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TAXATION PROF. ROEL E. HERMOSILLA

INCOME TAX – PART 3: INCOME TAXES ON CORPORATIONS

FOCUS: FOREIGN CORPORATIONS & OTHER TAXABLE ENTITIES

FOREIGN CORPORATIONS: RESIDENT AND NON-RESIDENT

FOREIGN CORPORATE TAXPAYER’S CLASSIFICATION

1. Foreign Corporation (FC):
• Created and/or organized under Foreign Laws;
• Subject to tax on income from sources within the Philippines only.

i.Resident Foreign Corporation (RFC): foreign corporations engaged in trade or business

in the Philippines through a branch office1; Taxable only on sources within the
Philippines.

ii.Non-resident Foreign Corporation (NRFC): foreign corporations not engaged in trade or

business in the Philippines; no permanent branch in the Philippines; Taxable only on
sources within the Philippines based on GROSS SALES/RECEIPTS.

Corporations may be classified further as:

a. Ordinary Corporations:
• Subject to normal or regular corporate tax rate (RCIT) of 30% under the
TRAIN Law, now either 25% or 20% under the CREATE Law
effective beginning July 1, 2020.

b. Special Corporations:
• Subject to income tax rates which are lower than the RCIT rate
• Classified as follows:
o Special Resident Foreign Corporations:
▪ International Carriers
▪ Offshore Banking Units (OBUs) – as amended by CREATE
Law, now taxed as RFC upon the effectivity of CREATE
Law
▪ Foreign Currency Deposit Units (FCDUs) – please see detailed
discussion on “Special Corporations” Section of this
handout
▪ Regional Operating Headquarters (ROHQs) – as amended by
CREATE Law, not considered as special corporations but
now taxed as RFC beg. Jan. 1, 2022
▪ Regional or Area Headquarters (RAHQs) – exempt from tax
▪ Branch Profit Remittance Tax

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o Special Non-resident Foreign Corporations:

▪ Non-resident cinematographic film owner, lessor, or distributor
▪ Non-resident owner or lessor of vessels chartered by Philippine
nationals
▪ Non-resident owner or lessor of aircraft, machinaries, and other
equipments

CORPORATE TAXPAYER’S SOURCES AND TYPES OF INCOME

TAXPAYER TAXABLE SOURCES
✓ RFC Within ONLY
✓ NRFC Within ONLY
✓ Special Corporations Please see detailed discussion in the section provided for this topic

Corporate taxpayer’s types of income are grouped together as follows:

I. Capital gains – derived from sale of shares of stock
II. Passive income – derived from interest income, royalties, prizes, winnings,
cinematographic film and similar works, dividends and share
in net income of taxable or business partnership
III. Business income – derived from business, and other income

I. CAPITAL GAINS – RFC & NRFC

A. Sale or exchange of shares of stock in a domestic corporation considered capital asset:

1. Persons liable to the tax:
a. Corporate taxpayers – domestic or foreign

2. Rate of tax:
a. Sales of shares of stock NOT LISTED & TRADED through a Local Stcok
Exchange, held as capital asset:
▪ 15% on the Net Capital Gain

3. Computations:
a. Tax Base: NET CAPITAL GAIN

RFC NRFC
N/T C N/T C
A. Sale or Exchange of
Shares of Domestic
Corporation not 5% 15%** 5% 15%**
listed or not traded in - 1st P100,000 As amended - 1st P100,000 As amended
the local stock 10% - In under 10% - In under
exchange* excess of CREATE Law excess of CREATE
TAX BASE: P100,000 P100,000 Law
✔ Net Capital Gain

II. PASSIVE INCOME

RFC NRFC
N/T C N/T C
A. Interest Income
a.1. Interest or yield on bank 20% 20% 30% 25%**
savings deposit, bank time starting
deposit, deposit substitute or January 1,

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money market, trust funds, or 2021

similar arrangements

a.2. Interest income under the 7.5% 15%** Exempt Exempt

expanded foreign currency starting
deposit system* the date of
the
effectivity
of CREATE
LAW

a.3. Interest on foreign loans NA NA 20% 20%

B. Royalties (All sorts) 20% 20% 30% 25%**

starting
January 1,
2021

C. Dividends
c.1. Cash and Property Exempt Exempt 30% or 25% or
Dividends received by a 15% 10% **
domestic corporation from starting
another domestic corporation January 1,
**Intercorporate Dividends 2021
provided that the country where
the Company is domiciled
provides for a 15% credit on PH
taxes deemed paid. (Tax
Sparing Rule)

