TAX REPORT

ADA MAE D. ABELLERA

DIVIDEND INCOME
Any distribution made by a corporation to its shareholders out of its unrestricted retained earnings
payable to its shareholders whether in money or in other property.

Dividend paid by a foreign corporation

1. When the recipient is a resident citizen or a domestic corporation

Dividends received by resident individual stockholders shall be subject to the rates of 5%-32%,
while dividends received by domestic corporate stockholders shall be subject to 30%.

2. When recipient is a non-resident citizen or an alien or a foreign corporation

Dividend from income received from a foreign corporation not doing business in the Philippines
shall be treated as income from foreign sources; hence, exempt from Philippine income tax if
received by a non-resident citizen or an alien or a foreign corporation

However, dividends of a domestic corporation which are delivered in cash to foreign

corporations as stockholders are subject to the payment of income tax, the exemption clause in
the charter notwithstanding. (NOTE: TAX EXEMPTIONS ARE PERSONAL TO THE FRANCHISE
GRANTEE.)

What is being taxed here is the dividend income of the foreign corporate stockholder, the
income of which is required to be withheld by the paying corporation and remitted to the BIR.

The same applies to dividend income paid by a domestic corporation, registered with PEZA and
enjoying income tax holiday, to its foreign parent company.

REASON FOR THE ABOVE RULE: the subsidiary has a separate and distinct personality from its
foreign parent company.

How about branch profits?

They are exempt from the branch profit remittance tax by express provision of law and because
the Philippine branch is merely an extension of the foreign head office. They are one and the
same corporation.
Cash dividend V. Stock Dividend

It is a disbursement to the stockholder of the It involves no disbursement , and the corporation

accumulated earnings, and the corporation parts parts with nothing to the stockholders who
irrevocably with all the interest therein receive , not an actual dividend but a certificate of
stock.
It is a dividend payable in reserve or increase of
additional stock of the corporation.

When declared and paid to the stockholders and Being the property of the corporation and not of
such cash becomes the absolute property of the the stockholder, may be reached by an execution
latter and cannot be reached by creditors of the against the corporation and may be sold as a part
corporation in the absence of fraud. of the corporate property.

Cash and/or property dividends

Those that are declared as such on or after Jan. 1, 1998 shall be subject to the 10% withholding
tax.

Stock dividend

Represents the transfer of surplus to capital account , hence, not subject to income tax because
they are not realized income
It constitutes income if it gives the shareholder an interest different from that which his former
stockholdings represented

What if a corporation cancels or redeems stock issued as dividend at such time and in such manner as
to make the distribution or cancellation, in whole or in part, essentially equivalent 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 it represents a distribution of earnings or profits.

Treasury shares

These are stocks issued and fully paid for and re-acquired by the corporation either by purchase,
donation, forfeiture or other means.
They do not have the status of outstanding shares
May be re-issued or sold again
Royalty income

Royalties means a payment or a portion of the proceeds paid to the owner of a right for the use of such
rights. It is a form of payment of any kind received as a consideration for the use of, or the right to use,
any copyright of literary, artistic or scientific work, including cinematographic films, or films or tapes
used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula
or process, or for use of, or the right to use, industrial, commercial, or scientific equipment, or for
information concerning industrial, commercial or scientific experience.

Covers both payments made under a license and compensation which a person would be
obliged to pay for fraudulently copying or infringing the right.
valuable property that can be developed and sold on a regular basis for a consideration.

Example: software. It is generally assimilated as a literary, artistic or scientific work protected by

the copyright laws of the various countries.

WHEN ROYALTY CONSIDERED AS ACTIVE BUSINESS; WHEN CONSIDERED AS PASSIVE INCOME

A royalty is a valuable property that can be developed and sold on a regular basis for a
consideration. Any gain derived therefrom is considered as an active business income subject to
the normal income tax. It is a special form of rental income for the use of intangible property.
However, when a person pays royalty to another for the use of its intellectual property, such as
copyrights, p[atents, trademarkas, such royalty is a passive income of the owner thereof subject
to withholding tax.

WHEN IS ROYALTY PAYABLE?

