INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

CHAPTER 12

INCOME TAX OF CORPORATIONS

Problem 12 1 TRUE OR FALSE
1. False for tax purposes, a corporation does not include both general
professional partnership and joint venture with a consortium service
contract with the government.
2. False domestic corporations refer only to corporations that are
created or organized under Philippine laws. Foreign corporations are
also operating in the Philippines but not created under Philippine laws.
3. False nonresident corporations are taxed based on gross income
within.
4. False Only domestic corporations are to be taxed for income within
and without.
5. True
6. True
7. True
8. False the MCIT is applicable also to resident foreign corporations for
their income derived within.
9. True
10.False Not taxable because the corporation is a foreign corporation.
11.False 30%, but legally, foreign corporations are not allowed to own
real property in the Philippines as provided by anti-dummy law.
12.False interest income of resident foreign corporation is subject to a
final tax of 20%, but interest income of nonresident foreign corporation
is subject to normal corporate tax.
13.True
Problem 12 2 TRUE OR FALSE
1. True
2. True
3. False MCIT is applicable only to corporation that are subject to normal
tax rate.
4. True
5. False Other fixed or determinable annual, periodic or casual gains,
profits and income are not treated as branch profit.
6. True
7. True
8. True
9. True
10.False exempt from income tax and VAT.
11.False not imposed also to insurance companies
12.True

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 12 3 TRUE OR FALSE
1. False the net additions to reserve funds are not part of income but
instead deducted from gross income.
2. True
3. False In general, GOCCs are subject to corporate income tax.
4. True
5. False royalties received in the active pursuit of business is subject to
a normal tax of 30%.
6. True
7. True
8. True
9. True
10.False If the unrelated income of the proprietory educational
institution exceeds the related income, the income tax rate applicable
would be the corporate income tax of 30%.
11.False Sale of real property outside the Philippines by a resident
foreign corporation is not subject to tax in the Philippines.
12.False 10% based on gross income within
Problem 12 4
1. C
2. A
3. A
4. D
5. C
6. A
7. A
8. B
9. A
10. C
11. A*
12. A
13. B

Problem 12 5
1. B
2. A
3. D
4. A
5. B
6. B
7. A
8. D
9. B
10. C
11. D Only family-closed corporation is subject to
IAET.
12. A
13. C

*This is on the assumption that a resident foreign corporation acquired a real

property and subsequently sold it without the confiscation of the real
property by the Philippine Government.
As a rule, foreign corporations are not allowed to own and acquire real
properties in the Philippines as provided by the anti-dummy law. (PD 715, May
28, 1975)

Problem 12 6
1. Letter C

Taxable
income

Income tax
due

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Gross income (P8,000,000 + P4,000,000)
Business expenses (P5,000,000 + P3,000,000)
Gain on sale of warehouse (P3,000,000
P2,000,000)
Net taxable income

P12,000,00
0
( 8,000,000
)
1,000,00
0
P5,000,000

Corporate income tax (P5,000,000 x 30%)

P1,500,00
0

Note: The land and warehouse sold is an

ordinary asset. Hence, subject to normal tax.
2.

Letter B
Gross income within
Business expenses
Gain on sale of warehouse (P3,000,000
P2,000,000)*
Net taxable income

P8,000,000
( 5,000,0
00)
1,000,00
0
P4,000,000

Corporate income tax (P4,000,000 x 30%)

P1,200,00
0

*This is on the assumption that a resident foreign corporation acquired a real

property and subsequently sold it without the confiscation of the real
property by the Philippine Government.
Problem 12 7
Gross income within

Multiplied by normal corporate tax rate

Income tax due
Problem 12 8
Gross income within

P2,800,00
0
30
%
P
840,000

Not in the Choices = P2,700,000.

Less: Allocated operating expenses (P30,000,000

x 15/75)
Net taxable income
Multiplied by normal corporate tax rate

P15,000,0
00
6,000,0
00
P
9,000,000
30
%

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Income tax due

P2,700,00
0

Problem 12 9
1. Letter D
Domestic corporation:
Total net income (P160,000 + P240,000)
Multiplied by normal tax rate
Income tax due
Less: Tax credits:
Local
Foreign, Actual, P60,000 lower
limit (P120,000 x 240/400) =
P72,000
Income tax still due and payable

P400,000
30%
P120,000
P42,000
60,000

P18,000

Supporting computation:
Gross income within
without (P180,000 + P75,000
+ P190,000)
Deductions within
- without (P80,000 + P25,000 +
P100,000)
Net income
2.

