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: 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. 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.

e.

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. 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. Answer: P38,000 Salary (P20,000 x 12) Add: Benefits Christmas bonus Productivity bonus 20,000 2,000 240,0 00

8. a.

10.

Loyalty award Cash gift Anniversary bonus 13th month pay Total Less: Exemption Income subject to tax

3,000 1,000 2,000 20,000 48,000 30,000

18,0 00 258,0 00

EXERCISES 52.1: 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. ANSWER: B Proceeds of life insurance Less: Premiums paid (1,000 x 12 x 20) Subject to tax 3. ANSWER: C Total amounts received (50,000 x 12) Less: Face value of the policy Deemed interest (taxable) 4. ANSWER: C Total amounts received (50,000 x 12) Less: Amount of premiums paid (1,000 x 12 x 20) Subject to tax 500,00 0 240,00 0 260,00 0 600,00 0 500,00 0 100,00 0 600,00 0 240,00 0 360,00 0

2.

Prob 5-2.2

1.

ANSWER: C

Proceeds of insurance Less: Premiums paid (P10,000 x 20) Income subject to tax 2. ANSWER: D None because Sonia died.
Prob 5-2.3

500,0 00 200,00 0 300,00 0

ANSWER: D Income from coconut land Income from bus operation Income subject to tax
Prob 5-2.4:

50,0 00 30,000 80,000

ANSWER:

B P 500,00 0 400,00 0 100,00 0

Proceeds of life insurance policy Less: Amounts of premiums paid Amount subject to tax

Prob 5-2.5:

ANSWER:

C P 200,00 0 P 60,000 80,000 140,00 0 60,00 0

Proceeds of insurance policy Less: Amount paid upon assignment Premiums subsequently paid Taxable income
Prob 5-3.1

ANSWER:

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:

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 54. Prob 54.1 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 Increase in value of car (P600,000 450,000) Income
Prob 5-4.3

40,0 00 150,00 0 190,00 0

ANSWER: C Payment for the salaries

60,0 00

ANSWER:

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 55

EXERCISE 5

5.1: ANSWER: C Talent fee Professional fee Total amount taxable Cash prize Pay per view Talent fee Taxable amount EXERCISES 55.2 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 c. return. 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. 400,000 1,000,000 1,400,000 25,000,00 0 30,000,00 0 12,000,00 0 67,000,00 0

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; The talent fees derived from Inter-Island Broadcasting Network amounting to P100,000 is a professional income subject to graduated rates of tax. 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.

b.

c.

PROBLEM 5-6.1 ANSWER: D

Salary (P25,000 x 12) Other benefits: 13th month pay 25,00 0 2,500 30,000 57,500 30,000

300,0 00

Cash gift Longevity pay Total Less: Amount of exemption Proceeds of life insurance (300,000 200,000) Income subject to tax

27,5 00 100,00 0 427,50 0

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. 2 Basic salary . Commissions Honoraria Holiday pay Overtime pay Hazard pay Other benefits (36,000 30,000) Income subject to tax 95,000 15,000 10,000 7,000 8,500 6,000 6,00 0 147,50 0

EXERCISES 5 8 1. ANSWER: D

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. Castaeda, 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, government securities are now subject to tax. 8. ANSWER: D

interest

on

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 employees 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 1,000,0 00

16.

ANSWER: D The exemption from income tax on a qualified senior citizen does include exemption from value-added tax, estate tax, donors tax and income tax on passive income.

17.

ANSWER: A Monthly salary and allowance (P3,500 + 1,000) Months received (January to June 15) Actual amount of salaries received Net income from trimobile Income subject to tax 4,5 00 5.5 24,750 24,000 48,750

EXERCISES 61 1. SITUS OF TAXABLE INCOME a. Nonresident citizen Within only b. Nonresident alien Within only (NETB) c. Nonresident citizen Within only d. Resident alien Within only e. Nonresident alien Within only (NETB) f. Nonresident alien Within only (ETB) CLASSIFICATION

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 Less: Personal exemption 420,0 00

Basic personal Additional Taxable income Tax on P 250,000 95,000 x 30% Income tax

50,000 25,000

75,0 00 345,0 00

50,000 28,500 78,500

c. If Carina has no daughter to support, her filing status is single. d. Gross compensation income Less: Basic personal exemption Taxable compensation income Tax on P 250,000 120,000 x 30% Income tax 7. a. Compensation income Jim Less: Personal exemption Taxable compensation income Business income Pat Less: Expenses Net income Less: Personal exemptions Taxable income b. Compensation income Jim 86,000 160,0 00 50,0 00 110,0 00 500,0 00 275,0 00 225,0 00 50,00 0 175,0 00 160,0 00 P 50,000 36,000 420,0 00 50,00 0 370,0 00

