
CWT if income payments to partner exceeds 720,000
A
15%
21
Q
Are partnerships wherein part or all of its income is derived from the conduct of trade or business, They are engaged in other business activities that do not constitute the practice of their common professions.
A
General Co-Partnership, Ordinary Partnerships or Commercial Partnership
22
Q
Considered like a corporation subject to corporate income taxes. The taxable net income and income tax due shall be computed in the same manner, procedures and in same basis as in the case of ordinary corporate taxpayer
A
Ordinary Partnership
23
Q
Either the itemized deduction or OSD may be claimed by Ordinary Partnerships.
A
24
Q
Passive income is subject to final tax and some income may be exempt. An income tax qredit applies.
A
25
Type of Partnership that is subject to RCIT or MCIT, whichever is higher
Ordinary Partnership
26
The 20% RCIT applies when the taxable income does not exceed P5M and total assets do not exceed P100 million, excluding the land on which the particular business entity's office, plant and equipment are situated.
27
The partners are considered as stockholders. Therefore, the profits distributed to them by partnership are considered dividends and subject to final tax rate of 10% (for Resident / Citizen partner) or 20% for_NRAETB or 25% for NRANETB
28
With regard to partner's share in net loss of the partnership, this type of partnership may be claimed as a deductible expense in his personal income tax return
GPP
29
With regard to partner's share in net loss of the partnership, this type of partnership when has loss, is not deductible since subject to final tax
Ordinary Partnership
30
Both GPP and OP are required to file tax returns
31
Exists whenever the ownership of an undivided thing or right belongs to different person
Co-Ownership
32
For income tax purposes, the individual co- owners are liable for the taxes due on their respective shares
33
The co-ownership itself is not considered as a separate taxable entity
34
In general, unless otherwise stated or determined, is deemed a tax exempt partnership because its purpose is normally is merely to preserve the property and effect the collection of its income.
Co-Ownership
35
There is co-ownership in the following instances:
Two or more heirs inherit an undivided property from a / decedent; or
2. A donor makes a gift of an undivided property in favor of two or more donees
36
GR: It is not taxable when the activities are limited merely to preservation of the co-owned property but the co-owners are liable for income tax in their separate and individual capacities.
37
Co-ownership is taxable when:
1. The income of the co-ownership is reinvested by the co-owners in business creating a partnership.
2. When a co-ownership is formed or established voluntarily, or upon agreement of the parties.
3. Where the inherited property remained undivided for more than 10 years and no attempt was ever made to divide the same among the co-heirs, nor was the property under administration proceedings nor held in trust, the property should be considered as owned by an unregistered partnership,
38
Taxable Co-Ownership is treated similarly to a corporation and is subject to corporate income taxes. Its taxable net income and income tax obligations are calculated in the same manner and procedure as those for ordinary corporate taxpayers.
39
The Co-Ownership can choose to adopt either the itemized deductions or the Optional Standard Deduction
40
The Co-Ownership is also liable for either a 2% MCIT or a 25% or 20% RCIT. which is higher, as well as final tax on passive income
41
It is MANDATORY for the Co-Ownership to file income tax returns quarterly and annually, on a cumulative basis.
42
Is a business arrangement in which two or more parties agree to combine resources, expertise, and efforts to achieve a specific business goal, project, or enterprise while remaining independent entities. It can be formed through a contractual agreement or by creating a separate legal entity.
Joint Venture
43
Is also defined as an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses
Joint Venture
44
As a rule, all Joint Ventures are REQUIRED to register with BIR pursuant to Section 236 of the Tax Code, as amended and secure its own TIN (Tax Identification Number).
45
Two types of Joint Venture for tax purposes:
1. Exempt Joint Venture
2. Taxable Joint Venture
46
Considered unregistered partnership which is treated as ordinary corporations subject to corporate income tax
Taxable Joint Venture
47
Exempt (Non-taxable) joint venture (JV)
Refers to a JV that is not treated as a taxable corporation under the National Internal Revenue Code (NIRC). Such JVs are exempt from corporate income tax. Instead, the income is passed through to the co-venturers, who report it in their separate tax returns..
48
Exempt joint venture shall not be subject to the corporate income tax under Section 27(A) of the Tax Code, as amended. Being exempt from income tax, the income of the joint venture shall also be exempt from expanded withholding tax.