Philippines
P450,000

Income tax due

(290,000)
.

(205,000)

P160,000

P240,000

P445,000
(205,000)
P240,000
30%
P 72,000
42,000
P 30,000

(P30,000,000

(P10,000,000

Multiplied by normal corporate tax rate

Foreign
P445,000

Letter C
Resident foreign corporation
Gross income within
Deductions within
Net income
Multiplied by normal corporate income tax
Income tax due
Less: Local
Income tax still due and payable

Problem 12 10 D
Net income from PAGCOR
P28,000,000)
Net income from NAPOCOR
P4,000,000)
Total net income

102,000

P2,000,00
0
6,000,00
0
P8,000,00
0
30
%
P2,400,00
0

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 12 11 C
Net income from National Power Corporation

P
8,000,000
5,000,0
00
P13,000,0
00
3
0%
P
3
,
9
0
0
,
0
0
0

Net income from National Books Store

Total net income
Multiplied by corporate normal tax
Income tax due

Problem 12 12 A
Gross profit (P3,000,000 P1,400,000)
Capital gains on sale of paintings
Operating
expenses
before
charitable
(P800,000 P100,000)
Net income before charitable contribution

contribution

Charitable contributions - limit (P1,840,000 x 5%),

lower
Actual P100,000
Net taxable income
Multiplied by corporate normal tax rate
Income tax due

Problem 12 13 C

P1,600,00
0
940,00
0
(700,00
0)
P1,840,00
0
( 92,000)
.
P1,748,00
0
30
%
P
5
2
4
,
4
0
0

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Operating expenses
Less: Net operating loss 4th year
Gross income
Multiplied by MCIT rate
Minimum corporate income tax

P4,000,000
100,000
P3,900,000
2%
P
78,000

Domestic and resident foreign corporation taxed during the taxable

year with MCIT cannot enjoy the benefit of NOLCO. Nevertheless, the
running of the three (3) year period for the expiry of NOLCO is not
interrupted by the fact that such corporation is subject to MCIT. (Rev.
Reg. 14-2001)
Problem 12 14 B
Operating loss
Operating expenses
Gross income
Multiplied by minimum corporate income tax rate
Income tax payable 4th year
5th year net income
Multiplied by normal tax rate
Income tax due
Less: Excess of minimum income tax over normal
tax
Net income tax payable
Problem 12 15
1. Letter A
Net income per GAAP
Add: Allowance for bad debts
Income before incentive to CHED contribution
Less: Incentive to CHED contribution (P300,000 x
50%)
Net taxable income
Multiply by normal corporate income tax rate
Income tax due
2. Letter C
Net income per GAAP
Add: Operating expenses
Gross income

(P
200,000)
1,000,00
0
P
800,000
2
%
P
16,000
P320,000
30%
P 96,000
16,000
P 80,000

P5,000,000
150,000
P5,150,000
150,000
P5,000,000
30%
P1,500,000

P
5,0
00,

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Multiply by minimum corporate income tax rate
Minimum corporate income tax higher

000
80,000,00
0
P85,000,00
0
2
%
P
1,7
00,
000

Normal tax (P5,000,000 x 30%)

P1,500,000

Problem 12 16
1 Letter A
.
Income tax payable current year MCIT (P8,000,000 x 2%)
2
.

P 160,000

Letter C
Net operating income (P8,000,000 P7,000,000)
Multiplied by normal tax rate
Normal tax
Less: Excess of MCIT
Income tax payable

P1,000,000
30%
P 300,000
100,000
P 200,000

Problem 12 17 A
None. There is no excess corporate MCIT over NCIT in year 3 to be applied on
year 4 because the MCIT is not yet applicable for the company as it only has
3 years of operation in year 3.
Problem 12 18
1 Letter A
.
Income tax payable
Divided by MCIT tax rate
Gross income
2
.