The payor is required to deduct and withhold final taxes on royalty payments when the royalty is
paid or is payable. After which, the corresponding return and remittance must be made within
10 days after the end of each month.

RENTAL INCOME

Refers to earnings derived from leasing real estate as well as personal property.
Rental income on property located in the Philippines paid to a non-resident alien or non-
resident foreign corporation shall be subject to the 25% or 30% final withholding tax,
respectively.
If the rented property is being used in business, said rental income shall be subject to the
expanded withholding tax of 5% to be withheld by the lessee. Failure on the part of the lessee to
 withhold and remit the said withholding tax shall not entitle him to claim the rental expense as
deduction from his gross income.

TAX TREATMENT OF LEASEHOLD IMPROVEMENTS MADE BY THE LESSEE

Outright Method- The lessor may report as income at the time when such buildings or
improvements are completed the fair market value of such buildings or improvements subject
to the lease.
Spread-out Method- The lessor may spread over the life of the lease the estimated depreciated
value of such building or improvement at the termination of the lease and report as income for
each year of the lease an aliquot part thereof.

NOTE: If improvements are in lieu of rent, the value thereof is income to the landlord only in the
year of termination of the lease.

PREPAID or ADVANCE RENTAL

Only be considered as rental income of the lessor once the advance rental is utilized by the lessee.

LONG-TERM CONTRACT

Means building, installation, or construction contracts covering period in excess of one year.
Taxable for the period in which income is determined, such determination depending upon
the nature and terms of the particular contract.

PRIZES and AWARDS

Contest awards or prizes received from an employer or another are generally taxable. Thus,
amounts received as an award for special services are taxable; so also are prizes won in a
competitive contest conducted for non-commercial or commercial purposes. Such payments are
for services rendered.

Amounts received as prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement are not taxable and are considered as
exclusions from gross income but only if:

1. The recipient was selected without any action on his part to enter the contest or proceeding;
and
2. The recipient is not required to render substantial future services as a condition to receiving the
prize or award.

All prizes and awards granted to athletes in local and international sports competitions and
tournaments whether held in the Philippines or abroad and sanctioned by their national sports
associations shall be excluded from gross income.

Prizes derived from sources without the Philippines considered taxable income
 If the prizes are derived from sources without the Philippines, the same shall be included in the
gross income for taxpayers whose income derived from within and without the Philippines are
taxable in the Philippines.

GROSS INCOME FROM WHATEVER SOURCE DERIVED

It includes income whether coming from legal or illegal sources. It indicates a legislative policy to
include all income not expressly exempted within the class of taxable income under our laws.

FORGIVENESS OF INDEBTEDNESS

The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift,
or to a capital transaction, dependent upon the circumstances.

GAIN FROM SALE OF TREASURY STOCKS

Taxable gain or deductible loss depends on the real nature of the transaction.
Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as
deduction where permitted by law.

INCOME OF A CORPORATION IN LIQUIDATION VS. LIQUIDATING

DIVIDEND

If the distribution is in the nature of a recurring return on stock, it is an ordinary dividend. However, if
the corporation is really winding up its business or re-capitalizing and narrowing its activities, the
distribution may properly be treated as in complete or partial liquidation and as payment by the
corporation to the stockholder for his surrendered or relinquished stock in a corporation.

CREATION OF CORPORATE SINKING FUNDS

In order solely to secure payment of its bonds or other indebtedness, places property in trust, or
set aside certain amounts in a sinking fund under the control of a trustee who may be authorized to
invest and reinvest such sums from time to time, the property or fund thus set aside by the corporation
and held by the trustee is an asset of the corporation, and any gain arising therefrom is income of the
corporation and shall be included as such in its annual return.

RECEIPT OF TAX CREDIT OR REFUND

If a taxpayer receives a tax credit certificate or refund for erroneously paid tax which was claimed as a
deduction from his gross income that resulted in a lower net taxable income or a higher net operating
loss that was carried over to the succeeding taxable year, he realizes taxable income that must be
included in his income tax return in the year of receipt. This principle does not apply to tax credits or
refunds of erroneously paid income tax, estate tax, donors tax, and special assessments since they are
not deductible from gross income.