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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.

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.

d.

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.

8.
a.

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.

10.

Answer: P38,000
Salary (P20,000 x 12)
Add: Benefits
Christmas bonus
Productivity bonus

240,0
00
20,000
2,000

Loyalty award
Cash gift
Anniversary bonus
13th month pay
Total
Less: Exemption

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

Income subject to tax

18,0
00
258,0
00

EXERCISES 52.1:
1.

2.

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

Prob 5-2.2

1.

ANSWER: C

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

Proceeds of insurance
Less: Premiums paid (P10,000 x
20)
Income subject to tax
2.

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

ANSWER: D
None because Sonia died.

Prob 5-2.3

ANSWER: D
Income from coconut land

50,0
00
30,000
80,000

Income from bus operation


Income subject to tax
Prob 5-2.4:

ANSWER:

Proceeds of life insurance policy


Less: Amounts of premiums paid
Amount subject to tax

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

Prob 5-2.5:

ANSWER:

Proceeds of insurance policy


Less:
Amount paid upon
assignment
Premiums subsequently
paid
Taxable income

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

140,00
0
60,00
0

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

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

Prob 5-4.3

ANSWER: C
Payment for the salaries

60,0
00

Prob 5-4.4

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

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 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.

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:

Salary (P25,000 x 12)

300,0
00

Other benefits:
13th month pay

25,00
0
2,500
30,000
57,500
30,000

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:

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:

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:

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:

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:

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:

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.

interest

on

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 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

16.

1,000,0
00

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.

CLASSIFICATION

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)

2. a. No. A mother is not a qualified dependent for purposes of additional


exemption.
b. No. An aunt is not a qualified dependent for purposes of claiming
additional exemption.
c.

Yes. Cindy because she is supporting her daughter who is living with
her.

d. Yes. He is entitled to an additional exemption on his dependent


daughter.

e. No. A benefactor of a senior citizen is not a qualified dependent for


purposes of additional exemption.
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.

None. Each taxpayer is entitled to a basic personal exemption of


P50,000 regardless of his status. The additional exemption on each
dependent child is P25,000 regardless of the status of the taxpayerclaimant.

4. a. None.
Additional personal exemption can be claimed only on
dependent children regardless of the support being extended by other
persons.
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. No. A mixed income earner cannot be classified as a MWE regardless of
his compensation income from employment.
b. Yes, because the daughter is a qualified dependent.
c.

Gross compensation income


Less: Basic personal exemption
Additional exemption
Taxable compensation income

240,0
00
50,000
25,000

75,0
00
145,0

00
Tax on P 140,000
5,000 x 25%
Income tax

22,500
1,250
23,750

d. Gross compensation income

240,0
00
50,00
0
190,0
00

Less: Basic personal exemption


Taxable income
Tax on P 140,000
50,000 x 25%
Income tax

22,500
12,500
35,000

7. a. Compensation income Jim

160,0
00
50,0
00
110,0
00

Less: Personal exemption


Taxable compensation income
Business income Pat

500,0
00
275,0
00
225,0
00
50,00
0
175,0
00

Less: Expenses
Net income
Less: Personal exemption
Taxable income
b. Compensation income Jim
Less: Personal exemptions
Basic personal
Additional exemptions

160,0
00
50,000
25,000

Taxable income
Tax on P 70,000
15,000 x 20%

P 8,500
3,000

75,00
0
85,00
0

Income tax due

11,500

Business income Pat

500,0
00
275,0
00
225,0
00
50,00
0
175,0
00

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
623,251.27 x 32%
Income tax due

9 a. Salary
.
b. Interest on bank deposit

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
199,440.
41
324,440.
41

- Compensation
- Passive income tax exempt (long-

c. Honorarium
d. Prizes

e.
f.
g.
h.

i.
j.

Lotto winnings
Income from farming
Royalties on books
Dividends from domestic
company
13th month pay
Interest on preterminated
deposits

term)
Compensation income
Ordinary business income (not exceeding
P10,000)
Tax exempt
Business income
Passive income (10%)
Passive income (10%)

- Exempt up to P 30,000
- Passive income (12%)

10 a. Juan
.
Salary

150,0
00

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

50,000
75,000

125,0
00
25,00
0

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

b. Maria
Salary

125,0
00
50,00
0
75,00
0

Less: Basic personal exemptions


Taxable income
Tax on P 70,000
5,000 x 20%
Income tax due
Less: Withholding tax
Income tax payable

8,500
1,000
9,500
15,000
( 5,500)

Income tax Juan


Income tax Maria
Income tax payable /
refund
11 a
.
.