P
200,000
2
%
P10,000,00
0

Letter C
Income tax expense
Divided by corporate normal income tax rate

P
150,000
30

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Net taxable income

%
P
500,000

The excess of MCIT over NCIT shall be recorded in the corporations books as
an asset under the account title Deferred Charges, MCIT. This asset account
shall be carried forward and may be credited against the normal tax due for a
period not exceeding three taxable years immediately succeeding the taxable
year(s) in which the same has been paid. (Rev. Regs. No. 9-98)
Problem 12 19 C
Rental income (P1,900,000/95%)
Capital gains
Total gross income
Operating expenses
Net taxable income
Multiplied by corporate normal tax
Income tax due

Excess of MCIT over NCIT

Add: Expanded withholding tax (P2,000,000
P1,900,000)
Total creditable income tax
Less: Income tax due
Tax refund

Problem 12 20 A
Gross income (P1,600,000 P1,200,000)
Less: OSD (P400,000 x 40%)
Net income
Multiplied by normal tax rate
Income tax due

P2,000,00
0
500,00
0
P2,500,00
0
(2,350,00
0)
P
150,000
30
%
P
4
5
,
0
0
0
P 40,000
100,000
P140,000
45,000
P 95,000

P400,000
160,000
P240,000
30%
P 72,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Capital gains tax (P1,600,000 x 6%)

P96,000

Tax advantage using normal tax (P96,000

P72,000)

P24,000

Problem 12 21
1. Letter D
Domestic Corporation:
a. Not traded in local exchange:
Selling price
Cost (P110 x 12,000 shares)
Capital gain
Tax on P100,000 x 5%
Tax on excess (P280,000 P100,000) x 10%

P1,600,000
1,320,000
P 280,000
P

5,000
18,000

P
23,000

b. Traded in local exchange (P1,800,000 x .005)

9,000
c. Sale of land abroad (P3,000,000
P2,500,000) x 30%
d. Sale of land Philippines (P1,200,000 x 6%)

150,000
72,00
0
P254,00
0
Note: OSD is not applicable to land sold in Japan because the land is a
capital asset.
2.

Letter A
Resident Foreign Corporation
a.
b.
c.
d. (P1,200,000 x 6%)
Total

P 23,000
9,000
72,000
P104,000

3. Answer not in the choices = P122,000.

Nonresident Foreign Corporation
a.
b.
c.
d. (P1,200,000 P900,000) x 30%
Total

90,000
P122,000

Problem 12 22 C
Interest from savings deposits (P3,000,000 x 20%)

P 600,000

P 23,000
9,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Royalty income (P1,000,000 x 20%)
Interest from a depository bank EFCD (P1,500,000 x
7.5%)
Total passive final tax

200,000
112,500
P 912,500

Dividend from a domestic corporation received by a domestic corporation is

tax exempt.
Dividend from a nonresident foreign corporation is subject to normal tax.
Problem 12 23
1. Letter B
Domestic Corporation
a. ($20,000 @ 7.5% x P50)
b. P300,000 @ 20%
c. P100,000 @ 20%*
d. P 80,000 @ 20%
Total

2.

Letter B = Resident foreign corporation (same as letter 1)

3.

Letter C
Nonresident foreign corporation
a. Exempted
b. (P300,000 @ 30%)
c. (P100,000 @ 30%)
d. (P 80,000 @ 30%)
Total

P75,000
60,000
20,000
16,00
0
P171,000

P90,000
30,000
24,000
P144,000

*It is assumed that the royalty income from franchising is a passive income.
Problem 12 24
1. Letter B
Dividend income - (PCB and Magnolia are both domestic
corporations)
Interest income on US dollar loans ($3,000 x 10% x P50)
2.

Letter C
Interest on Philippine peso loans
Operating expenses
Taxable income
Multiplied by normal corporate tax
Income tax due

Problem 12 25 A
Related income

Exempt
P15,000
P2,000,000
( 900,000)
P1,100,000
30%
P 330,000
P1,000,00
0

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Unrelated income

1,500,00
0
P2,500,00
0
(3,000,00
0)
(P
500,000)

Total revenue
Operating expenses
Net loss
Minimum corporate income tax (P2,500,000 x 2%)

P50,000

Problem 12 26

1
.
2
.

Letter D
Letter A

Educational income:

200A

Tuition and miscellaneous fees

P4,000,000

Sales of canteen
Sales of bookstore

700,000
300,000

Total related income

P5,000,000

Non-educational income:
Rent income (net/95%)

P5,200,000

Sale of scrap materials

60,000

Total unrelated

P5,260,000

Costs and expenses:

Cost of sales canteen

(P400,000)

Cost of books sold

( 240,000)

Operating expenses

(2,000,000)

Purchase of library books

(1,000,000)

Cost of classroom construction

Purchase of school furniture

( 500,000)
.

