Answer Key Chapters 1 7(1)

(1)

CHAPTER 1 – PRINCIPLES OF TAXATION

TRUE OR FALSE-SET A

1. FALSE 9. TRUE 17. FALSE 25. FALSE

2. TRUE 10. TRUE 18. FALSE 26. TRUE

3. TRUE 11. TRUE 19. FALSE 27. FALSE

4. TRUE 12. TRUE 20. TRUE 28. TRUE

5. TRUE 13. FALSE 21. TRUE 29. TRUE

6. FALSE 14. FALSE 22. TRUE 30. FALSE

7. TRUE 15. FALSE 23. TRUE

8. FALSE 16. FALSE 24. FALSE

MULTIPLE CHOICE 1. D* 21. D 41. D 61. C 2. C 22. D 42. A 62. C 3. B** 23. D 43. A 63. C 4. D 24. D 44. B 64. C 5. C 25. B 45. C 65. A 6. B 26. A 46. C 7. C 27. A 47. B 8. C 28. D 48. A 9. D 29. C 49. C 10. D*** 30. C 50. D 11. A 31. A 51. D 12. D 32. C 52. C 13. D 33. D 53. B 14. C 34. C 54. D 15. C 35. A 55. A 16. D 36. C 56. A 17. A 37. D 57. A 18. A 38. C 58. D 19. C 39. D 59. C 20. B 40. A 60. A

*Taxation may be imposed to raise revenue and in the exercised of police power, at the same time. **Statement 1 – False; similarity of tax from license fee, not a distinction.

***Statement 1 – False; should be “jurisdiction” instead of “symbiotic relation”. Statement 2 – False; should be “symbiotic relation” instead of “jurisdiction”

CHAPTER 2 - INDIVIDUAL TAXPAYERS

(2)

2-1

1. RC 4. NRA-NETB

2. RC 5. NRC

3. RC 6. RA

2-2

1. P125,000 = BPE + APE for Ana and PWD. The brother shall likewise qualify as PWD within 4th_degree

2. P150,000 = BPE + APE for four dependents. Note: Not entitled for APE for his 20 years old recognized natural child for being gainfully employed. Assume further that all the requirements to qualify for additional exemption under the “Foster Child Act” were complied with.

3. P0 or none; Reciprocity clause applies to a nonresident alien engaged in trade or business. The taxpayer in the problem is a nonresident alien not engage in trade or business. Dividend income from a domestic corporation is not considered as income derived from trade or business.

4. P90,000 = BPE of P40,000 (lower than P50,000 allowed in the Philippines) + APE of P25,000 per dependent (lower than the P30,000 allowed in U.S.A. as provided in the problem).

Total personal exemption = P50,000 BPE + P25,000 x 2 additional personal exemption = P90,000 5. P100,000 = BPE + APE for his 2 minor children.

2-3

TAX TYPE Tax RATE TAX TYPE Tax RATE

1 FWTx 20% 19 Exempt

-*Prizes received from Philippine sources exceeding P10,000 are subject to 20% final tax rate. On the other hand, Other WINNINGS (regardless of amount) are subject to 20% final tax rate.

2 FWTx 7.5% 20 Exempt -3 BTx Tax Table 21 FWTx 25% 4 FWTx 20% 22 BTx Tax Table 5 Exempt - 23 Exempt -6 BTx Tax Table 24 FWTx 20% 7 BTx Tax Table 25 FWTx 20% 8 BTx Tax Table 26 FWTx 10%

9 BTx Tax Table 27 BTx Tax Table

11 FWTx 20% 29 FWTx 20%

12 FWTx 10% 30 FWTx 25%

13 FWTx 20% 31 FWTx 10%

15 BTx Tax Table 33 Exempt Sub.to OPT

16 FWTx 20% 34 BTx Tax Table

17 FWTx 20% 35 BTx Tax Table

18 BTx Tax Table

2-4

1. Taxpayer is a resident citizen 1.1 Taxable income = P1,000,000 1.2 Income tax payable = P160,000

(3)

1.3 Final tax on passive income = P14,500 1.4 Total income tax expense = P299,500

Gross business income, Philippines P1,000,000

Gross business income, USA 500,000

Business expenses, Philippines (700,000)

Business expenses, USA (430,000)

Compensation income, Philippines 600,000

Dividend income-foreign corp. 40,000

Interest income-bank deposit abroad 30,000

Raffle draw winnings 10,000

Basic personal exemption (50,000)

Taxable income P1,000,00

0

Tax Due [(P125,000)+(.5M x 32%)] P285,000

Creditable withholding tax on bus. income (125,000)

Income Tax Payable P160,000

Dividend income – DC (50k x 10%) P5,000

Interest income bank deposit-Phls.@20% 4,000

Interest income FCDS deposit @ 7.5% 3,000

Royalty income from composition @10% 2,500

PCSO winnings exempt

Final Tax on Passive Income P14,500

Basic income tax due P285,000 The question is tax expense; ignore

Final taxes on passive income 14,500 the income tax payable of P160,000.

Total income tax expense P299,500

2. Taxpayer is a nonresident citizen 2.1 Taxable income = P860,000 2.2 Income tax payable = P115,200 2.3 Final tax on passive income = P11,500 2.4 Total income tax expense = P251,700

Business expenses, Philippines (700,000) ***Assume situs is without the Phls.; refer Compensation income, Philippines 600,000 to page 300 for the determination of

Dividend income-foreign corp. *** the situs of dividend income.

Taxable income P860,000

Tax Due [(P125,000)+(360k x 32%)] P240,200

Creditable withholding tax on bus. Income (125,000) Assume the tax withheld pertain to

Income Tax Payable P115,200 Income derived in the Phls.

Dividend income – DC (50k x 10%) P5,000

(4)

3. Taxpayer is a resident alien

3.1 Taxable income = P860,000 (same answer with #2.1; nonresident citizen) 3.2 Income tax payable = P115,200 (same answer with #2.2; nonresident citizen) 3.3 Final tax on passive income = P14,500 (same answer with #1.3; resident citizen) 3.4 Total income tax expense = P254,700 computed as follows:

4. Taxpayer is a nonresident alien engaged in trade or business 4.1 Taxable income = P910,000

4.2 Income tax payable = P131,200 4.3 Final tax on passive income = P16,500 4.3 Total income tax expense = P267,700

Business expenses, Philippines (700,000) ***Assume situs is without the Phls.; refer Compensation income, Philippines 600,000 to page 300 for the determination of

Dividend income-foreign corp. *** the situs of dividend income.

Basic personal exemption - The problem is silent as to “reciprocity”

Tax Due [(P125,000)+(410k x 32%)] P256,200

Creditable withholding tax on bus. Income (125,000) Assume the tax withheld pertain to

Income Tax Payable P131,200 Income derived in the Phls.

Dividend income – DC (50k x 20%) P10,000 Use 20% rate for DI from DC instead of 10%

Interest income FCDS deposit @ 7.5% exempt

(5)

Compensation income, Philippines P600,000

Dividend income - DC 50,000

Dividend income from foreign corp. - Assume situs is without

Interest income bank deposit, Phls. 20,000

Interest income on FCDS deposit Exempt

Royalty income from composition 25,000

PCSO winnings 200,000 Not exempt under the tax code if the

Total GROSS Income P905,000 taxpayer is NRA-NETB.

x 25%

Income Tax Due/expense P226,250

2-5

1. Taxpayer is a resident citizen a. Taxable net income = P1,026,100 b. Income tax payable = P293,352 c. Final tax on passive income = P38,030 d. Capital gains tax = P120,600

Solution:

From Phils. From Abroad

Total

Income from employment P180,000 P280,000 P460,000

Business income 850,000 960,000 1,810,000

Deductible business expenses (610,000) (730,000) (1,340,000)

Interest income on personal loans** 6,000 3,000 9,000

Dividend income from foreign corp. 6,800 2,000 8,800

Prizes from singing contest 5,600 - 5,600

Interest income on bank deposits 4,200 4,200

Interest income on money market placements 1,600 1,600

Royalty income 50,000 50,000

Winnings/ prizes from lotteries, raffles 16,900 16,900

Lotto winnings --- 50,000 50,000

Basic Personal exemption (50,000)

Additional exemption

-Taxable income P1,026,100

TAX DUE:

First P500,000 P125,000

Excess @ 32% 168,352

**All incomes regardless of source are taxable. However, personal expenses are not allowed as deduction from the gross income

P293,352

Final Tax on Passive income:

Interest income on bank deposits 10,800

Interest income on money market placements 7,500

(6)

Winnings/ prizes from lotteries, raffle draws 45,000

Total P153,300

@ 20% P30,660

Dividend income from domestic corp. 5,700

-Royalty income from sale of books 68,000

-Total P73,700

@ 10% 7,370

TOTAL FINAL TAX ON PASSIVE INCOME P38,030

Capital Gains Tax:

Sale of lot (P1,060,000 x 6%) P63,600

Sale of house and lot (P950,000 x 6%) 57,000

Total P120,600

2. Taxpayer is a non-resident citizen a. Taxable income = P388,400 b. Income tax payable = P91,520 c. Final tax on passive income = P38,030 d. Capital gains tax = P120,600

Solution:

From Phils.

