ESTATES AND TRUSTS

ESTATES AND TRUSTS

The rules in taxation of individuals generally apply to estates and trusts. The taxable income of an estate or trust shall be computed in the same manner and on the same basis as in the case of an individual. Estates and trusts are allowed a personal exemption of P20,000. The income tax rates for individual taxpayers likewise apply. The taxable year of estates and trusts shall be the calendar year. Just like individuals. Estates and trust are required to file a declaration of estimated income for the current taxable year on or before April 15, of the same taxable year.

Definition of Terms

Estate or inheritance- refers to all the properties, rights and obligations of a person which are not extinguished by his death and also those which have accrued thereto since the opening of the succession.

Trust- is an agreement by will or an agreement under which title to property is passed to another for conservation or investment with the income therefrom and ultimately the corpus or principal to be distributed in accordance with the directives of the creator as expressed in the governing instrument.

Trustor or grantor- is the person who establishes a trust.

Beneficiary- is the person for whose benefit the trust ahs been created. A beneficiary has equitable title to the property transferred to the trust, including, generally, the possession and use of the property.

Fiduciary- is the general tern which applies to all persons or corporations that occupy positions of peculiar confidence towards others, such as trustees, executors, guardians, or administrators, receivers or conservators. For income tax purposes, a fiduciary is any person or corporation that holds in trust an estate of another person or persons.

Taxable Estates

Taxable estates are estates of deceased persons under judicial settlement. Taxation of an estate begins from the time of death. Hence any income received after the death shall form part of the income of the estate.

Income of estates not under judicial settlement are not taxable to the estate. In this case, a co-ownership is created and the co-owners, after actual or constructive receipt of the income are the ones liable to income tax in their individual capacities.

Taxable Trusts
For a trust to be taxable, it must be irrevocable, meaning it cannot be changed by recall or cancellation, both as to the corpus or principal and income. In a revocable trust where title to income may be revested in the grantor, the trust itself is not subject to income tax. It is the grantor who is taxable. In case of trust where the income may be held or distributed for the benefit of the grantor, such income is likewise taxable directly to the grantor.


Gross Income

The items of gross income of estates and trust are the same items of gross income of individuals as provided in the tax code. They include:
1. income accumulated in trust for the benefit of an unborn or unascertained person or persons with contingent interest, and income accumulated or held for future distribution under the terms of the will or trusts.
2. Income which is to be distributed currently by the fiduciary to the beneficiaries and income collected by a guardian of an infant which is to be held or distributed as the court may direct.
3. Income received by estates of deceased persons during the period of administration or settlement of the estate.
4. Income, which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

Allowable deductions
Estate or trust is allowed a personal exemption of P20,000. This is regardless of the number of trust a beneficiary may receive income from. Aside from the personal exemption of 20,000 allowed, income of trust and estate may be deductible from gross income.

Income which is to be distributed currently by the fiduciary to the beneficiaries; and income collected by a guardian of an infant which is to be held or distributed as the court may direct, are deductible from gross income of the fiduciary. This is so because such income is taxable directly to the beneficiary, whether distributed or not.

Income received by estates of deceased persons during the period of administration or settlement of the estate; and income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated, are taxable either to the fiduciary or beneficiary, depending on the amounts paid or credited to the legatee, heir or beneficiary.

If taxable to the fiduciary (meaning no income has been distributed to the beneficiary) the income is not deductible from the gross income of the fiduciary. But if taxable to the beneficiary, such income shall form part of the gross of the fiduciary and is deductible from such gross income. The income thus distributed is to be included in the gross income of the beneficiary.
The deductions just discussed shall not be allowed in the case of a trust administered in a foreign country.

Consolidation 

When two or more trust are created by the same grantor and the beneficiary in both trusts is the same, the taxable income of all the trusts shall be consolidated and the tax computed on such consolidated income.