200
B
P6,000,00
0
1,600,000
400,00
0
P7,000,00
0
P5,500,00
0
20,00
0
P5,520,00
0
(P
800,000)
( 320,0
00)
(3,000,00
0)
(1,500,00
0)
( 200,000
)

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Total costs and expenses

(P4,140,000)

Net taxable income

200A Income tax (P6,120,000
30%)
200B Income tax (P6,700,000
10%)
Less: CWT from rent
200A (P5,200,000
P4,940,000)
200B (P5,500,000
P5,225,000)
Income tax still due and payable

P6,120,000
x

(P5,820,0
00)
P6,700,00
0

P1,836,000

P670,000

260,000

275,000

P1,576,000

P395,000

A proprietory educational institution has an option to either deduct its

capital expenditures on depreciable assets during the year for the
expansion of school facilities (outright expense) or deduct allowances for
depreciation on such assets, [Sec. 34 (A) (2), NIRC]. In this case, it is more
advantageous for BCU to treat capital expenditures on depreciable assets
as outright expense.
The non-educational income in 200A is greater than the educational
income; therefore, the tax rate to be used in 200A should be the normal
corporate income tax of 30%. On the other hand, a special tax rate of
10% should be used in 200B because the educational income is greater
than the non-educational income. [Sec. 27 (B), NIRC]
Problem 12 27 D
P-0-, Government educational institutions are tax-exempt.
Problem 12 28 B
Income tax payable (P700,000 x 0.025)

P17,500

Problem 12 29 A
Manila to Beijing (P5,000 x 2,000)
Manila Hong Kong Beijing (P6,000 x 4,000) x
P3,000/P6,000
Manila to Hong Kong (P3,000 x 2,000)
Total reportable gross income within
Multiplied by applicable rate
Income tax
Problem 12 30 A
Within

P10,000,000
12,000,000
6,000,000
P28,000,000
2.5%
P
700,000

Dragon Films

American
Aircraft

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Gross receipts
Multiplied by special tax rate
Philippine income taxes

P10,000,000
25%
P 2,500,000

P20,000,000
7 %
P 1,500,000

Note: Gross income means gross receipts. The aforementioned resident

foreign corporations are subject special tax rates (final taxes). They are not
allowed to deduct costs or expenses from their gross receipts. The cost of
service is only applicable for MCIT purposes. (Sec. 27(E)(4), NIRC)
Problem 12 31 A
Operating net income after tax
Tax rate on branch remittance
Branch profit remittance tax
Branch profit remittance, net of tax (P24,000,000 x 85%)
Dividend income from Pharma Co.
Total branch profit remittance

P24,000,00
0
15
%
P
3,600,000
P20,400,00
0
7,000,00
0
P27,400,00
0

Note: Sec. 28 (A) (4) of NIRC provides that the following income within
of a foreign corporation shall not be treated as branch profit for tax
purposes unless the same are effectively connected with the conduct
of the trade or business in the Philippines:
1.
2.
3.
4.

Interest, dividends, rents, royalties;

Remuneration for technical services;
Salaries, wages, premiums, annuities, emoluments;
Other fixed or determinable annual, periodic or casual gain,
profits, income and capital gains.

Problem 12 32 B
Income tax (P80,000/80%) x 20%

P20,000

Note: Although cooperatives are tax-exempt, they are still subject to final
income taxes on interest income.
Problem 12 33 A
All of the transactions of Unlad Cooperative are exempt from income taxes.
Problem 12 34 B
1 Letter A

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

.
Income tax due 1st quarter [(P495,000/99%)
P480,000) x 30%
Less: 1% creditable withholding tax (P495,000/99%)
P5,000
P495,000
200A excess tax credit used in first quarter
1,000
200B
Income tax still due and payable 200B first
quarter
2
.

P 6,000

6,000
P - 0 -

Letter C
Income tax due 2nd quarter [(P792,000/99%)
P700,000) x 30%
Income tax due 1st quarter [(P495,000/99%)
P480,000) x 30%
Withholding tax 2nd quarter [(P792,000/99%)
(P495,000/99%) x 1%
Remaining excess tax credit 200A (P10,000 P1,000)
Income tax still due and payable 2nd quarter 200B

Problem 12 35 C
Gross receipts (P2,940,000/98%)

Net taxable income

Multiplied by corporate normal tax rate
Income tax due

Income tax still due and payable 2nd Qtr.