Income from employment P180,000

Business income 850,000

Deductible business expenses (610,000)

Interest income on personal loans 6,000

Dividend income from foreign corp. 6,800

Prizes from singing contest 5,600

Additional exemption -Taxable income P388,400 TAX DUE: First P250,000 P50,000 Excess @ 30% 41,520 P91,520 Final Tax on Passive income:

 As long as there is no interest income from foreign currency bank deposit under FCDS/FCDU, the final tax on passive income of a nonresident citizen is the same with that of a resident citizen.

Capital Gains Tax:

 All individual taxpayers are subject to the same types of CGTs 3. Taxpayer is a nonresident alien engaged in trade

a. Taxable income = P388,400 (same with a non-resident citizen taxpayer) b. Income tax payable = P91,520 (same with a non-resident citizen taxpayer) c. Final tax on passive income = P38,600

d. Capital gains tax = P120,600 (all individual taxpayers are subject to the same types of CGTs) Final Tax on Passive income:

Interest income on bank deposits 10,800

(7)

Royalty income 90,000

Dividend income from domestic corp 5,700 rate is 20%

Winnings/ prizes from lotteries, raffle draws 45,000

Total P159,000

@ 20% P31,800

Dividend income from domestic corp.@ 20% -

-Royalty income from sale of books 68,000

-@ 10% 6,800

TOTAL FINAL TAX ON PASSIVE INCOME P38,600

2-6

a. Taxable income of the husband = P1,115,000 b. Taxable income of the wife = P840,000

c. Consolidated tax due of the husband and the wife = P555,600

Husband Wife

INCOME:

Compensation income P 850,000 P650,000

Income-Profession [P800,000/2)] 400,000 400,000

Income from trading business 250,000

-LESS:

Expenses-practice of profession [ P320,000/2)] (160,000) (160,000)

Expenses – trading business (100,000)

-Basic Personal exemption (50,000) (50,000)

Additional exemption (75,000) -TAXABLE INCOME P1,115,000 P840,000 Tax due: First P500,000 P125,000 P125,000 In excess of P500,000 @ 32% 196,800 108,800 Total P321,800 P233,800

Consolidated Tax Due P555,600

Note: Personal expenses are not deductible. The Premium payments for health insurance are likewise nondeductible because the total gross income of the family exceeded the threshold of P250,000.

(8)

2-7

a. Total capital gains taxes

Sale of shares of domestic corp. directly to a buyer (P100,000 x 5%) + P50,000 x 10% P10,000 Capital gain on sale of land in the Philippines classified as capital asset (P5M x 6%) 300,000

Total capital gains tax P310,000

Note: Sale of shares in the local stock exchange is subject to transaction tax of ½ of 1% of GSP b.

Dividend income from domestic corp. @ 10% P4,000

Interest income on Philippine bank deposit (3,200 + 2,400 + 8,000)/80% x 20% 3,400 Interest income on Phl. bank deposit under FCDU (4,000 + 4,000 + 2,000) x 7.5% 750

Interest income on government bonds 2,000

Royalty - literary 1,000

Royalty other than literary 2,400

Total Final tax on passive income of Daniel and Kat P13,550

Note: Interest income on long-term deposit is tax exempt c.

Business income P600,000

Rental income net of tax (P200,000/95%)/2 100,000

Dividend income from nonresident corp. (P10,000/2) 5,000

Interest income on notes receivable [P6,000 + (P2,000/2)] 7,000 Interest income on bank deposit abroad [P5,000 + (P5,000/2)] 7,500

Capital gain on sale of land abroad (P500,000/2) 250,000

Gain on sale of shares – New York Stock Exchange P30,000/2 15,000

Expenses [P350,000 +(75,000/2)] (387,500)

Personal exemption (50,000)

Taxable net income of Daniel P547,000

d.

Gross income from practice of profession (P360,000/90%) P400,000

Rental income net of tax (P190,000/95%)/2 100,000

Dividend income from resident corp. 20,000

Dividend income from nonresident corp. (P10,000/2) 5,000

Interest income on notes receivable [P4,000 + (P2,000/2)] 5,000 Interest income on bank deposit abroad [P5,000 + (P5,000/2)] 7,500

Capital gain on sale of land abroad (P500,000/2) 250,000

Gain on sale of shares – New York Stock Exchange P30,000/2 15,000

Expenses [P200,000 +(75,000/2)] (237,500)

Taxable net income of Kat P515,000

2-8

a. Income tax payable, first quarter = P32,500 b. Income tax payable, second quarter = P14,500 c. Income tax payable, third quarter = P19,233 d. Income tax payable, fourth quarter = P59,823 e. Final tax on passive income = P15,800 f. Capital gains tax = P600,000 x 6% = P36,000

Solution:

1 st_Q ₂_Qnd ₃rd _Q _Q4/Year

Gross Profit from Sales P300,000 P500,000 P710,000 P980,000

(9)

Taxable income P180,000 P238,000 P304,110 P503,300

Tax Due (Tax Table) P32,500 P47,000 P66,233 P126,056

Less: Tax Paid

Q1 - (32,500) (32,500) (32,500)

Q2 - (14,500) (14,500)

Q3 - (19,233)

Income Tax Payable P32,500 P14,500 P19,233 P59,823

Note: The amounts shown above are cumulative.

(Amounts are cumulative) Amount % Tax

Dividend received from domestic corp. 30,000 10 P3,000

Interest income from

BPI 16,000 20 3,200

UCPB 18,000 20 3,600

Metro Bank 30,000 20 6,000

Total final tax on passive income P15,800

2-9

Gross compensation income P230,000

Note: SSS loan is nondeductible

SSS premium contributions (3,600)

Philhealth contributions (2,400)

Pag-ibig contributions (1,800)

Union dues (2,200)

Basic exemption (50,000)

Premium payment on health insurance (2,400)

2-10

Gross compensation income P450,000

SSS premium contributions (3,600) Philhealth contributions (2,400) Pag-ibig contributions (2,000) Union dues (1,000) Basic exemption (50,000) Additional exemption (100,000)

Premium payment on health insurance

-Taxable income P291,000

2-11

a. Special Alien employed by ROHQ = P170,000 computed as follows: On Compensation income:

P850,000 x 15% P127,500

On other Income (Apply rules on NRA-NETB)

Dividend Income from a dom. corp. P50,000

Int. Inc. Phil. bank deposit 20,000

Int. Inc. fr. Bank dep. under FCDS exempt

(10)

Total Other Income P170,000

Tax rate @ 25% 42,500

TOTAL INCOME TAX EXPENSE P170,00

0

 Being a nonresident alien-not engaged in trade or business for income taxation purposes, a Special Alien is not entitled to personal exemptions and subject to 25% final tax on other income including PCSO winnings.

b. Filipino Citizen employed by ROHQ = P218,500 computed as follows: Compensation income (Subject to basic tax):**

Gross Compensation P850,000

Less: Personal exemption (50k + 50k) (100,000)

Net Taxable Income P750,000

First P500,000 P125,000

Excess of P250,000 @ 32% 80,000 P205,000

Passive Income, Phls. (Subject to Final Tax)

Dividend Income from a dom. corp. @ 10% P5,000

Int. Inc. Phil. bank deposit @ 20% 4,000

Int. Inc. fr. Bank dep. under FCDS @ 7.5 4,500

PCSO winnings exempt 13,500

 **Filipinos employed by ROHQs/RHQs holding managerial or technical position shall have the option to be taxed either at 15% on their gross compensation income or based on Section 24(A) of the tax code. However, Filipinos exercising the option to be taxed at 15% preferential rate must meet all the three (3) requirements as discussed in page 98. In the problem provided, the Filipino counterpart failed to meet the “compensation threshold test” of at least P975,000. Consequently, the taxpayer shall be subject to basic income tax on its “compensation income” under Section 24(A) of the tax code.

c. Filipino Citizen employed by an OBU = P141,000 computed as follows: Compensation income (Subject to 15% F.Tax)***

P850,000 x 15% P127,500

Int. Inc. fr. Bank dep. under FCDS @ 7.5% 4,500

PCSO winnings exempt 13,500

TOTAL ICNOME TAX EXPENSE P141,000

 ***Filipinos employed by OBUs as well as Petroleum Contractors/Subcontractors shall be subject to 15% Final Tax on their “compensation income”.

