La Consolacion University Philippines

College of Business, Entrepreneurship and Accountancy

Income taxation
Handout on Taxation for Partnerships, Co-ownerships, Joint Ventures, Estates and Trusts before
and after the TRAIN law.
Instructor: Mr. Leomar B. Seminiano, MICB, CPA
The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not
include general professional partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract with the
Government. 'General professional partnerships' are partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the income of which is derived from engaging in any
trade or business. (Section 22B as last amended by R.A. No. 10963)
Partnerships
A. Kinds of Partnerships
GENERAL PROFESSIONAL PARTNERSHIP - is one formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from engaging in any
trade or business.
A GPP (General professional partnership) shall not be subject to the income tax but is required to file
an annual income tax/return for information about the share of each of the partner in the partnership.
It does not pay national income taxes rather, it just serves as a conduit or pass-through where its income
is ultimately taxed to the partners comprising it.
GENERAL PROFESSIONAL PARTNERSHIP
Partners in a GPP shall be liable for income tax in their separate and individual capacities.
Partner’s corresponding share in the partnership’s losses are as follows:
a. Where the result of operation is a loss, the loss will be divided according to the agreement of the
partners.
b. In the absence of an agreement on the distribution of losses, the losses shall be distributed according
to the profit sharing ratio.
GENERAL CO-PARTNERSHIPS
- is one which is not a general professional partnership.
- are considered as corporations and are taxed as corporations.
- Partners are considered stockholders.
- Unregistered business partnerships
B. General Professional Partnership
GPPs are not subject to income tax, but they are required to file returns of their income for the sole
purpose of furnishing information as to the share in the gains or profits which each partner shall include
in his individual return.
It is the individual partners who shall be subject to INCOME TAX (SCHEDULAR TAX/BASIC TAX)
in their separate and individual capacities.
Each partner shall report as gross income his distributive share, actually or constructively received, in
the net income of the partnership, under the principle of constructive receipt.
Distributive share of the partners
For purposes of computing the distributive share of the partners, the net income of the partnership shall
be computed in the same manner as a corporation.
Formula:
Gross Income XXXXX
Allowable deductions (XXXXX)
Equals: Net distributable income XXXXX
Multiply: Ratio of distribution (Percentage of distribution per partner) %
Total: Distributive share of the partner XXXXX

GPPs may claim either:

