SPIT: November 20

Steps in determining the tax due

AMT

• Capital - extend
• Income
• Exempt
• Taxable
• Schedular (because the income is subject to final withholding tax)
• Resident Payee
• Capital gains tax on real property in the Philippines
• Why impose tax only on property in the Philippines: CHA:Territorial application of Philippine laws

-SIR: sabi ng law eh

• Capital gains tax on shares of stocks
• Passive investment income
• Interest income
• Investment income
• Dividends
• royalties

• Nonresident Payee

[note: once a type of income has been subjected to tax, it would not be subject to another income tax - one tax system rule]

• Global

-if schedular tax system does not apply?

-system where the taxpayer is required to lump up all items of income earned during a taxable period and pay under a single set of income tax rates on these different items of income

-REMEMBER THE FORMULA! (see page 68 of Reviewer on Taxation (2008))

HOW TO COMPUTE INCOME TAX:
GLOBAL TAX SYSTEM:

GS (gross sales)

-COS (Cost of sales)

GI (Gross income

-D (deductions)

-PAE (Personal and additional exemptions for individuals)

NTI (Net taxable income)

x rate

IT due

-CWT

BALANCE

3 principles in Philippine tax laws to determine when to impose tax

1. Citizenship principle

-Filipino citizens

-you are taxed based on your citizenship; under old law, you are entitled to all the protection that your state could give you because of your citizenship...and then you could be imposed income tax

-NOTE: under new law, impose income tax only on worldwide basis only on RESIDENT CITIZENS

1. Resident citizens
2. Nonresident citizens

2. Residence principle

-concerns aliens more

• Resident alien
• Nonresident aliens

3. Source principle
• Nonresident aliens
• Foreign corporations

WHO IS THE TAX PAYER

[Sec. 23]

*don't argue anymore on whether the person is a citizen or not because usually the problem would give the status of the person

Taxpayer	Which are taxed
INDIVIDUAL CITIZEN >resident >nonresident ALIEN >resident >nonresident
CORPORATIONS >Domestic corporations >Foreign corporations ...resident ...nonresident	SECTION 27 SECTION 28 A B
Partnerships
Estates/trusts

Review on cOrpo

Incorporators:

At least 5 natural persons

Majority of the incorporators must be resident citizens

citizenship requirement: required for President, Secretary and Treasurer

e.g. GE Corporation

5 natural persons - all foreigners but residents of RP + GE US - is this a domestic corporation? YES, AS long as organized under Philippine Laws

*note the negative list: list of industries wherein foreigners could not enter

-if it is a domestic corporation, what do they get from the SEC? Certificate of Registration

*is there a difference in tax treatment between a

PHILIPPINE BRANCH (SEC. 28A(5)]

SUBSIDIARY

e.g. SMC

-a local corporation listed in the PSE

-assuming that there are 5 natural persons - Filipinos - they went to Japan, organized SMC Japan - they own  1% and 99% owned by SMC Philippines - FOREIGN CORPORATION because organized under Japanese laws

e.g. Of foreign corporations - in laymen's term: branch of a Foreign corporation here in RP

-if they open a branch here in RP, what do they get? LICENSE TO DO BUSINESS IN THE PHILIPPINES

There are 5 types of income under the law

[assignment!]

ESTATES

-created by operation of law, when an individual dies, leaving properties to his compulsory heirs

e.g. House left by a deceased person. The heirs merely resides on the house. Are they liable for income tax? NO. No income received

...when liable for income tax? When the estate earns income, e.g. When the house is being rented out or being used for other commercial purposes

e.g. X love Y, gets married and have two kids - A & B...X dies

Liable on estate tax? Sabi ni sir oo, as long as there is a transfer - there is a transfer by operation of law upon X's death

TRUST

-a legal arrangement wherein the owner of the property (trustor) transfers ownership to the trustee who would hold and control the property belonging to the owner's instructions, for the benefit of a designated person (beneficiary)

-who is the person subject to the tax? The recipient of the income

• Trustor: if the trust is revocable (section 63)
• Trustee: if the trust is irrevocable (Section 60-61)

How to tax income of the estate or trust?

e.g. Property of the estate/trust earns P5ook per month ; X earned P200k per month when he died.

X died aug. 31, 2009. at the end of the year, Y comes to you for advice and asks, "Atty., may tax ba akong babayaran for 2009?"

ANSWER: Estate liable for estate tax on the income of the estate from September to December: P2M

Income tax from January to August: P1.6M tax base

(but note the personal exemption): Is he entitled to the tax exemption or is the exemption already availed of by the estate so it would not be available anymore to the income tax?

Section 35 (C), par. 2: "If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year

ADDITIONAL PROBLEM: is the property the exclusive property of X?

...hahaha okay fine, nosebleed...

...SIR: If you could split the income of the property, lower tax rate is imposed! PROGRESSIVE TAX SYSTEM...the higher the tax based, the higher the tax rate

...so it would be more beneficial to the client to assume that the property is co-owned by Y and so she would have to declare her own income from the property, and she would also be entitled to her own exemption

CO-OWNERSHIPS

-whenever the ownership of an undivided thing or right belongs to different persons

e.g. TCT co-owned by A, B, C, & D

...you don't know yet which part of the lot is yours

...could you sell your portion of the property? YES (but question is, are you required to get the consent of the other co-owners?)

If A sells his inchoate right to the property, what kind of tax should be imposed?

>INCOME TAX

When would you want to pay a certain tax:

CGT: would want to use it if the FMV or GSP huge! You would only pay 6% based on GSP or CFMV and you gain more; because even if there is a loss, you are still presumed by law that you made a gain...so 6% would still be imposed on you

Vs.

Income tax: if the FMV or GSP is small or there is a loss!

-when the person dies, the transfer of ownership is automatic; so there is co-ownership established.

-when the property left by the decedent is income producing...

...continue example: Mr. X dies august 30, 2009. He has left a 20-door apartment which is being rented out, co-owned with other people.

• When does the rental income become the property of the heirs, and each of them are required to report their income share in their ITR: upon partition of the property
• See: partition ideally should be done 6 months after death, file estate tax return, attaching extrajudicial partition, and attestment that there are no loans...

Let's say the property upon death:

200M - Forbes property

100M - apartments

Total: 300M

>the property would be divided into two (assumed as conjugal property): 1/2 of the properties to the wife, 1/2 to the estate

>among  the heirs, the 1/2 estate would be divided...(REVIEW SUCCESSION)

>ONCE you find out which part belong to you, you can now report as individual income the income derived from the apartment which was assigned to you

PARTNERSHIPS

e.g. A & B contributed money, made a profit of P1M. Agreed that P400k each would be distributed to each of them, leaving P200k to the partnership. Is the partnership liable for income tax, and if so, how much income subject to income tax. Is the partners liable for income tax individually, and if so how much income is subject to income tax?

Under SEC22B, Tax Code is considered as a corporation subject to income tax. SO taxed similarly as a corporation.

Assignment!