( 6,600
)
( 5,50
0)
(12,10
0)

Monthly insurance premium

150

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

200
12
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


Times number of months during the year
Deductible health insurance premium

1
2.

12
1,800

a
.

Compensation income
Less: Personal exemption
Basic personal
Additional (25,000 x 2)

50,000
50,000

Tax on P 70,000
30,000 x 20%
Income tax due

100,0
00
100,00
0
8,500
6,000
14,50
0

Gross income
Less: Allowable deductions
Optional deductions
(200,000 x 40%)

8
1,600
200,000

Total compensation income

b
.

200

200,000
80,00
0

Basic personal
Additional exemptions
Taxable income
Tax on P 10,000
10,000 x 10%
Income tax due
c
.

50,000
50,000 180,00
0
20,00
0
500
1,000
1,500

Gross compensation income


Less: Basic personal and additional
exemptions
Taxable income
Tax on P 70,000
30,000 x 20%
Income tax due

1
3.

Compensation income
Business income
Gross income
Less: Deductions
Optional (186,000 x 40%)

8,500
6,000
14,50
0
Case 1
125,0
00
186,0
00
311,0
00

Total
Taxable income
EXERCISE 6 2
1. ANSWER: B
Gross receipts
Less: Expenses

Case 2
80,000
230,00
0
310,00
0

74,40
0

Itemized
Personal exemption

200,0
00
100,00
0
100,0
00

50,0
00
124,4
00
186,6
00

105,00
0
50,00
0
155,00
0
155,00
0

950,00
0
120,00 830,00

0
Prize, contest
Salary (37,600 + 2,400)
Rent income (38,000/95%)
Less: Depreciation
Total
Less: Basic personal exemption
Taxable income

40,000
8,000 32,000
907,00
0
50,00
0
857,00
0

2. ANSWER: D
Tax on P 500,000

125,00
0
114,24
0
239,24
0

357,000 x 32%
Income tax due
Less: Withholding taxes
Profession (950,000 x 15%)
Salary
Rent (40,000 38,000)
Income tax payable

142,50
0
2,400
2,00 146,90
0
0
92,34
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

0
5,000
40,000

2,400
20,000
600
23,000
40,000
20,000
3,500
150,00
0
20,00
0
233,50
0

EXERCISE 6 - 3
Resident
or citizen
20%

NRA
ETB
20%

Tax table
20%
20%
10%
Tax table
20%
Exempt
20%
Exempt
5%
10%
10%

Not taxable
20%
20%
10%
Tax table
20%
Exempt
20%
Exempt
5%
20%
20%

7.5%

Exempt

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. Earnings from interest on money market
4. Royalties on inventions
5. Royalties on books
6. Prizes amounting to P7,500
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

EXERCISE 64.1
1.

ANSWER:

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

RC

1. Rent on apartment in the

YES

RA,
NRC
YES

Phils.
2. Rent on apartment in

YES

Canada
3. Dividend-domestic
corporation
4. Dividend-foreign corporation
5. Lotto winnings in the Phils.
6. Lotto winnings in U.S.A.
7. Cash prize on contest, Phils.
8. Cash prize on contest, U.S.A.
9. Interest, bank deposit in

NRA(ETB)NRA(NETB)
YES

YES

NO

NO

NO

YES

YES

YES

YES

YES
NO
YES
YES
YES
YES

NO
NO
NO
YES
NO
NO

NO
NO
NO

NO
NO
NO

YES

YES

NO
NO

NO
NO

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

YES

YES

YES

Problem 6
4.3
1.
ANSWER: C
Taxpayer is resident citizen.
Compensation income, Philippines

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

Business income, Philippines


Business income, Canada
($200,000 x P25)
Total gross income within and
without
Less: Deductions
Expenses, Philippines
Expenses, Canada
($150,000 x 25)
Net income
Less: Personal exemptions
Basic personal
Additional

220,00
0
3,750,00
0

50,000
25,000

Taxable income
Tax on P500,000
925,000 x 32%
Income tax due
Less: Withholding tax
Income tax payable
2.