 Additional Notes For Final Tax on Dividends for DC, RFC, & NRFC:
 TAX SPARING RULE:

 RR-5-2021 states that:

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 Tax on Inter-corporate Dividends

Dividends declared by Dividends received by Tax
DC DC EXEMPT
DC RFC EXEMPT
DC NRFC 25% FT OR 15%FT**
FC DC 25% RCIT OR EXEMPT**
FC RFC EXEMPT (Income earned
outside of PH)
FC NRFC EXEMPT (Income earned
outside of PH)

III. ON BUSINESS AND OTHER INCOME

TAX BASE
1. Regular Corporate Income Tax (RCIT):
a. Taxable Income (Gross Income less Allowable deductions)
2. Minimum Corporate Income Tax (MCIT):
a. GROSS INCOME (Net Sales/Revenue less Cost of Sales/Services)
3. FOR NRFC:
a. GROSS SALES/RECEIPTS less Discounts, Returns, & Allowances or NET
SALES/RECEIPTS

NOTE: Meaning of gross income:

 For sale of goods – Gross sales less sales returns, allowances, discounts and cost of
goods sold.
 For sale of services – Gross receipts less sales returns, allowances, discounts and cost
of services sold. Cost of services sold means all direct costs and expenses incurred to
provide the services required by the customers and clients including (a) salaries and
employee benefits of personnel, consultants and specialists directly rendering the
service and (b) cost of facilities used directly in providing the service such as
depreciation, rental of property and cost of supplies. In the case of banks, cost of
services sold shall include interest expense.

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 It shall also include all items of income enumerated under Section 32 (A) of the Tax
Code, as amended, except income exempt from tax and income subject to final
withholding tax.

TAX RATES – RFC & NRFC

1. RCIT/NCIT:
a. BEFORE CREATE LAW: 30% (RFC & NRFC)
b. BEG. JULY 1, 2020: 25% (RFC)
c. BEG. JAN. 1, 2021: 25% (NRFC)

 If in case of Fiscal Year accounting period, the TI shall be computed without

regard to the specific date when specific transactions occur. The income and
expenses for the Fiscal Year shall be deemed to have been earned & spent
equally for each month of period. Read RR-5-2021

2. MCIT: (for DC AND RFC ONLY)

a. BEFORE CREATE LAW: 2% (whether DC or RFC)
b. BEG. JULY 1, 2020 UNTIL JUNE 30, 2023, under the CREATE LAW: 1%
 Provided it is already the 4th TY or beyond after commencement of its operations.
 Registration date with the BIR is the start of commencement of operations.
 Does not apply to NRFC
 Amount payable:
o MCIT when there is 0 taxable income or net loss
o In excess of the R/NCIT
 When payable: Quarterly and annual bases. Simultaneous: (a) to filing the quarterly
ITR (within 60 days from the close of each of the first 3 quarters of the taxable year);
and (b) to filing the annual Final or Adjustment ITR (on or before the 15th day of the
4th month following the close of the taxable year).

 Excess MCIT over R/NCIT paid: Creditable against the R/NCIT of the immediate
following 3 years provided the R/NCIT is greater than the MCIT. The excess MCIT
losses its creditability after 3 years.

 Suspension of imposition (exception)

o Proven substantial losses due to:
▪ Prolonged labor dispute (over 6 months)
▪ Force majeure (act of GOD or insurgency)
▪ Legitimate business reverses (fire or theft)

 Corporations Exempt from MCIT:

o Proprietary Educational Institutions and Hospitals (subject to 10% tax, now 1%)
o International Carriers (subject to 2.5% tax on Gross PH Billings)
o OBUs (before subject to 10% tax, now under CREATE, subject to regular taxes
hence, subject to MCIT)
o FCDUs subject to 10% tax – onshore income; exempt if offshore income
o ROHQs (before subject to 10% tax, now under CREATE, subject to 25% RCIT
hence, maybe subject to MCIT)
o PEZA registered entities’ income (subject to ITH or the 5% preferential GIT or
the 5% Special Corporate Income Tax under CREATE)
o BOI registered entities for income subject to ITH

