EXERCISES 5-1 1. None. The entire income is exempt because Minnie is a MWE. Basic salary P 48,000 Overtime and night-shift differential pay 14,000 Hazard pay 12,000 Other benefits: 13 th month pay P 4,000 Less: Exemption 30,000 - . Total (not taxable) 74,000 2. a. None. Proceeds of life insurance policy payable upon the death of the insured are excluded from gross income. b. Fernando must report P20,000 [(P12,000 x 10) – 100,000] as income. The rule is "amounts received in excess of the face amount of the policy are usually taxable as interest;” hence, included in the gross income. c. No. It does not matter whether the insured is the mother or the wife of the beneficiary. The exclusion exists because life insurance benefits closely resemble inheritances which are not taxable. 3. None, because Angel is not required to pay income tax on the entire amount he received as proceeds from insurance policy. The reason being that the insured did not outlive the policy. If however, his father outlived the life insurance policy, Angel must report an income of P75,000 (the face amount of P100,000 minus the premiums paid in the amount of P25,000). 4. Rodolfo must report an income of P75,000. Although acquired by him, he is not required to
Transcript
EXERCISES 5-1
1. None. The entire income is exempt because Minnie is a MWE.
Basic salary P 48,000Overtime and night-shift differential pay 14,000Hazard pay 12,000Other benefits: 13th month pay P 4,000 Less: Exemption 30,000 - .Total (not taxable) 74,000
2. a.
None. Proceeds of life insurance policy payable upon the death of the insured are excluded from gross income.
b.
Fernando must report P20,000 [(P12,000 x 10) – 100,000] as income. The rule is "amounts received in excess of the face amount of the policy are usually taxable as interest;” hence, included in the gross income.
c.
No. It does not matter whether the insured is the mother or the wife of the beneficiary. The exclusion exists because life insurance benefits closely resemble inheritances which are not taxable.
3. None, because Angel is not required to pay income tax on the entire amount he received as proceeds from insurance policy. The reason being that the insured did not outlive the policy.
If however, his father outlived the life insurance policy, Angel must report an income of P75,000 (the face amount of P100,000 minus the premiums paid in the amount of P25,000).
4. Rodolfo must report an income of P75,000.
Although acquired by him, he is not required to report the value of the inherited properties in his income tax return because properties acquired thru inheritance are subject to estate tax; the liability being on the estate and not on the recipient of the estate.
5. a.
The P20,000 given to cover medical expenses are actual damages, while the other P20,000 constitutes moral damages. Both actual and moral damages are not subject to tax.
b.
The P150,000 awarded by the court for winning in the libel case is not taxable. Libel is included in the phrase "personal injury or sickness," which is exempt from income tax.
c.
Not included in the gross income. The amount of P12,000 being given by the employer to its employees in case of disability are not salaries but compensation for personal injuries being suffered by its employees.
d.
Taxable. Salaries received by employees who are unable to work due to personal injuries or sickness are taxable. It does not make any difference between receiving the salary while he is working and receiving the same even while the employee is unable to work.
e.
Not taxable. The P60,000 is in the form of moral damages which is not capable of pecuniary estimation. Besides, it is in the nature of a return of capital.
6. 6. No, because all the requisites for exemption from income tax are present: (1) Tanda retired at age 60 which is more than the required age of 50 years; (2) a private pension plan is maintained by the employer; and, (3) he worked with San Jose Corporation for more than 10 years. The law does not require continuous service. Therefore, the 10-year service requirement is satisfied even if he had a broken service with the company.
7. The amount is taxable to Nilo. Separation pay is exempt from income tax if the cause of separation from service is death, sickness, physical disability, or any cause beyond the control of the employee.
None of the above-mentioned can be pointed out as the very cause of his separation from service. Inefficiency in service due to frequent tardiness caused by heavy traffic is not beyond the control of the employee.
8. a.
Taxable.
b.
Taxable.
c.
Not taxable. Kay was awarded without joining the contest and not required to render substantial future services. Moreover, the prize given was in recognition of an educational attainment.
9. The prize won by Tornado is taxable. The fight was not sanctioned by a national sports associations. As a matter of fact, it was held in a very secluded place. The main purpose of the fight is for the gamblers to bet on their favorite fighter and not to promote sports.
Loyalty award 3,000 Cash gift 1,000 Anniversary bonus 2,000 13th month pay 20,000 Total 48,000 Less: Exemption 30,000 18,0
00 Income subject to tax 258,0
00
EXERCISES 5–2.1:
1. ANSWER: D The entire amount of proceeds of the insurance policy received by the beneficiary of Okeze from Filipinas Life Assurance Company is not taxable because they are more considered as indemnity rather than as gain or profit.
2. ANSWER: B
Proceeds of life insurance 500,000
Less: Premiums paid (1,000 x 12 x 20)
240,000
Subject to tax 260,000
3. ANSWER: C
Total amounts received (50,000 x 12) 600,000
Less: Face value of the policy 500,000
Deemed interest (taxable) 100,000
4. ANSWER: C
Total amounts received (50,000 x 12) 600,000
Less: Amount of premiums paid (1,000 x 12 x 20)
240,000
Subject to tax 360,000
Prob 5-2.2
1. ANSWER: C
Proceeds of insurance 500,000
Less: Premiums paid (P10,000 x 20)
200,000
Income subject to tax 300,000
2. ANSWER: D
None because Sonia died.
Prob 5-2.3
ANSWER: D
Income from coconut land 50,000
Income from bus operation 30,000Income subject to tax 80,000
Prob 5-2.4:
ANSWER: B
Proceeds of life insurance policy Less: Amounts of premiums paid Amount subject to tax
P 500,00
0400,00
0100,00
0
Prob 5-2.5:
ANSWER: C
Proceeds of insurance policy P 200,00
0Less: Amount paid upon assignment
P 60,000
Premiums subsequently paid
80,000 140,000
Taxable income 60,00 0
Prob 5-3.1
ANSWER: C
Applying the principle of “beyond the control test,” the separation from employment of Mr. Jacobo was due to a cause which is within his control, that is resignation; while the cessation from employment of Mr. Kintanar was made without his control.
Therefore, the separation pay received by Mr. Jacobo is a taxable income while the amount received by Mr. Kintanar is not taxable.
Prob 5-3.2
ANSWER: C
The retirement benefit of P300,000 is taxable to Jovito because he retired at the age of 48. To be exempt from the payment of income tax, the taxpayer must be at least 50 years on the date of his retirement.
In the case of the proceeds from insurance policy, the amount exempt is P40,000 (P2,000 x 20) only which represents the return of the premiums paid.
Prob 5-3.3
ANSWER: B
There is no showing that Mario was in the service of the same employer for at least ten (10) years, that he is at least fifty(50) years of age at the time of retirement, that he has never availed of the benefit of exclusion, and that the retirement gratuity came from a reasonable retirement plan maintained by his employer.
The amount of P250,000 is taxable because Remus is only 49 years old upon retirement. To be exempt from income tax, the retirement age of an employee must be at least 50 years.
Prob 5-3.4
ANSWER: D
The money value of the accumulated leave credits given to a retiring government official or employee is not subject to tax (CIR s. CA, et.al, 203 SCRA 72).