( 6,000)
( 3,000)
( 9,000)
P 12,000

P3,000,00
0
1,200,00
0
P1,800,00
0
30
%
P
540,000

Less: OSD (P3,000,000 x 40%)

Less: Creditable income taxes paid

1st Qtr. (P1,960,000/98%) x 60% x 30%
2% creditable tax 2nd quarters gross receipts
(P2,940,000/98%) (P1,960,000/98%) x 2%

P 30,000

P360,000
20,000

380,00
0
P
160,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

With the issuance by the BIR of RMC No. 16-2010 in relation to RR No. 22010, the taxpayers are no longer allowed to change methods (OSD to
Itemized Deductions or vice versa) from quarter to quarter within the same
taxable year. The said RMC provides that the method adopted for the 1 st
quarter shall be the same method to be applied to the succeeding quarters of
the same taxable year as well as in the preparation of the annual ITR of the
said taxable year.
Problem 12 36 C
Income tax from ordinary net income (P1,000,000
P900,000) x 30%
Final income taxes:
Interest income on peso savings (P100,000 x 20%)
Expanded foreign currency deposit (P100,000 x 7.5%)
Total income taxes

P30,000
20,000
7,500
P57,500

Problem 12 35 A
Income tax on interest income from peso savings bank
(P100,000 x 30%)
Tax on cash dividend domestic corporation (P100,000 x
30%)
Tax on cash dividend from a resident foreign corporation
(P100,000 x 30%)
Total income tax

P 30,000
30,000
30,000
P90,000

Interest income earned by nonresident foreign corporation from EFCD is taxexempt.

Problem 12 36 C
Gross income - cumulative
Itemized deductions - cumulative
Net taxable income
Multiplied by normal corporate income tax
Income tax due
Total income tax paid in previous quarters - tax
credit
Income tax still due and payable

3rd Quarter
P880,000
(704,000)
P176,000
30%
P 52,800

Problem 12 37 C
Regular tax (P1,000,000 P900,000) x 30%
Final tax on interest income peso deposit (P100,000 x
20%)
Final tax on interest income EFCD (P100,000 x 7.5%)
Total income tax

4th Quarter
P1,120,000
(896,000)
P 224,000
30%
P
67,200
( 52,800)
P

14,400
P 30,000
20,000
7,500
P 57,500

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 12 38 A
Interest income from peso savings bank (P100,000 x 30%)
Cash dividend from domestic corporation (P100,000 x 30%)
Cash dividend from a resident foreign corporation
with 100% earnings in the Philippines (P100,000 x 30%)
Total income tax
Problem 12 39 C
Cash dividend from a domestic corporation (P100,000 x
30%)

P
30,000
30,000
30,00
0
P
90,000
P 30,000

The cash dividend received from a resident foreign corporation is considered

income outside the Philippines because its earnings within does not reached
50%.
Problem 12 40 D
Zero because the earnings of the said resident foreign corporation have no
tax situs in the Philippines.
Problem 12 41 C
Income
subject
to
normal
tax
rate
(P300,000/30%)
Passive income (P60,000/20%)
Capital gains (P35,000: 5,000 at 5%, 30,000 at
10%)
Total income
Less: Income taxes paid:
Income tax per annual tax return
Final tax on passive income
Capital gains tax
Amount subject to 10% surtax

Problem 12 42 A
Net taxable income (P300,000/30%)
Add: Passive income (P60,000/20%)
Capital gains (P100,000) + (P35,000/10%)
Total

P300,000
60,000
35,000

P1,000,00
0
300,000
400,00
0
P1,700,00
0

395,00
0
P1,305,00
0
P1,000,00
0
300,000
450,00
0
P1,750,00

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

0
Less: Income tax per ITR
Passive income final tax
Capital gain tax

P300,000
60,000
40,000

IAET base
Multiplied by IAET tax rate
IAET
Problem 12 43
1 Letter A
.
Reserve funds, beginning
Add: Net additions to reserve funds during the year
Total
Less: Reserve funds, ending
Amount of reserve funds released
2 Letter B
.
Gross premium collected

