INCOME TAX

Q: DIFFERENT TAX RATES APPLICABLE TO CORPORATIONS (continuation p.399)A: Charitable and other contribution made by corporation shall be limited to only 5% of the taxable

income from business before deduction for contribution. Tax credit for taxes withheld - the tax withheld by the payor of the income may be claimed as tax

credit by the recipient of the income against tax due on the income received. Tax credit for foreign income tax is allowed to: (a) RC; (b) DC and NOT allowed to: (a) aliens or (b)

RFC    EXCEPTION: When there was a net loss in a foreign country to which a foreign income tax was paid or incurred, the tax payer is not qualified to a tax credit or a deduction for such foreign income tax     A depositary bank (DC or RFC) under the foreign currency deposit system shall be subject to final

income tax of 10% on income derived by it from:    (a) Foreign currency transactions with local commercial banks including branches of foreign banks and other depositary banks under the expanded foreign currency deposit system (bank to bank transactions in Php).

    (b) Interest income from foreign currency loans granted to residents.        BUT, income of corporations from transactions with depositary banks, under the expanded system shall be exempt from income tax. (Applicable also to non-resident taxpayers) (This refers to the dollar and other foreign currency transactions)         Dividends from domestic corporations (intra-corporate dividends) are exempt

Q:  Securities defined        These are bonds and debendtures but not "notes" of whatever class or duration

o All securities of a corporation must be registered with SEC before they are offered to the public for sale 

       Q:  Control defined        The ownership of stocks in a corporation possessign at least 51% of the total voting power of all classes of stocks entitled to vote.         Q: Dividends declared by corporations:        (a) Cash dividends        (b) Stock dividends        (c) Scrip dividends        (d) Property dividends         (e) Liquidating dividends        (f) Disguise dividends        (g) Optional dividends - where the stockholders are given the option to choose whther to receive the dividends in cash or stock        (h) Others (representing share in the profits of the corporation)        Q: Taxability of cash/property dividends issued by a corporation

A stock dividend representing the transfer of surplus to capital account - generally is NOT subject to tax because they are considered unrealized gain and cannot be subjected to income tax until the gain has been realized

    EXCEPTIONS:    1. Where treasury share is cancelled and redeemed by the corporation    2. Where controlling interest or the ownership of each stockholder is no longer uniform after the declaration of stock dividend, such as, in the case of issuance of optional dividend.    3. Where the corporation has different kinds of stocks    4. Where the dividend issued is dividends in stocks"    5. Where the "Proportionate Test Rule" applies giving the shareholder a greater interest in the corporation after its distributions    6. Where the recipient is not a stockholder of the corporation.    Q:   Disguised dividend defined        This is the amount paid by Domestic Corporation to a non-resident foreign corporation for services rendered by the latter to the former, when the amount paid exceeds the value of the services rendered.        Q:   When is redemption of stocks NOT taxable?        (a) When there is redemption or cancellation        (b) When the transaction involves stock dividends and        (c) When the 'time and manner' of the transaction makes it 'essentially equivalent to a distribution of taxable dividends'            Q:    Holding Period defined          This is the period during which an individual taxpayer held on to the capital assets. The holding period of capital assets is NOT applicable corporate taxpayers holding shares of stocks NOT listed and to real properties even if they are considered capital assets.          REMINDERS:          Individuals receiving cash or property dividends:          Cash or property dividends received by individual taxpayer (RC, NRC, OCW and Seamen) is

a passive income subject to final income tax of 10%; BUT, if the issuing corporation is a foreign corporation, the dividend is NOT passive income and therefore subject to normal income tax

         The final income tax of 10% on dividend is imposed on said cash/property dividends actually or constructively received from a DC, joint stock company, insurance or mutual funs companies, regional operating headquarters of MNC or share of an individual in the distributive net income of a taxable partnership, association, joint venture or consortium of which the taxpayer is a partner.   

          A taxpayer liable for the payment of final income tax DOES NOT file a tax return relative thereto, as it is the obligation of the withholding agent to do so in behalf of the taxpayer.  EXCEPTION: (a) individual taxpayer subject to tax on capital gains from the sale, barter or exchange of shares of stock NOT traded thru exchanges shall file a return within 30 days after transaction, and (b) from the sale or disposition of real property within the same period following each sale or other disposition of said property.

             Q:    Corporate Readjustments/Reorganization:A:        (a) Merger        (b) Consolidation        

Q:    How is gain or loss resulting from merger and consolidation treated for income tax purposes?        It may either be that ---        1. No gain or loss shall be recognized or        2. Gain, but no loss, shall be recognized        Q:  Merger or consolidation of corporationsA:    (a)    WHERE GAINS AND LOSS ARE UNRECOGNIZED (gains are not taxable and losses are not deductible)    1. Property for stocks - parties to the exchange are corporations involved in a merger or consolidation, the transferee corporation exchanges property solely for stocks in the transferor corporation    2. Stocks for stocks - the transferee exchanges his stocks only for the stock of the transferor corporation    3. Securities for stocks/securities - the transferee exchanges his securities only for the stock of the transferor corporation     4. Property for stocks where transferee gains control of transferorcorporation

    (b) WHERE GAIN IS RECOGNIZED BUT LOSS UNRECOGNIZED:    1. If, in the exchanges above, the transferee received not only stock or securities permitted to be received without the recognition of gain or loss but also money/property, the gain realized by transferee shall be recognized but not the loss.        2. If the transferor corporation receives not only stock or securities permitted to be received but also money/property, and DOES NOT distribute it in pursuance of the plan of merger or consolidation, the gains shall be taxable but the loss not deductible.       Q: Transfer of an individual of his property to a corporation:A:    (a) When an individual transfers his property to a corporation in exchange for stock or unit of participation in such a corporation resulting in a situation where he alone, or together with others (not exceeding four) gains control (at least 51% of the total voting power of all classes of stocks entitled to vote) of the corporation - no gain or loss is recognized if the transfer is solely for stock of the corporation

(b) Whereas, if the transfer he made involves not only stock but also for money and/or property - GAIN, but no loss is recognized