Prob 5-3.5
ANSWER: A
The P1,000,000 is part of Larry's retirement pay and not a gift.
Considering that the requisites for exemption from payment of tax are satisfied, the additional P1,000,000 is not taxable.
Prob 5-3.6
ANSWER: D
The separation pay received by Evelyn is taxable because of the voluntary action on her part. To be exempt, the causes for separation must be either death, sickness, physical disability, or any cause beyond the control of the employee.
The separation pay received by Ling-ling and Gina are exempt because they are separated from service due to redundancy and disability, causes which are beyond their control.
EXERCISES 5–4.
Prob 5–4.1
ANSWER: C
Only the amount of P300,000 corresponding to the income which was lost during the period of treatment is taxable because even if he did not meet an accident, that income would have been taxable.
Prob 5-4.2
ANSWER: A
Two months' salary 40,000
Increase in value of car (P600,000 - 450,000)
150,000
Income 190,000
Prob 5-4.3
ANSWER: C
Payment for the salaries 60,0 00
Prob 5-4.4
ANSWER: D
The amount of P500,000 should not be declared in the income tax returns of the heirs. The amount represents damages received on account of personal injuries (which includes death), therefore excludible from gross income [Sec. 32 (B) {1}, TRA). The reason is that life insurance proceeds
represents indemnity and not income.
The proceeds of life insurance policies paid to the beneficiary, in this case the wife, upon the death of the insured is excluded from gross income.
EXERCISES 5–5
EXERCISE 5–
5.1:
ANSWER: C
Talent fee 400,000Professional fee 1,000,000 Total amount taxable 1,400,000
Cash prize 25,000,000
Pay per view 30,000,000
Talent fee 12,000,000
Taxable amount 67,000,00 0
EXERCISES 5-5.2
a. The P350,000 value of the car is subject to a final tax of 20%.
b. The P5,000 is subject to graduated tax to be reported in the income tax
return.
c. The cash prize and the equivalent amount of the 100 shares are subject to 20% final tax because the awards given are not in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement.
EXERCISES 5-5.3
Being a resident citizen, Monique Salonga is taxable on income within and without the Philippines. Consequently:
a. The income of $75,000 is taxable to her unless she has acquired the status of a contract worker. In which case, the $75,000 is not taxable to her because contract workers are taxable only on income derived from sources within the Philippines;
b. The talent fees derived from Inter-Island Broadcasting Network amounting to P100,000 is a professional income subject to graduated rates of tax.
c. The $5,000 value of the trophy is not taxable to her because it is in recognition of an outstanding achievement. An award for outstanding achievement is a gift, and not a taxable income.
PROBLEM 5-6.1
ANSWER: D
Salary (P25,000 x 12) 300,000
Other benefits: 13th month pay 25,00
0 Cash gift 2,500 Longevity pay 30,000 Total 57,500 Less: Amount of exemption
30,000 27,500
Proceeds of life insurance (300,000 – 200,000)
100,000
Income subject to tax 427,500
EXERCISE 5 – 7
1. None. Holiday pay, overtime pay, night shift differential pay and hazard pay earned by a minimum wage earner shall likewise be exempt from income tax.
Only option D has complied with the requisites for exemption from tax of retirement benefits, viz: (1) There must be a private pension maintained by the employer and approved by the BIR; (2) The retiring official or employee has been in the service of the same employer for at least ten (10) years; (3) The age must be at least 50 years old at the time of retirement; and (4) The benefit of exemption can be availed of only once.
2. ANSWER: C
A monthly gratuity of P20,000 to a Medal of Valor awardee is exempt from income tax (RA 9049).
Terminal leave pay of employees of the government are exempt from tax (CIR v. Castañeda, GR 96016, Oct. 17, 1991).
Retirement per Collective Bargaining Agreement is considered voluntary, hence subject to income tax and withholding tax on wages (BIR Ruling No. 071-98).
Separation benefits consisting of the market value/zonal value of the residential lot, is tax exempt (BIR Ruling No. 056-95).
3. ANSWER: C
Letter A refers to “deductions from gross income.”
Letter B refers to “tax exemption.”
Letter D refers to “tax credit.”
Exclusion refers to income received or earned but is not taxable as income because exempted by law or treaty. Such tax free income are not to be included in the income tax return unless information regarding it is specifically called for (Sec. 61, Regs.).
4. ANSWER: A
This is a case of key insurance where the company insures the life of its key employee. The proceeds is not taxable to the corporation because it is considered as an indemnification for the loss of the president which is one of the company's key employees.
5. ANSWER: A
The P3,500,000 is exempt from income tax because it is given as indemnification for the loss on the destruction of the company
building.
6. ANSWER: B
The proceeds of life insurance should be declared for estate tax purposes if the designation of the beneficiary was revocable.
7. ANSWER: C
The provision exempting "interest on government securities" has been deleted in the Tax Reform Act. Therefore, interest on government securities are now subject to tax.
8. ANSWER: D
The pension from GSIS is not taxable while the interest from the time deposit is subject to a final tax of 20%.
No, the separation due to the economic condition is one which is beyond the employee’s control, hence, excluded from gross income and not subject to withholding tax.
9. ANSWER: A
The phrase "personal injuries" which are exempt from income tax includes moral damages awarded by the court on account of mental anguish experienced by one person due to libelous statements made against him.
10. ANSWER: C
Prizes amounting to P10,000 or less are to be included in the computation of gross income. They are not subject to final tax.
11. ANSWER: C
The amount of P1,500 given by his mother to Luis is in the form of a condonation or gift and not a taxable income.
12. ANSWER: D
Dismissal from employer due to inefficiency in service is a cause which is not beyond the control of the employee. Under the “beyond the control test,” whenever an employee is separated from service for a cause or causes which is/are beyond his control, the separation pay received by him is not subject to tax.
13. ANSWER: D
Damages received by a taxpayer due to physical injuries or sickness are not taxable to him. However, damages received as compensation for lost profits are subject to tax.
14. ANSWER: D
Thirteenth month pay and other benefits are exempt from income tax. However, the amount in excess of P30,000 are taxable to the employee.
15. ANSWER: B
Exclusion from gross income 1,000,000
16. ANSWER: D
The exemption from income tax on a qualified senior citizen does include exemption from value-added tax, estate tax, donor’s tax and income tax on passive income.
17. ANSWER: A
Monthly salary and allowance (P3,500 + 1,000)
4,500
Months received (January to June 15)
5.5
Actual amount of salaries received 24,750Net income from trimobile 24,000Income subject to tax 48,750
EXERCISES
6-1
1. CLASSIFICATION SITUS OF TAXABLE INCOME
a. Nonresident citizen Within onlyb. Nonresident alien
(NETB)Within only
c. Nonresident citizen Within onlyd. Resident alien Within onlye. Nonresident alien
(NETB)Within only
f. Nonresident alien (ETB)
Within only
2. a. Yes, Allen is qualified as head of family because of his mother who is dependent upon and living with him.
b. No. An aunt is not a qualified dependent for purposes of claiming the status of head of family. Moreover, the aunt is not living with the taxpayer.
c. Yes. Cindy is already a widow and she is supporting her daughter who lives with her.
d. No. A taxpayer who is separated in bed and board with the spouse but not legally separated maintains the status of a married taxpayer.
e. No. A benefactor of a senior citizen would be qualified to acquire the status of a head of family regardless of whether such senior citizen is a relative or not if the senior citizen is living with the taxpayer.