QUESTIONS:
1. The normal tax of a foreign corporation starting July 1, 2020 is:
a. 25% b. 32% c. 33% d. 35%

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2. “Taxable income received during the year from sources within only” is the tax base for
income tax purposes of this class of taxpayer:
a. Domestic corporation c. Non-resident alien
b. Resident foreign corporation d. Resident Alien

3. Dividend income received by a resident foreign corporation from a domestic corporation is

A. Subject to 10% final tax C. Subject to 15% final tax
B. Part of taxable income D. Tax exempt

Items 4 through 7 are based on the following information:

A corporation, in its first year of operations, had the following data in 2022:
Philippines Foreign
Gross income P400,000 P300,000
Expenses 200,000 200,000

4. If the taxpayer is a resident foreign corporation and the data are on business, the taxable
income is:
a. P200,000 b. P300,000 c. P100,000 d. P400,000

5. If the taxpayer is a non-resident foreign corporation and the income and expenses are on
an isolated transaction, the gross income subject to final tax is:
a. P200,000 b. P300,000 c. P100,000 d. P400,000

6. If the taxable year is 2022, the taxpayer is a resident foreign corporation and the data are
on business, the tax due is:
a. P50,000 b. P60,000 c. P90,000 d. P100,000

7. If the taxable year is 2022, the taxpayer is a non-resident foreign corporation and the data
are on business, the tax due is:
a. P50,000 b. P60,000 c. P90,000 d. P100,000

8. A corporation, engaged in business in the Philippines and abroad, has the following data in
its first year of operations in 2021:
Gross income, Philippines P975,000
Expenses, Philippines 750,000
Gross income, U.S.A. 770,000
Expenses, U.S.A. 630,000
Interest on bank deposit, Philippines 25,000
The income tax payable if the corporation is:
Domestic Resident Non-resident
foreign foreign
a. P116,800 P 72,000 P320,000
b. 127,750 78,750 350,000
c. 91,250 91,250 250,000
d. 120,450 74,250 330,000

Items 9 and 10 are based on the following information:

A resident corporation had the following data for 2021 (first year of operations):
Gross profit from sales P2,000,000
Dividend from domestic corporation 20,000
Capital gain on land in the Philippines held for two years
(sold at P1,000,000) 200,000
Capital gain on shares of domestic corporation held for two

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months (direct sale to buyer) 120,000

Business expenses 1,100,000
9. The total capital gains taxes for the year:
a. P25,000 b. P48,000 c. P30,000 d. P 18,000

10. The normal tax of the corporation at the end of the year:
a. P315,000 b. P225,000 c. P288,000 d. P231,000

11. The following income taxpayers are allowed to claim Optional Standard Deduction
(OSD) under R.A. 9504 in lieu of the itemized deductions, except:
A. Domestic corporation
B. General professional partnership
C. Resident foreign corporation
D. Non-resident foreign corporation

12. Which of the following transactions derived by an individual taxpayer is/are subject to
the same income tax rate and computation, regardless his/her residency, citizenship or
whether the said taxpayer is doing business in the Philippines or not?
I. Dividends derived from resident foreign corporation
II. Sale of real properties classified as capital asset located in the Philippines
III. Sale of domestic shares of stock not traded in the local stock exchange
a. II and III
b. I only
c. II only
d. I, II and III

13. Which of the following is required to be submitted before a non-resident foreign income
earner of dividends, interest and royalties, may avail of the preferential tax rates under
a tax treaty agreement?
I Tax Treaty Relief Application
II Certificate of Residence for Tax Treaty Relief
III Final withholding tax return
a. II only
b. II and III only
c. I, II and III
d. I and II only

SITUATIONAL
Items 1 through 6 are based on the following information:
The following selected cumulative balances were taken from the records of a RESIDENT
FOREIGN CORPORATION in its fifth year of operations in 2021. It had an income tax
refundable of P10,000 for the previous year for which there is a certificate of tax credit.
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Gross profit from sales P 800,000 P1,600,000 P2,400,000 P3,100,000
Capital gain on sale directly to buyer
of shares of domestic corporation 50,000 50,000 50,000 100,000
Dividend from domestic corporation 10,000 10,000 20,000 20,000
Interest on Philippine currency bank 5,000 10,000 15,000 20,000
deposit
Business expenses 600,000 1,200,000 1,700,000 2,100,000
Income tax withheld 15,000 35,000 65,000 115,000
1. The capital gain tax paid for the year:
a. P1,250 b. P12,500 c. P15,000 d. P20,000