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

125,000
296,000
421,000
10,000
411,200

ANSWER: C
Total final taxes paid:
Dividend from a domestic
company
Final tax rate
Share in income of business
partnership
Final tax rate
Total final tax

40,00
0
10%
50,00
0
10%

4,000
5,000
9,000

YES

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.

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

ANSWER: B
Taxpayer is a resident alien.
Compensation income, Philippines

120,0
00
350,00
0
470,00
0
220,00
0
250,00
0

Business income, Philippines


Gross income within
Less: Expenses, Philippines
Net income within
Less: Personal exemption
Basic personal
Additional exemption
(P25,000 x 4)
Taxable income
5.

50,00
0
100,000

150,00
0
100,00
0

ANSWER: A
Taxpayer becomes a
nonresident citizen.
Net income within

250,00

Less: Basic personal exemption


Taxable income
6.

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

7.

350,0
00
220,00
0
130,00
0
40,00
0
90,00
0

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

8.

0
50,0
00
200,00
0

ANSWER: D
Lotto winnings
Proceeds of life insurance
Total exemption

350,0
00
40,000
50,00
0
440,00
0
25%
110,00
0
1,540,0
00
250,0
00
1,790,0
00

The inheritance is more of a donation rather than an income.


EXERCISE 65.1

ANSWER:

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:
.

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

104,00
0
90,00
0
125,00
0
215,00
0
56,50
0

Rent income (57,000/95%)


Net income
Less: Personal exemptions
Basic personal
Additional (25,000 x 2)

50,00
0
50,000

Taxable income
Tax on P 140,000
82,500 x 25%
Income tax due

22,50
0
20,625
43,125

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

100,00
0
222,50
0

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:

15,000
28,125

Salary

104,00
0

Gross receipts on business


Rent income
Professional income
Total
Less: Optional deductions (275,000 x
40%)
Net income
Less: Personal exemption
Basic personal
Additional

P
125,00
0
60,000
90,00
0
275,00
0
110,00
0

50,0
00
50,000

Taxable income
Tax on P 140,000
29,000 x 25%
Income tax due
Less: Withholding tax
Income tax payable

165,00
0
269,00
0

100,00
0
169,00
0

22,5
00
7,250
29,750
15,000
14,750

PROBLEM 6-5.4

1. ANSWER:

Gross compensation income (7,000 + 300)


x 12

87,600

Less: Personal exemption


Basic personal
Additional exemption
Taxation income
2. ANSWER:

50,000
25,000

75,000
12,600

Gross business income


Less: Optional deduction (150,000 x 40%)
Net
Less: Personal exemptions
Taxable income

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

EXERCISES 6-6.1: PERSONAL


EXEMPTIONS
1.

ANSWER:

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:

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:

An illegitimate child is now considered as a qualified dependent for


purposes of claiming additional exemption
4.

ANSWER:

The amount of basic personal exemption allowed to NRA ETB must


not exceed the amount of exemption being allowed in the Philippines.
5.

ANSWER:

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 with.


6.

ANSWER:

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:

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:

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:

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:

A senior citizen is ordinarily taxable unless he qualifies under the


exemptions which are also being granted to ordinary taxpayers.
EXERCISES 6-6.2
1.

ANSWER:

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

50,00
0

Additional exemptions:
Legitimate child
Illegitimate child (recognized
natural child)
Total
2.

ANSWER:

25,0
00
25,0
00

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:

Basic personal exemptions:


Husband
Wife
Additional exemptions (25,000 x 4)
Total
4.

64,000
100,000
164,000

ANSWER: C
Basic personal exemption
Additional exemption (25,000 x 3)
Total personal exemptions

5.

50,00
0
50,00
0

50,000
75,000
125,000

ANSWER: D
Professional fees
Allowances

180,000
24,000

Total
Less: Expenses
Salaries
Traveling expenses
Office supplies
Rent expense
Taxable income before exemption
Less:
Personal exemption (50,000
+[25,000 x 3])
Taxable income
6.

Additional (25,000 x 4)
Taxable income

96,000
108,000
125,000
.

220,000
50,00
0
100,0 150,000
00
70,000

Answer: C
Gross compensation income
Less: Personal exemptions
Basic personal
Additional (25,000 x 2)
Taxable income

8.

36,00
0
20,00
0
4,000
36,00
0

Answer: A
Gross compensation income
Less: Personal exemptions
Basic personal

7.