3. a. In the absence of an agreement, John has the right to claim the additional exemption because under Revenue Regulation 2-98, husbands have the right to claim additional exemption on the dependent children. Besides, he has actual custody over the two children.
b. If Marsha could prove that she provided chief support over the children, both spouses would be disqualified to claim additional exemption. Marsha is disqualified because the children are not living with her despite the support she is extending. John is disqualified because he does not furnish chief support to his children.
c. Yes, because not one of them can claim P50,000 which is the amount allowed to each married individual taxpayer. At most, they would acquire only the status of either single or head of family depending upon the circumstances surrounding the case.
4. a. Julio is the one qualified to claim as head of family because he is providing chief support to his mother who is also living with him. The rest are giving only minimal amount of support.
b. None. Additional personal exemption can be claimed only on dependent children.
5. a. None. Aunties are not qualified dependents for purposes of claiming additional exemption.
b. None. The mother is not a qualified dependent.
c. None. The daughter is disqualified because of her age. She is already more than 21 years old.
d. None. Both Decepeda and his sister cannot claim additional
exemption on their father.
e. P 100,000. Elantra is allowed to claim dependents on his four children only.
6. a. Carina is qualified as head of family. She is already a widow and has one dependent daughter living with her.
b. Gross compensation income 420,000
Less: Personal exemption Basic personal 50,000 Additional 25,000 75,0
00Taxable income 345,0
00
Tax on P 250,000 50,000 95,000 x 30% 28,500 Income tax 78,500
c. If Carina has no daughter to support, her filing status is “single.”
d. Gross compensation income 420,000
Less: Basic personal exemption 50,00 0
Taxable compensation income 370,000
Tax on P 250,000 P 50,000
120,000 x 30%
36,000
Income tax 86,000
7. a. Compensation income – Jim 160,000
Less: Personal exemption 50,0 00
Taxable compensation income 110,000
Business income – Pat 500,000
Less: Expenses 275,000
Net income 225,000
Less: Personal exemptions 50,00 0
Taxable income 175,000
b. Compensation income – Jim 160,000
Less: Personal exemptions Basic personal 50,000 Additional exemptions 25,000 75,00
0Taxable income 85,00
0
Tax on P 70,000 P 8,500
15,000 x 20% 3,000 Income tax due 11,500
Business income – Pat 500,000
Less: Expenses 275,000
Net income 225,000
Less: Personal exemptions 50,00 0
Taxable income 175,000
Tax on P 140,000 22,500 35,000 x 25% 8,750 Income tax due 31,250
Income tax – Jim P 11,500
Income tax – Pat 31,250Total income tax 42,750
8. a. Tax on P 40 x 5% 2.00
b. Tax on P 10,000 x 5% 500
c. Tax on P 10,000 500.00 2,245.40 x 10% 224.54Income tax 724.54
d. Tax on P 250,000 50,000
e. Tax on P 250,000 50,000 206,780 x 30% 62,034Income tax due 112,034
f. Tax on P 500,000 125,000.00
623,251.27 x 32% 199,440.41
Income tax due 324,440. 41
9.
a. Salary - Compensation
b. Interest on bank deposit - Passive income – tax exemptc. Honorarium - Compensation incomed. Prizes - Ordinary business income (not exceeding
P10,000)e. Lotto winnings - Tax exemptf. Income from farming - Business incomeg. Royalties on books - Passive income (10%)h. Dividends from domestic
company- Passive income (10%)
i. 13th month pay - Exempt up to P 30,000j. Interest on preterminated
deposits- Passive income (12%)
10.
a. Juan
Salary 150,000
Less: Personal exemptions Basic personal 50,000 Additional exemptions (25,000 x 3)
75,000 125,000
Taxable income 25,000
Tax on P 10,000 500 15,000 x 20% 3,000
Income tax due 3,500 Less: Withholding tax 10,100 Income tax payable ( 6,6
00)
b. Maria
Salary 125,000
Less: Basic personal exemptions 50,00 0
Taxable income 75,000
Tax on P 70,000 8,500 5,000 x 20% 1,000 Income tax due 9,500 Less: Withholding tax 15,000 Income tax payable ( 5,500)
Income tax – Juan ( 6,600) Income tax – Maria ( 5,500) Income tax payable 12,100
11.
a.
Monthly insurance premium 150
Times number of months in a year 12 Deductible health insurance premium 1,800
b.
Monthly insurance premium (maximum) 200
Times number of months in a year 12 Deductible health insurance premium 2,400
c.
No amount of health or hospitalization insurance premium is deductible because the total income of the family exceeds P250,000.
d.
Monthly insurance premium (maximum 200
Times number of months during the year 8 Deductible health insurance premium 1,600
12.
a.
Compensation income 200,000
Less: Personal exemption
Basic personal 50,000 Additional (25,000 x 4) 100,000 150,0
00Total compensation income 50,000
Tax on P 30,000 2,500 20,000 x 15% 3,000 Income tax due 5,500
Tax on P 30,000 2,500 25,000 x 15% 3,750 Income tax due 6,250
c.
Gross income 200,000
Less: Optional standard deductions (200,000 x 10%)
20,00 0
Net income 180,000
Less: Basic personal and additional exemptions
150,000
Taxable income 30,000
Income tax due P 30,000 28,500
Case 1 Case 213.
Compensation income 125,000
80,000
Business income 186,000
230,000
Gross income 311,000
310,000
Less: Deductions Optional (186,000 x 74,40
40%) 0 Itemized 105,00
0 Personal exemption 50,0
00 50,00
0 Total 124,4
00155,00
0 Taxable income 186,6
00155,00
0
EXERCISE 6 – 2
1. ANSWER: B
Gross receipts 950,000
Less: Expenses 120,000
830,000
Prize, contest 5,000Salary (37,600 + 2,400) 40,000Rent income (38,000/95%) 40,000Less: Depreciation 8,000 32,000 Total 907,00
0Less: Basic personal exemption 50,00
0Taxable income 857,00
0
2. ANSWER: D
Tax on P 500,000 125,000
357,000 x 32% 114,240
Income tax due 239,240
Less: Withholding taxes Profession (950,000 x 15%) 142,50
0 Salary 2,400 Rent (40,000 – 38,000) 2,00
0146,90
0 Income tax payable 92,34
0
3. ANSWER: B
Interest on preterminated deposit (20,000 x 12%)
2,400
Winnings in raffle (100,000 x 20%) 20,000Dividend from C Corp. (6,000 x 10%) 600 Total final withholding tax 23,000
4. ANSWER: B
Interest on long-term bank deposit 40,000Winnings in lotto 20,00013th month pay 3,500Life insurance benefits 150,00
0Loan benefits - SSS 20,00
0Total income exempt from income tax 233,50
0
EXERCISE 6 - 3
I N C O M E Resident or citizen
NRA ETB
1. Interest on bank deposit with Banco de Oro- Php
20% 20%
2. Interest on bank deposit with a bank in the United States in U.S. dollar Tax table Not
taxable3. Earnings from interest on money market 20% 20%4. Royalties on inventions 20% 20%5. Royalties on books 10% 10%6. Prizes amounting to P7,500 Tax table Tax
table7. Prizes amounting to P20,000 20% 20%8. Winnings in lotto – Philippines Exempt Exempt 9. Winnings in lottery 20% 20%10. Interest on long-term investment Exempt Exempt 11. Interest on deposit for 4 ½ years 5% 5%12. Cash dividends – domestic corp. 10% 20%13. Share of partner in net income of taxable
partnership10% 20%
14. Interest income under expanded foreign currency deposit system 7.5% Exempt
EXERCISES 6–4.1
1. ANSWER: A
Under the Tax Reform Act, only resident citizens are taxable on
income derived from sources within and without the Philippines. All others are taxable on income within only.