1. Itemized deductions or
2. OSD
Allowed deductions to partners from their distributive share in arriving at net taxable income
The following rules shall govern the claim of the partners of deductions;
In computing taxable income defined under Section 31 of the National Internal Revenue Code (NIRC),
all expenses which are ordinary and necessary, incurred or paid for the practice of profession, are
allowed as deductions. Since the taxable income is in the hands of the partner, as a rule apart from the
expenses claimed by the GPP in determining its net income, the individual partner can still claim
deductions incurred or paid by him that contributed to the earning of the income taxable to him. The
following rules shall govern the claim of the partners of deductions from their share in the net income
of the partnership:
a. If the GPP availed of the itemized deduction in computing its net income, the partners may still
claim itemized deductions from said share, provided, that, in claiming itemized deductions, the partner
is precluded from claiming the same expenses already claimed by the GPP. In fine, if the GPP claimed
itemized deductions the partners comprising it can only claim itemized deductions which are in the
nature of ordinary and necessary expenses for the practice of profession which were not claimed by the
GPP in computing its net income or distributable net income during the year.
Hence, if the GPP availed of itemized deductions, the partners are not allowed to claim the OSD from
their share in the net income because the OSD is a proxy for all the items of deductions allowed in
arriving at taxable income.
b. If the GPP avails of OSD in computing its net income, the partners comprising it can no longer
claim further deduction from their share in the said net income for the following reasons:
i. The partners’ distributive share in the GPP is treated as his gross income not his gross
sales/receipts and the 40% OSD allowed to individuals is specifically mandated to be deducted not from
his gross income but from his gross sales/ receipts; and
ii. The OSD being in lieu of the itemized deductions allowed in computing taxable income as
defined under Section 31 of the NIRC, it will answer for both the items of deduction allowed to the
GPP and its partners.
c. Since one-layer of Income Tax is imposed on the income of the GPP and the individual partners
where the law had placed the statutory incidence of the tax in the hands of the latter, the type of
deduction chosen by the GPP must be the same type of deduction that can be availed of by the partners.
Accordingly, if the GPP claims itemized deductions, all items of deduction allowed under Section 34
of the NIRC can be claimed both at the level of the GPP and at the level of the partner in order to
determine the taxable income. On the other hand, should the GPP opt to claim the OSD, the individual
partners are deemed to have availed also of the OSD because the OSD is in lieu of the itemized
deductions that can be claimed in computing taxable income.
d. If the partner also derives other gross income from trade, business or practice of profession
apart and distinct from his share in the net income of the GPP, the deduction that he can claim from his
other gross income would follow the same deduction availed of from his partnership income as
explained in the foregoing rules.
Provided, however, that if the GPP opts for the OSD, the individual partner may still claim 40% of its
gross income from trade, business or practice of profession but not to include his share from the net
income of the GPP.
A taxpayer who elected to avail of the OSD not exceeding 40% of gross sales or gross receipts, in case
of an individual taxable under Sections 24(A) and 25(A)(1) of the NIRC, or 40% of gross income, in
case of a corporation subject to tax under Section 27(A) or 28(A)(1) of the NIRC shall signify in his/its
return such intention, otherwise he/it shall be considered as having availed himself of the itemized
deductions allowed under Section 34 of the NIRC. Once the election to avail of the OSD or itemized
deduction is signified in the return, it shall be irrevocable for the taxable year for which the return is
made.
The election to claim either the OSD or the itemized deduction for the taxable year must be signified
by checking the appropriate box in the Income Tax Return filed for the first quarter of the taxable year
adopted by the taxpayer. Once the election is made, the same type of deduction must be consistently
applied for all the succeeding quarterly returns and in the final Income Tax Return for the taxable year.
Any taxpayer who is required but fails to file the quarterly Income Tax Return for the first quarter shall
be considered as having availed of the itemized deductions option for the taxable year.
An individual taxpayer who is entitled to and claimed the OSD shall not be required to submit with his
tax return such financial statements otherwise required under the NIRC. Provided, that, except when
the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross
sales or gross receipts. In the case of a corporation, however, said corporation is still required to submit
its financial statements when it files its annual Income Tax Return and to keep such records pertaining
to its gross income as herein defined.” (RR-2-2010)
In determining his distributive share in the net income of the partnership:
A. Each partner shall report as gross income his distributive share, actually or constructively received,
in the net income of the partnership.
B. Income payments made periodically or at the end of the taxable year by a GPP to the partners, such
as drawings, advances, sharings, allowances, stipends etc. shall be subject to a CWT of 15% if the gross
income in one taxable year exceeds 720,000 and 10% of otherwise.
GENERAL CO PARTNERSHIPS
The partnership is treated like a corporation and is subject to corporate income tax of 30% or 2% of
Gross income whichever is higher, while the individual partners are considered as stockholders and
therefore, profits distributed to them by the partnership are taxable as dividends.
A. The share of RC, NRC, RA individual partner in the distributable net income after tax of a partnership
is subject to FWT of 10% whether distributed to the partners or not.
B. The share of a partner who is a NRA-ETB in the Philippines in the distribution net income after tax
of a taxable partnership shall be subject to a FWT of 20%.
The taxable income of a general co partnership after deducting the corporate income tax, shall be
deemed to have been actually or constructively received by the partners in the same taxable year, and
shall be taxed to them in their individual capacity, whether actually distributed or not.
Distributive share of the partners
Gross Income XXXXX
Allowable deductions (XXXXX)
Equals Taxable Income XXXXX
Income tax (RCIT 30%) (XXXXX)
Equals net distributive income XXXXX
Ratio of distribution %
Total distributive share of the partner XXXXX