49
The gross payments to the JV are not subject to the 2% CWT. For example, a Joint venture constructed a project in the Province of Rizal for P5M. Here, the income payment of the Province of Rizal shall be 5M, gross, without deducting CWT of 2%.
50
Under the Tax Code, as amended, exempt joint ventures are:
1. Joint Venture undertaking construction projects
2. Joint Venture engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government.
51
Share in net income of Joint Venture by the Corporations (joint venturer) from a non taxable JV is reported as part of gross income subject to regular corporate income tax.
52
Joint ventures or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal. geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government are exempted from corporate taxes.
53
However, joint ventures or consortium formed for the purpose of undertaking construction projects shall comply with the following conditions (criteria) to be considered as joint venture not taxable as a corporation:
a) Should involve joining or pooling of resources by licensed local contracts; that is, licensed as general contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI);
b) These local contractors are engaged in construction business. The JV is formed for a single, specific project and does not engage in other business activities.
c) The Joint Venture itself must likewise be duly licensed as such by the PCAB of the DTI.
54
Tax- exempt Joint venture or consortium shall not include those who are mere supplier of goods, services, or capital to a construction project.
55
Joint ventures involving foreign contractors may also be treated as a nontaxable corporation only if:
a. the member foreign contractor is covered by a special license as contractor by the PCAB of the DTI; and
b. the construction project is certified by the appropriate Tendering Agency (government office) that the project is a foreign financed/internationally-funded project and that international bidding is allowed under the Bilateral Agreement entered into by and between the Philippine Government and the foreign/international financing institution pursuant to the implementing rules and regulations of Republic Act No. 4566 otherwise known as Contractor's License Law.
56
The failure of any of the parties (Joint venturer) to the joint venture to comply with the conditions (criteria) shall subject the joint venture to income tax.
57
Example of a taxable joint venture is where one of the co- venturers is a landowner who does not possess a PCAB license and a real estate developer with PCAB license.
58
Absent any one of the above requirements, the Joint Venture or consortium formed for purpose of undertaking construction projects shall be considered as Taxable Corporation (or as a Taxable Join Venture).
59
JV involved in energy exploration, development or exploitation are not taxed as corporation if:
1. They operate under a service contract with the Philippine government.
2. The service contract is in accordance with the laws governing natural resources, such as the Petroleum Act or the Renewable Energy Act
60
Taxable Joint Venture:
In this case, the Joint Venture becomes a taxable entity subject to corporate income tax rate of 25% / 20%.
61
Share in net income of the Joint venture by the Corporations Individuals (joint venturer) from a Taxable Joint venture is treated as intercorporate dividend which is generally EXEMPT from income tax.
62
Imposition of creditable withholding taxes on certain income payments by joint ventures or consortiums (RR 14-2023)
The joint venture, even those unincorporated, shall be considered as withholding tax agent of the government. Thus, it shall withhold appropriate creditable w/taxes on its income payments to suppliers and employees.
63
The following are the creditable withholding tax rates:
1. Income payments made by joint ventures, whether incorporated or not taxable or non-taxable, to their local/resident supplier of goods and services:
i. Supplier of goods - 1%
ii. Supplier of services - (2%)
II. The share of each co-venturer or member from the net income of the joint venture or consortium that is not taxable as a corporation, prior to actual or constructive distribution, shall be subject to a 15% withholding tax rate.
64
The addition of withholding taxes on payments by joint ventures or consortiums enables the BIR to collect taxes ahead of the annual tax filing deadline and to capture information on suppliers' income through data matching of alphalists submitted by the withholding agent and the supplier.
65
Creditable withholding taxes are advance taxes collected at the source. This enables the BIR to collect taxes prior to the yearly tax filing date. Thus, this is a source of tax credit to be claimed by "Joint Venturer" or member in an Exempt Joint Venture.
66
No tax credit will arise in the share of each co-venturer or member from the net income of the taxable joint venture. The share in net income from a taxable JV is subject to final tax at 10% for R/C or 20% for NRAETB. Unlike Creditable withholding taxes, Final withholding taxes are not a source of tax credit.