EXERCISE 6–4.2
INCOME RC RA, NRC
NRA(ETB)
NRA(NETB)
1. Rent on apartment in the
Phils.
YES YES YES YES
2. Rent on apartment in
Canada
YES NO NO NO
3. Dividend-domestic
corporation
YES YES YES YES
4. Dividend-foreign corporation YES NO NO NO
5. Lotto winnings in the Phils. YES NO NO NO
6. Lotto winnings in U.S.A. NO NO NO NO
7. Cash prize on contest, Phils. YES YES YES YES
8. Cash prize on contest,
U.S.A.
YES NO NO NO
9. Interest, bank deposit in
U.S.A.
YES NO NO NO
10. Interest bank deposit – Phils. YES YES YES YES
Problem 6–
4.3
1. ANSWER: C
Taxpayer is resident citizen.
Compensation income, Philippines
120,000
Business income, Philippines 350,000
Business income, Canada ($200,000 x P25)
5,000,000
Total gross income 5,470,000
Less: Deductions Expenses, Philippines 220,00
0
Expenses, Canada ($150,000 x 25)
3,750,000
3,970,000
Net income 1,500,000
Less: Personal exemptions Basic personal 50,000 Additional 25,000 75,0
00Taxable income 1,425,0
00
Tax on P500,000 125,000 925,000 x 32% 296,000 Income tax due 421,000 Less: Withholding tax 10,000 Income tax payable 411,200
2. ANSWER: C
Total final taxes paid:
Dividend from a domestic company
40,000
Final tax rate 10% 4,000Share in income of business partnership
50,000
Final tax rate 10% 5,000Total final tax 9,000
3. ANSWER: A
Resident citizen opted to avail
of OSD.
Compensation income 120,000
Business income, Philippines 350,000
Business income, Canada ($200,000 x 25)
5,000,000
Total 5,350,000
Less: Optional deductions (5,350,000 x 40%)
2,140,000
3,210,000
Net income 3,330,000
Less: Basic personal exemption 50,0 00
Taxable income 3,280,000
4. ANSWER: B
Taxpayer is a resident alien.
Compensation income, Philippines
120,000
Business income, Philippines 350,000
Gross income 470,000
Less: Expenses, Philippines 220,000
Net income 250,000
Less: Personal exemption Basic personal 50,00
0 Additional exemption (P25,000 x 4)
100,000 150,000
Taxable income 100,000
5. ANSWER: A
Taxpayer becomes a nonresident
citizen.
Net income 250,000
Less: Basic personal exemption 50,0 00
Taxable income 200,000
6. ANSWER: D
Nonresident alien ETB.
Business income, Philippines 350,000
Less: Expenses, Philippines 220,000
Net income 130,000
Less: Personal exemption (lower) 20,00
0Taxable income 110,00
0
7. ANSWER: D
Taxpayer is NRA NETB.
Business income, Philippines 350,000
Dividend from a domestic company
40,000
Shares in net income of a partnership
50,00 0
Gross income 440,000
Rate 25% Final tax 110,00
0
8. ANSWER: D
Value of inheritance 500,000
Lotto winnings 1,540,000
Proceeds of life insurance 250,0 00
Total exemption 2,290,0 00
EXERCISE 6-5.1
ANSWER: D
Optional standard deductions are allowed only on professional or business income of an individual taxpayer, provided that he has signified in the tax return his intention to avail of said deductions.
Corporations can avail also of optional standard deductions
EXERCISE 6-5.2
ANSWER: B
. The term gross income means total sales, less cost of goods sold plus any income from investments and from incidental or outside operations or sources.
Deductions should not be made for items not ordinarily used in computing the cost of goods sold.
PROBLEM 6-5.3
1. ANSWER: A
Salary (99,000 + 5,000) 104,000
Professional income (83,000 + 7,000) 90,000
Gross income, business 125,000
Total 215,000
Less: Professional and business expenses 56,50 0
158,500
Rent income (57,000/95%) 60,00 0
Net income 322,500
Less: Personal exemptions Basic personal 50,00
0 Additional (25,000 x 2) 50,000 100,00
0Taxable income 222,50
0
Tax on P 140,000 22,500
82,500 x 25% 20,625 Income tax due 43,125 Less: Tax credit Withholding tax on -
Wages P 5,000
Professional income 7,000
Rent (60,000-57,000) 3,000
15,000
Income tax payable 28,125
2. ANSWER: D
Salary 104,000
Gross receipts on business P
125,000
Rent income 60,000Professional income 90,00
0Total 275,00
0Less: Optional deductions (P275,000 x 40%)
110,00 0
165,000
Net income 269,000
Less: Personal exemption Basic personal 50,0
00 Additional 50,000 100,00
0Taxable income 169,00
0
Tax on P 140,000 22,500
29,000 x 25% 7,250 Income tax due 29,750 Less: Withholding tax 15,000 Income tax payable 14,750
PROBLEM 6-5.4
1. ANSWER: C
Gross compensation income (7,000 + 300) x 12
87,600
Less: Personal exemption Basic personal 50,000 Additional exemption 25,000 75,000Taxation income 12,600
2. ANSWER: C
Gross business income 150,000
Less: Optional deduction (150,000 x 40%) 60,000 Net 90,000Less: Personal exemptions 50,000 Taxable income 40,000
EXERCISES 6-6.1: PERSONAL
EXEMPTIONS
1. ANSWER: B
Personal exemptions are arbitrary amounts allowed in the nature of a deduction from the amount of gross compensation income and/or net business and/or professional income, as the case may be, for personal, living or family expenses of an individual (Sec. 9, Regs.).
2. ANSWER: A
Nonresident aliens not engaged in trade or business in the Philippines are not allowed to claim personal exemptions. They are subject to final tax based on the entire gross income derived from sources within the Philippines.
3. ANSWER: C
An illegitimate child is now considered as a qualified dependent for purposes of claiming the status as head of family.
4. ANSWER: B
The amount of basic personal exemption allowed to NRA ETB must not exceed the amount of exemption being allowed in the Philippines.
5. ANSWER: C
Senior citizens are not considered as qualified dependents by its benefactor for purposes of claiming the additional exemptions.
Illegitimate children are now considered as qualified dependents for purposes of additional exemption provided that all the other requisites are complied.
6. ANSWER: C
The husband is the proper claimant of the additional exemptions except when he does not derive any income from sources within the Philippines or he explicitly waives his right in favor of his wife.
