FOR SCRIPT (GROSS INCOME REPORT)

3. Discuss the taxation for dividends.

- Any distribution made by a corporation out of it’s earnings or profits and payable to it’s shareholder’s
whether in money or in other property. (Sec. 73, NIRC)

Types of Dividends:
a. Cash Dividends – paid in cash
This is the most common type of dividend, in which shareholders are paid in
cash from the profits of the company.
For example, if a company declares a cash dividend of 50% per share and a
shareholder owns 100 shares, they will receive a total of 50 in cash.

b. Property Dividends – paid in non-cash properties including stocks or securities of another

corporation.
Instead of cash, shareholders receive non-cash assets as dividends, such as
stocks or securities of another company. This type of dividend can
sometimes be advantageous for shareholders if the assets they receive
appreciate in value.
For example, a company may distribute its shares of another company as a
property dividend to its shareholders.
c. Scrip Dividends – those paid in notes or evidence of indebtedness of the corporation.
This type of dividend is paid out in the form of promissory notes or evidence
of debt owed by the corporation to its shareholders. These notes can
typically be redeemed for cash at a later date. An example of this type of
dividend would be a company issuing bonds to its shareholders as a dividend
payment.
Bond means - In simple terms, a bond in accounting is a type of debt
instrument issued by a company or government entity to raise funds. It
involves borrowing money from investors and promising to pay them back
with interest over a specified period of time. Bonds are considered liabilities
on a company's balance sheet and the interest payments made to
bondholders are recorded as expenses.
d. Stock Dividends – paid in the stocks of the corporation.
In this type of dividend, shareholders receive additional shares of the
company's stock instead of cash. The overall value of the shares remains the
same, but the number of shares increases, resulting in a dilution of
ownership for existing shareholders.
For example, if a company issues a 10% stock dividend, shareholders will
receive an additional 10 shares for every 100 shares they hold.
e. Liquidating Dividends – distribution of corporate net asset.
This type of dividend is paid out when a company is going through the
process of liquidation or dissolution. It is essentially a distribution of the
company's net assets to its shareholders.
For example, if a company is liquidating and has $10 million in assets and 1
million outstanding shares, each shareholder would receive $10 per share as
a liquidating dividend.
As a rule, dividends are income subject to tax. However, the following are not income for taxation
purposes:
1. Stock dividends
- Stock dividends representing transfer of surplus to capital account shall not be subject to tax. Stock
dividends are in the form of increase in corporate value (i.e. capital gain) which should be properly
taxable when realized through disposal or sale of the stocks investment.
The distribution of stocks of another corporation as dividends is a taxable property dividend and not a
stock dividend.
This means that according to tax laws, when a company issues stock
dividends, which are shares of their own stock given to shareholders, it is not
considered taxable income because it represents an increase in the
company's value. However, if these stock dividends are later sold, the
resulting capital gains would be subject to taxation. Additionally, if a
company distributes stock from another corporation as dividends instead of
their own stock, it is considered a form of taxable property dividend.
For example, if Company A has a surplus of $10,000 and decides to issue
stock dividends to their shareholders, this will not be subject to taxation as
it represents a transfer of surplus to their capital account. However, if a
shareholder decides to sell their stock dividends, any resulting capital gains
would be subject to taxation. If Company A decides to distribute stock from
Company B as dividends to their shareholders, this distribution would be
considered a taxable property dividend. So, if a shareholder receives 100
shares of Company B's stock as dividends, they would need to report this as
taxable income on their tax return.
2. Liquidating dividends
- Under the NIRC, the receipt of liquidating dividends is not viewed as income but as exchange of
properties. When the liquidating dividends exceed the cost of the investments, the excess is a taxable
capital gain, subject to regular income tax. Any loss is deductible only to the extent of capital gain.
This means that when a company pays out liquidating dividends to their
shareholders, it is not considered as income for the shareholders. Instead, it
is seen as the exchange of properties between the company and the
shareholders. If the amount of liquidating dividends received by the
shareholders is more than the original cost of their investments, the excess
amount is taxed as a capital gain. On the other hand, if the amount of
liquidating dividends received by the shareholders is less than the original
cost of their investments, it is considered a deductible loss for the
shareholders.
For example, if John purchased 100 shares of Company A for $10 each, his
total investment would be $1000. If Company A goes bankrupt and decides to
distribute liquidating dividends of $12 per share, John would receive a total
of $1200. Since the total amount of liquidating dividends he received is more
than his original investment of $1000, the excess amount of $200 would be
taxed as a capital gain. On the other hand, if the liquidating dividends were
$8 per share, John would only receive $800, resulting in a deductible loss of
$200.
Taxability of Stock Dividends
- Normally, stock dividends are exempt from income tax. Exceptionally, stock dividends are subject to tax
at the fair value of the stocks received under the following conditions:

a. Subsequent cancellation and redemption

- If a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to
make the distribution and cancellation or redemption, in whole or in part, equivalent to the distribution
of a taxable dividend, the amount so distributed shall be taxable to the extent it represents a distribution
of earnings or profit.