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2. The final tax paid on passive income within the year:

a. P4,000 b. P10,000 c. P12,500 d. P16,000

3. The income tax due at the end of the first quarter:

a. P25,000 b. P35,000 c. P50,000 d. P40,000

4. The income tax due at the end of the second quarter:

a. P50,000 b. P70,000 c. P140,000 d. P30,000
5. The income tax due at the end of the third quarter:
a. P66,000 b. P45,000 c. P75,000 d. P140,000

6. The income tax due at the end of the year:

a. P320,000 b. P350,000 c. P55,000 d. P25,000

SPECIAL RESIDENT FOREIGN CORPORATIONS

SRFC TAX % TAX BASE

International Carrier  2.5% Gross Philippines Billings

Offshore Banking Units BEFORE:

(OBUs)  10% Gross interest from
residents
(Final Tax)
CREATE LAW:
 25% upon the effectivity of
CREATE Law OR 1% BEG. JULY RCIT or MCIT
1, 2020 UNTIL JUNE 30, 2023

Foreign Currency  Exempt from all taxes Offshore Income

Deposit Units (FCDUs
 10% FT Onshore Income

 RCIT Others

Regional Operating BEFORE:

Headquarters (ROHQs)  10% Taxable Income

CREATE LAW:
 25% BEG. JAN. 1, 2022 OR RCIT or MCIT
1% BEG. JAN. 1, 2022 UNTIL
JUNE 30, 2023

Regional or Area EXEMPT FROM TAX -

Headquarters (RAHQs)
Branch Profit  15% Total profits applied or
Remittance Tax earmarked for remittance
without deduction for the
tax component

Branch Profit Remittance Tax

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Formula:
Profit remittance Php xxx x 15% = BPRT Php XXX

Exempt Entities: Activities registered with the following shall be exempt from BPRT
1. PEZA: Philippine Economic Zone Authority
2. SBMA: Subic Bay Metropolitan Authority
3. CDA: Clark Development Authority

SPECIAL NON-RESIDENT FOREIGN CORPORATIONS

SNRFC TAX % TAX BASE

Non-resident cinematographic film  25% Gross Income from Philippines
owner, lessor, or distributor Sources
Non-resident owner or lessor of vessels  4.5% Gross rentals and other
chartered by Philippine nationals chartered fees as approved by
Maritime Industry Authority
Non-resident owner or lessor of aircraft,  7.5% Gross rentals or fees derived
machinaries, and other equipments within the PH

Items 1 and 2 are based on the following information:

In 2022, Jaguar Inc., a branch of a foreign company doing business in the Philippines, had the
following income and expenses:
Gross income P100,000,000
Business expenses 60,000,000
Dividend from domestic corporation 500,000
Interest on Philippine currency bank deposit 100,000
Capital gain on sale directly to buyer of stock
investment
in domestic corporation 150,000
Quarterly income taxes paid 10,000,000
In early 2023, the branch earmarked for remittance to its head office abroad the dividend
received, the capital gain and P10 million of its net income in 2018.
1. The income tax still due at the end of 2018 is:
a. P2.00 million b. P2.96 million c. P3.01 million d. P4.00 million

2. The branch profits remittance tax and the total amount to be remitted to its head office
abroad are:
Branch profits Amount to be Branch profits Amount to be
remittance tax Remitted remittance tax Remitted
a. P1.2750 million P8.5000 million c. P1.5000 million P9.1275 million
b. P1.5000 million P9.1400 million d. P1.3710 million P7.7690 million

3. How much final tax was withheld from each of the following gross receipts by a
nonresident foreign corporation in 2018?
Rent from lease of aircraft to a domestic surveying company. P1,000,000
a. P60,000 b. P75,000 c. $10,000 d. None

Royalty from use of patent in the Philippines. 200,000

a. P60,000 b. P75,000 c. $10,000 d. None

Interest on US Dollar loan to a domestic company engaged in the $50,000

construction business.