Gross income

Net income

P1,000,000
500,000
P1,500,000
900,000
P 600,000

P10,000,00
0
600,00
0
P10,600,00
0

Add: Reserve funds release

Less: Operating expenses

Net additions to reserve funds

400,00
0
P1,350,00
0
10
%
P
135,000

P4,600,000
500,000

5,100,00
0
P
5,500,000

In the case of insurance companies, whether domestic or foreign doing

business in the Philippines, the net additions, if any, required by law to
be made within the year to reserve funds and the sums other than
dividends paid within the year on policy and annuity contracts may be
deducted from their gross income: Provided, however, that the released
reserve be treated as income for the year of release. [Sec. 37 (A), NIRC;
Sec. 129, Rev. Regs. No. 2]
Problem 12 44
1. Letter D
Franchise fee

P10,000,00

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

0
200,00
0
P
9,800,000

Less: Creditable withholding tax (P10,000,000 x 2%)

Net amount of franchise fee
2.

Letter B
Franchise fee

P10,000,00
0
6,000,00
0
P
4,000,000
1,600,00
0
P
2,400,000
30
%
P
720,000
200,00
0
P
520,000

Less: Pre-operating and training costs

Gross income
Less: OSD (P4,000,000 x 40%)
Net taxable income
Multiplied by normal tax rate
Income tax due
Less: Creditable withholding tax (P10,000,000 x 2%)
Income tax still due and payable

When royalties are received in active pursuit of business, it is subject to

30% regular corporate income tax. If royalties are derived from passive
income, these are generally subject to 20% final tax. (BIR Ruling No. DA
(C-101) dated October 17, 2008)
Problem 12 45
Year 201A
Withi
n
Gross income:
Philippines
USA
Japan
Deductions:
Philippines
USA
Japan
Net income
Multiply by tax rate
Income tax payable

P1,000,00
0

Witho
ut

Tot
al

P
400,000
300,000

P1,000,00
0
400,000
300,000

(200,00
0)
(200,00
0)

(800,000)
(200,000)
(200,00
0)
P

(800,000)
.
P

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Tax credit allowed see supporting
computation
Income tax still due

200,0
00

P300,0
00

500,0
00
30
%
P
1
5
0
,
0
0
0
( 90,00
0)
P
6
0
,
0
0
0

Supporting computation:
US
Japa
n
Total

Tax credits:
(P200,000/P500,000) x P150,000 = P60,000 vs.
P80,000
Allowed, lower
(P100,000/P500,000) x P150,000 = P30,000 vs.
P30,000
Allowed, lower

P
60,000
30,00
0
P90,00
0

(P300,000/P500,000) x P150,000 = P90,000 vs.

P100,000
Allowed, lower
Problem 12 46
Interest from savings deposit Metrobank (P3,000,000 x 20%)

Royalty income Philippine Mining Company (P1,000,000 x

20%)
Interest from a depository bank under expanded foreign
currency
deposit - PCI Bank ($30,000 x P50 x 7.5%)
Dividends from Zerxes, a resident foreign corporation
(P500,000 x 30%)
Total final passive income taxes

90,0
00
P90,00
0
P
600,000
200,000
112,500
150,00
0
P1,062,50
0

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 12 47
Reported income before tax
Add: Loss from sale of shares of stock outside stock
market
Total
Less: Gains subject to final income tax:
(1) Gain from sale of stock in the stock market
(2) Gain from sale of short-term debt securities
(3) Gain from sale of real property
(P9,400,000 P4,400,000)
Adjusted income subject to corporate income tax
Multiply by normal corporate income tax
Correct amount of income tax

P
25,000
10,000

P10,000,00
0
5,00
0
P10,005,00
0

5,000,00
0

5,035,00
0
P
5,630,000
30
%
P
1,6
89,
000

Total reported income before tax

Less: Normal corporate income tax
Total accounting income after tax

P10,000,00
0
1,689,00
0
P
8,3
11,
000

Problem 12 48
Total revenue
Operating expenses
Service charge credit card (P1,000,000/5%) x 3%
Net income
Multiplied by normal corporate tax
Income tax due
Less: Creditable expanded withholding tax
(P1,000,000/5%) x %
Income tax still due and payable
Problem 12 49
Taxable income (normal tax)
Add: Income subject to final tax
Income exempt from tax
Income excluded from gross income
Amount of NOLCO deducted

P1,000,000
( 10,000)
( 600,000)
P 380,000
30%
P 114,000
100,000
P

P 60,000
50,000
10,000
50,000

14,000
P
900,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Total
Less: Dividends
Income tax paid for the year
Improperly accumulated income
Multiply by tax rate
Tax on improperly accumulated income