204,000

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

Answer: C
Upin
Balbal
Total additional exemption

25,000
25,000
50,000

EXERCISES 6 7. CLASSIFICATION OF INDIVIDUAL INCOME


TAXPAYERS
1.

ANSWER:

A nonresident alien not engaged in trade or business (NRA NETB) is

not entitled to claim personal exemption.


2.

ANSWER:

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:

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:

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:

Royalty income on musical compositions are subject to a final tax of


10%.
7.

ANSWER: C
Interest (taxpayer is NRA ETB)

64,00
0

The dividend is subject to final tax.


EXERCISES

1.

ANSWER:

68.1.
PREMIUM
PAYMENTS
HOSPITALIZATION INSURANCE

ON

HEALTH

AND/OR

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.
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:

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

200,0
00
50,000
25,000
2,400

77,40
0
122,6
00

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:

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 13 th 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)

157,75
6
50,000
75,000

Taxable income
Tax on P 30,000
2,756 x 15%
Income tax due
4.

125,00
0
32,756

2,500.00
413.40
2,913.40

ANSWER: C
Compensation income
Add: Professional income
Less: Expenses

53,00
0
350,000
140,000

Total
Less: Exemptions
Basic personal
Additional

50,000
25,000

Taxable income
Tax on P140,000
48,000 x 25%
Income tax due
5.

ANSWER: D
Refer to the solution to Problem 6.

6.

ANSWER: A

Total

75,00
0
188,00
0

22,500
12,000
34,500

Salary (P191,000 + 25,000)


Add: Taxable other benefits
13th month pay
Other benefits
Total
Less: Exemption

210,00
0
263,00
0

216,00
0
18,000
15,000
33,000
30,000

3,00
0
219,00
0

Less: Personal exemption

50,00
0
169,00
0

Taxable income
Tax on P 140,000
29,000 x 25%
Income tax due
Less: Withholding tax
Income tax payable
7.

22,500
7,250
29,750
25,000
4,750

ANSWER: D
Gross income, restaurant

900,00
0
160,00
0
1,060,0
00

Taxable other income (200,000 x 80%)


Total
Less: Deductions
Business expenses (900,000 x 60%) x
85%
Basic personal exemption
Additional exemption

459,000
50,000
25,000

Taxable income
8.

534,00
0
526,00
0

ANSWER: A
Basic salary
Cost of living allowance
Hazard pay

210,549
.76
6,000.00
3,600.00

Gross compensation income


Add: Net income from profession
Professional income
Less: Expenses
Total gross income
Less: Personal exemption
Taxable income

P156,890.0
0
67,500.00

9,600.
00
220,149
.76

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

.76
Tax on P 250,000
9,539.76 x 30%
Income tax due
Less: Withholding tax on wages
Income tax payable
9.

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

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)

40,000
17,000
292,5
00
22,50
0
90,00
0

Total
Less: Personal exemption
Taxable income
Tax on P 250,000
128,000 x 30%
Income tax due
10
.

23,000

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

50,0
00
38,40
0
88,40
0

ANSWER: B
Gross compensation income (210,438.24 +
6,000)
Less: Personal exemptions
Basic personal
Additional

216,438.
24
50,000.
00
75,000.
00

Taxable income
Tax on P 70,000
21,438.24 x 20%
Income tax due

8,500.0
0
4,287.
65
12,787.

125,000
.00
91,438.
24

Less: Withholding tax


Income tax payable
11
.

65
27,246.
40
(14,458.
75)

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

50,965.2
5
50,000.0
0
965.25

Less: Personal exemption


Taxable income
Tax on P 965.25 x 5%
Less: Withholding tax
Income tax payable
12
.

48.26
( 431.
45)
( 383.
19)

ANSWER: B
Income tax due of Alex

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

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
.

220,00
0
50,00
0
50,000

100,0
00
120,000

ANSWER: C
Gross compensation income

200,00
0

Less: Personal exemptions


Basic personal
Additional
Taxable income
15
.

50,00
0
50,000

100,000
100,000

Answer: B
Salary - 1/1 to 6/30 (P8,000 x 6)
Add: Proceeds of insurance
Less: Premium payments (P5,000 x 20)
Gross income
Less: Personal exemption
Taxable income

48,000
500,00
0
100,000

400,000
448,000
50,000
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:

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.
Sadi natapos

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

Tax Base

Within and
without
Within only

Taxable
income
Taxable
income
Gross
income

Within only

*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

2008

2009

3,000,0
00
7,000,
000
10,000,
000
5,000,
000
5,000,0
00

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

1,000,0
00
2,000,0
00
3,000,0
00
2,000,0
00
30

Income tax
b
.