Less: Personal exemptions Basic personal Additional exemptions Taxable income Tax on P 70,000 15,000 x 20% Income tax due Business income Pat Less: Expenses Net income Less: Personal exemptions Taxable income Tax on P 140,000 35,000 x 25% Income tax due Income tax Jim Income tax Pat Total income tax 8. a. Tax on P 40 x 5% b. Tax on P 10,000 x 5% c. Tax on P 10,000 2,245.40 x 10% Income tax d. Tax on P 250,000 e. Tax on P 250,000 206,780 x 30% Income tax due f. Tax on P 500,000

50,000 25,000

75,00 0 85,00 0

P 8,500 3,000 11,500 500,0 00 275,0 00 225,0 00 50,00 0 175,0 00 22,500 8,750 31,250 P 11,500 31,250 42,750 2.00 500 500.00 224.54 724.54 50,000 50,000 62,034 112,034 125,000. 00

623,251.27 x 32% Income tax due 9 a. . b. c. d. Salary Interest on bank deposit Honorarium Prizes

199,440. 41 324,440. 41 - Compensation

- Passive income tax exempt - Compensation income - Ordinary business income (not exceeding P10,000) e. Lotto winnings - Tax exempt f. Income from farming - Business income g. Royalties on books - Passive income (10%) h. Dividends from domestic - Passive income (10%) company i. 13th month pay - Exempt up to P 30,000 j. Interest on preterminated - Passive income (12%) deposits

10 a. Juan . Salary Less: Personal exemptions Basic personal Additional exemptions (25,000 x 3) Taxable income Tax on P 10,000 15,000 x 20% Income tax due Less: Withholding tax Income tax payable b. Maria Salary Less: Basic personal exemptions Taxable income 125,0 00 50,00 0 75,00 50,000 75,000 150,0 00 125,0 00 25,00 0

500 3,000 3,500 10,100 ( 6,6 00)

0 Tax on P 70,000 5,000 x 20% Income tax due Less: Withholding tax Income tax payable Income tax Juan Income tax Maria Income tax payable 11 a . . Monthly insurance premium Times number of months in a year Deductible health insurance premium b . Monthly insurance premium (maximum) Times number of months in a year Deductible health insurance premium c . d . 8,500 1,000 9,500 15,000 ( 5,500) ( 6,600) ( 5,500) 12,100 150 12 1,800 200 12 2,400

No amount of health or hospitalization insurance premium is deductible because the total income of the family exceeds P250,000. Monthly insurance premium (maximum Times number of months during the year Deductible health insurance premium 200 8 1,600 200,000 50,000 100,000

1 2.

a .

Compensation income Less: Personal exemption Basic personal Additional (25,000 x 4) Total compensation income Tax on P 30,000 20,000 x 15% Income tax due

150,0 00 50,000 2,500 3,000 5,500 200,000

b .

Gross income Less: Allowable deductions

Expenses Basic personal Additional exemptions Taxable income Tax on P 30,000 25,000 x 15% Income tax due c . Gross income

105,000 50,000 100,000 255,00 0 (55,00 0) 2,500 3,750 6,250

200,0 00 Less: Optional standard deductions 20,00 (200,000 x 10%) 0 Net income 180,00 0 Less: Basic personal and additional 150,00 exemptions 0 Taxable income 30,0 00 Income tax due P 30,000 28,50 0 Case 1 125,0 00 186,0 00 311,0 00 74,40 0 50,0 00 124,4 00 186,6 00 105,00 0 50,00 0 155,00 0 155,00 0 Case 2 80,000 230,00 0 310,00 0

1 3.

Compensation income Business income Gross income Less: Deductions Optional (186,000 x 40%) Itemized Personal exemption Total Taxable income

EXERCISE 6 2 1. ANSWER: B

Gross receipts Less: Expenses Prize, contest Salary (37,600 + 2,400) Rent income (38,000/95%) Less: Depreciation Total Less: Basic personal exemption Taxable income 2. ANSWER: D Tax on P 500,000 357,000 x 32% Income tax due Less: Withholding taxes Profession (950,000 x 15%) Salary Rent (40,000 38,000) Income tax payable

950,00 0 120,00 0 40,000 8,000

830,00 0 5,000 40,000 32,000 907,00 0 50,00 0 857,00 0 125,00 0 114,24 0 239,24 0