 The 15% tax rate is a final tax on “gross compensation” income. Hence, personal exemptions shall not be deducted from such income.

d. Filipino Citizen employed by a Petroleum Contractor = P141,000 (refer to computations in assumption “c”)

e. Filipino Citizen employed by ROHQ with gross compensation income of P1,250,000 = P346,500 OR P201,000 computed as follows:

Compensation income (Subject to basic tax):****

Gross Compensation P1,250,000

(11)

Net Taxable Income P1,150,000

First P500,000 P125,000

Excess of P650,000 @ 32% 208,000 P333,000

Int. Inc. fr. Bank dep. under FCDS @ 7.5% 4,500 13,500

OR

Compensation income (Subject to final tax):****

Gross Compensation P1,250,000

Tax rate 15% P187,500

Passive Income, Phls. (Subject to Final Tax) Dividend Income from a dom. corp. @ 10%

P5,000

Int. Inc. fr. Bank dep. under FCDS @ 7.5% 4,500 13,500

TOTAL TAXES P201,000

 ****Filipinos employed by ROHQs/RHQs holding managerial or technical position shall have the option to be taxed either at 15% on their gross compensation income or based on Section 24(A) of the tax code, provided, however, that Filipinos exercising the option to be taxed at 15% preferential rate must meet all the three (3) requirements as discussed in page 79.

2-12

1. P6M x 6% = P360,000

2. ZV P2.2M vs. SP of P2.5M**; CGT = P2.5M x 6% = P150,000; **SP = Cost + Gain 3. Unutilized Proceeds = none; the proceeds were fully utilized; CGT = P0

4. Unutilized Proceeds = P5M x 20% = P1M; CGT = 1/5 x 6M x 6% = P72,000

2-13

a. P15M x 6% = P900,000 b. P20M x 6% = P1,200,000

c. P0

2-14

C.G. Tax = none; the transaction resulted to a loss

2-15

C.G. Tax = P100,000 x 5% = P5,000

2-16

C.G. Tax = (P100,000 x 5%) + (P50,000 x 10%) = P10,000

2-17

C.G. Tax = none

TRUE OR FALSE

1. TRUE 11. TRUE 21. FALSE

2. TRUE 12. TRUE 22. TRUE

6. FALSE 16. FALSE 26. TRUE

(12)

10. FALSE 20. TRUE 30. FALSE

MULTIPLE CHOICE 1. D 16. B 31. A 46. A 2. C 17. D 32. B 47. B 3. D 18. B 33. D 48. B 4. D 19. C 34. D 49. D 5. B 20. D 35. B 50. B 6. A 21. D 36. D 51. A 7. B 22. B 37. A 52. B 8. B 23. D 38. D 53. C 9. D 24. B 39. A 10. B 25. A 40. B 11. B 26. D 41. D 12. B 27. D 42. B 13. A 28. C 43. D 14. C 29. B 44. D 15. D 30. A 45. D

Supporting Computations (Multiple Choice): (9)

Gross income, Philippines P800,000

Gross income, USA 600,000

Expenses, Philippines (400,000)

Expenses, USA (300,000)

(10 and 11)

(12)

(16 and 18) Income Tax Due = P1,200,000 x 15% = P180,000

NOTE: Only SFEs employed in RHQs/ROHQs have the option to be taxed at either 15% Final Tax or Basic Tax (19) Basic Tax Due = P125,000 + (600,000 x 32%) = P317,000; Taxable Income = P1.2M-Personal exemptions = P1.1M (32)

Copyright (11,250/90%)x10% P1,250

Royalty (12,000/80%) x 20% 3,000

(13)

(treated as dividend income) (270,000/90%) x10%

(34)

Business expenses, Philippines (300,000)

(42) CGT = P1.5M/P4M x P4M x 6% = P90,000 (47)

Professional income (gross) P175,000

Rental income (gross); 2 years 50,000

Wagering gains 50,000

Kickbacks received 40,000

Facilitation fee ND

Insurance expense (1/2 year) (1,000)

Car expense (50%) (15,000)

Professional expenses (40,000))

Premium pay’t on health insurance (2,400)

Basic and APE (75,000)

(48)

Subject to preferential tax rate = P750,000 x 15% P112,500

Subject to 15% FBT = P170,000/85% x 15% 30,000

CGT (refer to computation below) 160,000

Income subject to 25% FWT:

Dividend income from DC P40,000

Interest income from peso bank deposit 50,000

Interest income - FCDS exempt

PCSO winnings 1,000,000

Total P1,170,000

Tax Rate 25% 292,500

0 On shares of stock = P100,000 x 5% + (50,000 x 10%) P10,000

On real property = P2.5M x 6% 150,000

TOTAL CGT P160,00

0  De minimis benefits are tax exempt

 Interest income from bank deposit under FCDS is exempt. SAEs are treated as NRAs-NETB with respect to their other income. Consequently, such interest income is tax exempt.

(14)

(49)

CGT (as computed in #48) P160,000

FBT (P170,000/85% x 15%***) 30,000

FWT on Passive incomes:

Dividend income from DC @ 10% P4,000

Interest income from peso bank deposit @ 20% 10,000

Interest income-FCDS @ 7.5% 1,500

Raffle draw winnings @ 20% 16,000 31,500

BASIC INCOME TAX:

Salaries, allowances, honoraria P750,000

Taxable Net Income P700,000

Basic Tax under Section 24(A) 189,000

0

 ***The SFE is not qualified for the 15% preferential tax rate. However, the fringe benefits received shall still be subject to 15% FBT because under RR 11-2010, the option to be subject to 15% preferential tax rate and the coverage of fringe benefit tax are independent to each other. Thus, as provided in the aforementioned RR, there would be instances where a Filipino employee shall enjoy 15% preferential tax rate but may not be covered by fringe benefit tax for not being a supervisory/managerial employee. Likewise, there would be instances where such SFE may not be subject to 15% preferential tax rate due to failure to meet any of the three (3) tests discussed earlier but may be subject to 15% FBT for being a “managerial” employee. The taxpayer in this particular case is occupying a managerial position.

CHAPTER 3 – FRINGE BENEFITS

PROBLEM SOLVING P3.1

Subject to FBT Subject to Basic Tax Exempt

1. P120,000 - -2. - - P80,000 3. 50,000 - -4. - - 5,000/ yr. (RR 8-2012) 5. - - 360,000 6. 250,000 - -7. - - 45,000 8. - - 15,000 9. 60,000 - -10. - - 1,500 P3.2 a) Yes b) GUMV = P330,000/68%=P485,294 c) No. FBT is a final tax, hence, nonreturnable d) FBT = P485,294 x 32% = P155,294

e) Within 10th_{day of the month following the end of the calendar quarter in which the fringe benefits were granted to} the recipient.

(15)

f) No. It is subject to basic tax instead of FBT. P3.3 P466,000 computed as follows:

Compensation income P480,000

Monthly transportation allowance** 36,000

De Minimis Benefits

Taxable Benefits

13th_{month pay} _- _P40,000

Christmas bonus (P5,000 is de minimis) P5,000

-Christmas bonus (in excess of P5,000) 20,000

Productivity incentive pay (de minimis under RR 1-2015) 10,000

-Uniform allowance (15,000-5,000) 5,000 10,000

Medical allowance (entire amount is de minimis) 10,000

-Rice subsidy [24,000-(1,500 x 12)] 18,000 6,000

Total (known as 13th_{Month Pay & Other Benefits)} _76,000

Tax Exempt 13th_{Month Pay & Other Benefits} _(82,000)

-Personal exemption (50,000)

**Fixed Allowances received regularly shall be treated as part of basic compensation income

P3.4 P130,000 computed as follows: Compensation income P180,000 De Minimis Benefits Taxable Benefits

13th_{month pay and mid-year bonus} _P30,000

Christmas bonus 5,000 2,500

Uniform allowance (7,500-5,000) 5,000 2,500

Actual Medical allowance (P12,000-10,000) 10,000 2,000

Medical allowance to dependents (P2,000-1,500) 1,500 500

Rice subsidy [entire amount is de minimis] 18,000

-Monetized vacation leave [7,500-(500x 10)] 5,000 2,500

Total (known as 13th_{Month Pay & Other Benefits)} _40,000

Tax Exempt 13th_{Month Pay & Other Benefits} _(40,000)