 Consolidated gross income                xxx
Less: consolidated deductions            xxx
Consolidated taxable income              xxx
Less personal exemptions                  xxx
Taxable income                               xxx
Multiply by tax rate in sec 24A             x%
Amount of income tax on consolidated
  Taxable income                              xxx

Each trustee shall compute his share of the income tax on the consolidated taxable income based on the formula:

Taxable income of a trust
Before exemption                    X             income tax on                    = income tax payable
Consolidated taxable income of                consolidated income               by each trustee
All trust before exemption

 

TAXATION OF CORPORATION
January 20, 2009

Classification of Income Taxpayers (other than individuals)
1. CORPORATION

a. DOMESTIC CORPORATIONS- are those created or organized under and by virtue of Philippine laws

1. Domestic corporations in general
2. Government-owned and controlled corporations
3. Taxable partnerships
4. Proprietary educational institutions
5. Non-profit hospitals

b. FOREIGN CORPORATIONS- are those organized in accordance with laws of their respective countries
1. Resident Corporations- are those engaged in trade or business within the Philippines 
2. Non-resident corporations- are those not engaged in trade or business within the Philippines

Sources of Income

       Aside from knowing the classification of the taxpayer, the source of income is the next important thing to determine- whether it is from the Philippines or without. The following rules apply:

1. Domestic corporations are taxable on income from sources within and without the Philippines;
2. Foreign corporations whether resident or non-resident are taxable only on income from Philippines sources.

Categories of income and tax rates
1. Business Income- generally, business income earned by a corporation is taxed at the following rates, (sec. 27A, sec. 28a1 and sec. 28b1)
  Year Tax Rate
  2000 32%
 

2. Passive income- passive income are subject to a separate and final tax. These are taxed at fixed rates ranging from 5% to 20%. Passive income are not to be included in gross income computation. 

Domestic and resident foreign corporations. 
Generally, the pro forma computation of the normal income tax of domestic and resident foreign corporations follows:
Gross income                                    xxx
Less allowable deductions                   xxx
NET INCOME                                     xxx
Multiply by TAX RATE (2000)               32%
Tax Due                                          X X X

For domestic and resident corporations adopting the fiscal year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

Domestic and resident foreign corporations are subject to the Minimum corporate Income tax (MCIT).

Domestic Corporations in particular  

Proprietary Educational Institutions and Non-Profit Hospitals. The 10% tax on the taxable income is subject to limitation. If the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived from all sources, the tax prescribed under sec. 27A of the tax code shall be imposed on the entire taxable income.

Note: Unrelated trade, business or other activity means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function.

Government-Owned or Controlled Corporations, Agencies or Instrumentalities- subject to the provisions of existing special laws or general laws, all corporations, agencies or instrumentalities owned or controlled by the Government shall pay such rate of tax upon their taxable income as are imposed by the code upon corporations or associations engaged in a similar business, industry or activity. The following are exempt:
1. GSIS
2. SSS
3. Philippine Health and Insurance Corporation
4. Philippine Charity Sweepstakes Office
5. Philippine Amusement and Gaming Corporation

 
The basis of tax for non-resident foreign corporation is gross income from sources within the Philippines, such as interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums) annuities, emoluments, or other fixed or determinable annual. Period or casual gains, profits and income and capital gains.

Generally, the pro-forma computation of the income tax of non-resident foreign corporation follows:

Gross income xxx
Multiply by tax rate (2000) 32%
Tax Due xxxx

Non-resident foreign corporation, in particular
• Non resident cinematographic film owner, distributor is taxed at 25% of gross income
• Non resident owner or lessor of vessels chartered by Philippine nationals is taxed at four and one-half percent of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the maritime industry authority.
 
Allowable deductions 

Allowable deductions are items or amounts which the law allows to be deducted from gross income in order to arrive at the taxable income. A domestic or resident foreign corporation may deduct from its business income, itemized deduction under the tax code. Non resident foreign corporations are not allowed deductions from gross income.