142,50 0 2,400 2,00 0

146,90 0 92,34 0 2,400 20,000 600 23,000 40,000 20,000 3,500 150,00 0 20,00 0

3. ANSWER: B Interest on preterminated deposit (20,000 x 12%) Winnings in raffle (100,000 x 20%) Dividend from C Corp. (6,000 x 10%) Total final withholding tax 4. ANSWER: B Interest on long-term bank deposit Winnings in lotto 13th month pay Life insurance benefits Loan benefits - SSS

Total income exempt from income tax EXERCISE 6 - 3 INCOME 1. Interest on bank deposit with Banco de Oro- Php 2. Interest on bank deposit with a bank in the United States in U.S. dollar 3. 4. 5. 6. Earnings from interest on money market Royalties on inventions Royalties on books Prizes amounting to P7,500

233,50 0 Resident or citizen 20% Tax table 20% 20% 10% Tax table 20% Exempt 20% Exempt 5% 10% 10% 7.5% NRA ETB 20% Not taxable 20% 20% 10% Tax table 20% Exempt 20% Exempt 5% 20% 20% Exempt

7. Prizes amounting to P20,000 8. Winnings in lotto Philippines 9. Winnings in lottery 10. Interest on long-term investment 11. Interest on deposit for 4 years 12. Cash dividends domestic corp. 13. Share of partner in net income of taxable partnership 14. Interest income under expanded foreign currency deposit system EXERCISES 64.1 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 64.2 INCOME 1. Rent on apartment in the Phils. 2. Rent on apartment in Canada 3. Dividend-domestic corporation 4. Dividend-foreign corporation RC YES YES YES YES RA, NRC YES NO YES NO NRA(ETB)NRA(NETB) YES NO
YES YES

NO
YES

NO

NO

5. 6. 7. 8. 9.

Lotto winnings in the Phils. Lotto winnings in U.S.A. Cash prize on contest, Phils. Cash prize on contest, U.S.A. Interest, bank deposit in

YES NO YES YES YES YES

NO NO YES NO NO YES

NO NO
YES

NO NO
YES

NO NO
YES

NO NO
YES

U.S.A. 10. Interest bank deposit Phils. Problem 6

4.3 1. ANSWER: C Taxpayer is resident citizen. Compensation income, Philippines Business income, Philippines Business income, Canada ($200,000 x P25) Total gross income Less: Deductions Expenses, Philippines Expenses, Canada ($150,000 x 25) Net income Less: Personal exemptions Basic personal Additional Taxable income Tax on P500,000 925,000 x 32% Income tax due Less: Withholding tax Income tax payable 2. ANSWER: C Total final taxes paid: Dividend from a domestic company Final tax rate 40,00 0 10% 125,000 296,000 421,000 10,000 411,200 220,00 0 3,750,00 0

120,00 0 350,00 0 5,000,0 00 5,470,0 00

3,970,0 00 1,500,0 00 75,0 00 1,425,0 00

50,000 25,000

4,000

Share in income of business partnership Final tax rate Total final tax 3. ANSWER: A Resident citizen opted to avail of OSD. Compensation income Business income, Philippines Business income, Canada ($200,000 x 25) Total Less: Optional deductions (5,350,000 x 40%) Net income Less: Basic personal exemption Taxable income 4. ANSWER: B Taxpayer is a resident alien. Compensation income, Philippines Business income, Philippines Gross income Less: Expenses, Philippines Net income Less: Personal exemption Basic personal Additional exemption (P25,000 x 4) Taxable income

50,00 0 10%

5,000 9,000

120,00 0 350,00 0 5,000,00 0 5,350,00 0 2,140,00 3,210,00 0 0 3,330,0 00 50,0 00 3,280,0 00

120,0 00 350,00 0 470,00 0 220,00 0 250,00 0 50,00 0 100,000

150,00 0 100,00 0

5.

ANSWER: A Taxpayer becomes a nonresident citizen. Net income Less: Basic personal exemption Taxable income 250,00 0 50,0 00 200,00 0

6.

ANSWER: D Nonresident alien ETB. Business income, Philippines Less: Expenses, Philippines Net income Less: Personal exemption (lower) Taxable income

350,0 00 220,00 0 130,00 0 20,00 0 110,00 0

7.

ANSWER: D Taxpayer is NRA NETB. Business income, Philippines Dividend from a domestic company Shares in net income of a partnership Gross income Rate Final tax 350,0 00 40,000 50,00 0 440,00 0 25% 110,00 0 500,00 0 1,540,0 00 250,0 00 2,290,0

8.