67
1. Taxation of the Joint Venture
Non Taxable JV - The JV itself is not subject to corporate income tax
Taxable JV - The JV itself is subject to corporate income tax at 20%/25%
68
2. Tax Treatment of the Co- venturer's share in the JV net income
*Corporate venturer co
Non Taxable JV - The share in net income is subject to corporate income tax 20%-25%
Taxable JV - The share in net income is treated as intercorporate dividend which is generally EXEMPT from income tax
69
2. Tax Treatment of the Co- venturer's share in the JV net income
*Individual co- venturer
Non Taxable JV - The share in net income is subject to regular income tax
Taxable JV - The share in net income is subject to final tax at 10% for R/C; or 20% for NRAETB
70
An autonomous and duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve their social, economic, and cultural needs and aspirations by making equitable contributions to the capital required, patronizing their products and services and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles
Cooperative
71
Refers to the accumulated amount of money annually deducted from the net surplus, which shall be less than fifty (50%) for the first five years of operation after resignation and at least ten per centrum (10%) of the net surplus thereafter, intended not for the allocation or distribution to the members but for the protection and stability of the cooperative, commonly referred to as the Reserve Fund.
a) Accumulated Reserves
72
Refers to the certificate/ruling issued by BIR granting exemption to a cooperative, which is valid for a period of five (5) years from the date of issue
b) Certificate of Tax exemption/Ruling
73
Refers to the government agency created under R.A. 6939 mandated to register, regulate and develop cooperatives.
c) Cooperative Development Authority
74
Refers to the interest earned by the member's paid up to the capitalization of the cooperative. It is based on the average share capital contribution of members computed on a per month basis against the preset amount earmarked by the board of directors for interest on share capital.
d) Interest on Share Capital
75
Refers to transactions of cooperatives which are part of the objectives and purposes a enumerated in the Articles of Cooperation.
e) Related operations/transactions
76
Refers to the cooperative activity that provides goods and services to members where the cooperative generates net savings/surplus,
f) Transaction with members
77
Refers to the cooperative activity that provides goods and services to non-members where the cooperative generates net savings/surplus.
g) Transaction with non-members
78
Refers to the net amount arising from the operations of the cooperative after deducting the operational expenses from revenue generated, not construed as profits, but as excess of payments made by the members for the loans borrowed or the goods and services bought from the cooperative including other inflows of assets resulting from its other operating activities and which shall be deemed to have been returned to them if the same is distributed as prescribed in accordance with Article 86 of RA 9520 and the by-laws of the cooperative.
h) Undivided Net Surplus/ Undivided Net Savings
79
Refers to transactions of cooperatives which are not part of the objectives and purposes as enumerated in the Articles of Cooperation.
i) Unrelated Transactions
80
Classification of Cooperatives according to the Extent of Tax Exemptions Granted:
A) Those duly registered cooperatives which transact business with members only;
81
B) Those duly registered cooperative which transact business with both members and non-members which are further sub-classified according to the following:
B.1) Cooperatives with accumulated reserves and undivided net savings (ARUNS) of not more than Ten Million Pesos (Php 10,000,000.00); and
B.2) Cooperatives with accumulated reserves and undivided net savings of more than Ten Million Pesos (Php 10,000,000.00).
82
Exemptions / Taxability of Duly Registered Cooperatives:
A. TAX EXEMPTIONS of those duly registered cooperatives which transact business with members only.
Duly registered cooperatives dealing/transacting business with members only shall be exempt from paying any taxes and fees imposed under the internal revenue laws and other tax laws, including but not limited to:
a) Income Tax imposed under NIRC, as amended;
b) Value-Added Tax (VAT) imposed under NIRC, as amended;
c) Percentage Tax imposed under NIRC, as amended;
d) Donor's Tax imposed under NIRC, as amended, on donations to duly accredited charitable research and educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperatives;
e) Excise Tax under NIRC, as amended, for which it is directly liable;
f) Documentary Stamp Tax imposed under NIRC, as amended, provided, however, that the other party to the taxable document/transaction who is not exempt shall be the one directly liable for the tax;
g) Annual Registration Fee of P500.00 under NIRC, as amended (repealed by EOPT);
h) All taxes on transactions with insurance companies and banks, including but not limited to 20% final tax on interest deposits and 7.5% final income tax on interest income derived from a depository bank under the expanded foreign currency deposit system; and
i) Electric cooperatives duly registered with the Authority shall be exempt from VAT on revenues on systems loss and VAT on revenues on distribution, supply, metering and lifeline subsidy of electricity to their members.