7. ANSWER: D
No matter how big is the income of the wife as compared to the husband, if the latter does not waive his right to claim the additional exemption or he is a nonresident and his income is not purely derived from sources without, he will always claim the additional exemption.
8. ANSWER: B
In cases of personal exemptions, only NRA ETB are subject to the law on reciprocity. Nonresident aliens who shall come to the Philippines and stay therein for an aggregate period of more than 180 days are deemed NRA ETB.
9. ANSWER: D
A moron, although mentally defective shall not qualify as dependent because he is not actually financially dependent from the taxpayer.
A child of a marriage which has been declared void ab initio is a qualified dependent for purposes of additional exemption.
A child pursuing his studies elsewhere is deemed living with the taxpayer. He is considered “away temporarily” from the taxpayer’s home.
A dependent receiving a salary of P1,000 monthly is not considered as gainfully employed.
10. ANSWER: D
The term “benefactor of a senior citizen” pertains to any person who takes care of a senior citizen as his dependent, whether or not related to him.
EXERCISES 6-6.2
1. ANSWER: C
The taxpayer is qualified as head of family because of the legitimate and recognized natural child.
Only legitimate, illegitimate (which includes recognized natural child) or legally adopted children can qualify as dependent for purposes of claiming additional exemptions. Thus, common law husband and widowed mother of common law husbands are disqualified. The total personal and additional exemptions is:
Personal exemptions 50,000
Additional exemptions: Legitimate child 25,0
00
Illegitimate child (recognized natural child)
25,000
50,000
Total 100,000
2. ANSWER: B
A nonresident alien engaged in trade or business is allowed to claim basic personal exemptions as deduction from gross income. They are not, however, allowed to claim additional exemption.
The personal exemptions allowed shall be the lesser amount between that allowed in his country and the amount fixed as exemption for citizens or residents in the Philippines.
3. ANSWER: D
Basic personal exemptions: Husband 50,00
0 Wife 50,00
064,000
Additional exemptions (25,000 x 4) 100,000Total 164,000
4. ANSWER: B
Basic personal exemption 50,000Additional exemption (25,000 x 3) 75,000Total personal exemptions 1 25, 000
5. ANSWER: D
Professional fees 180,000Allowances 24,000 Total 204,000Less: Expenses Salaries 36,00
0 Traveling expenses 20,00
0 Office supplies 4,000 Rent expense 36,00
0 96,000
Taxable income before exemption 108,000Less: Personal exemption (50,000 125,000
+[25,000 x 33])Taxable income .
6. Answer: A
Gross compensation income 120,000Less: Personal exemptions Basic personal 50,00
0 Additional (25,000 x 4) 100,0
00150,000
Taxable income 270,000
7. Answer: C
Gross compensation income 220,000Less: Personal exemptions Basic personal 50,00
0 Additional (25,000 x 2) 50,00
0100,000
Taxable income 120,000
EXERCISES 6 – 7. CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS
1. ANSWER: D
A nonresident alien not engaged in trade or business (NRA NETB) is not entitled to claim personal exemption.
2. ANSWER: A
An alien who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient (Sec. 5, Regs.).
3. ANSWER: D
The tax base for resident citizens, resident aliens, and nonresident citizens is taxable income, while nonresident aliens NETB are taxed on the entire gross income derived from sources within the Philippines.
4. ANSWER: D
5. ANSWER: B
Prizes amounting to more than P10,000 are subject to a final tax of
20%.
Interest on dollar deposits are subject also to a final tax of 20%.
Cash dividends received by individuals as stockholders of a corporation are subject to a final tax of 10%.
6. ANSWER: A
Royalty income on musical compositions are subject to a final tax of 10%.
7. ANSWER: C
Interest and dividends (taxpayer is NRA ETB)
64,000
Less: Personal exemption 50,000Taxable income 14,000
EXERCISES 6–8.1. PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE
1. ANSWER: D
Premiums paid by the taxpayer for health insurance of his family is a deduction (but subject to limitations) from the gross income of an individual taxpayer, regardless of his status, i.e. single, married, or head of family.
2. ANSWER: D
Premiums paid on health insurance is deductible from gross income of an individual taxpayer if the income of his family does not exceed P250,000 during the year regardless of the nature of his income.
3. ANSWER: C
Compensation income earners are not allowed deductions except personal exemptions and insurance. The amount of health or hospitalization insurance allowed is limited to P2,400 or P200 a month.
Gross compensation income 200,000
Less: Deductions Basic personal 50,000 Additional exemption 25,000 Insurance premiums (200 x 12)
2,400 77 ,40 0
Taxable income 122,600
EXERCISE 6.8.2
Case 1:
None because the total gross income of the spouses exceeds P250,000.
Case 2:
None. The deduction on health insurance can be claimed by the wife being the claimant of the additional exemption on dependents.
Case 3:
The husband can only claim a maximum amount of P1,600 because only P200 is allowed as deduction every month, computed as follows: P200 x 8 = 1,600.
Case 4:
P1,200. The husband is allowed to claim the deduction even if in the meantime no dependent is qualified for additional exemption.
EXERCISES 6-9
1. ANSWER: A
Salary being a compensation income is returnable. Hence, part of the taxpayer’s gross income. Provided, however, that the employee is not a minimum wage earner.
Thirteenth month pay, including other benefits, are exempt from tax up to P30,000. Considering that 13th month pay is P8,000 only, the entire amount is exempt from income tax.
2. ANSWER: D
None. Nonresident citizens are taxable only on income within.
3. ANSWER: D
Gross compensation income 157,756Less: Personal exemptions Basic personal (head of family) 50,000 Additional (25,000 x 3) 75,000 125,00
0Taxable income 32,756
Tax on P 30,000 2,500.00 2,756 x 15% 413.40 Income tax due 2,913.4 0
4. ANSWER: C
Compensation income 53,000Add: Professional income 350,000 Less: Expenses 140,000 210,000Total 263,000Less: Exemptions Basic personal 50,000 Additional 25,000 75,000 Taxable income 188,000
Tax on P140,000 22,500 48,000 x 25% 12,000 Income tax due 34,500
5. ANSWER: D
Refer to the solution to Problem 6.
6. ANSWER: A
Salary (P191,000 + 25,000) 216,000Add: Taxable other benefits 13th month pay 18,000 Other benefits 15,000 Total 33,000 Less: Exemption 30,000 3,000 Total 219,000Less: Personal exemption 50,000 Taxable income 169,000
Tax on P 140,000 22,500 29,000 x 25% 7,250 Income tax due 29,750 Less: Withholding tax 25,000 Income tax payable 4,750
7. ANSWER: D
Gross income, restaurant 900,000Taxable other income (200,000 x 80%)
160,000
Total 1,060,000
Less: Deductions Business expenses (900,000 x 60%) x85%
459,000
Basic personal exemption 50,000 Additional exemption 25,000 534,000Taxable income 526,000
8. ANSWER: A
Basic salary 210,549.76
Cost of living allowance 6,000.00Hazard pay 3,600.00 9,600.0
0Gross compensation income 220,149.
76Add: Net income from profession Professional income P156,890.00 Less: Expenses 67,500.00 89,390.