Taxable income and tax due

In case of corporations, taxable income is the pertinent items of gross income less the deductions authorized for such types of income. Taxable income is the amount or tax base upon which tax rate is applied to arrive at the tax due. Depending on the taxpayer involved and for purposes of computing the income tax liability of a corporation, taxable income may refer to either one of the following:
1. Net income. The income arrived at after subtracting from the gross income from business the deductions of the taxpayer. For domestic and resident foreign corporations, in general; and other corporations from whose gross income deductions are allowed.

  Gross income                         xxxx
  Less allowable deductions        xxxx
  Net Income                           xxxx
  Multiply by tax rate                xxxx
  Tax due                               xxxx


2. Gross income: The entire or gross income from business without any deduction
For domestic and resident foreign corporations, subject to the MCIT; non resident foreign corporations not subject to the normal income tax rate (sec. 28b1)

  Gross income                        xxxx
  Multiply by tax rate               xxxx
  Tax due                              xxxx

Note that in computing for the taxable income, fraction of a peso is disregarded. For the tax due, a fraction amounting to fifty centavos or more is rounded off to a peso while a fraction amounting to less than fifty centavos is disregarded.

Corporations exempt from income tax. 

1. Labor, agricultural or horticultural organization not organized principally for profit; 
2. Mutual savings bank not having a capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit.
3. A beneficiary society, order or association, operating for the exclusive benefit of the members such as fraternal organization operating under the lodge system, or a mutual aid association or a nonstick corporation organized by employees providing for the payment of life, sickness, accident or other benefits exclusively to the members of such society, order, or associations, nonstick corporation or their dependents.
4. Cemetery company owned and operated exclusively for the benefit of its members;
5. Nonstock corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.
6. Business, league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual. 
7. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
8. A nonstick and nonprofit educational institutions
9. Government educational institution;
10. Farmers; or other mutual typhoon or fire insurance company, mutual ditch or irrigation company or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from member for the sole purpose of meeting its expenses, and
11. Farmers’ fruit growers or like associations organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them
 
Declaration of quarterly corporate income tax.  
 Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax shall be levied, collected and paid. The income tax computed decreased by the amount of tax previously paid or assessed during the preceding quarters shall be paid and the return filed not later than 60 days from the close of each of the first three quarters of the taxable year, whether calendar or fiscal.

A return showing the cumulative income and deductions shall still be filed even if the operations for the quarter and the preceding quarters yielded no tax due.

Every taxable corporation is likewise required to file a final adjustment return covering the total taxable income of the corporation for the preceding calendar or fiscal year which is required to be filed and paid on or before April 15 on or before the 15th day of the 4th month following the close of the fiscal year, as the case may be. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either

1. Pay the balance of the tax still due or
2. Carry over the excess credit
3. Be credited or refunded with the excess amount paid. 

De Minimis Benefits

The term “DE MINIMIS” benefits which are exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employees.

Examples of De Minimis Benefits Not Subject to the FBT

a. Monetized unused vacation leave credits of employees not exceeding 10 days during the year;
b. Medical cash allowance to dependents of employees not exceeding P750.00 per semester or P125 a month;
c. Rice subsidy of P1,500.00 or one (1) sack of 50 kilos rice per month amounting to not more than P1,500.00; (RR No. 5-2008)
d. Uniform and clothing allowance not exceeding P4,000.00 per annum;
e. Medical benefits given to the employees by the employer;
f. Employee achievement awards, e.g for length of service or safety achievement, which must be in form of a tangible personal property other the cash or gift certificate, with an annual monetary value not exceeding one-half (1/2) month of the basic salary of the employee receiving the award under an established written plan which does not discriminate in favor of highly paid employees;
g. Christmas and major anniversary celebrations for employees and their guests.

Fringe Benefits Tax

Fringe Benefit Tax, Defined.
Means any good, service or other benefit furnished or granted in cash or in kind by an employer (individual or corporation) to an individual employee, except rank or file. A fringe benefit is either taxable or exempt.