-Personal exemption (50,000) Taxable income P130,000 P3.5 1. a) P165,000 x 50% = P82,500 b) P82,500/68% x 32% = P38,824 2. a. P4.5M x 5% /4 x 50% = P28,125 b. P28,125/68% x 32% = P13,235 3. a. P4.5M b. P4.5M/68% x 32% = P2,117,647 4. a. P1,200,000 b. P1,200,000/68% x 32% = P564,705 5. a. P800,000 b. P800,000/68% x 32% = P376,470 6. a. P1,200,000/5 = P240,000 b. P240,000/68% x 32% = P112,941

(16)

TRUE OR FALSE

1. TRUE 6. FALSE 11. FALSE

2. FALSE 7. TRUE 12. TRUE

MODIFIED IDENTIFICATION 1. B 6. B 11. B 16. B 2. B 7. B 12. B 17. B 3. B 8. B 13. B 18. B 4. B 9. B 14. B 19. B 5. B 10. B 15. B 20. B MULTIPLE CHOICE 1. C 11. C 21. D 31. 41. 2. A 12. A 22. A 32. 42. 3. D 13. A 23. D 33. 43. 4. D 14. B 24. C 34. 44. 5. D 15. B 25. D 35. 45. 6. D 16. D 26. A 36. 46. 7. B 17. C 27. D 37. 47. 8. A 18. B 28. B 38. 48. 9. D 19. C 29. D 39. 49. 10. D 20. D 30. A 40. 50. 51. 52. 53. Supporting Computations (Multiple Choice):

(* #13)

The journal entry in letter “a” is the journal entry provided in related revenue regulations. Nonetheless, the authors believe that the journal entry should have been:

Compensation expense (@ GUMV) Pxx

Cash Pxx

Consequently, from the journal entry shown above, the account debited as “fringe benefit tax expense” in revenue regulations should not form part of the employer’s “Taxes Expense” but as a component of the employer’s “Compensation expense”. (23)

To managerial – fringe benefit expense P1,360,000

Fringe benefit tax expense 640,000

Rank and File 5,000,000

Total P7,000,000

(17)

Expenditure attributable to Managerial employees

(P1M x 20%) P200,000

Divide by GUMVF 68%

Grossed-up monetary value P294,118

x FBT rate 32%

Fringe Benefit Tax P94,118

(25) Total deductible expense = P1,000,000 + 94,118 = P1,094,118 (26)

Salaries and wages gross of CWT P380,000

Fixed monthly allowance** 60,000

Total compensation income subject to graduated rate P440,000

*Fixed Allowances received regularly per payroll are considered part of regular compensation subject to graduated rate (RR 10-2008)

(27)

Allowance not subject to liquidation P48,000

Divide by GUMVF 68% GUMV P70,588 x FB rate 32% FBT P22,588 (29) Annual rental P637,500 x 50%

Monetary value of housing benefit P318,750

Divide by GUMVF 68%

GUMVF P468,750

X FBT rate 32%

FBT P150,000

Add: Annual Rental 637,500

Total Deductible Expense P787,500

(30)  P2,000,000 x 5% x 50% / 12 = P4,1667.67  P4,1667.67 / 68% x 32% = P1,960.78 (31)  P3,000,000 x 5% x 50% / 12 = P6,250  P6,250/ 68% x 32% = P2,941.18 (32)  P5,000,000 / 12* = P416,667  P416,667/ 68% x 32% = P196,078.42 Monthly monetary value

(33)  (P5,000,000-2,000,000) / 12 = P250,000  P250,000/ 68% x 32% = P117,647.05 (35)  P1,000,000 / 68% = P1,470,588  P1,470,588 x 32% = P470,588 (36)  P800,000 / 68% = P1,176,471  P1,176,471 x 32% = P376,471 (37)  (P1,000,000/5) / 68% = P294,118  P294,118 x 32% = P94,118 (52) Pedro is not treated as minimum wage earner

Salaries P144,000

(18)

Tax exempt other benefits (82,000)

(53) Pedro is a minimum wage earner but his business income is taxable

Business income P200,000

0

CHAPTER 4 – INCOME TAX FOR CORPORATIONS

PROBLEM SOLVING: (P4.1)

CASE A (Domestic Corporation): 1. P1,636,500 2. P81,250 3. P550,000 Solution

Philippines Abroad Total

Gross sales P10,000,000 P5,000,000 P15,000,000

Sales returns 200,000 (200,000)

Cost of goods sold 3,500,000 2,250,000 (5,750,000)

Operating expenses 2,800,000 1,100,000 (3,900,000)

Interest income from trade receivable 100,000 50,000 150,000

Interest income from BPI deposits-USA - 80,000 80,000

Dividend income-resident foreign corp. 45,000 - 45,000

Dividend income-nonresident foreign corp. - 30,000 30,000

Tax rate 30%

Normal Corporate Income Tax Due P1,636,500

Philippines Final Tax

Interest income from BPI deposits-Phils. @ 20% 100,000 P20,000

Interest income from FCDS @ 7.5% 150,000 11,250

Income from money market placement @ 20% 200,000 40,000

Royalty income @ 20% 50,000 10,000

Final tax on passive income P81,250

Capital Gains Tax Gain on sale of shares sold directly to a buyer

[(100,000x 5%) + (50,000 x 10%)] P10,000

Sale of real property in the Philippines

(SP of P9M** x 6%) 540,000

(19)

**SP = Cost + Gain = P4M + 5M = P9M; SP is higher than FMV CASE B (Resident Foreign Corporation):

4. P1,093,500

5. P81,250 (Same with Case A) 6. P550,000 (Same with Case A) Solution:

Gross sales P10,000,000

Sales returns (200,000)

Cost of goods sold (3,500,000)

Operating expenses (2,800,000)

Interest income from trade receivable 100,000

Dividend income-resident foreign corp. 45,000

Tax rate 30%

Normal Corporate Income Tax Due P1,093,500

CASE C (Non-Resident Foreign Corporation): 7. P2,038,500 computed as follows:

Gross sales P10,000,000

Sales returns (200,000)

Cost of goods sold (3,500,000)

GROSS INCOME P6,300,000

ADD:

Interest income from trade receivable 100,000

Dividend income-resident foreign corp. 45,000

Interest income from BPI deposits-Phils. 100,000

Income from money market placement 200,000

Royalty income 50,000

Total “Gross” Income P6,795,000

Tax rate 30%

Final Tax Due (Basis: Gross income) P2,038,500

(P4.2) P0. A foreign corporation is taxable only on its income derived from sources within the Philippines. The incomes provided in the problem were all derived in U.S.

(P4.3)

Current account, BDO @ 20% P120,000

Savings deposit, BPI @ 20% 100,000

Interest income from government bonds @ 20% 40,000

Royalty income from various domestic corporations @ 20% 20,000

US dollar deposit, FCDU @ 7.5% 60,000

Total final taxes on passive income P340,000

(P4.4)

Q1 Q2 Q3 Q4

Gross profit from sales P1,600,000 P3,200,000 P4,800,000 P6,200,000

Business expenses (1,200,000) (2,400,000) (3,400,000) (4,200,000)

Taxable income 400,000 800,000 1,400,000 P2,000,000

(20)

MCIT (Gross Profit x 2%) 32,000 64,000 96,000 124,000

TAX DUE (Higher) P120,000 P240,000 P420,000 P600,000

Less: Income tax withheld (30,000) (70,000) (130,000) (230,000)

Tax Paid Q1 - (90,000) (90,000) (90,000)

Tax Paid Q2 (80,000) (80,000)

Tax Paid Q3 - (120,000)

Income Tax Payable P90,000 P80,000 P120,000 P80,000

(P4.5)

Year 4 Year 5 Year 6 Year 7 Year 8

MCIT 100,000 60,000 50,000 40,000 20,000

NCIT 30,000 70,000 60,000 30,000 90,000

TAX DUE (Higher) P100,000 P70,000 P60,000 P40,000 P90,000

Excess MCIT

Year 4 - (70,000) - -

-Year 7 (10,000)

Income Tax Payable P100,000 P0 P60,000 P40,000 P80,000

(P4.6) 1. P120,000 2. P690,000 3. P210,000 4. P495,000 Q1 Q2 Q3 Q4

Tax Due NCIT P300,000 MCIT P990,000 NCIT P1,410,000 NCIT P2,010,000

Excess MCIT Prior Yr (90,000) - (90,000) (90,000)

W/holding tax-Prior Yr (30,000) (30,000) (30,000) (30,00)

W/holding -During the Yr (60,000) (150,00) (270,000) (375,000)

Tax Paid Previous Qtr(s) (120,000) (810,000) (1,020,000)

Tax Payable P120,000 P690,000 P210,000 P495,000

(P4.7)

Case A (Taxable Joint Venture)

1. Taxable income of the joint venture = P20M 2. Taxdue of the joint venture = P6M 3. Taxable income of ABC Company = P10M 4. Taxdue of ABC Company = P3M 5. Taxable income DEF Company = P5M 6. Taxdue of DEF Company = P1.5M

Joint Venture ABC Co. DEF Co.