00Total gross income 309,539.
76Less: Personal exemption 50,000.
00Taxable income 259,539.
76 Tax on P 250,000 50,000.00 9,539.76 x 30%
2,861.93
Income tax due 52,861.93 Less: Withholding tax on wages
Professional income 22,500Dividend from foreign corporation (1,500 x 60) 90,000 405,000Total 428,000Less: Personal exemption (head of family) 50,000 Taxable income 378,000
Tax on P 250,000 50,000
128,000 x 30% 38,400
Income tax due 88,400
10.
ANSWER: B
Gross compensation income (210,438.24 + 6,000)
216,438.24
Less: Personal exemptions Basic personal 50,000.
00 Additional 75,000.
00 125,000
.00Taxable income 91,438.
24
Tax on P 70,000 8,500.00
21,438.24 x 20% 4,287. 65
Income tax due 12,787.65
Less: Withholding tax 27,246.40
Income tax payable (14,458.75)
11.
ANSWER: B
Basic salary (48,465.25 + 2,500) 50,965.25
Less: Personal exemption 50,000.00
Taxable income 965.25
Tax on P 965.25 x 5% 48.26 Less: Withholding tax ( 431.
45) Income tax payable ( 383.
19)
12.
ANSWER: B
Income tax due of Alex (14,458.75)
Income tax due of Paloma ( 383.19)
Aggregate amount payable/refund (14,841.
94)
13.
ANSWER: A
Gross compensation income 220,000
Less: Personal exemptions Basic personal 50,00
0 Additional (25,000 x 2) 50,000 100,0
00Taxable income 120,000
14.
ANSWER: C
Gross compensation income 200,000
Less: Personal exemptions Basic personal 50,00
0 Additional 50,000 100,000 Taxable income 100,000
15.
Answer: B
Salary - 1/1 to 6/30 (P8,000 x 6) 48,000Add: Proceeds of insurance 500,00
0 Less: Premium payments (P5,000 x 20) 100,000 400,000Gross income 448,000Less: Personal exemption 50,000 Taxable income 398,000
EXERCISE 6-10.
The petition has merit.
Cooperatives are not required to withhold taxes on interest from savings and time deposits of their members based on a BIR Ruling.
There is nothing in the ruling to suggest that it applies only when deposits are maintained in a bank. Rather, the ruling clearly states, without any qualification, that since interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes are paid by banks, cooperatives are not required to withhold the corresponding tax on the interest from savings and time deposits of their members. This interpretation was reiterated in BIR Ruling [DA-591-2006] dated October 5, 2006, which was issued by Assistant Commissioner James H. Roldan upon the request of the cooperatives for a confirmatory ruling on several issues, among
which is the alleged exemption of interest income on members’ deposit (over and above the share capital holdings) from the 20% final withholding tax. In the said ruling, the BIR opined that:
x x x x
3. Exemption of interest income on members’ deposit (over and above the share capital holdings) from the 20% Final Withholding Tax.
The National Internal Revenue Code states that a “final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from the deposit substitutes and from trust funds and similar arrangement x x x” for individuals under Section 24(B)(1) and for domestic corporations under Section 27(D)(1). Considering the members’ deposits with the cooperatives are not currency bank deposits nor deposit substitutes, Section 24(B)(1) and Section 27(D)(1), therefore, do not apply to members of cooperatives and to deposits of primaries with federations, respectively.
Given that petitioner is a credit cooperative duly registered with the Cooperative Development Authority (CDA), Section 24(B)(1) of the NIRC must be read together with RA 6938, as amended by RA 9520.
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to foster the creation and growth of cooperatives as a practical vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development and social justice. Thus, to encourage the formation of cooperatives and to create an atmosphere conducive to their growth and development, the State extends all forms of assistance to them, one of which is providing cooperatives a preferential tax treatment.
The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles 61 and 62 of RA 6938, which read:
ART. 61. Tax Treatment of Cooperatives. — Duly registered cooperatives under this Code which do not transact any business with non-members or the general public shall not be subject to any government taxes and fees imposed under the Internal Revenue Laws and other tax laws. Cooperatives not falling under this article shall be governed by the succeeding section.
ART. 62. Tax and Other Exemptions. — Cooperatives transacting business with both members and nonmembers shall not be subject to tax on their transactions to members. Notwithstanding the provision of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions; x x x.
This exemption extends to members of cooperatives. It must be emphasized that cooperatives exist for the benefit of their members. In fact, the primary objective of every cooperative is to provide goods and services to its members to enable them to attain increased income, savings, investments, and productivity. Therefore, limiting the application of the tax exemption to cooperatives would go against the very purpose of a credit cooperative. Extending the exemption to members of cooperatives, on the other hand, would be consistent with the intent of the legislature. Thus, although the tax exemption only mentions cooperatives, this should be construed to include the members.
All told, we hold that petitioner is not liable to pay the assessed deficiency withholding taxes on interest from the savings and time deposits of its members, as well as the delinquency interest of 20% per annum.
In closing, cooperatives, including their members, deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice.
CHAPTER 7
EXERCISES 7 – 1
1.
a. By contributing P100,000 each with the intention of dividing whatever profit is obtained, Atienza, Bauzon and Carmona have formed a business partnership which is taxable as a corporation. The registration with the Securities and Exchange Commission is not an indispensable requisite in its formation.
In this case, the business organization formed will fall under the phrase “partnership no matter how created or organized,” which is included in the definition of a corporation.
b. The business organization formed is a corporation. The five entrepreneurs served as the incorporators.
c. The two corporations have formed a joint venture because it is clear that their intention is to accomplish a single project which upon completion, the joint undertaking will be automatically dissolved. The joint venture is not taxable as a corporation (BIR Ruling 83-03).
d. Gigi and Jayjay have formed a general professional partnership. By organizing an accounting and auditing firm, they shall exercise a common profession for certified public accountants. A general professional partnership is not subject to income tax.
e. The business organization formed possesses the feature applicable to a joint stock company. It is taxable as a corporation.
2.
Classification Situs of Income Tax Base
a. Domestic corporation Within and without
Taxable income
b. Resident foreign corporation *
Within only Taxable income
c. Nonresident foreign corporation
Within only Gross income
*It is an international carrier (See Comm vs. BOAC, et al, GR Nos. 65773-74, April 30, 1987). In which case, the tax base can be Gross Philippine Billings.
3.
a.
Domestic corporation 2008 2009
Sales – domestic 3,000,000
3,000,000
Sales – abroad 7,000, 7,000,
000 000Gross sales 10,000,
00010,000,
000Less: Cost of goods sold
5,000, 000
5,000, 000
Gross income 5,000,000
5,000,000
Less: Expenses Domestic 1,000,0
001,000,0
00 Foreign 2,000,0
002,000,0
00 Total expenses 3,000,0
003,000,0
00Taxable income 2,000,0
002,000,0
00Rate 35
% 30
%Income tax 700,00
0 600,00
0
b.
Resident foreign
corporation
Sales – domestic 3,000,000
3,000,000
Less: Cost of goods sold (3/10 x 5,000,000)
1,500,000
1,500,000
Gross income 1,500,000
1,500,000
Less: Expenses on domestic sales
1,000,000
1,000,000
Taxable income 500,000 500,000Rate of tax 35
% 30%
Income tax 175,00 0
150,000
c.
