Filantropía Corporativa

Represents distribution of all the property or assets of a corporation in complete liquidation or dissolution. It is strictly not

dividend income, but rather is treated in effect, as a sale of shares of stock resulting in capital gain or loss. The difference between the cost or other basis of the stock and the amount received in liquidation of the stock is a capital gain or a capital loss.

Where property is distributed in liquidation, the amount received is the FMV of such property. The income is subject to ordinary income tax rates and NOT to the FWT on dividends.

62 (c) Royalty Income

Royalty is a valuable property that can be developed and sold on a regular basis for a consideration; in which case, any gain derived therefrom is considered as an active business income subject to the normal corporate tax.

Where a person pays royalty to another for the use of its intellectual property, such royalty is generally a passive income of the owner thereof subject to withholding tax.

(d) Rental Income

Refers to earnings derived from leasing real estate as well as personal property.

Aside from the regular amount of payment for using the property, it also includes all other obligations assumed to be paid by the lessee to the third party in behalf of the lessor (e.g., interest, taxes, loans, insurance premiums, etc.) [RR 19-86] Rent income may be in the following forms:

(a) Cash, at the stipulated price

(b) Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the contract of lease, e.g., real estate tax on the performance of certain obligations of the lessee, such advance payment is not income to the lessor.

(2) However, a security deposit that is applied to rental is taxable income to the lessor. regardless of the accounting method used by the lessor.

(1) Lease of personal property

Rental income on the lease of personal shall be subject to the graduated income tax real property located in the Philippines an effective tax treaty Domestic Corporation

Resident Foreign

Net taxable income shall be subject to

63

Lessor Tax Rate

Corporation 30% corporate

income tax or its gross income will be subject to 2% MCIT Non-resident Foreign

Corporation

Gross rental income from real property located in the Philippines shall be subject to 30%

corporate income tax, such tax to be

withheld and

remitted by the lessee in the Philippines (3) Tax treatment of:

(a) Leasehold improvements by lessee Rent Income from leasehold improvements:

i. Outright method- lessor shall report as income FMV of the buildings or improvements subject to the lease in the year of completion.

ii. Spread-out method- lessor shall spread over the remaining term of the lease the estimated depreciated (book) value of such buildings or improvements at the termination of the lease, and reports as income for each remaining term of the lease an aliquot part thereof. estimated BV at the end of the lease contract/ remaining lease term = Income per year

If for any reason than a bona fide purchase from the lessee by the lessor, the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed, lessor receives additional income for the year which the lease is so terminated to the extent of the value of such buildings or improvements when he became entitled to such possession exceeds

the amount already reported as income on account of the erection of such building or improvement. No appreciation in value due to causes other than the premature termination of lease shall be included (Sec. 49, Rev. Reg.

No. 2).

If the building or other leasehold improvement is destroyed before the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place, the amount previously reported as income because of the erection of the improvement, less any salvage value, to the extent that such loss was not compensated by insurance (Sec. 49, Rev.

Reg. No. 2),

(b) VAT added to rental/paid by the lessee If the lessee is VAT-registered, treat VAT paid as input VAT;

If the lessee is not VAT-registered OR not liable to VAT, treat VAT paid as additional rent expense deductible from gross income.

(c) Advance Rental/ Long Term Lease Pre-paid rent must be reported in full in the year of receipt, regardless of the accounting method used by the lessor.

iii. Annuities, Proceeds from life insurance or other types of insurance

Annuities are installment payments received for life insurance sold by insurance companies.

The aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at once with the burden of the income. [Art. 2021, New Civil Code]

64 The annuity payments represent a part that is taxable and not taxable. If part of annuity payment represents interest, then it is a taxable income. If the annuity is a return of premium, it is not taxable.

iv. Prizes and awards

A prize is a reward for a contest or a competition. It represents remuneration for an effort reflecting one’s superiority.

Contest prizes and awards received are generally taxable. Such payment constitutes gain derived from labor.

The EXCEPTIONS are as follows:

(1) Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievements are EXCLUSIONS from gross income if:

(a) The recipient was selected without any action on his part to enter a contest or proceedings; and

(b) The recipient is not required to render substantial future services as a condition to receiving the prize or award.