Gross income P50,000,000 P30,000,000 P20,000,000

Business expenses (30,000,000) (20,000,000) (15,000,000)

Taxable income P20,000,000 P10,000,000 P5,000,000

(21)

Tax Due P6,000,000 P3,000,000 P1,500,000

Case B (Tax Exempt Joint Venture)

7. Taxable income of the joint venture = P0 (tax exempt) 8. Tax due of the joint venture = P0

9. Taxable income of ABC Company = P24M 10. Tax due of ABC Company = P7.2M 11. Taxable income DEF Company = P11M 12. Tax due of DEF Company = P3.3M

Gross income P50,000,000 P30,000,000 P20,000,000

Share in the income of the joint venture

- 14,000,000 6,000,000

Net/ Taxable income P20,000,000 P24,000,000 P11,000,000

Tax Rate (NCIT) 30% 30%

Tax Due P0 P7,200,000 P3,300,000

(P4.8)

Case A:

1. Taxable income of the joint venture = P20M 2. Tax due of the joint venture = P6,000,000 3. Taxable income of Rico = P10M

4. Taxable income Earl = P5M

5. Final tax due of Rico (10%) = P980,000 6. Final tax due of Earl (10%) = P420,000

Joint Venture Rico Earl

Gross income P50,000,000 30,000,000 20,000,000

Taxable income P20,000,000 P10,000,000 P5,000,000

Less: Tax Due @ 30% (6,000,000)

Distributable income P14,000,000

Share in income

Rico @ 70% P9,800,000

Earl @ 30% 4,200,000

Case B:

7. Taxable income of the joint venture = P0 (tax exempt) 8. Tax due of the joint venture = P0

9. Taxable income of Rico = P24,000,000 10. Taxable income Earl = P11,000,000

11. Final tax due of Rico = P0 ; subject to basic and creditable withholding tax 12. Final tax due of Earl = P0 ; subject to basic and creditable withholding tax

Joint Venture Rico Earl

Gross income P50,000,000 30,000,000 20,000,000

(22)

Net income P20,000,000 P10,000,000 P5,000,000 Distributable income P20,000,000 Share in income Rico @ 70% P14,000,000 14,000,000 Earl @ 30% 6,000,000 6,000,000 Taxable income P24,000,000 P11,000,000 (P4.9) 1. [(P6M-4M) + (($50,000-$20,000)x45)] = P3,350,000 x 30% = P1,005,000 2. (P6M-4M) x 30% = P600,000 3. P6M x 30% = P1,800,000 4. P6M x 2.5% = P150,000 5. P6M x 1.5% = P90,000 6. P6M x 25% = P1,500,000 7. P6M x 4.5% = P270,000 8. P6M x 7.5% = P450,000 9. *P3,350,000 x 10% = P335,000; * from #1 10. P1,005,000; same computation with #1 11. P0; exempt

(P4.10)

1. [5M + 3M] x 2.5% = P200,000 2. [5M x 2.5%) + (3M x 1%)] = P155,000

3. [5M + 3M] x 2.5% = P200,000; No GPB on Gross receipts from USA to Russia (P4.11)

1.Related 4.Related

2.Related 5.Related

3.Related 6.Unrelated

(P4.12)

Gross income, related activities P5,000,000

Gross income, unrelated activities (excluding rental income) 5,000,000 Rental income from commercial spaces (gross of 5% WT) 2,000,000

Expenses, related activities (2,000,000)

Expenses, unrelated activities (3,000,000)

Tax Rate (NCIT); Unrelated income  Related income 30%

Tax Due 2,100,000

Less: Quarterly tax payments for the first 3 quarters (500,000)

Income Tax Payable P1,600,000

(P4.13)

Question 1:

Tuition fees P9,500,000

Miscellaneous fees 1,200,000

Income from bookstore 350,000

(23)

Salary, allowances and bonus (6,400,000)

Other operating expenses (2,600,000)

Depreciation expense-classrooms (75,000)

Depreciation expense-furniture and equipment (50,000)

Taxable income P2,105,000 x Tax Rate 10% Tax Due P210,500 Question 2: Tuition fees P9,500,000 Miscellaneous fees 1,200,000

Income from bookstore 350,000

Income of school canteen 180,000

Salary, allowances and bonus (6,400,000)

Other operating expenses (2,600,000)

Construction of additional classrooms (1,300,000)

Acquisition of furniture and equipment (400,000)

x Tax Rate 10%

Tax Due P53,000

(P4.14)

1. Income Tax Due (Payable) = P249,000 – CWT 15,000 = P234,000 2. Improperly accumulated earnings tax = P46,425

Solution:

Gross income (gross of 1% WT) P1,500,000

Business expenses (600,000)

Gain on sale of business asset 60,000

NOLCO in 2011 (130,000)

ADD:

2011 NOLCO 130,000

Interest on peso bank deposit (P5,000/80%) 6,250

Dividends from a domestic corporation 35,000

Gain on sales of shares, not listed and traded subjected to

capital gains tax (P150,000-115,000) 35,000 206,250

DEDUCT:

NCIT (P830,000 x 30%; higher than MCIT) 249,000

Final Tax on Passive income (6,250 x 20%) 1,250

Capital gains tax on shares (35,000 x 5%) 1,750

Dividends paid during the year 120,000 (372,000)

BALANCE P664,250

RE Jan. 1 200,000

RE Dec. 31, 2015 P864,250

LESS: Amount that may be retained (Par of Outs. Sh.)

(400,000)

IMPROPERLY ACCUMULATED EARNINGS P464,250

x IAET RATE 10%

IMPROPERLY ACCUMULATED EARNINGS TAX P46,425

(24)

(P4.16) (Sale 3 = P14,000) + (Sale 4 = P2,500) = P16,500

TRUE OR FALSE

2. FALSE 12. TRUE 22. TRUE

3. TRUE 13. FALSE 23. FALSE

(10) it shall be “prolonged labor dispute” resulting from temporary closure of the business (15) treated as inter-corporate dividend, hence, nontaxable

(17) should be from “within and without” (17) shall be ROHQ

(21) shall be IAET

(24) only if the taxpayer is a financial institution

(30) passive incomes are not subject to branch remittance tax

MULTIPLE CHOICE 1. D 21. D 41. C 61. D 2. B 22. B 42. A 62. A 3. C 23. A 43. D 63. A 4. B 24. C 44. D 64. A 5. D 25. D 45. B 65. A 6. C 26. B 46. B 66. B 7. D 27. D 47. C 67. C 8. B 28. D 48. C 68. C 9. B 29. A 49. A 69. B 10. B 30. C 50. D 70. A 11. A 31. B 51. D 71. A 12. D 32. C 52. D 72. A 13. B 33. A 53. A 73. D 14. D 34. D 54. B 74. A 15. C 35. C 55. B 75. A 16. B 36. D 56. D 17. C 37. C 57. C 18. B 38. - 58. B 19. A 39. B 59. C 20. D 40. B 60. B

Supporting Computations (Multiple Choice): (4).

Domestic RFC NRFC

Gross Income, Philippines P975,000 P975,000 P975,000

Expenses, Philippines (750,000) (750,000)

Gross Income, Malaysia 770,000

Expenses, Malaysia (630,000)

Interest on bank deposit - - 25,000

Taxable income 365,000 225,000 P1,000,000

(25)

Tax Due P109,500 67,500 300,000 (5).

Gross profit from sales P3,000,000

Business expenses (1,800,000)

Dividend income from a resident corporation 50,000

Dividend income from a nonresident corporation 40,000

Capital gain on sale of land in China 200,000

Interest income from notes receivable 20,000

Tax Due @ 30% P453,000

(6).

Sale of land-Phils. P2M x 6% P120,000

Sale of shares of domestic corp.

[(P100,000 x 5%)+(P20,000 x 10%)] 7,000

Capital gains tax P127,000

(7).

Interest income on peso bank deposit @ 20% P6,000

Interest income on foreign currency bank deposit 1,875

Interest income on treasury bills @ 20% 2,000

Total final taxes on passive income P9,875

(8). To Louie @ 10% P10,000 To Floyd @ 10% 10,000 To Zeus @ 10% 10,000 To JJ @ 20% 20,000 To Francis @ 25% 25,000

To Chen, a domestic corporation Exempt

To a resident foreign corporation Exempt

To a nonresident foreign corporation @ 15% 15,000

Total withholding taxes P90,000

(10).

Final W. Tax = $3,000 x P45 x 10% = 13,500 (11).