ANSWER: D Value of inheritance Lotto winnings Proceeds of life insurance Total exemption

00 EXERCISE 65.1 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 65.2 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) Professional income (83,000 + 7,000) Gross income, business Total Less: Professional and business expenses Rent income (57,000/95%) Net income Less: Personal exemptions Basic personal Additional (25,000 x 2) Taxable income 50,00 0 50,000 90,00 0 125,00 0 215,00 0 56,50 0 104,00 0

158,50 0 60,00 0 322,50 0

100,00 0 222,50 0

Tax on P 140,000 82,500 x 25% Income tax due Less: Tax credit Withholding tax on Wages P 5,000 Professional income 7,000 Rent (60,000-57,000) 3,000 Income tax payable
2. ANSWER: D

22,50 0 20,625 43,125

15,000 28,125

Salary Gross receipts on business Rent income Professional income Total Less: Optional deductions (P275,000 x 40%) Net income Less: Personal exemption Basic personal Additional Taxable income Tax on P 140,000 29,000 x 25% Income tax due Less: Withholding tax Income tax payable 22,5 00 7,250 29,750 15,000 14,750 P 125,00 0 60,000 90,00 0 275,00 0 110,00 0

104,00 0

165,00 0 269,00 0

50,0 00 50,000

100,00 0 169,00 0

PROBLEM 6-5.4

1. ANSWER:

C 87,600 50,000 25,000

Gross compensation income (7,000 + 300) x 12 Less: Personal exemption Basic personal Additional exemption Taxation income 2. ANSWER: C

75,000 12,600

Gross business income Less: Optional deduction (150,000 x 40%) Net Less: Personal exemptions Taxable income EXERCISES 6-6.1: PERSONAL EXEMPTIONS 1. ANSWER: B

150,00 0 60,000 90,000 50,000 40,000

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 taxpayers 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 Additional exemptions: Legitimate child Illegitimate child (recognized natural child) Total 2. ANSWER: B 25,0 00 25,0 00 50,00 0

50,00 0 100,0 00

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 50,00 0 50,00 0

Basic personal exemptions: Husband Wife Additional exemptions (25,000 x 4) Total 4. ANSWER: B Basic personal exemption

64,000 100,000 164,000

50,000

Additional exemption (25,000 x 3) Total personal exemptions 5. ANSWER: D Professional fees Allowances Total Less: Expenses Salaries Traveling expenses Office supplies Rent expense Taxable income before exemption Less: Personal exemption (50,000 +[25,000 x 33]) Taxable income 6. Answer: A Gross compensation income Less: Personal exemptions Basic personal Additional (25,000 x 4) Taxable income 7. Answer: C Gross compensation income Less: Personal exemptions Basic personal Additional (25,000 x 2) Taxable income

75,000 125,000

180,000 24,000 204,000 36,00 0 20,00 0 4,000 36,00 0

96,000 108,000 125,000 .

120,000 50,00 0 100,0 150,000 00 270,000

220,000 50,00 0 50,00 100,000 0 120,000

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 B

5. ANSWER:

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) Less: Personal exemption Taxable income
EXERCISES 68.1. PREMIUM PAYMENTS HOSPITALIZATION INSURANCE

64,00 0 50,000 14,000

1.

ANSWER:

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:

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 Less: Deductions Basic personal Additional exemption Insurance premiums (200 x 12) Taxable income EXERCISE 6.8.2 Case 1: Case 2: Case 3: Case 4: None because the total gross income of the spouses exceeds P250,000. None. The deduction on health insurance can be claimed by the wife being the claimant of the additional exemption on dependents. 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. P1,200. The husband is allowed to claim the deduction even if in the meantime no dependent is qualified for additional exemption. 50,000 25,000 2,400 200,0 00

77,40 0 122,6 00

EXERCISES 6-9 1. ANSWER: A

Salary being a compensation income is returnable. Hence, part of the taxpayers 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 Less: Personal exemptions Basic personal (head of family) Additional (25,000 x 3) Taxable income Tax on P 30,000 2,756 x 15% Income tax due 2,500.00 413.40 2,913.40 157,756 50,000 75,000 125,00 0 32,756

4.

ANSWER: C Compensation income Add: Professional income Less: Expenses Total Less: Exemptions Basic personal Additional Taxable income Tax on P140,000 48,000 x 25% Income tax due 53,000 350,000 140,000 50,000 25,000 22,500 12,000 34,500 210,000 263,000 75,000 188,000

5. 6.