(2) Prizes and awards granted to athletes in local and international sports competitions and tournaments held in the Philippines and abroad and sanctioned by their national associations shall be EXEMPT from income tax.

v. Pensions, retirement benefit, or separation pay

(1) Paid for past employment services rendered.

(2) A stated allowance paid regularly to a person on his retirement or to his dependents on his death, in consideration of past services, meritorious work, age, loss or injury. It is generally taxable unless the law states otherwise. [VALENCIA, Income Taxation 5^th ed. (200/’’9)]

vi. Income from any source whatever Inclusion of all income not expressly exempted within the class of taxable income under the laws irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and whether derived from legal or illegal sources

Forgiveness of indebtedness

The cancellation or forgiveness of indebtedness may have any of three possible consequences:

(a) It may amount to payment of income. If, for example, an individual performs services to or for a creditor, who, in consideration thereof, cancels the debt, income in that amount is realized by the debtor as compensation for personal services.

(b) It may amount to a gift. If a creditor wishes merely to benefit the debtor, and without any consideration therefore, cancels the debt, the amount of the debt is a gift to the debtor and need not be included in the latter’s report of income.

(c) It may amount to a capital transaction.

If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of a payment of dividend.

Tax Benefit Rule

This is a general principle in taxation which states that is a taxpayer deducted an item on his income tax return and enjoyed a tax benefit (reduced his income tax) thereby, and in a subsequent year recovers all or part of that item, he will recognize gross income in the year the deducted item is recovered. The rule has both an inclusionary and an exclusionary component, i.e., the recovery is included in the taxpayer’s gross income to the extent that the taxpayer obtained a tax benefit from the prior

65 year’s deduction, and the recovery is excluded to the extent that the prior year’s deduction did not provide a tax benefit.

Recovery of accounts previously written-off Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of the income tax benefit of said deduction. There is an income tax benefit when the deduction of the bad debt in the prior year resulted in lesser income and hence tax savings for the company. (Sec. 4, RR 5-99) Illustration:

Case A Case B Case C

Year 1

Gross Income 500,000 400,000 500,000

Less: Allowable Deductions (before write-off of Uncollectible Accounts/Debts)

(200,000) (480,000) (495,000)

Taxable Income (Net Loss) before write-off

300,000 (60,000) 5,000

Deduction for Accounts Receivable written off

(2,000) (2,000) (6,000)

Taxable Income (Net Loss) after write-off

298,000 (62,000) (1,000)

Year 2

Recovery of Amounts Written Off 2,000 2,000 6,000

Taxable Income on the Recovery 2,000 - 5,000

In Case A, the entire amount recovered (P2,000) is included in the computation of gross income in Year 2 because the taxpayer benefited by the same extent. Prior to the write-off, the taxable income was P300,000;

after the write-off, the taxable income was reduced to P298,000.

In Case B, none of the P2,000 recovered would be recognized as gross income in Year 2. Note that even without the write-off, the taxpayer would not have paid any income tax anyway.

The “taxable income” before the write-off was actually a net loss.

In Case C, only P5,000 of the P6,000 recovered would be recognized as gross income in Year 2. It was only to this extent that the taxpayer benefited from the write-off. The taxpayer did not benefit from the extra P1,000 because at this point, the P1,000 was already a net loss.

Receipt of tax refunds or credit

General rule: A refund of a tax related to the business or the practice of profession, is taxable income (e.g., refund of fringe benefit tax) in the year of receipt to the extent of the

66 income tax benefit of said deduction (i.e., the tax benefit rule applies).

Exceptions: However, the following tax refunds are not to be included in the computation of gross income:

(1) Philippine income tax, except the fringe benefit tax

(2) Income tax imposed by authority of any foreign country, if the taxpayer claimed a credit for such tax in the year it was paid or incurred.

(3) Estate and donor’s taxes

(4) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (Special assessments) (5) Value Added Tax

(6) Fines and penalties due to late payment of tax

(7) Final taxes (8) Capital Gains Tax

Note: The enumeration of tax refunds that are not taxable (income) is derived from an enumeration of tax payments that are not deductible from gross income.

If a tax is not an allowable deduction from gross income when paid (no reduction of taxable income, hence no tax benefit), the refund is not taxable.

SOURCE RULES IN DETERMINING