Problem 12 50
Tuition fees
Miscellaneous fees
Income from rents
Net income, school canteen
Net income, book store
Gross income
Less: Allowable deductions:
Payroll and administrative salary
Other operating expenses
Interest expense
Outright expense of capital expenditures for
new six rooms
Taxable income
Multiply by the applicable tax rate
Income tax

P150,000
200,000

170,00
0
P1,070,00
0
350,00
0
P
720,000
10
%
P
72,
00
0

P1,425,4
20
762,330
82,100
750,00
0

P2,843,1
00
362,600
60,000
36,200
24,8
00
P3,326,7
00

3,019,8
50
P306,85
0
10
%
P
3
0
,
6
8
5

Note: The tax differential on interest income shall now be used because
under R.A. 9337 specifically requires that the interest expense is to be

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

reduced by 33% of the interest income subjected to final tax during the
taxable year. It is assumed that the educational institution opted to treat the
capital expenditures as outright expense to avail of a lower tax.
Problem 12 51
(1)
Taxable income from operation (P1050,000/70%)
Add: NOLCO deducted

P1,500,000
100,
000
150,000
250,000
P2,000,
000

Interest income (P120,000/80%)

Capital gain (P230,000 P5,000)/90%
Total income for GAAP reporting, before tax
(2)
Tax on income from operation (P1,500,000 x 30%)
Tax on interest income (P150,000 x 20%)
Tax on capital gain (P250,000 P230,000)
Total income tax paid

P450,000
30,000
20,000
P500,000

(3)
GAAP income
Less: Total income tax (see 2)
Net income after tax GAAP

P2,000,000
500,000
P1,500,000

(4)
Taxable income from operation
Add: NOLCO
Income subjected to final tax (P150,000 +
P250,000)
Total
Less: Income tax paid
Net income after income tax
Multiplied by surtax rate
IAET = Surtax

P1,500,00
0
P100,000
400,000

500,00
0
P2,000,00
0
500,00
0
P1,500,00
0
10
%
P
150,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 12 52
1.
Sales
Cost of sales
Rent income
Gross income
Operating expenses
allowed
Net taxable income
Multiplied by NCIT rate
Income tax due
Quarterly tax paid
Income tax still due and
payable
2.
Royalty income, net of tax
Interest income, net of tax
Total passive income, net
of tax
Divide by
Total gross passive income
Multiplied by final tax rate
Final taxes

3rd
year
P1,000,0
00
( 600,00
0)
200,0
00
P
600,000
( 300,0
00)
P
300,000
30
%
P
90,000
(
10,0
00)
P
80,000

4th
year
P2,500,0
00
(1,200,0
00)
300,0
00
P1,600,0
00
(1,300,0
00)
P
300,000
30
%
P
90,000
(
20,0
00)
P
70,000

5th
year
P4,000,0
00
(2,400,0
00)
100,0
00
P1,700,0
00
(1,400,0
00)
P
300,000
30
%
P
90,000
(
30,0
00)
P
60,000

6th
year
P5,000,0
00
(2,700,0
00)
50,0
00
P2,350,0
00
(1,500,0
00)
P
850,000
30
%
P
255,000
(
40,0
00)
P
215,000

3rd
4th
5th
year
year
year
P P160,000 P120,000
80,000
20,00
32,00
16,00
0
0
0
P100,000 P192,000 P136,000

6th
year
P
40,000
24,00
0
P
64,000
80
%
P
80,000
20
%
P
16,000

80
80%
80%
%
P125,000 P240,000 P170,000
20
%
P
25,000

Problem 12 53
1. Sales
Less: Cost of sales
Reportable gross income per ITR

20
%
P
48,000

20
%
P
34,000

P10,000,00
0
6,000,00
0
P

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

4,000,000
2.

Gross profit
Less: Operating expenses:
Salaries
Depreciation
Supplies
Interest expense [P50,000
(P32,000/80% x 33%)
Net taxable income per ITR

P4,000,000
P1,000,000
300,000
200,000
36,800

1,536,800
P2,463,200

Note:
Interest income is subject to final tax of
20%
Inter-corporate dividend is tax-exempt.
Losses on investment in securities is not deductible
capital loss
3.

Final withholding tax paid (P32,000/80%) x

20%

4.

Net income before tax per GAAP

Less: Income tax (P2,463,200 x 30%)
Net income

P 8,000
P2,200,000
738,960
P1,461,040