Nonresident foreign
corporation
Sales – domestic 3,000,000
3,000,000
Yield from deposit substitute
400,00 0
400,00 0
Gross income 3,400,0 3,400,0
00 00Rate 35
% 30
%Income tax 1,190,0
001,020,0
00
4.
a. Bago Corporation shall be covered by the application of the MCIT effective 2010.
b. Yes, the corporation shall be subject to a minimum income tax in 2010 because the normal income tax is P90,000 while the 2% of the gross income which represents the minimum corporate income tax is P100,000, computed as follows:
Gross income – 2010 5,000,000
Less: Expenses 4,700,000
Taxable income 300,000Rate 30
%Normal income tax 90,000Less: Minimum income tax (5,000,000 x 2%)
100,000
Excess MCIT ( 10,000)
The counting of the four (4) year period shall commence in 2006 a year following the year in which the corporation was registered with the BIR.
The corporation is not covered by the MCIT from 2005 to 2009. It shall be covered only in 2010 or on the 4th year following the year in which it was registered with the Bureau of Internal Revenue.
5.
2007 2008 2009
Gross sales 4,580,000
5,250,000
2,850,000
Sales returns and discounts 200,000
175,000
295,000
Cost of goods sold 860,0 00
620,0 00
1,200,000
Total 1,060,0 00
795,0 00
1,495,0 00
Net 3,520,000
4,455,000
1,355,000
Add: Capital gain 30,0 00
.
35,0 00
Gross income 3,550,000
4,455,000
1,390,000
Less: Deductions 3,480,400
4,200,000
850,0 00
Taxable income 69,600 255,000
540,000
Rate of tax 35 %
35 %
30 %
Normal Income tax 24,360 89,250 162,000
MCIT: 2007 (3,550,000 x 2%) 71,000 2008 (4,455,000 x 2%) 89,100 2009 (1,390,000 x 2%)
.
. 27,80
0Income tax 71,00
089,250 162,00
0Excess MCIT – 2007 (71,000 – 24,360)
46,64 0
Less: Carry forward of excess MCIT
46,64 0
______
Income tax payable 71,00 0
42,61 0
162,000
6.
a.
Sales 6,000,000
Sales returns and allowances 200,000
Sales discounts 15,00 0
215,0 00
Net sales 5,785,000
Less: Cost of goods sold Inventory, January 1 2,400,0
00 Purchases 1,500,0
00 Freight-in 35,000 Purchase returns and allowances
( 30,000)
Purchase discounts ( 7,000)
Goods available for sale 3,898,000
Inventory, December 31 1,900,000
1,998,000
Gross income 3,787,000
Less: Operating expenses 1,600,000
Taxable income 2,187,000
Rate of tax 35 %
Normal Income tax 765,4 50
b.
MCIT (3,787,000 x 2%) 75,7 40
c.
Income tax due 765,4 50
7.
Gross sales 2,000,000
Less: Cost of sales 1,600,000
Gross income 400,000
Less: Optional standard deduction Gross income 400,000 Rate 40% 160,00
0Taxable net income 240,00
0
8.
a.
The rate of tax applicable to the educational institution is 10% because the income from unrelated activity does not exceed 50% of the entire gross income.
b.
If the income from unrelated activity is more than the income from related the Arts University would be subject to a tax rate of 35% until 2008 and 30% effective 2009.
9.
2006
a.
Provision for income tax 50,000
Income tax payable 50,0
00 To record income tax liability using normal income tax.
b.
Deferred charges – MCIT 15,000
Income tax payable 15,000
To record excess MCIT (65,000 – 50,000)
c. Income tax payable 65,000 Cash in bank 65,0
00 To record payment of income tax due for 2006.
2007
a.
The corporation is not allowed to carry forward and credit the 2006 excess MCIT against the income tax liability for 2007, since the 2007 MCIT is greater than the normal income tax for said year.
b.
To record income tax liability using the normal income tax rate.
Provision for income tax 85,000 Income tax payable 85,000
c. To record application of excess MCIT.
Deferred charges – MCIT 15,000 Income tax payable 15,000
d.
To record payment of income tax due for 2007.Income tax payable 100,00
0 Cash in bank 100,00
0
2008
The corporation is not allowed to carry forward and credit the 2006 and 2007 excess MCIT against the normal income tax liability for 2008 and 2009 since the 2008 and 2009 MCIT are greater than the Normal Income Tax for said year.
The accounting entries in 2008 and 2009 shall be similar to 2006 and 2007 above.
For taxable year 2010 when the expired portion of excess MCIT (65,000 – 50,000) for taxable year 2006 is closed to Retained Earnings account due to its non-application the entry is:
School canteen 250,000Dormitories 95,000Bookstores 48,000Car stickers 8,30
0Total 1,961,3
00
2.
If Fatima University is a non-stock, non-profit educational institution no income shall be reported for income tax purposes because non-stock non-profit schools are not subject to income tax.
3.
If Fatima University is a government educational institution it will not report any income for income tax purposes because government educational institutions are exempt from income tax.
11.
a.
Gross receipts 4,500,000
Less: Cost of sales 1,200,000
Gross income 3,300,000
Less: Deductions 680,0 00
Taxable income 2,620,000
Rate 35 %
Income tax 917,0 00
b.
Taxable income 2,620,000
Yield from deposit substitutes 75,000
Interest income 42,00 0
Total 2,737,000
Less: Dividends paid 375,000 Income tax paid 917,000 Tax on deposit substitutes (75,000 x 20%)
15,000
Tax on interest (42,000 x 20%) 8,400 Reserved for building construction 1,500,0
002,815,4
00 Improperly accumulated earnings ( 78,4
00)
12.
The final withholding tax to be paid by the corporation (whether domestic, resident foreign or nonresident foreign) is uniformly computed as follows
Gross selling price (P110 x 1,000) P 110,000
Less: Cost (P100 x 1,000) 100,000Net capital gain 10,000Rate of tax 5% Capital gains tax (final tax) 500
EXERCISES 7–2
7–2.1
1. ANSWER: A
2. ANSWER: C
3. Answer: D
For purposes of MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation is registered with the Bureau of Internal Revenue.
Firms registered with BIR in any year shall be covered by MCIT after the lapse of three calendar years.
The corporation is registered with BIR in 2004. Therefore, it shall be subject to MCIT effective 2008.
