INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 102

SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations

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

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
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 103
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Chapter 12: Income Tax of Corporations

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 Problem 12 5
1. C 1. B
2. A 2. A
3. A 3. D
4. D 4. A
5. C 5. B
6. A 6. B
7. A 7. A
8. B 8. D
9. A 9. B
10. C 10. C
11. A* 11. D Only family-closed corporation is subject to IAET.
12. A 12. A
13. B 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 tax
income due
Gross income (P8,000,000 + P4,000,000) P12,000,000
Business expenses (P5,000,000 + P3,000,000) ( 8,000,000)
Gain on sale of warehouse (P3,000,000 P2,000,000) 1,000,000
Net taxable income P5,000,000

Corporate income tax (P5,000,000 x 30%) P1,500,000

Note: The land and warehouse sold is an ordinary asset.

Hence, subject to normal tax.

2. Letter B
Gross income within P8,000,000
Business expenses ( 5,000,000)
Gain on sale of warehouse (P3,000,000 P2,000,000)* 1,000,000
Net taxable income P4,000,000

Corporate income tax (P4,000,000 x 30%) P1,200,000

*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 D
Gross income within P2,800,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 104
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Chapter 12: Income Tax of Corporations

Multiplied by normal corporate tax rate 30%

Income tax due P 840,000

Problem 12 8 Not in the Choices = P2,700,000.

Gross income within P15,000,000
Less: Allocated operating expenses (P30,000,000 x 15/75) 6,000,000
Net taxable income P 9,000,000
Multiplied by normal corporate tax rate 30%
Income tax due P2,700,000

Problem 12 9
1. Letter D
Domestic corporation:
Total net income (P160,000 + P240,000) P400,000
Multiplied by normal tax rate 30%
Income tax due P120,000
Less: Tax credits:
Local P42,000
Foreign, Actual, P60,000 lower 60,000 102,000
limit (P120,000 x 240/400) = P72,000
Income tax still due and payable P18,000

Supporting computation: Philippines Foreign

Gross income within P450,000
without (P180,000 + P75,000 + P190,000) P445,000
Deductions within (290,000)
- without (P80,000 + P25,000 + P100,000) . (205,000)
Net income P160,000 P240,000

2. Letter C
Resident foreign corporation
Gross income within P445,000
Deductions within (205,000)
Net income P240,000
Multiplied by normal corporate income tax 30%
Income tax due P 72,000
Less: Local 42,000
Income tax still due and payable P 30,000

Problem 12 10 D
Net income from PAGCOR (P30,000,000 - P28,000,000) P2,000,000
Net income from NAPOCOR (P10,000,000 P4,000,000) 6,000,000
Total net income P8,000,000
Multiplied by normal corporate tax rate 30%
Income tax due P2,400,000

Problem 12 11 C
Net income from National Power Corporation P 8,000,000
Net income from National Books Store 5,000,000
Total net income P13,000,000
Multiplied by corporate normal tax 30%
Income tax due P 3,900,000

Problem 12 12 A
Gross profit (P3,000,000 P1,400,000) P1,600,000
Capital gains on sale of paintings 940,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 105
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Chapter 12: Income Tax of Corporations

Operating expenses before charitable contribution (P800,000 P100,000) (700,000)

Net income before charitable contribution P1,840,000
Charitable contributions - limit (P1,840,000 x 5%), lower ( 92,000)
Actual P100,000 .
Net taxable income P1,748,000
Multiplied by corporate normal tax rate 30%
Income tax due P 524,400

Problem 12 13 C
Operating expenses P4,000,000
Less: Net operating loss 4 th year 100,000
Gross income P3,900,000
Multiplied by MCIT rate 2%
Minimum corporate income tax 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 (P 200,000)
Operating expenses 1,000,000
Gross income P 800,000
Multiplied by minimum corporate income tax rate 2%
Income tax payable 4 th year P 16,000

5th year net income P320,000

Multiplied by normal tax rate 30%
Income tax due P 96,000
Less: Excess of minimum income tax over normal tax 16,000
Net income tax payable P 80,000

Problem 12 15
1. Letter A
Net income per GAAP P5,000,000
Add: Allowance for bad debts 150,000
Income before incentive to CHED contribution P5,150,000
Less: Incentive to CHED contribution (P300,000 x 50%) 150,000
Net taxable income P5,000,000
Multiply by normal corporate income tax rate 30%
Income tax due P1,500,000

2. Letter C
Net income per GAAP P 5,000,000
Add: Operating expenses 80,000,000
Gross income P85,000,000
Multiply by minimum corporate income tax rate 2%
Minimum corporate income tax higher P 1,700,000

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%) P 160,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 106
SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations

2 Letter C
.
Net operating income (P8,000,000 P7,000,000) P1,000,000
Multiplied by normal tax rate 30%
Normal tax P 300,000
Less: Excess of MCIT 100,000
Income tax payable 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 P 200,000
Divided by MCIT tax rate 2%
Gross income P10,000,000

