INTERIM TRANSITION TO THE VALUE ADDED TAX

ILLUSTRATIONS:
Mr. Chinito, a pure business income earner, opted to the 8% income tax in the
first quarter of 2020. In June of 2020, he exceeded the P3M VAT threshold.

Jan. - March April - June July – Sept.

Sales Php. 1,200,00 Php. 2,000,000 Php. 1,000,000
Cost of sales 600,000 1,000,000 500,000
Gross profit Php. 600,000 Php. 1,000,000 Php. 500,000
Gain on sale of
20,000 30,000
domestic stocks
Gain on sale of used
40,000
equipment
Total income Php. 620,000 Php. 1,040,000 Php. 530,000
Less: expenses 320,000 450,000 300,000
Net income Php. 300,000 Php. 590,000 Php. 230,000

1st Quarter (January to March)

Mr. Chinito’s first quarter total tax due under 8% income tax shall be:
Sales: 1,200,000
Less: 250,000
Total 950,000
Multiply by: Optional income tax rate 8%
Total income tax due 76,000

2nd Quarter (April to June)

Mr. Chinito exceeded the P3M VAT threshold. He shall be subjected to regular tax and
required to pay percentage tax on sales or receipts made since January 1.

The percentage tax due shall be:

Total sales from January to June Php. 3,200,000
Multiply by: Percentage tax rate 3%
Total percentage tax due Php. 96,000

The taxable income of Mr. Chinito in the second quarter shall be computed as follows:
Sales Php. 3,200,000
Less: Cost of sales 1,600,000
Gross income from operations Php. 1,600,000
Other income subject to regular tax 40,000
Total income subject to regular tax Php. 1,640,000
Less:
Deductions (business expense) 770,000
Percentage tax expense 96,000
Taxable income Php. 774,000

The 2nd quarter income tax due of Mr. Chinito shall be computed as:

Income Tax due

Taxable income P 774,000
Less: Lower tax bracket 400,000 P 30,000
Excess P 374,000
Multiply by: Incremental tax rate 25% 93,000
Total tax due P 123,500
Less: Tax due in 1st Quarter 76,000
Income tax still due P 47,500

Mr. Chinito shall separately pay the P96,000 percentage tax which shall be assessed
upon VAT registration with the P47,500 income tax. Mr. Chinito shall pay the VAT
effective July 2020. The VAT system will be discussed extensively under Business &
Transfer Taxation.

3rd Quarter (July to September)

Sales P 2,400,000
Less: Cost of sales 2,100,000
Gross income from operations P 2,100,000
Other income subject to regular tax 40,000
Total income subject to regular tax P 2,140,000
Less:
Deductions (business expense) P 1,070,000
Percentage tax expense 96,000 1,166,000
Taxable income P 974,000

The 3rd quarter income tax due of Mr. Chinito shall be computed as:
 Income Tax due
Taxable income P 974,000
Less: Lower tax bracket 800,000 P 130,000
Excess P 174,000
Multiply by: Incremental tax rate 30% 52,200
Total tax due P 182,200
Less: Tax due in 2nd Quarter 123,500
Income tax still due P 58,700

Mr. Chinito shall separately pay the quarterly VAT aside from the P58,700 income tax.
The same process will be followed until the annual income tax return.

TAXABLE ESTATES AND TRUSTS

Taxable Estates
An estate is an income taxpayer if under judicial settlement or administration. An estate
under extra-judicial settlement is not a taxpayer. The income of the estate under extra-
judicial settlement is taxable to the heirs.

Taxable Trusts
A revocable trust is not a taxpayer and is treated as a pass-through entity whose
income is taxable to the grantor-trustor.
An irrevocable trust is a separate and distinct taxable entity (BIR Ruling 003-05, July
22, 2005). A taxable trust is treated as an individual taxpayer and is allowed P20,000
personal exemption.

Income taxable to estate or trust under the NIRC

1. Income accumulated in trust is for the benefit of unborn or unascertained person
of persons with contingent interests and income accumulated or held for future
distribution under the terms of the will or trust.
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.

