Interest or income earned from the HGC Bonds in excess of the weighted average interest rate of 10.15% is exempt from the 20% final withholding tax imposed by Section 27 (D)(1) of the Tax Code of 1997 but subject to the ordinary Income Tax.
Gains arising from the sale or transfer of the HGC Zeroes in the secondary market are exempt from Income Tax pursuant to Section 32(B)(7)(g) of the Tax Code since HGC Zeroes have a tenor of 5 years and 1 day.
Section 32(B)(7)(g) of the Tax Code exempts from Income Tax the gain realized from the redemption or retirement of bonds, as well as their sale or exchange in trade. The original issue discount notes does not fall within the purview of the term "gain" under said Section.
The original issuance of the HGC Zeroes shall be subject to Documentary Stamp Tax (DST) while the sale or transfer thereof in the secondary market in bearer form by simple delivery to the buyer is not subject to DST. (BIR Ruling No. 026-2002 dated June 27, 2002)
a. Seller or transferor is exempt from creditable withholding tax in accordance with Section 2.57.5 of RR No. 2-98
Exempt
b. Seller or transferor is habitually engaged in the real estate business and the selling price is:
i. P500,000 or less 1.5%
ii. More than P500,000 but not more than P2,000,000 3%
iii. More than P2,000,000 5%
2. The above tax treatment shall likewise apply in cases where the seller-corporation is habitually engaged in the real estate business, even if the buying corporation is not engaged in the real estate business.
3. If the property is an ordinary asset and the seller is not habitually engaged in the real estate business, the rate of creditable withholding tax is 6% of the gross selling price as provided in Section 3(J) of RR No. 6-2001. On the other hand, if the property is not actually used in the business of the seller-corporation, and is treated as a capital asset, a final tax of 6% shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building pursuant to Section 27(D)(5) of the Tax Code.
4. Where the seller-corporation habitually engaged in the real estate business sells real property held as ordinary asset to an individual not engaged in trade or business, the following rules shall apply:
If the sale is on installment plan (i.e., payments in the year of sale do not exceed 25% of the selling price), no withholding tax is required to be made on the periodic installment payments. In such a case, the applicable rate of tax based on the gross selling price or FMV of the property, whichever is higher, shall be withheld on the last installment or installments to be paid to the seller until the tax is fully paid.
b. If, on the other hand, the sale is on a "cash basis" or is a "deferred payment sale not on the installment plan" (i.e. payments in the year of sale exceed 25% of the selling price or FMV of the property, whichever is higher), the applicable withholding tax rate shall be withheld on the first installment.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the following rules shall apply:
a. If the sale is on installment plan, the tax shall be deducted and withheld by the buyer on every installment.
b. If, on the other hand, the sale is on a "cash basis" or is a "deferred payment sale not on the installment plan," the buyer shall withhold the tax based on the gross selling price or FMV of the property, whichever is higher, on the first installment.
For purposes of applying the foregoing rules, "gross selling price" shall mean the consideration stated in the sales document or the FMV determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher.
Registration with HLURB or HUDCC shall be sufficient for a seller/transferor to be considered as habitually engaged in real estate business. If the seller/transferor is not registered with the HLURB or HUDCC, he/it may prove that he/it is engaged in the real estate business by offering other satisfactory evidence (e.g. consummation during the preceding year at least 6 taxable real estate transactions regardless of amount). (BIR Ruling No. 027-2002 dated July 3, 2002)
Tax consequences of a conveyance of land by a dissolving corporation - If R Corp has no other creditors, the receipt by the trustee of the 3 parcels of land is in effect a distribution of liquidating dividends to the shareholders of R Corp subject to the following:
a. Stockholders receiving liquidating dividends will thereby realize capital gain or loss. The gain, if any shall be subject to Income Tax at the rates prescribed under then Section 21 (a) of the Tax Code. Moreover, pursuant to then Section 33 (B) of the Tax Code, as amended, only 50% of the aforementioned capital gain is reportable for Income Tax purposes if the shares were held by the individual stockholders for more than 12 months, and 100% of the capital gains if the shares were held for less than 12 months. Finally, the conveyance of real properties in the form of liquidating dividends to the stockholders is not subject to Documentary Stamp Tax (DST) under Section 196 of the Tax Code.
b. If the stockholders sell the aforementioned land and building received by them as liquidating dividends immediately after title thereto is transferred to their names and after the lease thereon shall have been terminated, the stockholders shall be subject to the 5% Capital Gains Tax (CGT) based on the gross selling price thereof or the FMV prevailing at the time of sale, whichever is higher, pursuant to then Section 21 (c) of the Tax Code, as amended. If the sale is effected on or after January 1, 1998, however, the CGT rate is 6% (Section 24 (D) (1), Tax Code of 1997). The sale shall also be subject to DST under Section 196 of the Tax Code of 1997.