4. ANSWER: D
Gross income 852,000
Less: Deductions 800,000
Taxable income 52,000Rate of tax 30
%Normal income tax 15,600MCIT (P852,000 x 2%) 17,040Income tax payable (higher) 17,040
5. Answer: C
Gross income 632,000
Less: Deductions 610,000
Taxable income 22,000Rate of tax 35
%Normal income tax 7,70
0MCIT (P632,000 x 2%) 12,640Income tax payable (higher) 12,640
PROBLEM 7-2.2
1. ANSWER: C
Minimum Corporate Income Tax 50,000Less: Normal income tax 20,000Excess of MCIT over NIT 30,000
Entry:
Deferred charges - MCIT 30,000 Income tax payable 30,000
Taxable income 900,000Add: Interest on bank deposit (16,000/80%)
20,000
Proceeds of insurance 1,200,000
NOLCO 300,000
Dividends from ABB 75,00 0
1,595,0 00
Total 2,495,000
Less: Dividends paid 500,000 Income tax paid 315,000 Interest on bank deposit (20,000 –16,000)
4,000 819,00 0
Improperly accumulated taxable income
1,676,000
Rate 10 %
Improperly accumulated earnings tax
167,60 0
3. ANSWER: D
4. ANSWER: D
5. ANSWER: C
PROBLEM 7-
4.1
1. ANSWER: C
Gross income 11,230,000
Less: Expenses Salary, allowances and bonus 6,400,000 Other operating expenses 2,600,000 Depreciation of additional school facilities: Classrooms (1,300,000/20 x 48,750
9/12) Furniture & equipment (400,000/20 x 6/12)
10,0 00
9,058,75 0
Taxable income 2,171,250
Rate of tax 10% Income tax 217,12
5
2. ANSWER: D
Tuition fees 9,500,000
Miscellaneous fees 1,200,000
Income of bookstore 350,000Income of school canteen 180,00
0Gross income 11,230,0
00Less: Expenses Salary, allowances and bonus
6,400,000
Other operating expenses 2,600,000 Construction of additional classrooms
1,300,000
Furniture and equipment 400,000 10,700,0 00
Taxable income 530,000Rate of tax 10
%Income tax 53,00
0
3. ANSWER: B
A public elementary school is also a government educational institution. They are exempt from income tax under Sec. 30 of the National Internal Revenue Code.
A non-stock, non-profit educational institution is exempt from tax under Article XIV, Sec. 4[3], [4] of the Constitution.
A non-profit educational institution is subject to an income tax rate of 10%.
4. ANSWER: D
PROBLEM 7–4.2
1. ANSWER: A
Gross income 10,000,000
Less: Deductions Operating expenses 6,400,0
00 Cost of building 2,500,0
008,900,00
0 Taxable income 1,100,00
0Rate of tax 10% Income tax due 110,00
0
2. ANSWER: C
Gross income 10,000,000
Less: Deductions Operating expenses 6,400,0
00 Depreciation(2,500,000/50x6/12)
25,00 0
6,425,00 0
Taxable income 3,575,000
Rate of tax 10% Income tax due 357,50
0
3. ANSWER: B
The importation of laboratory equipments are exempt from customs duties if the school is a private educational institutions.
The school building, even if rented only by the school, if being used actually, directly and exclusively for educational purpose is exempt from real property tax.
The portion of the school building is subject to real estate tax because it is not being used actually, directly and exclusively for educational purpose.
The income from operation is taxable. Only income received by non-stock non-profit educational institutions and government educational institutions are exempt.
0Gross income, U.S. ($125,000 x P40) P5,000,000Less: Expenses, U.S. ($62,000 x P40) 2,480,000
2,520,0
00
Gross income, HK ($345,000/5x40) 2,760,000Less: Expenses, HK ($230,000/5 x 40) 1,840,000
920,00 0
3,440,000
Taxable income 3,840,000
Rate of tax 30 %
Income tax 1,152,000
2. ANSWER: C
Gross income, Philippines 1,200,000
Less: Expenses, Philippines 800,00 0
Taxable income 400,000Rate of tax 30% Income tax 120,000
3. ANSWER: D
Gross income, Philippines 1,200,000
Rate of tax 30 %
Final tax 360,00 0
4 ANSWER: A
Gross income 1,200,000
Rate of tax 2.5 %
Income tax 30,00 0
5. ANSWER: B
Gross income, Philippines 1,200,000
Less: Expenses, Philippines 800,00 0
Taxable income 400,000Rate of tax 30
%
Income tax 120,00 0
Amount remitted to mother company (400,000 - 120,000)
280,000
Rate of tax 15% Branch profit remittance tax 42,000
6. ANSWER: A
Exempt from branch profit remittance tax.
7. ANSWER: B
Gross income 1,200,000
Rate of tax 25 %
Final tax 300,00 0
8. ANSWER: B
Gross income 1,200,000
Rate of tax 4.5 %
Final tax 54,00 0
EXERCISE 7 – 6
1. ANSWER: A
2. ANSWER: C
3. ANSWER: B
Net income after tax 40,000,000
Rate of tax 15% Branch profit remittance tax 6,000,00
0
4. ANSWER: C
Net income after tax 40,000,000
Royalty 3,500,000
Dividend 4,000,0 00
Total 47,500,000
Less: Branch profit remittance tax 6,000,0 00
Amount to be remitted to head office 41,500,000
5. ANSWER: B
6. ANSWER: D
GSIS, SSS, and PHIC are exempt from income tax.
PAGCOR is now subject to income tax per RA 9727.
7. ANSWER: C
8. ANSWER: C
All assets of a non-stock non-profit educational institution are exempt from customs duties on importation.
EXERCISE 7–7. MULTIPLE CHOICE THEORY
1. ANSWER: B
Cuentas en participacion is considered as a corporation subject to
corporate tax.
General professional partnerships and co-ownerships are not
subject to income tax.
A joint venture which is formed for the purpose of undertaking energy operations with the government are exempt from tax.
2. ANSWER: A
An individual permanently residing in the Philippines is classified as resident regardless of whether he is a citizen or not.
3. ANSWER: D
Domestic corporations and resident foreign corporations are taxed based on taxable income.
Non-profit cemeteries are exempt from income tax.
Nonresident foreign corporations are not allowed to claim deductions for purposes of income taxation. They are taxed based entirely on gross income derived from sources within the Philippines.
4. ANSWER: B
5. ANSWER: D
6. ANSWER: D
Dividends received by individuals from a domestic company are subject to final tax of 10%.
The rule on tax sparing credit applies only when the dividends are received by nonresident foreign from a domestic corporations.
7. ANSWER: B
Sales (2,968,000 /112%) P2,650,000
Less: Cost of sales 1,725,000
Gross income 925,000Less: Expenses Inclusive (386,400 / 112%) 345,000 Exclusive 450,000 795,000Taxable income 130,000Rate of tax (2008) 35% Income tax 45,500
EXERCISE 7–8. CASE PROBLEM
Excess income taxes paid in a year that could not be applied as tax credit to taxes due the following year may be refunded the next year.
Thus, if the excess income taxes paid in 2005 have not been entirely used by a taxable corporation against its quarterly income tax liabilities for 2006, the unused amount of the excess may still be refunded, provided that the claim for such a refund is made within two years after payment of the tax.
If a taxpayer suffered a net loss in 2006, incurring no tax liability to which a previous year’s tax credit could be applied, there is no reason for the BIR to withhold a tax refund which rightfully belongs to the taxpayer.
Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it, thereby enriching itself at the expense of its law-abiding citizens (solutio indebiti).
Thus:
Excess tax (TY ‘04, filed 4/15/05) 13,929,793.51
TY 2005 (filed 2006):Income tax due 4,187,523.0
0Less: Tax credit (excess tax ’05) 13,929,793.
51Balance (may be refunded) 9,742,270.5
1* * Claim for refund should be made not later that April 15, 2007.