ANSWER: D Refer to the solution to Problem 6. ANSWER: A Salary (P191,000 + 25,000) Add: Taxable other benefits 13th month pay Other benefits Total Less: Exemption Total Less: Personal exemption Taxable income Tax on P 140,000 216,000 18,000 15,000 33,000 30,000

3,000 219,000 50,000 169,000

22,500

29,000 x 25% Income tax due Less: Withholding tax Income tax payable 7. ANSWER: D Gross income, restaurant Taxable other income (200,000 x 80%) Total Less: Deductions Business expenses (900,000 x 60%) x85% Basic personal exemption Additional exemption Taxable income 8. ANSWER: A Basic salary Cost of living allowance Hazard pay Gross compensation income Add: Net income from profession Professional income Less: Expenses Total gross income Less: Personal exemption Taxable income Tax on P 250,000 9,539.76 x 30% Income tax due Less: Withholding tax on wages Income tax payable

7,250 29,750 25,000 4,750

900,000 160,000 1,060,0 00 459,000 50,000 25,000 534,000 526,000

210,549. 76 6,000.00 3,600.00 9,600.0 0 220,149. 76

P156,890.00 67,500.00

89,390. 00 309,539. 76 50,000. 00 259,539. 76

50,000.00 2,861.93 52,861.93 27,609.50 25,252.37

9.

ANSWER: B Business income, Phils., 1/1 4/30 Less: Expenses, Phils. Business income, Phils., 5/1 - 12/31 540,000 Less: Expenses, Phils. 247,500 Professional income Dividend from foreign corporation (1,500 x 60) Total Less: Personal exemption (head of family) Taxable income Tax on P 250,000 128,000 x 30% Income tax due 40,000 17,000 292,50 0 22,500 90,000 23,000

405,000 428,000 50,000 378,000

50,00 0 38,400 88,400

10 .

ANSWER: B Gross compensation income (210,438.24 + 6,000) Less: Personal exemptions Basic personal Additional Taxable income Tax on P 70,000 21,438.24 x 20% Income tax due Less: Withholding tax Income tax payable 8,500.0 0 4,287. 65 12,787. 65 27,246. 40 (14,458. 75) 216,438. 24 50,000. 00 75,000. 00

125,000 .00 91,438. 24

11 .

ANSWER: B Basic salary (48,465.25 + 2,500) 50,965.2 5

Less: Personal exemption Taxable income Tax on P 965.25 x 5% Less: Withholding tax Income tax payable 12 . ANSWER: B Income tax due of Alex Income tax due of Paloma Aggregate amount payable/refund 13 . ANSWER: A Gross compensation income Less: Personal exemptions Basic personal Additional (25,000 x 2) Taxable income 14 . ANSWER: C Gross compensation income Less: Personal exemptions Basic personal Additional Taxable income 15 . Answer: B Salary - 1/1 to 6/30 (P8,000 x 6) Add: Proceeds of insurance 50,00 0 50,000 50,00 0 50,000 48.26 ( 431. 45) ( 383. 19)

50,000.0 0 965.25

(14,458.7 5) ( 383.1 9) (14,841. 94)

220,00 0

100,0 00 120,000

200,00 0

100,000 100,000

48,000 500,00

Less: Premium payments (P5,000 x 20) Gross income Less: Personal exemption Taxable income
EXERCISE 6-10. The petition has merit.

0 100,000

400,000 448,000 50,000 398,000

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:

xxxx
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 a. Domestic corporation b. Resident foreign corporation * c. Nonresident foreign corporation

Situs of Income Within and without Within only Within only

Tax Base Taxable income Taxable income 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 Sales domestic Sales abroad Gross sales Less: Cost of goods sold Gross income Less: Expenses Domestic Foreign Total expenses Taxable income Rate Income tax b . Resident foreign corporation Sales domestic Less: Cost of goods sold (3/10 x 3,000,0 00 1,500,0 3,000,0 00 1,500,0 2008 3,000,0 00 7,000, 000 10,000, 000 5,000, 000 5,000,0 00 1,000,0 00 2,000,0 00 3,000,0 00 2,000,0 00 35 % 700,00 0 2009 3,000,0 00 7,000, 000 10,000, 000 5,000, 000 5,000,0 00 1,000,0 00 2,000,0 00 3,000,0 00 2,000,0 00 30 % 600,00 0

5,000,000) Gross income Less: Expenses on domestic sales Taxable income Rate of tax Income tax c . Nonresident foreign corporation Sales domestic Yield from deposit substitute Gross income Rate Income tax

00 1,500,0 00 1,000,0 00 500,000 35 % 175,00 0

00 1,500,0 00 1,000,0 00 500,000 30% 150,000

3,000,0 00 400,00 0 3,400,0 00 35 % 1,190,0 00

3,000,0 00 400,00 0 3,400,0 00 30 % 1,020,0 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 Less: Expenses Taxable income Rate Normal income tax Less: Minimum income tax (5,000,000 x 2%) Excess MCIT 5,000,0 00 4,700,0 00 300,000 30 % 90,000 100,000 ( 10,00 0)