%
600,00
0

3,000,0
00
1,500,0
00
1,500,0
00
1,000,0
00
500,000
35
%
175,00
0

3,000,0
00
1,500,0
00
1,500,0
00
1,000,0
00
500,000
30%

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

Resident foreign
corporation
Sales domestic
Less: Cost of goods sold (3/10 x
5,000,000)
Gross income
Less: Expenses on domestic
sales
Taxable income
Rate of tax
Income tax

c
.

%
700,00
0

150,000

Nonresident foreign
corporation
Sales domestic
Yield from deposit
substitute
Gross income
Rate
Income tax

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

5,000,0
00
4,700,0
00

Taxable income
Rate
Normal income tax
Less: Minimum income tax (5,000,000
x 2%)
Excess MCIT

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 4 th 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%)

2007

2008

2009

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

5,250,0
00
175,00
0
620,0
00
795,0
00
4,455,0
00

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

35
%
24,360

.
4,455,0
00
4,200,0
00
255,00
0
35
%
89,250

71,000
89,100
.

27,80
0

Income tax
Excess MCIT 2007 (71,000
24,360)
Less: Carry forward of excess
MCIT
Income tax payable
6 a
. .

71,00
0
46,64
0
71,00
0

Sales
Sales returns and allowances
Sales discounts

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

162,00
0

46,64
0
42,61
0

______

6,000,0
00
200,00
0
15,00
0

Net sales
Less: Cost of goods sold
Inventory, January 1

89,250

2,400,0
00
1,500,0
00
35,000
( 30,00
0)
(
7,00
0)
3,898,0
00
1,900,0
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

162,00
0

50

7 Gross sales
.
Less: Cost of sales

2,000,
000
1,600,
000
400,00
0

Gross income
Less:
Optional
deduction
Gross income
Rate

standard

Taxable net income


8
.

400,000
40%

160,00
0
240,00
0

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

15,0
00

To record excess MCIT (65,000 50,000)


c. Income tax payable
Cash in bank
To record payment of income tax due
for 2006.
2007

65,000
65,0
00

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
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

15,000
15,000

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:
Retained earnings
Deferred charges MCIT
10
.

1
.

Tuition fees
School canteen
Dormitories
Bookstores
Car stickers
Total

15,000
15,000
1,560,0
00
250,000
95,000
48,000
8,30
0
1,961,3
00

11
.

2
.

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.

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.

a
.

Gross receipts

4,500,0
00
1,200,0
00
3,300,0
00
680,0
00
2,620,0
00
35
%
917,0
00

Less: Cost of sales


Gross income
Less: Deductions
Taxable income
Rate
Income tax
b
.

Taxable income

2,620,0
00
75,000
42,00
0
2,737,0
00

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
12
.

375,000
917,000
15,000
8,400
1,500,0
00

2,815,4
00
( 78,4
00)

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)

110,000
100,000
10,000
5%
500

EXERCISES 72
72.1

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
Less: Deductions
Taxable income
Rate of tax
Normal income tax
MCIT (P852,000 x 2%)
Income tax payable (higher)

5.

Answer: C
Gross income
Less: Deductions
Taxable income
Rate of tax

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

Normal income tax


MCIT (P632,000 x 2%)
Income tax payable (higher)
PROBLEM 7-2.2

1.

2.

3.

ANSWER: C
Minimum Corporate Income Tax
Less: Normal income tax
Excess of MCIT over NIT

50,000
20,000
30,000

Entry:
Deferred charges - MCIT
Income tax payable

30,000

ANSWER: A
Retained earnings
Deferred charges - MCIT

30,000

ANSWER: B
2005
2006
2007
Total excess of MCIT over NIT
Journal entry:
Income tax payable
Deferred charges MCIT

30,000

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

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.