Interest income from loans P10,000,000

OPEX (P12M x 10/15) (8,000,000)

Income Tax Rate 30%

Income Tax Due P600,000

(12 and 13) Solution:

G Income P5,000,000 P3,000,000 P2,000,000 Expense s (3,000,000) (2,000,000) (1,500,000) TNI P2,000,000 P1,000,000 P500,000 NCIT 30% 30% 30% Tax Due P600,000 P300,000 P150,000 (14).

(26)

Joint Venture ABC Co. DEF Co. G Income P5,000,000 P3,000,000 P2,000,000 Sh. in Inc. 1,400,000 600,000 Expenses (3,000,000) (2,000,000) (1,500,000) TNI P2,000,000 P2,400,000 P1,100,000 NCIT - 30% 30% Tax Due - P720,000 P330,000

(17). Income Tax Due = (P10M-P4M) x 30% = P1,800,000 (18). Income Tax Due = P10M x 2.5% = P250,000 (20). Income Tax Payable = [5M + 3M] x 2.5% = P200,000

(21). Tax Expense (Income & CCT = ([5M + 3M] x 2.5% )) + CCT = P200,000 + 60,000 = P260,000 (22). Branch Remittance Tax = P2M x 15% = P300,000

(27).

Gross income, related activities P5,000,000

Gross income, unrelated activities (except rental income) 5,000,000

Rental income from commercial spaces (gross of 5% WT) 2,000,000 P12,000,000

Expenses, related activities 2,000,000

Expenses, unrelated activities 3,000,000 (5,000,000)

Tax rate (unrelated income>related income) 30%

Tax due P2,100,000

Less: Quarterly tax payments P500,000

Withholding tax on rental income 100,000 (600,000)

Tax payable P1,500,000

(28).

Income from tuition fees P3,500,000

Miscellaneous school fees 1,500,000

Dividend income from foreign corp. 2,000,000

Rental income (gross of 5% WT) 2,000,000 P9,000,000

OPEX (4,000,000)

Taxable income P,000,000

Tax rate (related income>unrelated income) 10%

Tax due P500,000

Less: Withholding tax on rental income (100,000)

Tax payable P400,000

(29).

Tuition and other fees P5,000,000

Rental income (gross of 5% WT) 50,000

OPEX (1,500,000)

CAPEX (2,000,000)

Tax rate (related income>unrelated income) 10%

Tax due P155,000

(30).

(27)

Rental income (gross of 5% WT) 1,500,000

OPEX (8,200,000)

Tax rate (not a non-profit hospital) 30%

Tax due P540,000

(30).

Tuition fees P4,800,000

Rental income (gross of 5% WT) 5,200,000

OPEX (9,450,000)

Tax rate (unrelated income is higher) 30%

Tax due P165,000

Tax payable (P95,000)

(#s 39 TO 46). ERRATUM: Change year of commencement of operations to 2003

‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 NCIT P25,000 P130,000 P200,000 P0 P100,000 P150,000 P8,000 P1,000 MCIT 100,000 150,000 190,000 300,000 50,000 60,000 40,000 50,000 DUE (Higher) 100,000 150,000 200,000 300,000 100,000 150,000 40,000 50,000 EXCESS MCIT 75,000 20,000 - 300,000 - - 32,000 49,000 TAX DUE P100,000 P150,000 P200,000 P300,000 P100,000 P150,000 P40,000 P50,000 MCITCO -‘08 (75,000) ‘09 (20,000) ‘11 (100,000) (150,000) -TAX PAYABLE P100,000 P150,000 P105,000 P300,000 P0 P0 P40,000 P50,000

CHAPTER 5 – PARTNERSHIPS, ESTATES AND TRUSTS

PROBLEM SOLVING

P5.1

1. Income tax due of the partnership = P0 (tax exempt) 2. Income tax due of LJ = P397,000

LJ

LJ’s gross income from his trading business P1,000,000

LJ’s expenses from his trading business (600,000)

Share from the net income of a GPP 400,000

Royalty, books published in USA 150,000

Salaries, gross of withholding tax 450,000

Tax Due (Tax Table) P397,000

P5.2

Case A (Ordinary Partnership):

1. Tax due of the partnership = P240,000 2. Tax due of Rivera = P0

(28)

RR Partnership Rivera Reyes

Gross Income P2,000,000 P800,000 P1,000,000

Allowed Deductions (1,200,000) (900,000) (700,000)

Basic exemption - (50,000) (50,000)

Taxable income P800,000 (P150,000) P250,000

Tax Rate 30% Tax Table Tax Table

Tax Due P240,000 P0 P50,000

Note: The partners’ share in the net income of the partnership is treated as dividend income subject to a final tax rate of 10%.

Case B (General Professional Partnership): 3. Tax due of the partnership 4. Tax due of Rivera 5. Tax due of Reyes

RR Partnership Rivera Reyes

Gross Income P2,000,000 P800,000 P1,000,000

Allowed Deductions (1,200,000) (900,000) (700,000)

Basic exemption - (50,000) (50,000)

Share in partnership income - 320,000 480,000

Taxable income P800,000 P170,000 P730,000

Tax Rate EXEMPT Tax Table Tax Table

Tax Due P0 P14,500 P198,600

P5.3

1. Income tax payable/(refundable) of the partnership = P352,500 2. Income tax payable/(refundable) of Villamin = P40,150 3. Income tax payable/(refundable) of Francis = P0 4. Final tax on passive income of the partnership = P7,750 5. Final tax on passive income of Villamin = P40,908 6. Final tax on passive income of Francis = P97,317 7. Capital gains tax of the partnership = P150,000 8. Capital gains tax of Villamin = P0

9. Capital gains tax of Francis = P7,000 Partnership:

Gross profit from sale of services P3,500,000

Direct cost of services (1,500,000)

Business Expenses (700,000)

Rental Income in business assets (gross) (P142,500/95%)

150,000

X tax rate 30%

Tax due P435,000

Quarterly tax payments (75,000)

Withholding tax on rent (7,500)

Income tax payable P352,500

Interest Income on peso bank deposits @ 20% P4,000

Interest income-FCDS @ 7.5% 3,750

Final Tax on passive income of the partnership P7,750

Capital gains tax on real property (2.5M x 6%) 150,000 DISTRIBUTABLE INCOME:

Total income subject to final tax 70,000

Capital gain 300,000

Less:

(29)

Final tax due (7,750)

Capital gains tax (150,000)

DISTRIBUTABLE INCOME P1,227,250

Villamin:

Gross income from sole-proprietorship business 925,000

Allowable business expenses (670,000)

Dividend Income-resident foreign corp. 120,500

Tax due (tax table) P72,650

Quarterly tax payments (32,500)

Income tax payable P40,150

Final Tax – (P1,227,250/3 X 10%) P40,908

Capital gains tax - Villamin P0

Francis:

Income Tax payable

(No income subject to basic tax)

P0

Dividend Income @ 10% P8,500

Royalty Income @ 20% 7,000

Share in the distributive share of the partnership income

(P1,227,250/3 X 2 x 10%) 81,817

Total final tax on passive income P97,317

Capital gains tax on shares of stock [(P100,000 x 5%) + (20,000 x 10%)]

7,000

P5.4

1. Income tax payable of the business partnership = P114,000 2. Income tax payable of the GPP = P0

3. Income tax payable of Louie = P26,875 4. Income tax payable of Floyd = P44,563

Business

Partnership GPP

Gross income P800,000 P500,000

Deductible expenses (420,000) (375,000)

Net or Taxable income P380,000 P125,000

Tax rate 30%

Income tax due/payable P114,000 EXEMPT

Louie and Floyd Louie Floyd

Gross Income P 325,000 P 380,000

Dividend from foreign corporation 12,000 8,250

Prize, supermarket raffle - 7,500

Share in income of GPP 37,500 87,500

(30)

Additional exemption (50,000)

-Taxable income P157,500 P228,250

Income tax payable (tax table) P26,875 P44,563

NOTE:

 The share in the net income of the business partnership, the dividend income from a domestic corporation and royalty from books are subject to a final tax rate of 10%.