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 . Gross sales Sales returns and discounts Cost of goods sold Total Net Add: Capital gain Gross income Less: Deductions Taxable income Rate of tax Normal Income tax MCIT: 2007 (3,550,000 x 2%) 2008 (4,455,000 x 2%) 2009 (1,390,000 x 2%) Income tax Excess MCIT 2007 (71,000 24,360) Less: Carry forward of excess MCIT Income tax payable 6 a Sales 2007 4,580,0 00 200,00 0 860,0 00 1,060,0 00 3,520,0 00 30,0 00 3,550, 000 3,480,4 00 69,600 35 % 24,360 71,000 89,100 . 71,00 0 46,64 0 71,00 0 . 89,250 27,80 0 162,00 0 ______ 162,00 0 2008 5,250,0 00 175,00 0 620,0 00 795,0 00 4,455,0 00 . 4,455,0 00 4,200,0 00 255,00 0 35 % 89,250 2009 2,850,0 00 295,00 0 1,200,0 00 1,495,0 00 1,355,0 00 35,0 00 1,390, 000 850,0 00 540,00 0 30 % 162,00 0

46,64 0 42,61 0 6,000,0

. Sales returns and allowances Sales discounts Net sales Less: Cost of goods sold Inventory, January 1 Purchases Freight-in Purchase returns and allowances Purchase discounts Goods available for sale Inventory, December 31 Gross income Less: Operating expenses Taxable income Rate of tax Normal Income tax b MCIT (3,787,000 x 2%) . c . Income tax due 2,400,0 00 1,500,0 00 35,000 ( 30,00 0) ( 7,00 0) 3,898,0 00 1,900,0 00 200,00 0 15,00 0

00 215,0 00 5,785,0 00

1,998,0 00 3,787,0 00 1,600,0 00 2,187,0 00 35 % 765,4 50 75,7 40 765,4 50 2,000, 000 1,600, 000 400,00 0

7 Gross sales . Less: Cost of sales Gross income Less: deduction Optional standard

Gross income Rate Taxable net income 8 . a . b . 9 . a .

400,000 40%

160,00 0 240,00 0

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. 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. 2006 Provision for income tax Income tax payable To record income tax liability using normal income tax. 50,000 50,0 00

b .

Deferred charges MCIT Income tax payable To record excess MCIT (65,000 50,000)

15,000 15,0 00 65,000 65,0 00

c. Income tax payable Cash in bank To record payment of income tax due for 2006. a . b .

2007 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. To record income tax liability using the normal income tax rate. Provision for income tax Income tax payable 85,000 85,000

c. To record application of excess MCIT. Deferred charges MCIT Income tax payable d . To record payment of income tax due for 2007. Income tax payable Cash in bank 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: Retained earnings Deferred charges MCIT 10 . 1 . Tuition fees School canteen Dormitories Bookstores Car stickers Total 2 . 3 . 11 a 15,000 15,000 1,560,0 00 250,000 95,000 48,000 8,30 0 1,961,3 00 15,000 15,000

100,00 0 100,00 0

If Fatima University is a non-stock, non-profit educational institution no income shall be reported for income tax purposes because nonstock non-profit schools are not subject to income tax. 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. Gross receipts 4,500,0

. Less: Cost of sales Gross income Less: Deductions Taxable income Rate Income tax b . Taxable income Yield from deposit substitutes Interest income Total Less: Dividends paid Income tax paid Tax on deposit substitutes (75,000 x 20%) Tax on interest (42,000 x 20%) Reserved for building construction Improperly accumulated earnings 375,000 917,000 15,000 8,400 1,500,0 00

00 1,200,0 00 3,300,0 00 680,0 00 2,620,0 00 35 % 917,0 00 2,620,0 00 75,000 42,00 0 2,737,0 00

2,815,4 00 ( 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) Less: Cost (P100 x 1,000) Net capital gain Rate of tax Capital gains tax (final tax) P 110,000 100,000 10,000 5% 500

EXERCISES 72 72.1

1. 2. 3.

ANSWER: A ANSWER: C 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 Less: Deductions Taxable income Rate of tax Normal income tax MCIT (P852,000 x 2%) Income tax payable (higher) 852, 000 800,00 0 52,000 30 % 15,600 17,040 17,040 632,00 0 610,00 0 22,000 35 % 7,70 0 12,640 12,640

5.

Answer: C Gross income Less: Deductions Taxable income Rate of tax Normal income tax MCIT (P632,000 x 2%) Income tax payable (higher)

PROBLEM 7-2.2

1.