83
B) Those duly registered cooperative which transact business with both members and non-members which are further sub-classified according to the following:
B.1) Cooperatives with Accumulated Reserves and Undivided Net Savings (ARUNS) of not more than Ten Million Pesos (Php 10,000,000.00);
EXEMPTED from all national internal revenue taxes, These types of cooperatives are exempt from taxes similar to those duly registered cooperatives which transact business with members only
84
B.2) Cooperatives with Accumulated Reserves and Undivided Net Savings (ARUNS) of more than Ten Million Pesos (Php 10.000.000.00
B.2.1 Business transactions with members
Business activities engaged in by such cooperatives with its members where said cooperative generates revenues shall be exempt from all national internal revenue taxes. These business transactions are exempt from taxes as enumerated in "TAX EXEMPTIONS" of those duly registered cooperatives which transact business with members only.
85
B.2.2 Business transactions with non-members.
Cooperatives with accumulated reserves and undivided net savings of more than Php10,000,000.00 which transact with non-members shall:
b.2.2) Pay the following taxes at the full rate:
b.2.2.1) Income Tax
On the amount allocated for interest on capitals: Provided. That the same tax is not consequently imposed on interest individually received by the members. The tax base for all cooperatives liable to income tax shall be the net surplus arising from the business transactions with non-members after deducting the amounts for the statutoru reserve funds for as provided for in the Cooperative Code and other laws. (Based on Joint Rules and Regulations implementing RA 9520)
86
b.2.2.2) Value Added Tax (VAT)
On transactions with non-members: Provided, however, That cooperatives, pursuant to Section 109, par. (L), (M) and (N) of the NIRC as amended by RA 9337. shall be exempt from the imposition of VAT
87
b.2.2.3) Percentage Tax
All sales of goods and or services rendered to non members shall be subject to the applicable percentage taxes imposed by the NIRC, as amended, except sales made by producers, marketing or service cooperatives;
88
b.2.2.4) All other Internal Revenue Taxes unless otherwise provided by the law;
89
B.2.3) Be entitled to limited or full deductibility of donations to duly accredited charitable, research and educational institutions and reinvestment to socio-economic projects within the area of operation of such cooperative.
90
B.2.4) All cooperatives, regardless of the amount of accumulated reserves and undivided net savings, shall be entitled to an exemption on all local taxes and taxes on transactions with insurance companies and banks, including but not limited to 20% final tax on interest deposits and 7.5% final income tax on interest income derived from a depository bank under the expanded foreign currency deposit system.
91
The net surplus of every cooperative shall be distributed as follows:
"(1) An amount for the reserve fund which shall be at least ten per centum (10%) of net surplus: Provided, That, in the first five (5) years of operation after registration, this amount shall not be less than fifty per centum (50%) of the net surplus:
The reserve fund shall be used for the stability of the cooperative and to meet net losses in its operations. The general assembly may decrease the amount allocated to the reserve fund when the reserve fund already exceeds the share capital.
"(2) An amount for the education and training fund, shall not be more than ten per centum (10%) of the net surplus. The bylaws may provide that certain fees or a portion thereof be credited to such fund. The fund shall provide for the training, development and similar other cooperative activities geared towards the growth of the cooperative movement.
"(3) An amount for the community development fund, which shall not be less than three per centum (3%) of the net surplus. The community development fund shall be used for projects or activities that will benefit the community where the cooperative operates.
"(4) An optional fund, a land and building, and any other necessary fund the total of which shall not exceed seven per centum (7%).
"(5) The remaining net surplus shall be made available to the members in the form of interest on share capital not to exceed the normal rate of return our investments and patronage refunds: Provided. That any amount remaining after the allowable interest and the patronage refund have been deducted shall be credited to the reserve fund.
92
Formula to compute the income tax on interest on share capital is:
Gross surplus- transaction with non-members
Less: Operating Expenses
= Net Surplus
Add: Other Operating income transaction with non- members
= Total Net Surplus for Allocation and Distribution
Less:
> Reserve funds at least 10%
> Education and training fund-not more than 10%
> Community dev't fund-not less than 3%
> Optional fund- not exceed 7%
= Remaining Net Surplus (Distributable Net Surplus) x % of Interest on share capital*
= Interest in Share Capita
Note:
That any amount remaining after the allowable interest and the patronage refund have been deducted shall be credited to the reserve fund.
** Must not to exceed the normal rate of return on investments.
93
All income of cooperatives not related to the main/principal business/es under its Articles of Cooperation shall be subject to all the appropriate taxes under the N1RC, as amended. This is applicable to all types of cooperatives whether dealing purely with members or both members and non-members.