100,00
0
10,000
20,000
30,000

ANSWER: B
Income tax, 2nd Qtr (MCIT higher)
Less: Taxes withheld Prior year
Taxes withheld 1st qtr

60,000
40,000

330,00
0
10,000
20,000

Taxes withheld 2nd qtr


Net income tax payment 1st

30,000
40,000

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
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

470,00
0
10,000
20,000
30,000
40,000
40,000
230,000
30,000

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

10,000
20,000
30,000
40,000
35,000
40,000
70,000
230,000
30,000

ANSWER: A
Annual income tax (MCIT higher)
Less: Taxes
Taxes
Taxes
Taxes
Taxes

withheld
withheld
withheld
withheld
withheld

Prior year
1st qtr
2nd qtr
3rd qtr
4th qtr

400,00
0
70,00
0
670,00
0

Income tax due, Final Qtr - NIT


5.

100,00
0
230,00
0

505,00
0
165,0
00
550,00
0

10,000
20,000
30,000
40,000
35,000

Net income tax payment 1st

40,000

Net income tax payment 3rd

70,000

Qtr
Qtr
MCIT paid in the 2nd Qtr

230,000

Income tax due, Final Qtr - NIT

EXERCISE 73
1. ANSWER: A
Gross income
Less: Deductions
Expenses
NOLCO

2,950,0
00
1,750,0
00
300,00
0

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

Improperly accumulated earnings


tax

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

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

Total
Less: Dividends paid
Income tax paid
Interest on bank deposit
(20,000 16,000)
Improperly accumulated taxable
income
Rate

475,00
0
75,0
00

500,000
315,000
4,000

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

3.
4.
5.

ANSWER: D
ANSWER: D
ANSWER: C

PROBLEM

7-

4.1
1 ANSWER:

.
Gross income

11,230,0
00

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

9,500,00
0
1,200,00
0
350,000
180,00
0
11,230,0
00

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

9,058,75
0
2,171,25
0
10%
217,12
5

6,400,000
2,600,000
1,300,000
400,000

10,700,0
00
530,000

Rate of tax

10
%
53,00
0

Income tax
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:

PROBLEM 74.2
1. ANSWER: A
Gross income
Less: Deductions
Operating expenses
Cost of building

10,000,0
00
6,400,0
00
2,500,0
00

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

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

6,400,0
00
25,00
0

6,425,00
0
3,575,00
0
10%
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 nonstock non-profit educational institutions and government educational
institutions are exempt.

4.

ANSWER:

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.

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

ANSWER: C
Gross income, Phils.
Less: Expenses
Taxable income
Rate of tax (2008)

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

Income tax
3.

110,25
0

ANSWER: A
Gross income, Philippines

740,00
0
10,00
0
750,00
0
35%
262,50
0

Interest on bank deposit, PNB


Total
Rate of tax (2008)
Final tax
4.

ANSWER: A

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:

60,00
0
30,000

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

Gross income, Philippines


Less: Deductions
Taxable income
Rate of tax (2008)
Income tax

200,00
0
80,000

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

PROBLEM 7
5.4
1. ANSWER: B
Gross income, Philippines
Less: Expenses, Phils.
Gross income, U.S. ($125,000 x P40)
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.

Less: Expenses, Philippines


Taxable income
Rate of tax
Income tax

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

ANSWER: D
Gross income, Philippines
Rate of tax
Final tax

400,00
0

ANSWER: C
Gross income, Philippines

3.

1,200,000
800,000

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

ANSWER: A
Gross income
Rate of tax

1,200,0
00
2.5
%

Income tax
5.

30,00
0

ANSWER: B
Gross income, Philippines
Less: Expenses, Philippines
Taxable income
Rate of tax
Income tax
Amount remitted to mother company
(400,000 - 120,000)
Rate of tax
Branch profit remittance tax

6.

1,200,0
00
800,00
0
400,000
30
%
120,00
0
280,000
15%
42,000

ANSWER: A
Exempt from branch profit remittance tax.

7.

ANSWER: B
Gross income
Rate of tax
Final tax

8.

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

ANSWER: B
Gross income
Rate of tax
Final tax

EXERCISE 7 6
1. ANSWER: A
2.

ANSWER:

3.

ANSWER: B

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

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.

ANSWER: B

6.

ANSWER: D

40,000,0
00
15%
6,000,00
0
40,000,0
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.

ANSWER:

8.

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.

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:

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
1,725,0
00
925,000

Less: Cost of sales


Gross income
Less: Expenses
Inclusive (386,400 / 112%)
Exclusive
Taxable income
Rate of tax (2008)
Income tax

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.