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a. P60,000 b. P75,000 c. $10,000 d. None

Interest on US Dollar deposit with a local bank operating a Foreign Currency

Deposit Unit. $20,000
a. P60,000 b. P75,000 c. $10,000 d. None

4. A mother corporation is abroad, with a branch office in the Philippines. Which of the
following statements is wrong?
a. In a year, the branch in the Philippines is subject to a profit remittance tax on its
remittance of profits to the mother company abroad, even if the profits from which the
remittance was made was a prior year’s profits.
b. The profit remittance tax is fifteen percent (15%) final tax of the amount of profit for
remittance, as applied for with the bank.
c. The bank with which the application for remittance was filed would be the withholding
agent of the Bureau of Internal Revenue.
d. Even activities registered with the Philippine Economic Zone Authority (PEZA), from the
profits from which remittance is applied for, will be subject to the profit remittance tax.

OTHER TAXABLE ENTITIES

SUMMARY OF TAXING INCOME FOR PARTNERSHIPS (PH) AND PARTNERS

Taxable PH Tax exempt PH

All other PH
GPPH/JV or Consortium for CP/EO
Corporation
Extension of the partners
Calendar/Fiscal accounting period Calendar accounting period only for GPPH

QF/P – within 60 days ff. close of 1,2 & 3 AIIR – on or before the 15th day of the 4th
quarters month ff. the close of the calendar AP.

AF/AITR – on or before the 15th day of the

4th month ff. the close of C/F AP

NI (NL) computed in the same manner as a

corporation (IDs or OSD for deductions)

Partners Partners

Income constructively received in cash

Irrespective of AM used, share in NI taxable to the partners, distributed
or not
Share in NL is deductible in tax exempt PH only, but not in taxable PH

Final tax rate: Annual ITR

1998 – 6% Compartment: Pr for GPPH (treated as
NI)
1999 – 8% Deductions: No further deduction is
allowed and can not avail the 8%
income tax rate option.

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2000 – 10% Progressive rates

Compensation paid to partners

Compensation: Additional professional income for

GPPH:
AITR – Co AITR – Pr
Progressive rates Progressive rates
Both taxable & exempt PH (dual personality)

Taxable PH Tax exempt PH

To the extent of income derived from trade or To the extent of income derived from
business the exercise of common profession by
the partners in GPPH

Apply the same rules as above Apply the same rules as above.

CO-OWNERSHIP
a. Is a co-ownership taxable? Generally no, because the activities of the co-owners are
usually limited to the preservation of the property owned in common and collection of the
income therefrom.
b. What is the tax liability of the co-owners? They shall report in their respective income tax
returns their shares of the income of the co-ownership.
c. When will a co-ownership be taxable? When the income of the co-ownership is invested
by the co-owners in business or other income producing properties, the co-ownership will
be taxable as a corporation because the co-owners have constituted themselves into a
taxable PH.

Problems
Items 1 and 2 are based on the following information:
Balbon and Company, a business partnership, has the following data of income and expenses
in 2018:
Gross income P750,000
Expenses 200,000
Dividend from a domestic corporation 75,000
Interest on bank deposit (gross of tax) 10,000
Partners Bal and Bon share profits and losses in the ratio of 55% and 45%, respectively.
1. The income tax payable by Balbon and Company is:
a. P15,000 b. P165,000 c. P176,000 d. Exempt

2. The final taxes on the respective share of Bal and Bon in the 2018 partnership income are:
Bal Bon Bal Bon
a. P25,740.00 P21,060.00 c. P24,227.50 P19,822.50
b. P31,157.50 P25,492.50 d. P30,250.00 P55,045.00

3. For purposes of income taxation, which of the following is not considered as corporation?
a. General professional partnership c. Unregistered partnership
b. Business partnership d. Joint stock companies

4. A general professional partnership is exempt from income tax, but is required to file an
annual income information return:
a. For statistical purposes.
b. Because the net income of the partnership will be traced into the income tax returns of
the partners.

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c. Because all income earners are required to file income tax returns.
d. None of the above.