94
Formula to compute the tax base for all cooperatives liable to regular income tax
Gross Profit- unrelated transactions / income
Add: Other Non-Operating income (unrelated income)
Gross Income- unrelated income
Less: Expenses- unrelated transactions / income
= Taxable Income
25%
95
All cooperatives, regardless of classification shall be subiect to:
a.) Capital Gains Tax from sale of shares of stock or sale, exchange or other disposition of real property classified as capital assets;
b.) Documentary stamp taxes on transactions of cooperatives dealing with non-members, except transactions with banks and insurance companies, Provided that whenever one party to the taxable document enjoys the exemption from DST, the other party who is not exempt shall be the one directly liable for the tax;
c.) VAT billed on purchases of goods and services, except the VAT on the importation by agricultural cooperatives of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce, pursuant to Section 109(L) of the NIRC, as amended. All tax free importations shall not be transferred to any person until five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarity liable to pay twice the amount of the tax and/or the duties thereon;
d.) Withholding tax on compensation/wages, except in the case where an employee is a minimum wage earner (MWE); and creditable and final withholding taxes, if applicable. All cooperatives, regardless of classification, are considered as withholding agents on all income payments that are subject to withholding, and
e.) All other taxes for which cooperatives are directly liable and not otherwise expressly exempted by any law.
96
All members of cooperatives shall be liable to pay all the necessary internal revenue taxes under the NIRC, as amended, except for the following:
a) Any tax and fee, including but not limited to final, tax on member's deposits or fixed deposits (otherwise known as share capital) with cooperatives, and documentary tax on transactions of members with the cooperative; and
b) Patronage Refund which includes all refunds, returns or rebates of the net savings generated from the operation of the cooperative.
97
The application for exemption by a qualified cooperative is a pre- Certificate of Tax Exemption/Ruling shall be issued only after determination by the BIR that the cooperative has complied with all the necessary documentary requirements for entitlement under RA 9520, as enumerated above
98
The Certificate of Tax Exemption/Ruling must be signed by the BIR Regional Director/ Assistant Commissioner, Legal Service, as the case may be, and shall be acted upon within forty-five (45) days from the date of submission of the complete documentary requirements, otherwise the BIR officer/employee concerned may be held liable under Article 140 of RA 9520.
All duly registered cooperatives under RA 9520 shall apply for a Certificate of Tax Exemption/Ruling within sixty (60) days counted from the date of issuance of certificate of registration.
Exemption from taxes herein stated shall apply to the duly-registered cooperatives on the year the certificate of tax exemption/ruling was issued.
99
Refers to the total value of all properties, rights and obligations of a decedent on date of death. The estate is to be transferred from decedent to his successors.
Estate
100
During the settlement period, where the title to properties is NOT YET FINALLY TRANSFERRED to the heirs, the income earned from the estate is subject to income tax.
101
Refers to a deceased person (individual) whose property are the object of laws on succession.
Decedent
102
Is a person called to the succession either by provision of a will or operation of law
Heir
103
Is a person whom a gift of real property is given by virtue of will.
Devisee
104
Is a person whom a gift of PERSONAL property is given by virtue of will.
Legatee
105
Appointed by decedent thru will
Executor
106
Appointed by court
Administrators
107
Classification of Estate
1. Estate under Judicial administration (Taxable Estate)
2. Estate NOT under judicial administration (Non-Taxable Estate)
108
The settlement is the object of judicial testamentary or intestate proceedings. There is a court proceeding since there is probate made in court.
Estate under Judicial administration
109
An estate is an INCOME TAXPAYER if under judicial settlement or administration. The income of an estate is taxable to the "Estate of Decedent".
110
Is a juridical person but it is considered like an individual, for tax purposes, subject to individual income tax.
Estate of Decedent
111
The taxable net income and income tax due shall be computed in the same manner, procedures and on same basis as n the case of ordinary individual taxpayer.
112
Kind of Estate where administration is not a taxpayer. The INCOME OF ESTATE is taxable to the HEIRS AND BENEFICIARIES.
Estate Not under Judicial Administration
113
The settlement is NOT the object of judicial testamentary or intestate proceedings in Estate Not under Judicial Administration
114
There is a taxable estate when the properties are under judicial settlement.
115
The distributed income of estate to the heirs is a SPECIAL deduction from the gross income of the taxable estate.
116
Taxable estate shall observe the rule on tax credit and shall file a quarterly and annual income tax returns.