On the other hand, if there are still creditors, such creditors have preference over the corporate assets of R Corp. vis-à-vis its shareholders, and therefore, the shareholders who are individuals are not yet deemed to be in receipt of their respective share in the net assets of the corporation. In which case, the transfer of the 3 parcels of land pursuant to the Deed of Conveyance is indeed a mere transfer to a trust, which would not be subject to the Income Tax, withholding tax nor to the DST on conveyances of real property.
The notarial certification, however, would be subject to the DST of Ten Pesos (P10) pursuant to then Section 188 of the Tax Code, as amended. The shareholders themselves become subject to Income Tax on the liquidating gains, if any, once the liabilities of the trust are settled and there is no impediment to the distribution of the net assets of the trust, whether or not there is in fact an actual distribution of assets.
In addition, the transfer of real property as liquidating dividends to the shareholders of a corporation is not subject to the DST on conveyance of real property. (BIR Ruling No. 028-2002 dated July 22, 2002)
WITHHOLDING TAX; compensation income of government employees; substituted filing of ITR - The withholding tax on compensation income of government employees is creditable in nature. Thus, pursuant to Section 79(C)(2) of the Tax Code of 1997, the amount deducted and withheld during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 24 (A).
As regards any deficiency or excess in the monthly withholding, Step 6 of Section 2.79 (B)(5)(b) of Revenue Regulations (RR) No. 2-98 provides that the deficiency tax (when the amount of tax computed in Step 5 is greater than the amount of cumulative tax already deducted and withheld or when no tax has been withheld from the beginning of the calendar year) shall be deducted from the last payment of compensation for the calendar year. If the deficiency tax is more than the amount of last compensation to be paid to an employee, the employer shall be liable to pay the amount of tax which cannot be collected from the employee. The obligation of the employee to the employer arising from the payment by the latter of the amount of tax which cannot be collected from the compensation of the employee must be settled between the employee and employer.
The excess tax (when the amount of cumulative tax already deducted and withheld is greater than the tax computed in Step 5) shall be credited or refunded to the employee not later than January 25 of the following year. However, in case of termination of employment before December, the refund shall be given to the employee at the payment of the last compensation during the year. In return, the employer is entitled to deduct the amount refunded from the remittable amount of taxes withheld from compensation income in the current month in which the refund was made, and in the succeeding months thereafter until the amount refunded by the employer is fully repaid.
Moreover, RR No. 3-2002 dated March 22, 2002 provides that employees receiving compensation income from only one taxable year whose tax due is equal to tax withheld qualify for substituted filing of ITR.
In substituted filing of ITR, the employer’s annual information return (BIR From No. 1604-CF) may be considered the "substituted" ITR of the employee inasmuch as the information he would have provided the BIR in his own ITR (BIR Form No. 1700) would have been exactly the same information contained in the employer’s annual information return. This being the case, the taxpayer has the option not to file his ITR for the taxable year involved.
In addition, substituted filing applies only if all the following circumstances are present:
1. The employee receives purely compensation income (regardless of amount) during the taxable year;
2. The employee receives the income only from one employer during the taxable year;
3. The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer; and
4. The employee’s spouse also complies with all the three (3) conditions stated above.
Furthermore, RR 3-3002 shall cover taxable year 2002 and succeeding years although substituted filing is optional on the part of the employee for income earned for taxable year 2001. (BIR Ruling No. 029-2002 dated July 31, 2002)
Taxability of properties surrendered as ill-gotten wealth in favor of the Philippine Government - Certificates placed upon documents, instruments and papers for the national, provincial, city or municipal government, made at the instance and for the sole use of some other branch of the national, provincial, city or municipal government, are exempted from Documentary Stamp Tax [see Section 212 (2), 1997 Tax Code]. With regard to the Capital Gains Tax, no such tax is due because there is no capital gain to be taxed, there being no sale or exchange of capital assets involved [see Section 34(2), 1997 Tax Code] since the subject properties were voluntarily surrendered to the Republic of the Philippines which is the real owner of the same. (BIR Ruling No. 030-2002 dated August 7, 2002)
VALUE-ADDED TAX – Even for the sake of argument, FWP’s gross receipts do not exceed P 550,000.00 for any 12 - month period, this does not mean that it is given the option to register as a VAT taxpayer. The option applies only where a taxpayer is otherwise subject to VAT if not for the fact that it does not meet the P 550,000.00 threshold under Section 109 (z) of the Tax Code of 1997, in which case, it becomes subject to the 3% Percentage Tax under Section 116 of the Tax Code of 1997. This is not the case of FWP where VAT exemption is based on a special law under Section 109(q) of the Tax Code of 1997. In view of the foregoing, FWP does not have the option to register either as VAT or non-VAT taxpayer with respect to its gross receipts as subcontractor. It however, has the option to register as VAT or non-VAT taxpayer with respect to its other activities, provided they fall under the above mentioned instances in the regulation where such option is indeed given. (BIR Ruling No. 031-2002 dated August 12, 2002)
Effective date of merger - For purposes of compliance with BIR reportorial requirements on merger, the general rule is that the effective date of merger shall be the date of approval by the SEC of the Articles and Plan of Merger pursuant to Sec. 79 of the Corporation Code. In this case, the SEC approved the merger on April 30, 2002.
However, when the parties to the merger provided for a date when their merger shall take effect, in which case, the effective date of merger shall be the date agreed upon by the constituent corporations (as stated in their Plan of Merger), which in this case is June 30, 2002. Thus, for purposes of complying with the requirements of the post merger notice and filing of the short period return under Section 52 (c) of the Tax Code of 1997, the 30 day period shall be reckoned from the effective date of merger, June 30, 2002. (BIR Ruling No. 032-2002 dated August 12, 2002)
DONOR’S TAX; sale of realty less than the adequate value - York Philippines is not subject to Donor’s Tax when it sold its building and improvements on rented land to the new lessee for less than the market value of the properties, as stated in their previous tax declarations.
The sale resulted from the global restructuring of York Group which prompted York Philippines to cease operations and consequently dispose its assets and risk losing the value of its building and the improvements upon pre-termination of its lease.
As a rule, under Sec. 100 of the Tax Code of 1997, transfers for less than an adequate and full consideration in money or money’s worth of property is deemed a gift, thus subject to Donor’s Tax. However, this rule is not absolute. In the case of Commissioner of Internal Revenue vs. BF Goodrich Phils., Inc. G. R. No. 104171, February 24, 1999, the Supreme Court ruled that: "it is possible that real property may be sold for less than the adequate consideration for a bona fide business purposes; in such an event, the sale remains an arm’s length transaction. In the present case, the private respondent was compelled to sell the property even at a price less than its market value, because it would have lost all ownership rights over it upon expiration of the parity amendment."
In the case at bar, there is no showing of donative intent on the part of York. Though Sec. 100 does not require donative intent since its purpose is to close any avenue for tax avoidance by encompassing all transactions where there is a disparity in consideration, it is, however, indicative of a strong proof that a gratuity is intended. However, jurisprudence recognizes those instances where there is no gratuity intended – these are dealings done in the ordinary course of business. Although it is true that these dealings per se are not sufficient to rule out the existence of donative intent, it is equally true that donative intent is not synonymous with a disparity in consideration.
Since York’s transaction is an arm’s length transaction and a bona fide business arrangements, the same negates the fiction which treats the effect as a donation. Accordingly, it is not subject to Donor’s Tax ordinarily imposed on gift or donation under Sec. 98 in relation to Sec. 100 of the Tax Code of 1997. (BIR Ruling No. 033-2002 dated August 16, 2002)
Taxation of Additional Compensation Allowance (ACA) - The ACA given to government employees pursuant to EO 219 shall not be subject to withholding tax deductions but shall be subject to Income Tax as "taxable compensation income."
However starting January 1, 2000, it shall be treated as part of the "other benefits" under Section 32(b)(7)(e) of the Tax Code of 1997, which are excluded from gross compensation income, provided, that the total amount of such benefits does not exceed P30,000.00.
This ruling modifies BIR Ruling No. 179-99 dated November 22, 1999 stating that ACA is exempt from taxes provided for under AO No. 53 on the condition that such allowance was not integrated in the basic pay. (BIR Ruling No. 034-2002 dated August 16, 2002)
IMPROPERLY ACCUMULATED EARNINGS TAX; publicly-held corporations - Improperly accumulated earnings tax is a penalty imposed on the corporation for the improper accumulation of its earnings to deter the avoidance of tax by the shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. However, the improperly accumulated earnings tax shall not apply to, among others, publicly-held corporations.