5. The members of this form of business organization shall be liable for income tax only on
their individual capacity and their share in the profits, whether distributed or otherwise,
shall be returned for taxation. This applies to:
a. Duly registered general co-partnership c. General professional partnership
b. Unregistered general co-partnership d. Joint-stock companies

6. The share of a partner in the profits of a general professional partnership is regarded as

received by him and thus taxable although not yet distributed. This principle is known as:
a. Advance reporting of income c. Accrual method of accounting
b. Actual receipt of income d. Constructive receipt of income

7. If a general professional partnership is on the accrual method of accounting, and a partner

on his own transactions is on the cash method of accounting, in the partner’s
determination of his taxable income for a year:
a. He can consolidate his share in the net income of the partnership, determined by the
partnership under the accrual method, with his own income determined under the cash
method.
b. He must convert his income from the partnership into cash method before consolidating
it with his own income on the cash method.
c. He must convert his own income into accrual method before consolidating it with his
own income from the partnership under the accrual method.
d. He does not have to report his income from the partnership because the partnership is
exempt from income tax.

Items 8 and 9 are based on the following information:

Ringky & Tingky is a general professional partnership, with Ringky, married, and Tingky,
single, participating equally in the income and expenses. The following are data for the
partnership and the partners in 2018:
Ringky & Tingky
Ringky Tingky
Gross receipts P 600,000 P P
150,000 200,000
Expenses 350,000 80,000
120,000
8. The share in net income of Ringky from the partnership is:
a. P300,000 b. P125,000 c. P600,000 d. P450,000

9. The taxable income of Tingky is:

a. P145,000 b. P155,000 c. P173,000 d. P205,000

Items 10 and 11 are based on the following information:

Money and Penny, CPAs, a partnership of Certified Public Accountants, had a gross receipts of
P220,000 and expenses of P85,000 in 2018:
Money Penny
Share in profit and loss ratio 75% 25%
Income from other business P125,000 P325,000
Expenses 80,000 190,000
Amount withdrawn from partnership 30,000 12,500
Civil status Married Unmarried
Dependent children None 2
10. The income tax payable by the partnership is:

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a. P72,600 b. P45,900 c. P44,550 d. None

11. The taxable income of Money and Penny is:

a. P96,250 and P68,750, respectively c. P101,250 and P33,750, respectively
b. P146,250 and P168,750, respectively d. P13,000 and P94,000, respectively

12. Which of the following is not gross compensation income?

a. Salary of P20,000 of an employee.
b. Bonus of P20,000 of an employee.
c. Salary of P20,000 of a partner in a general professional partnership.
d. Honorarium of P20,000 of an employee who is a member of the board of directors of a
corporation.

13. Each partner shall report as income his distributive share, actually or constructively
received, in the net income of a general professional partnership. The share of a partner
(with current year’s gross income of P720,000 or below) if withdrawn shall be subjected to
creditable withholding tax of:
a. 15% b. 20% c. 32% d. 10%

Items 14 through 17 are based on the following information:

King, single, and Kong, married with two dependent children, are partners in the following
partnerships. King holds a 60% interest while 40% interest belong to Kong. The partnership
income and expenses for the taxable year 2018 are given below:
Profits withdrawn
Partnership Income Expenses Net King Kong
Prof. PH I P400,000 P200,000 P200,000 P60,000 P40,000
Prof. PH II 400,000 500,000 (100,000) - -
Business PH I 500,000 200,000 300,000 40,000 20,000
Business PH II 200,000 300,000 (100,000) - -

Note: The partnerships remitted to the BIR the corresponding withholding tax on the share of
King and Kong.

The partners’ personal income and expenses for the same taxable year are shown below:
King Kong
Gross income from business P400,000 P600,000
Business expenses 240,000 380,000
Other income:
Rent, net of withholding tax of 5% 57,000 -
Gain on sale of residential house in the
Philippines on a selling price of P1,000,000 - 250,000
Dividend from domestic company, gross of 50,000 70,000
tax
Royalty, net of tax 40,000 -
Interest on bank deposit, net of tax 60,000 20,000

14. The capital gain tax paid by Kong during the year:
a. P15,000 b. P20,000 c. P60,000 d. Exempt

15. The final tax paid by King on passive income within the year:
a. P48,000 b. P42,600 c. P37,000 d. P41,700

16. The taxable income of King:

a. P230,000 b. P260,000 c. P280,000 d. P287,000

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17. The income tax payable by (refundable to) Kong after tax credits:
a. None b. P2,000 c. (P2,000) d. (P4,000)