117
Income from decedent's estate which are credited or distributed to the heirs shall be included in the gross income of individual's income tax return of each heir. However, where no such distribution to the heirs is made during the taxable year that such income is subjected to income tax payments by estate, the subsequent distribution thereof is no longer taxable on part of heir.
118
An allowance paid to heir out of corpus (property) of estate is not deductible from gross income.
119
The income distributed to the heirs or beneficiaries are subject to 15% CWT
120
IF estate's gross receipts/ sales PLUS other non- operating income exceeds the VAT thresholds or P3 million
Subject to Graduated Tax Rates under Sec 24 (A) (2)
Taxable net income subject to Graduated Tax rates under Sec 24 (A)
121
IF estate's gross receipts / sales PLUS other non-operating income DO NOT exceeds the VAT thresholds or P3 million
Subject to Graduated Tax Rates under Sec 24 (A) (2)
- Taxable net income subject Graduated Tax rates
or
8% Optional income Tax rate
- Sales/receipts PLUS Other non- operating income- 250,000) x 8%
122
123
Computation of Taxable income of the Estate
Gross Income of estate
Less:
Allowed Deductions
Business Expenses
Income from estate distributed to the heir
= Taxable Net Income
Income tax due under Sec 24 (A)
124
Is primarily a fiduciary relationship between a person called a Trustor and a Trustee.
Trust
125
Sets up a Trust, i.e., putting assets in a Trust or under the name of a Trustee.
Trustor
126
Is a person or entity appointed by the Trustor to take care of the assets placed in the Trust on behalf of or for the benefit of the Beneficiaries named in the Trust.
Trustee
127
It is in the Trust Deed or Trust Agreement that the Trustor should put all their instructions as regards who should be benefited, when they should be benefited, what they will get (if hard assets), how much (if cash), and what conditions the beneficiaries must fulfill to be entitled to the income and/or principal of the Trust.
128
Is a right on property, real or personal, held by one party for the benefit of another.
Trust
129
Refers to an agreement executed between a trustor-grantor and a trustee-fiduciary whereby property of the former (grantor or trustor) is transferred to the latter (trustee) for conservation and management and ultimately, the title to the property in trust (corpus) as well as income there from will be transferred to the beneficiary as directed by grantor
Contract of Trust
130
Parties:
1. Grantor-Trustor
2. Trustee
3. Beneficiary
131
Arrangement created by agreement under which title to property is passed to another for conservation or investment with the income and the corpus/principal distributed in accordance with the directions of the creator; to be taxable as a separate entity, grantor must have absolutely and irrevocably given up control and benefit over the trust.
132
The trust is irrevocable
Taxable Trust
133
Generally, a Trust is irrevocable when the substantial terms and conditions of a trust (e.g., addition or subtraction of named beneficiaries) can no longer be changed.
134
A trust is a taxpayer if under the terms of the trust, the fiduciary may accumulate the income or distribute to beneficiary at his discretion
135
The trust is revocable
Non-Taxable Trust
136
If under the terms of trust, title to any part of corpus or principal of trust may be reverted to grantor. The entire trust is for the benefit of Grantor.
Revocable Trust
137
In a Revocable Trust, the Trustor can change the terms and conditions of the Trust for whatever reason. There is more flexibility for the Trustor in a Revocable Trust in terms of control over the assets in the Trust and in adding or removing beneficiaries
138
For tax purposes, the income of REVOCABLE TRUSR is part of the gross income of the GRANTOR-TRUST
139
A taxable trust must observe the rule on gross income Sec 32 (A) and may adopt either itemized deductions or OSD (Optional Standard Deductions).
140
The distributed income of taxable Trust to the beneficiary is a special deduction from the gross income of the taxable trust.
141
Must observe the rule on tax credit and shall file quarterly and annual income tax returns. Income from trust which are credited or distributed to the beneficiary shall be included in the gross income of individual's income tax return of each beneficiary. The income distributed is subject to 15% CWT.
142
Tax rates: Taxable Trust (Same as Estate)
143
Exemption of Employee's Trust from tax:
The tax imposed to trust 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
(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.
144
Several Trust with Common Grantor and Common Beneficiary
Under the Tax Code, as amended (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.
145
A separate return will be filed for each trust by their respective trustee or fiduciary.
146
The separate returns filed by different fiduciaries shall be consolidated by the BIR. The exemption of 20,000 (deducted from gross income) was disallowed by TRAIN Law, Income tax must be computed based on consolidated return.