ANSWER: C Minimum Corporate Income Tax

50,000

Less: Normal income tax Excess of MCIT over NIT Entry: Deferred charges - MCIT Income tax payable 2. ANSWER: A Retained earnings Deferred charges - MCIT ANSWER: B 2005 2006 2007 Total excess of MCIT over NIT Journal entry: Income tax payable Deferred charges MCIT PROBLEM 7-2.3: 1. ANSWER: B Income tax, 1st Qtr (NIT higher) Less: Taxes withheld Prior year Taxes withheld 1st qtr Excess MCIT prior year Income tax due, 1st Qtr (normal income tax) 2. ANSWER: B Income tax, 2nd Qtr (MCIT higher) Less: Taxes withheld Prior year Taxes withheld 1st qtr Taxes withheld 2nd qtr Net income tax payment 1st Qtr Income tax due, 2nd Qtr MCIT 3. ANSWER: C Income tax, 3rd Qtr (NIT higher) Less: Taxes withheld Prior year Taxes withheld 1st qtr 10,000 20,000 10,000 20,000 30,000 40,000 10,000 20,000 30,000 30,000

20,000 30,000

30,000 30,000 30,000 27,000 5,000 10,000 42,000 42,000 42,000

3.

100,00 0 60,000 40,000

330,00 0

100,00 0 230,00 0 470,00 0

Taxes withheld 2nd qtr Taxes withheld 3rd qtr Net income tax payment 1st Qtr MCIT paid in the 2nd Qtr Excess MCIT in prior year Income tax due, 3rd Qtr - NIT 4. ANSWER: C Annual income tax (NIT higher) Less: Taxes withheld Prior year Taxes withheld 1st qtr Taxes withheld 2nd qtr Taxes withheld 3rd qtr Taxes withheld 4th qtr Net income tax payment 1st Qtr Net income tax payment 3rd Qtr MCIT paid in the 2nd Qtr Excess MCIT in prior year Income tax due, Final Qtr - NIT 5. ANSWER: A Annual income tax (MCIT higher) Less: Taxes withheld Prior year Taxes withheld 1st qtr Taxes withheld 2nd qtr Taxes withheld 3rd qtr Taxes withheld 4th qtr Net income tax payment 1st Qtr Net income tax payment 3rd Qtr MCIT paid in the 2nd Qtr Income tax due, Final Qtr - NIT

30,000 40,000 40,000 230,000 30,000 400,00 0 70,00 0 670,00 0 10,000 20,000 30,000 40,000 35,000 40,000 70,000 230,000 30,000 505,00 0 165,0 00 550,00 0 10,000 20,000 30,000 40,000 35,000 40,000 70,000 230,000 475,00 0 75,0 00

EXERCISE 73 1. ANSWER: A Gross income Less: Deductions Expenses NOLCO Taxable income Rate of tax Income tax due 2. ANSWER: D Taxable income Add: Interest on bank deposit (16,000/80%) Proceeds of insurance NOLCO Dividends from ABB Total Less: Dividends paid Income tax paid Interest on bank deposit (20,000 16,000) Improperly accumulated taxable income Rate Improperly accumulated earnings tax 3. 4. 5. ANSWER: D ANSWER: D ANSWER: C 7C 500,000 315,000 4,000 1,750,0 00 300,00 0

2,950,0 00

2,050,0 00 900,000 35 % 315,00 0 900,000

20,000 1,200,0 00 300,00 0 75,00 0

1,595,0 00 2,495,0 00 819,00 0 1,676,0 00 10 % 167,60 0

PROBLEM 4.1 1 ANSWER: .

Gross income 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 10,0 (400,000/20 x 6/12) 00 Taxable income Rate of tax Income tax 2. ANSWER: D Tuition fees Miscellaneous fees Income of bookstore Income of school canteen Gross income Less: Expenses Salary, allowances and bonus Other operating expenses Construction of additional classrooms Furniture and equipment Taxable income Rate of tax Income tax 3. 6,400,000 2,600,000 1,300,000 400,000

11,230,0 00

9,058,75 0 2,171,25 0 10% 217,12 5 9,500,00 0 1,200,00 0 350,000 180,00 0 11,230,0 00

10,700,0 00 530,000 10 % 53,00 0

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 74.2 1. ANSWER: A Gross income Less: Deductions Operating expenses Cost of building Taxable income Rate of tax Income tax due 2. ANSWER: C Gross income Less: Deductions Operating expenses Depreciation(2,500,000/50x6/ 12) Taxable income Rate of tax Income tax due 3. 6,400,0 00 25,00 0 6,400,0 00 2,500,0 00