 The prize in a supermarket raffle by Louie (more than P10,000) is subject to 20% final tax

P5.5

1. Income tax payable of the estate = P43,000 2. Income tax payable of Louie = P2,250 3. Income tax payable of Floyd = P3,688

Louie Floyd Estate

Gross income (gross of 5% tax) P 325,000 P 380,000 P800,000

Deductible expenses (117,000) (205,000) (420,000)

Prize, supermarket raffle 7,500

Basic exemption (50,000) (50,000) (20,000)

Additional exemption (50,000) -

-Taxable income P120,000 P140,750 P360,000

Tax Due (Tax Table) P18,500 P22,688 P83,000

Less CWTax (5%) (16,250) (19,000) (40,000)

Income Tax Payable P2,250 P3,688 P43,000

P5.6

1. Income tax payable of the estate = P49,000 2. Income tax payable of Louie = P42,500 3. Income tax payable of Floyd = P35,188

Estate

Rental income of the estate (gross 5% tax) P1,000,000

Deductible operating expenses (estate) (500,000

Income distributed to Louie (50,000)

Income distributed to Floyd (50,000)

Tax due (tax table) P89,000

Less: CWtx (50,000)

Income Tax Payable P49,000

Louie Floyd

Gross Income P 325,000 P 380,000

Prize, supermarket raffle 7,500

Amount received from the Income of the estate 50,000 50,000

Basic exemption (50,000) (50,000)

(31)

Tax Due P42,500 P35,188

P5.7

1. Income tax payable of the trust = P310,600 2. Income tax payable of Pedro = P131,640

Gross income of the trust P3,000,000

Deductible business expenses of the trust (1,800,000)

Income distributed to EDT during the year (200,000)

Dividend income from resident foreign corporation 100,000

Income Tax payable (tax table) P310,600

Compensation income P800,000

Rental income (gross) 500,000

Rental expenses (80,000)

Dividend from foreign corporation 8,250

Tax Due P351,640

Tax payments (Quarter 1-3) (120,000)

CWTx on rent (100,000)

Income Tax Payable-Pedro P131,640

P5.8

1. Taxable income of Trust 1 = P780,000 2. Taxable income of Trust 2 = P1,280,000

3. Consolidated taxable income of the Trust 1 and 2 = P2,080,000 4. Income tax payable of Trust 1 = P14,860

5. Income tax payable of Trust 2 = P26,540 6. Taxable income of Juan = P1,950,000 7. Taxable income of Pedro = P1,350,000

Trust 1 Trust 2 Consolidated

Gross income of the trust P3,000,000 P3,000,000 P6,000,000

Deductible business expenses of the trust (1,800,000) (1,800,000) (3,600,000)

Income distributed to Rico during the year (500,000) (500,000)

Dividend income-resident corporation 100,000 100,000 200,000

Basic exemption (20,000) (20,000) (20,000)

Taxable income P780,000 P1,280,000

TAX DUE (PAID) P214,600 P374,600

Total consolidated income P2,080,000

TAX DUE (Allocated Income Tax Due) P229,460 P401,140 P630,600

Trust #1=214,600/589,200 x P630,600 Trust #1=374,600/589,200 x P630,600

Less: Tax Paid P214,600 P374,600

INCOME TAX PAYABLE P14,860 P26,540

Juan Pedro

Compensation income P1,000,000 1,200,000

Gross business income 1,000,000 600,000

Business expenses (550,000) (400,000)

Dividend from foreign corporation 50,000

Amount received from the income of the trust 500,000

(32)

Taxable income P1,950,000 P1,350,000 MULTIPLE CHOICE 1. A 21. D 41. B 61. C 2. C 22. A 42. B 62. B 3. B 23. D 43. D 63. C 4. B 24. D 44. C 64. D 5. B 25. D 45. D 65. D 6. A 26. A 46. C 7. A 27. D 47. D 8. D 28. C 48. D 9. B 29. A 49. D 10. C 30. A 50. D 11. B 31. D 51. B 12. A 32. B 52. D 13. B 33. A 53. D 14. C 34. D 54. C 15. B 35. A 55. C 16. A 36. D 56. D 17. D 37. C 57. B 18. B 38. C 58. D 19. C 39. D 59. D 20. B 40. D 60. C

Supporting Computations (Multiple Choice): 15. (P2M-1M) x 30% = P300,000 16. Subject to 10% final tax 17.

Partnership net profit (net of 30% tax) (P800,000 x 70%)

P560,000 Other Income:

Interest income, net 8,000

Dividend income (tax exempt) 20,000

Total distributive income P588,000

Share of T (50%) P294,000

Applicable tax (10% final tax) P29,400

18. P600,000 – P350,000 x 50% = P125,000 19.

Share in GPP’s income P125,000

Own income (P150,000-70,000) 80,000

Taxable income of Ramos P155,000

20.

Gross income P750,000

Expenses (200,000)

x 70%

Net income after corporate tax 385,000

Add:

(33)

Bank interest income, Metrobank (net of final tax) 80,000

Distributable net income P485,000

Tita: P485,000 x 55% x 10% P26,675

Ghore: P485,000 x 45% x 10% P21,285

32. Statement IV – subject to creditable withholding tax, not final tax 40.

Income of the estate P600,000

Expenses (150,000)

Distribution of income to Francis (120,000)

41.

Francis’ own income P500,000

Income of the estate received by Francis 120,000

60.

Compensation income P1,500,000

Business income 1,000,000

Taxable income of Ramos P2,450,00

0 61.

Trust’s income P40,000,000

Income distributed to Atty. Lo Yer (Gross) (P8.5M / 85%) (10,000,000)

62.

Compensation income (Gross amount) P3,000,000

Income of the trust received by Niah (Gross) 10,000,000

63 – 65.

# 64 TRUST 1 # 65 TRUST 2

Net income P4,000,000 Net income P6,000,000

Personal exemption (20,000) Personal exemption (20,000) Taxable income P3,980,000 Taxable income P5,980,000

Tax due: Tax due:

1st_P500,000 _P125,000 ₁st_P500,000 _P125,000

Excess @ 32% 1,113,600 Excess @ 32% 1,753,600 Tax due/paid 1,238,600 Tax due/paid 1,878,600 Versus Share 1,262,171* Versus Share 1,896,429** Tax Payable P23,571*** Tax Payable P17,829**** # 63

Consolidated:

(34)

Personal exemption (20,000) Taxable income P9,980,000 Tax Due (Consolidated):

1st_P500,000 _P125,000 Excess @ 32% 3,033,600 Total P3,158,600 Less Paid: Trust 1 (1,238,600) Trust 2 (1,878,600) Income Tax Payable 41,400 Share in the Tax due:

Trust 1 (3,980/9,960***) x P1,238,600 1,262,171* 41,400 x 3,980/9,960***** =23,571*** Trust 2 (5,980/9,960) 1,896,429** 41,400 x 5,980/9,960 =17,829**** 3,980+5,980 = 9,960*****

CHAPTER 6 – CONCEPT OF INCOME

MULTIPLE CHOICE 1. B 13. C 25. D 37. C 2. D 14. D 26. B 38. D 3. B 15. A 27. B 39. D 4. A 16. B 28. A 40. C 5. D 17. D 29. D 41. C 6. D 18. A 30. A 42. C 7. A 19. C 31. D 43. D 8. D 20. C 32. D 44. -9. B 21. A 33. B 45. A 10. D 22. D 34. B 11. C 23. D 35. B 12. A 24. D 36. B Supporting Computations: 32. P300,000 4/12 = P100,000 23.

Gain on sale of personal property purchased in the Philippines and sold in Hongkong

P-Compensation received for personal services in the Philippines 200,000

Rent income from real property in Malaysia

-Gain from sale in the Philippines of shares of a foreign corporation 100,000

Deductions identified with:

Philippine income (80,000)

Foreign income

-Deductions unidentified with any particular income (P30,000 x 300,000/1,000,000) (9,000)

Philippine Net Income P211,000

34.

Gross Receipts P600,000

Rental expenses (120,000)

Salaries expense (100,000)

(35)

Taxable income P330,000 35. (Resident Alien)

Gross Income P2,000,000

Dividend income from foreign corp. (50,000 x 60%) 30,000

36. Final Tax Withheld on dividend income from domestic corp. = (P90,000 + 72,000)/ 90% x 10% = P18,000

37. (Domestic Corp = Taxable on income within and without

Allowable deductions (4,000,000)

Dividend income from domestic corp. exempt

Dividend income foreign corp. (95% from R.P.) 1,000,000

Dividend income foreign corp. (60% from R.P.) 800,000

Dividend income foreign corp. (25% from R.P.) 400,000

38. (Resident Foreign Corp = Taxable on income from Philippine sources only

Allowable deductions (4,000,000)

Dividend income from domestic corp. exempt

Dividend income foreign corp. (80% from R.P.) (P1M X 80%=considered from Phil. sources)

800,000 Dividend income foreign corp. (60% from R.P.)

(P800,000 x 60%)

480,000 Dividend income foreign corp. (25% from R.P.)

(entire amount is considered income from sources outside of the Phils.)

-Taxable income P7,280,000 39. DI-Microsoft -DI-Intel (P400,000 x 60% x 30%) P72,000 DI - IBM

-Interest income – BDO @ 20% 120,000

FCDS deposit @ 7.5% 60,000

Royalty income @ 20% 20,000

Total final taxes on passive income P272,000 40.