For instance, a corporation declared stock dividends and immediately called the stock dividends for
redemption and cancellation. This act is equivalent to declaration of cash dividends.

b. If it leads to substantial alteration in ownership in the corporation.

- Substantial alteration in ownership in a corporation may occur when stock dividends are given in lieu of
cash dividends or when the corporation declared an optional stock or cash dividend.
This means that if there is a significant change in the ownership of a
corporation, certain actions may be taken. For example, if a corporation gives
out stock dividends instead of cash dividends, or if they declare a dividend
that shareholders can choose to receive in either stock or cash, this would
be considered a substantial alteration in ownership. This may have
implications for shareholders and their percentage of ownership in the
corporation.

4. Discuss the taxation for royalties.

- A royalty is a legally-binding payment made to an individual, for the ongoing use of his or her
originally-created assets, including copyrighted works, franchises, and natural resources. But royalties
are predominantly associated with musicians, who receive such payments whenever their originally-
recorded songs are played on the radio or television, used in movies, performed at concerts, bars, and
restaurants, or consumed via streaming services. In most cases, royalties are revenue generators
specifically designed to compensate the owners of songs or properties, when they license out their
assets for another party's use.
 As for taxation of Royalties:
Royalties in general are subject to 20% final tax for all individual tax payers except for a non -
resident alien not engage in trading or business which is subject to 25% tax, for corporations it is
still 20% final tax for domestic corporation and resident domestic corporation and 30% final tax
for non - resident foreign corporation.
An example illustration of this could be a successful author who earns royalties from their books.
In this case, they would be subject to a 20% tax on their royalty income. However, if a foreign
publisher wanted to purchase the rights to their book and pay them royalties, the tax rate would
be 25% instead of 20% because they are considered a non-resident foreign corporation.

Let's say the author from the example earns $10,000 in royalties from their books in a year. As an
individual taxpayer in a domestic corporation, they would pay a 20% tax on this amount,
resulting in a tax payment of $2,000.

Now, if a foreign publisher offers to purchase the rights to their book and pay them $10,000 in
royalties, the author would have to pay a 25% tax on this amount as a non-resident foreign
corporation. This would result in a tax payment of $2,500.

On the other hand, if the author's domestic publisher pays them $10,000 in royalties, they would
only have to pay a 20% tax, resulting in a tax payment of $2,000.

This shows how the tax rate for royalties can vary for different types of taxpayers and
corporations.

 Passive royalties from cinematographic films and similar works are subject to 20% final tax for all
individual tax payers except for a non - resident alien not engage in trading or business which is
subject to 25% tax.
For example, if John, a resident individual, earns $10,000 in passive
royalties from a film he produced, he will be subject to a final tax of
$2,000 (20% of $10,000). However, if Maria, a non-resident alien, earns
the same amount of passive royalties, she will be subject to a final tax
of $2,500 (25% of $10,000).

 Passive royalties from books, literary works and musical compositions are subject to 10% final
tax for all individual tax payers except for a non - resident alien not engage in trading or business
which is subject to 25% tax, for corporations it is still 10% final tax for domestic corporation and
resident domestic corporation and 30% final tax for non - resident foreign corporation.
This applies as a final tax, meaning that the tax is deducted from the
 income at the source and does not require further reporting or
payment.
For example, if a musician earns $10,000 in passive income from
royalties for their songs, they would be subject to a final tax of $1,000
(10%). However, if they are a non-resident alien not engaged in any
business activities, they would be subject to a higher final tax of
$2,500 (25%). If a domestic corporation earns $50,000 in passive
income from book sales, they would be subject to a final tax of $5,000
(10%). But if a non-resident foreign corporation earns the same
amount, they would be subject to a higher final tax of $15,000 (30%).

 For active royalties all those received by an individual tax payer would be subject to regular
income tax but a non – resident alien not engage in trading or business would be subjected to
25% final tax, for corporations those royalties received by a domestic and resident foreign
corporation would be subject to regular income tax while non – resident foreign corporation
would be subjected to 30% final tax.

This means that the amount of tax paid on royalties received by an individual
or a corporation depends on their residency status and whether they are
engaged in business activities or not. If an individual is a resident and
engaged in business, they would be subject to regular income tax on all
royalties received. However, a non-resident alien who is not engaged in
business would only have to pay a 25% final tax on their royalties. Similarly,
a domestic or resident foreign corporation would pay regular income tax on
their royalties, while a non-resident foreign corporation would only have to
pay a 30% final tax on their royalties.

For example, if a resident individual receives $1000 in royalties, they may

have to pay a certain percentage of that amount as regular income tax. But if
a non-resident alien receives the same $1000 in royalties, they would only
have to pay a flat rate of 25% as final tax on that amount. This also applies
to corporations, where domestic and resident foreign corporations would pay
regular income tax on their royalty income while non-resident foreign
corporations would only pay 30% of the royalty amount as final tax .