CO-OWNERSHIP
There is co-ownership whenever the ownership of an undivided thing or right belongs to different
persons. In default of contracts, or of special provisions, co-ownership shall be governed by the
provisions of this Title. (Article 484, R.A. No 386)
CO-OWNERSHIP
- State where an undivided thing or right belongs to two or more persons
- Right of common dominion which 2 or more persons have over a spiritual, ideal part of a thing which
is not physically divided
SOURCES OF CO-OWNERSHIP
1. By law
2. By contract
3. By chance
4. By occupation or occupancy
5. By succession or will
General rule: A co-ownership is exempt from income tax. The income of the co-ownership will be
taxable (BASIC TAX) to the co-owners in their respective capacities.
Exception: The following are the instances when the co-ownership may become an unregistered general
co partnership and therefore become taxable:
1. Co-owner appoints an administrator who manages the affairs of the co-ownership by making
investments therein from which profits are realized. This applies even if there is already a partition
ordered by the court should the joint management be given to one of the owners.
2. The co-owners used the common properties and/or income derived therefrom as a common fund with
intent to make profits.
3. When the property remained undivided for more than 10 years and no attempt was ever made to
divide the same among the co-heirs, nor was the property under administration proceedings nor held in
trust.
4. In all other instances when the co ownership activities are already beyond mere preservation of the
co-owned property.
Joint venture and consortium
The following are the requisites to qualify as a joint venture:
1. Each party to the joint venture must make a contribution, not necessarily of capital, but by way of
services, skill, knowledge, material or money.
2. There must be an intent to make profits which must be shared among the parties
3. There must be a joint proprietary interest and right of mutual control over the subject matter of the
enterprise and
4. Usually, there is a single business transaction.
Exempt Joint Venture
Joint ventures or consortium organized for the following purposes shall not be taxable as a corporation.
A. Construction projects
B. Engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government.
The following are the requirements in a order for a joint venture or consortium for the purpose of
undertaking construction project is exempt:
1. Involve joining or pooling of resources by licensed local contractors, that is, licensed as general
contractors by the Philippine Contractors Association Board (PCAB) of the DTI
2. These local contractors are engaged in construction business
3. The joint venture itself must likewise be duly licensed as such by PCAB
If a Joint Venture is exempt, its income will be taxable (BASIC TAX) to the co venturers to the extent
of their share in profits.
Taxable Joint Venture
Absent any one of the requisites for exemption, the joint venture shall be considered as a taxable
corporation and the share in the profits by the co venturers shall be taxable.
If RC, NRC, RA – 10% FWT. If NRA-ETB – 20% FWT – on the share of an individual in the net
income after tax of an association, a joint account or a joint venture or consortium of which he is a
member or a co-venturer.
ESTATES AND TRUSTS
DEFINITION OF TERMS
1. Estate (inheritance) – refers to all the property, 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.
2. Heir is the person called to the succession either by the provision of a will or by operation of law.
3. Trust is the arrangement created by will or an arrangement under which title to property is passed to
another for conservation or investment with the income therefrom and ultimately the corpus (Principal)
to be distributed in accordance with the directions of the creator as expressed in the government
instrument.
4. Trustor or grantor is the person who establishes a trust.
5. Trustee is the one in whom confidence is reposed as regards property for the benefit of another person.
Example of which is the Philippine Trust Company.
6. Beneficiary – is the person for whose benefit the trust has been created.
7. Fiduciary - from the Latin fiducia, meaning "trust," a person (or a business like a bank or stock
brokerage) who has the power and obligation to act for another (often called the beneficiary) under
circumstances which require total trust, good faith and honesty. The most common is a trustee of a trust,
but fiduciaries can include business advisers, attorneys, guardians, administrators of estates, real estate
agents, bankers, stockbrokers, title companies or anyone who undertakes to assist someone who places
complete confidence and trust in that person or company. Characteristically, the fiduciary has greater
knowledge and expertise about the matters being handled. A fiduciary is held to a standard of conduct
and trust above that of a stranger or of a casual business person.
The taxable income of the estate or trust shall be computed in the same manner and on the same basis
as in the case of INDIVIDUALS except for the following:
(A). There shall be allowed as a deduction in computing the taxable income of the estate or trust the
amount of the income of the estate or trust for the taxable year which is to be distributed currently by
the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant
which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall
be included in computing the taxable income of the beneficiaries, whether distributed to them or not.
Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under
Subsection (B) of this Section in the same or any succeeding taxable year.
(B) In the case of income received by estates of deceased persons during the period of administration
or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be
either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction
in computing the taxable income of the estate or trust the amount of the income of the estate or trust for
its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary
but the amount so allowed as a deduction shall be included in computing the taxable income of the
legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections
(A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in
the return of said trust shall not be included in computing the income of the beneficiaries.
Note bene:
1. The above additional deductions allowed shall be taxable (BASIC TAX) to the beneficiaries.
Formula
Gross Income XXXXX
Expenses/Losses (XXXXX)
Income from current year distributed to beneficiaries (XXXXX)
Personal exemption (Repealed under the TRAIN Law) (20,000 )
Equals taxable income XXXXX
Rate per tax table %
Total Income tax XXXXX

ESTATES
Judicial vs. Extra judicial settlement

Judicial Extra judicial

Taxable as separate entity Not taxable as separate entity

The income of the estate is to be declared by the

beneficiaries
Fiduciary/trustee files the ITR and pays the tax Heirs and beneficiaries file the ITR of the estate
thereon and pay the tax due thereon.

TRUSTS
KINDS TAXATION
1. Irrevocable trust Taxable as separate entity
2. Revocable trust – is a trust where title can -Not taxable as a separate entity
revert back to the grantor anytime
-The income of the trust is to be declared and
taxed on the grantor.
3. Trust in which income is for the benefit of the -Not taxable as a separate entity
grantor
-The income of the trust is to be declared and
taxed on the grantor.

CONSOLIDATION OF TWO OR MORE TRUSTS

Requisites for Consolidation
1. There are two or more trusts which derive income
2. The creator of the trust in each instance is the same person, and the beneficiary in each instance is
the same.
Nota bene.
1. The basis of determining the income tax due of the trustee is pro-rated in the basis of the net income
of the said trustees.