18. Which of the following is subject to improperly accumulated earnings tax?

a. Insurance companies c. Business partnerships
b. Banks and non-bank financial intermediaries d. Investment companies

19. Oro, Plata and Mata are heirs of Panday who died on February 14, 2018. The properties of
Panday comprised solely of real property primarily deriving rental income. For income tax
purposes, the heirs will be taxed on rental income from the inherited property for the year
2018 as:
a. An unregistered partnership c. A co-ownership
b. A corporation d. A joint account

20. 1st Question: Is a co-ownership taxable? No, because the activities of the co-owners are
limited to the preservation of the property and the collection of income therefrom.
2nd Question: Is the share of co-owner taxable? Yes, because each co-owner is taxed
individually on his distributive share in the net income of the co-ownership.
a. Answers to both questions are correct.
b. Answer to Question 1 is wrong, answer to Question 2 is correct.
c. Answer to Question 1 is correct, answer to Question 2 is wrong.
d. Answers to both questions are wrong.

SUMMARY OF TAXING INCOME FOR ESTATES AND TRUSTS

1. What is an “estate” and when is it considered as a separate income taxpayer? An “estate”

is the totality of the property left by a deceased person, whether real, personal, tangible or
intangible. An “estate” is considered as a separate income taxpayer only when it is a
subject either of an “intestate court proceedings” or a “testate court proceedings”.
2. What is a “trust” and when is it considered a separate income taxpayer? A “trust” is the
totality of property conveyed by a person called the trustor to another person called the
trustee for the purpose of enabling the latter to safeguard such property. A “trust” is
considered as a separate income taxpayer if the “trust” created is an irrevocable trust.
3. Rules in the computation of the tax on estates and trusts:
a. The same rules in the determination of gross income for individuals are applied in the
case of estates and trusts.
b. Estates and trusts are allowed the same deductions from gross income as are allowed
to individuals. In addition, they can further deduct the following items from gross
income:
1. Amount of its income which is to be distributed currently to the beneficiaries; and
2. Amount of its income for the taxable year which is properly paid or credited during
such year to any heir, legatee, or beneficiary, but the amount so allowed as a
deduction shall be included in computing the taxable income of the heir, legatee or
beneficiary.
c. Estates and trusts are required to use only the calendar accounting period.
d. The progressive rates of tax used for individuals are applied to estates and trusts.
4. Consolidation of income in trusts. This is done when the grantor and the beneficiary of the
several trusts are the same persons in each instance.
Tax formula:
Consolidated gross income P xxx
Less: Consolidated deductions xxx
Consolidated taxable income P xxx

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CRC-ACE/TAX: WEEK 7 – INCOME TAXES ON CORPORATIONS

Problems
1. Which of the following is not subject to tax as a separate income taxpayer?
a. Estates under judicial settlement c. Unregistered partnerships
b. Irrevocable trust d. Revocable trust

Items 2 and 3 are based on the following information:

Pinoy died on January 1, 2018, leaving a gross estate of P10,000,000. Judicial testamentary
proceedings were instituted for the settlement of the estate. In 2018, the estate realized a
gross income from business of P1,000,000 and incurred business expenses in the amount of
P300,000. Income of the estate for the same year were also distributed to the following
children-beneficiaries:
Pipoy, married with one dependent child, with
professional income of P320,000 and expenses of P250,000
P100,000
Pipay, single, 14 years old 250,000
2. The income tax due from the estate of Pinoy:
a. P200,000 b. P32,500 c. P182,600 d. Exempt

3. The income taxes due from the beneficiaries:

Pipoy Pipay Pipoy Pipay
a. P38,750 P104,000 c. P104,000 P38,750
b. P47,500 Exempt d. Exempt P47,500

4. Pacman created two trusts, Trust 1 and Trust 2 as fiduciaries, and Chavit a common
beneficiary. The following are the data on income and expenses of Trust 1 and Trust 2 in
2018:
Trust 1 Trust 2
Gross income P180,000 P160,000
Deductible expenses and losses 50,000 80,000
Distribution made out of year’s 20,000
income
The income tax due under trust consolidation by the BIR:
a. Exempt b. P16,000 c. P22,000 d. P38,000

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