Other Definition of Terms

The term rank and file employees means all employees who are holding neither managerial or supervisory position.

Managerial employee - is one who is vested with powers or prerogatives to lay down and execute management policies and or to hire, transfer, suspend, lay off, recall, discharge, assign or discipline employees.

Supervisory employees- are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment.

Grossed-up Monetary Value- the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property which has been received plus the amount of fringe benefit tax due thereon.

De Minimis Benefits- facilities or benefits furnished or offered by an employer to his employees that are of small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employees.

Nature of the Fringe Benefit Tax

The Fringe Benefit Tax shall be treated as a final income tax of the employee. (2nd par. Sec. 2.33 (a), RR No. 3-98)

Fringe Benefits, Defined.

For purposes of taxation, fringe benefit means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employee) such as but not limited to the following:

1. housing
2. expense account
3. vehicle of any kind
4. household personnel, such as maid, driver, and others
5. interest on loan at less than market rate to the extent of the difference between the market

rate and actual rate granted
6. membership fees, dues, and other expenses borne by the employer for the employee in social

and athletic clubs or other similar organizations
7. expenses for foreign travels
8. holiday and vacation expenses
9. educational assistance to the employer or his dependents
10. life or health insurance and other non-life insurance premiums or similar amounts in excess of

what the law allows

Employers Subject to the Fringe Benefits Tax

a. the fringe benefits granted to the employee (other than rank and file) is taxable to the employer

unless exempted;
b. whether the employer is an individual, professional partnership, or corporation;
c. whether the corporation is taxable or not;
d. whether the employer is the government and its instrumentalities.

NOTE: Fringe benefits whether paid by non-profit or non-stock corporations or the government are subject to the fringe benefit tax.

Taxation of Fringe benefits received by resident employees except rank and file employees.

As a general rule fringe benefits are subject to a final tax to be paid by the employer unless exempted. The rate is

a. 34 %, effective January 1, 1998
b. 33 %, effective January 1, 1999
c. 32 %, effective January 1, 2000 and thereafter

Based on the grossed up monetary value of the fringe benefit furnished or granted to the employee by the employer, whether an individual or corporation unless exempted.

The Grossed up monetary value of the fringe benefits represents:

1. The total amount of income realized by the employee;
2. Which includes the net amount of money or net monetary value of the property which has been received;
3. Plus the amount of fringe benefit tax thereon otherwise due from the employee but paid by the employer for an in behalf of his employee.

The grossed up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by
a. 66 %, effective January 1, 1998
b. 67%, effective January 1, 1999
c. 68%, effective January 1, 2000 and thereafter

Determination of amount subject to Fringe Benefits Tax

In general, the computation of the fringe benefits tax would entail
a. valuation of the benefit granted, and
b. determination of the proportion or percentage of the benefit which is subject to the fringe benefit tax.

General guidelines for valuation of Fringe Benefits subject to FBT:

a. if the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount granted or paid for;

b. if the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property as determined by the Commissioner of Internal Revenue;

c. if the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property.

When Fringe Benefits irrespective of kind are not taxable or when exempt from Fringe Benefit Tax.

(1) where such fringe benefit is required by the nature of , or necessary to the trade, business or profession of the employer;
(2) when the fringe benefit is for the convenience or advantage of the employer.

Kinds of Fringe Benefits that are not taxable or not subject to the FBT

1. Fringe benefits which are authorized and exempted from tax under special laws;
2. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans.
3. Benefits given to the rank and file employees whether granted under a collective bargaining agreement or not;
4. De minimis benefits as defined in the rules and regulations by the Secretary of Finance, upon the recommendation of the Commissioner.


The fringe benefit tax, therefore, does not apply to fringe benefit granted by an employer to an employee under the following circumstances:
1. if it is received by rank and file employee;
2. even if received by a supervisory or managerial employee, if the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer, or when granted for the convenience or advantage of the employer himself.
3. If it is exempt under section 33 (c. ) of the tax code.