Taxable income of the deceased taxpayers

In the case of the death of a taxpayer, there shall be included in computing taxable
income for the taxable period in which falls the date of his death, among accrued up to
the date of his death if not otherwise properly includible in respect of such period or a
prior period. (Sec. 44, NIRC)

Illustration 1: Deceased taxpayer

Miss X died on July 15, 2021. Her estate underwent judicial settlement. She had the
following income in 2021:

Compensation income P 320,000

Rental income 960,000
Total P 1,280,000

The decedent leases a property which earns P80,000 monthly rental.

The accounting period of the decedent shall be terminated at the date of death. Since
the estate is under judicial administration, the estate of the decedent shall be registered
as an individual taxpayer.
Thus, the following income shall be reported to the income tax return of the:

Decedent Estate of the decedent

Compensation income P 320,000 -
Rental income (6.5 months x P80,000) 520,000 -
Rental income (5.5 months x P80,000) P 440,000
Taxable income P 840,000 P 440,000

Note:
1. January 1 to July 25, 2021, is 6.5 months while July 16 to December 31 is 5.5 months.
2. Cut-off of income at the date of death is necessary not only for proper accounting of
income taxes but also for estate taxes. In estate taxation, income accruing before death
are part of gross estate while those accruing after that are excluded.
If the state of the decedent is administered extra-judicially, her heirs will report their
share in the P440,000 net rentals in their individual tax returns.

Illustration 2: Estate
The estate of Mr. Barbel has P850,000 gross income before business expenses of
P200,000. The estate administrator distributed P300,000 to the heirs in accordance with
the will of Mr. Barbel.
The taxable income of the estate will be computed as follows:

Gross income
Less: 850,000
Regular allowable deductions P 200,000
Special allowable deduction
Income distribution to heirs 300,000 500,000
Taxable net income P 350,000

Note: it must be recalled that income distribution from the estate is a special deduction against
the gross income of the estate. The heirs shall include the P300,000 income distribution in their
taxable income.

Illustration 3: Trust
Mr. Batman designated in irrevocable trust property in favor of Robin and appointed
Superman as trustee. The property earned P720,000 income before expenses of
P200,000 and trust fees of P50,000. In accordance with the trust indenture, Superman
distributed P1,000,000 to Robin.
The taxable income of the trust shall be computed as follows:

Gross income 720,000

Less: Regular allowable deductions P 250,000
Special allowable deduction
Income distribution to beneficiaries 100,000 350,000
Taxable net income P 370,000

CONSOLIDATION OF TWO OR MORE TRUSTS

Multiple irrevocable trusts designated be the same grantor for the tax benefit of the
same beneficiary shall be consolidated for purposes of income tax.
The consolidation of irrevocable trusts is necessary to eliminate tax savings which the
grantor may derive be deliberately splitting the corpus of the trusts into several trusts.

Illustration 1
Don Ambrocio designated three trusts all in favor of his daughter, Cindy:

Designatio
Trust Trustee Operating Income Distribution to Cindy
n
Trust 1 Irrevocable AJ 400,000 40,000
Trust 2 Irrevocable BJ 600,000 60,000
Trust 3 Revocable CJ 400,000 80,000

The trustee of Trust 1 and Trust 2 shall prepare tax returns covering the income of the
property held under their control as follows:

Trust 1 Trust 2
Operating income P 400,000 P 600,000
Less: Special itemized deduction
Income distribution to beneficiary 40,000 60,000
Taxable income P 360,000 P 540,000
Income tax due per tax table P 22,000 P 65,000

For purposes of income taxation, the income of the Trust 1 and Trust 2 will be
consolidated as follows:
Trust 1 Trust 2 Consolidated
Taxable net income 360,000 540,000 900,000
Income tax due 160,000
Allocated tax due 64,000 96,000
Less: Income tax paid 22,000 65,000 87,000
Income tax still due 42,000 31,000 73,000

The consolidated tax due is allocated to Trust 1 and Trust 2 as follows:

 - Trust 1 = P360,000/P900,000*P160,000 = P64,000
- Trust 2 = P540,000/P900,000*P160,000 = 96,000
Trust 3 is not taxable as it is revocable. The entire P400,000 income of Trust 3 including
the P80,000 income distribution to Cindy will be included in the taxable income of Don
Ambrocio.