10,000,0 00

8,900,00 0 1,100,00 0 10% 110,00 0 10,000,0 00

6,425,00 0 3,575,00 0 10% 357,50 0

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 nonstock non-profit educational institutions and government educational institutions are exempt. 4. ANSWER: C

EXERCISES 7 5 PROBLEM 75.1. 1. ANSWER: A Gross income, Philippines Less: Expenses, Philippines Gross income, U.S.A. Less: Expenses, USA Royalties, USA Taxable income Rate of tax (2008) Income tax 2. ANSWER: C Gross income, Phils. Less: Expenses Taxable income Rate of tax (2008) Income tax 3. ANSWER: A Gross income, Philippines Interest on bank deposit, PNB

P 740,00 0 425,00 0 690,00 0 450,00 0

P 315,00 0 240,00 0 50,00 0 605,00 0 35% 211,75 0

740,00 0 425,00 0 315,00 0 35% 110,25 0

740,00 0 10,00 0

Total Rate of tax (2008) Final tax 4. ANSWER: A

750,00 0 35% 262,50 0

PROBLEM 7 5.2 ANSWER: D Gross income, Phils. Less: Deductions Gross income, USA Less: Deductions Taxable income Rate (2009) Income tax PROBLEM 7 5.3 ANSWER: 200,00 0 80,000 60,00 0 30,000

120,00 0 30,00 0 150,00 0 30% 45,000

C 2,800,0 00 1,300,0 00 1,500,0 00 35 % 525,0 00

Gross income, Philippines Less: Deductions Taxable income Rate of tax (2008) Income tax PROBLEM 7 5.4 1. ANSWER: B Gross income, Philippines Less: Expenses, Phils. Gross income, U.S. ($125,000 x P40) 1,200,000 800,000

400,00 0

P5,000,000 Less: Expenses, U.S. ($62,000 x P40) 2,480,000 Gross income, HK ($345,000/5x40) 2,760,000 Less: Expenses, HK ($230,000/5 x 40) 1,840,000 Taxable income Rate of tax Income tax 2. ANSWER: C Gross income, Philippines Less: Expenses, Philippines Taxable income Rate of tax Income tax 3. ANSWER: D Gross income, Philippines Rate of tax Final tax 4 ANSWER: A Gross income Rate of tax Income tax 5. ANSWER: B Gross income, Philippines Less: Expenses, Philippines

2,520,0 00 920,00 0 3,440,0 00 3,840,0 00 30 % 1,152,0 00

1,200,0 00 800,00 0 400,000 30% 120,000

1,200,0 00 30 % 360,00 0

1,200,0 00 2.5 % 30,00 0

1,200,0 00 800,00 0

Taxable income Rate of tax Income tax Amount remitted to mother company (400,000 - 120,000) Rate of tax Branch profit remittance tax 6. ANSWER: A Exempt from branch profit remittance tax. 7. ANSWER: B Gross income Rate of tax Final tax 8. ANSWER: B Gross income Rate of tax Final tax

400,000 30 % 120,00 0 280,000 15% 42,000

1,200,0 00 25 % 300,00 0

1,200,0 00 4.5 % 54,00 0

EXERCISE 7 6 1. ANSWER: A 2. 3. ANSWER: C 40,000,0 00 15% 6,000,00 0 40,000,0

ANSWER: B Net income after tax Rate of tax Branch profit remittance tax

4.

ANSWER: C Net income after tax

Royalty Dividend Total Less: Branch profit remittance tax Amount to be remitted to head office 5. 6. ANSWER: B ANSWER: D

00 3,500,00 0 4,000,0 00 47,500,0 00 6,000,0 00 41,500,0 00

GSIS, SSS, and PHIC are exempt from income tax. PAGCOR is now subject to income tax per RA 9727. 7. 8. ANSWER: C

ANSWER: C All assets of a non-stock non-profit educational institution are exempt from customs duties on importation.

EXERCISE 77. 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. ANSWER: D Domestic corporations and resident foreign corporations are taxed based on taxable income. Non-profit cemeteries are exempt from income tax.

3.

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. 5. 6. ANSWER: B

ANSWER: D 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%) Less: Cost of sales Gross income Less: Expenses Inclusive (386,400 / 112%) Exclusive Taxable income Rate of tax (2008) Income tax P2,650, 000 1,725,0 00 925,000 345,000 450,000 795,000 130,000 35% 45,500

EXERCISE 78. 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 years 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) TY 2005 (filed 2006): Income tax due Less: Tax credit (excess tax 05) Balance (may be refunded)

13,929,793. 51 4,187,523.0 0 13,929,793. 51 9,742,270.5 1*

* Claim for refund should be made not later that April 15, 2007.