DI-Microsoft & Intel @ 30% basic tax P270,000

DI - IBM

-Interest income – BDO @ 20% 120,000

FCDS deposit @ 7.5% 60,000

Royalty income @ 20% 20,000

(36)

CHAPTER 7 – INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME

PROBLEM SOLVING:

P7.1

INCOME SUBJECT TO BASIC TAX:

Basic salary (P900,000+P300,000) P1,200,000

Director’s fee 200,000

Business income:

Retail business 250,000

Apartment rental (P190,000/95%) 200,000

Dividend income from a resident corporation 50,000

13th_{, Xmas and MidYear Bonus (net of P82,000} exclusions)

98,000

Gross Income subject to basic tax (Q#1) P1,998,000

LESS:

Business expenses (125,000)

Net Taxable income (Q#4) P1,823,000

Income tax due (Q#5) P548,360

INCOME SUBJECT TO FINAL TAX:

Cash dividend from a domestic corporation P50,000

Interest from savings deposit 20,000

Royalties from book publications 50,000

Prizes from contest won 50,000

Winnings town lottery 50,000

Total Income subject to final tax (Q2) P220,000

INCOME EXEMPT FROM TAX:

Stock dividend from a domestic corporation P25,000

Damages received from injuries and sickness 85,000

Proceeds-life insurance coverage of his father 300,000

Total income exempt from tax (Q3) P410,000

P7.2

1) P10,000 2) P15,000

3) P715,000 computed as follows:

Gross profit from sales P1,000,000

Taxable recovery-receivables 10,000

(37)

Rent income excluding security deposit 250,000

Operating expenses (500,000)

Write-off during the year (60,000)

P7.3

1) P240,000 + 24,000 = P264,000 2) P240,000 + 24,000 = P264,000 3) P1,000,000

Income from improvement (Remaining BV after lease term) (P3M x 5/15)

Remaining Lease Term after completion = 10 years Remaining life after lease term = 5 years

P1,000,000

4) P100,000

P7.4

Ramon Magsaysay award P50,000

Athlete of the year award 100,000

Prize for winning an Olympic Medal 500,000

Winnings – Philippine lotto 100,000

Total Winnings and Awards exempt from income tax P750,000

If the Question was total amount exempt from income tax, the answer would have been:

Total Winnings and Awards exempt from income tax P750,000

Gift from Mayor Alfredo Lim 250,000

Car from Honda as a gift 1,000,000

Total Amount exempt from income tax P2,000,000

P7.5 P0; The P800,000 should be exempt from income tax

P7.6 P1,000,000; The interest income from expanded foreign currency deposit

P7.7 Taxable Proceeds = P1,000,000 – P600,000 = P400,000

P7.8 Income within = None. The ratio of income without over total income for the past 3 years < 50%.

P7.9

Salary for the first quarter P180,000

Honorarium as speaker in one of ABC’s team building activities 10,000

Retirement pay Exempt

Commissions 30,000

Fee as a member of ABC’s board of directors 50,000

10 days monetized vacation leave Exempt

Interest income from time deposit F. Tax

Productivity incentive pay and 13th_{month pay} _Exempt

(Productivity pay=P10,000 de minimis under RR 1-2015) (Total of excess of productivity of P10,000 + 60,000 bonus is not more than P82,000, hence tax exempt)

Income from improvement (Remaining BV after lease term) (P3M x 5/15)

Remaining Term after completion = 10 years Remaining life after lease term = 5 years

P1,000,000 /10 years =P100,000

(38)

Total compensation income subject to tax P270,000 P7.10 INCOME Q#1 Q#2 Q#3 Q#4 Income within Income without Taxable income (Resident Citizen) Taxable income (Nonresident Citizen) A. Rental income (gross)

 From an apartment unit in USA, - P240,000 P240,000

 From a parcel of land in Makati P180,000 180,000 P180,000

B. Royalties from book

 Published in the Philippines 30,000 -

- Published in USA 20,000 20,000

C. Interest income earned on notes receivable

 From a debtor who resides in USA 15,000 15,000

 From a debtor who resides in Manila 25,000 25,000 25,000

D. Net profit from sales, merchandising business

 From Philippine outlet 300,000 300,000

- From USA outlet 200,000 200,000 200,000

E. Dividend income from two domestic corporations. Gross income from the Phils. for the past 3 years

 60% of its world income 60,000 - -

- 85% of its world income 80,000 - -

-F. Dividend income from two resident foreign corporations. Gross income from the Philippines for the past 3 years was equivalent to:

 40% of its world income - 40,000 40,000

- 60% of its world income 12,000 8,000 20,000 12,000

G. Prizes received from Supermarket raffle: From the Philippines:

 ABC Supermarket 8,000 - 8,000 8,000

 DEF Superstore 12,000 - -

-From USA:

 UVW Supermarket - 6,000 6,000

- XYZ Supersavers - 14,000 14,000

-H. Prizes and winnings from lotto

 Philippine lotto 200,000 - - - USA lotto 100,000 - -BASIC EXEMPTION (50,000) (50,000) TOTAL P907,00 0 P643,00 0 P1,018,000 P375,000

(39)

P7.11

DIVIDEND INJURIES/DAMAGES PRIZES/AWARDS

1. 10% F.Tax 8. Exempt 15. Basic

2. 10% F.Tax 9. Exempt 16. Exempt

3. Basic Tax 10. Basic Tax 17. Exempt

4. Exempt 11. Exempt 18. Exempt

5. Basic Tax 12. Basic Tax 19. Exempt

6. Exempt 13. Exempt 20. Basic Tax

7. N.taxable 14. Basic 21. Basic Tax

22. Exempt 23. Basic Tax

24. 20% final tax (individual taxpayer) 25. Basic Tax VARIOUS PROCEEDS/INCOME 26. Final Tax 27. Exempt 28. Exempt 29. Exempt 30. Exempt TRUE OR FALSE

1. TRUE 8. TRUE 15. FALSE 22. FALSE

2. FALSE 9. TRUE 16. FALSE 23. FALSE

3. TRUE 10. TRUE 17. TRUE 24. TRUE

4. FALSE 11. TRUE 18. FALSE 25. TRUE

7. FALSE 14. FALSE 21. FALSE

MULTIPLE CHOICE 1. C 16. A 31. C 46. D 2. B 17. A 32. C 47. D 3. D 18. C 33. D 48. D 4. D 19. B 34. D 49. B 5. B 20. D 35. C 50. C 6. B 21. D 36. C 51. B 7. B 22. C 37. D 52. C 8. B 23. A 38. B&D 53. D 9. C 24. C 39. D 54. D 10. A 25. C 40. D 55. D 11. C 26. A 41. D 56. C 12. C 27. D 42. D 57. A 13. B 28. C 43. D 58. B 14. C 29. D 44. D 59. B 15. B 30. D 45. A 60. C

Supporting Computations (Multiple Choice): No. 13.

Write-off 2013

2013 Income (Loss) before write off

2014 Recovery 2014 TAXABLE RECOVERY P50,000 P350,000 P20,000 P20,000 10,000 (50,000) 10,000

(40)

-30,000 20,000 30,000 20,000 P40,000 No. 14.

Case A Case B Case C

2013 Income(loss) before write-off P120,000 P60,000 (P40,000)

Write-off 40,000 40,000 50,000

2014 Recovery P40,000 P10,000 P50,000

TAXABLE RECOVERY P40,000 P10,000 P0

No. 17.

Interest from Philippine Currency Certificate = subject to 20% final tax; non-returnable income Refund of income tax = not an income

No. 25.

Rent for 2015 and 2016 (prepaid rent is taxable yr. of receipt regardless of accounting method)

P3,600,000

Annual real property tax 30,000

Total annual income P3,630,000

No. 26.

Rent for 2016 (already reported in 2015) P0

Annual real property tax 30,000

Income from improvement [(P36M x **3/15) / 12]

600,000

Total annual income P630,000

Lease Term: 12.5 years

Remaining Lease term after completion of the improvement: 12 years Useful life of the improvement: 15 years

Remaining useful life of the improvement after termination of the lease: 3 years** No. 27.

Royalty – as an author @ 10% P10,000

Other royalties P800,000

x 20% 160,000

Total final tax on royalty income P170,000

No. 38. Letter “B” is subject to 20% final withholding tax while letter “C” is subject to CGT. No. 39. Exclude lotto winnings

No. 46.

Proceeds from the taxpayers life insurance P2,000,000

Less premiums paid (P15,000 x 25) (375,000) P1,625,000

Rent income from inherited properties 200,000