2. Letter C
Income tax expense P 150,000
Divided by corporate normal income tax rate 30%
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%) P2,000,000
Capital gains 500,000
Total gross income P2,500,000
Operating expenses (2,350,000)
Net taxable income P 150,000
Multiplied by corporate normal tax 30%
Income tax due P 45,000

Excess of MCIT over NCIT P 40,000

Add: Expanded withholding tax (P2,000,000 P1,900,000) 100,000
Total creditable income tax P140,000
Less: Income tax due 45,000
Tax refund P 95,000

Problem 12 20 A
Gross income (P1,600,000 P1,200,000) P400,000
Less: OSD (P400,000 x 40%) 160,000
Net income P240,000
Multiplied by normal tax rate 30%
Income tax due P 72,000

Capital gains tax (P1,600,000 x 6%) P96,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 107
SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations

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 P1,600,000
Cost (P110 x 12,000 shares) 1,320,000
Capital gain P 280,000

Tax on P100,000 x 5% P 5,000

Tax on excess (P280,000 P100,000) x 10% 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% 150,000

d. Sale of land Philippines (P1,200,000 x 6%) 72,000
P254,000
Note: OSD is not applicable to land sold in Japan because the land is a capital asset.

2. Letter A
Resident Foreign Corporation
a. P 23,000
b. 9,000
c.
d. (P1,200,000 x 6%) 72,000
Total P104,000

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

Nonresident Foreign Corporation
a. P 23,000
b. 9,000
c.
d. (P1,200,000 P900,000) x 30% 90,000
Total P122,000

Problem 12 22 C
Interest from savings deposits (P3,000,000 x 20%) P 600,000
Royalty income (P1,000,000 x 20%) 200,000
Interest from a depository bank EFCD (P1,500,000 x 7.5%) 112,500
Total passive final tax 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) P75,000
b. P300,000 @ 20% 60,000
c. P100,000 @ 20%* 20,000
d. P 80,000 @ 20% 16,000
Total P171,000

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

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 108
SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations

3. Letter C
Nonresident foreign corporation
a. Exempted
b. (P300,000 @ 30%) P90,000
c. (P100,000 @ 30%) 30,000
d. (P 80,000 @ 30%) 24,000
Total 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) Exempt
Interest income on US dollar loans ($3,000 x 10% x P50) P15,000

2. Letter C
Interest on Philippine peso loans P2,000,000
Operating expenses ( 900,000)
Taxable income P1,100,000
Multiplied by normal corporate tax 30%
Income tax due P 330,000

Problem 12 25 A
Related income P1,000,000
Unrelated income 1,500,000
Total revenue P2,500,000
Operating expenses (3,000,000)
Net loss (P 500,000)

Minimum corporate income tax (P2,500,000 x 2%) P50,000

Problem 12 26
1. Letter D
2. Letter A
Educational income: 200A 200B
Tuition and miscellaneous fees P4,000,000 P6,000,000
Sales of canteen 700,000 1,600,000
Sales of bookstore 300,000 400,000
Total related income P5,000,000 P7,000,000

Non-educational income:
Rent income (net/95%) P5,200,000 P5,500,000
Sale of scrap materials 60,000 20,000
Total unrelated P5,260,000 P5,520,000

Costs and expenses:

Cost of sales canteen (P400,000) (P 800,000)
Cost of books sold ( 240,000) ( 320,000)
Operating expenses (2,000,000) (3,000,000)
Purchase of library books (1,000,000) (1,500,000)
Cost of classroom construction ( 500,000)
Purchase of school furniture . ( 200,000)
Total costs and expenses (P4,140,000) (P5,820,000
)
Net taxable income P6,120,000 P6,700,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 109
SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations

200A Income tax (P6,120,000 x 30%) P1,836,000

200B Income tax (P6,700,000 x 10%) P670,000
Less: CWT from rent
200A (P5,200,000 - P4,940,000) 260,000
200B (P5,500,000 P5,225,000) . 275,000
Income tax still due and payable 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) P10,000,000
Manila Hong Kong Beijing (P6,000 x 4,000) x P3,000/P6,000 12,000,000
Manila to Hong Kong (P3,000 x 2,000) 6,000,000
Total reportable gross income within P28,000,000
Multiplied by applicable rate 2.5%
Income tax P 700,000

Problem 12 30 A
Within Dragon Films American Aircraft
Gross receipts P10,000,000 P20,000,000
Multiplied by special tax rate 25% 7 %
Philippine income taxes P 2,500,000 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 P24,000,000
Tax rate on branch remittance 15%
Branch profit remittance tax P 3,600,000

Branch profit remittance, net of tax (P24,000,000 x 85%) P20,400,000

Dividend income from Pharma Co. 7,000,000
Total branch profit remittance P27,400,000

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:
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 110
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Chapter 12: Income Tax of Corporations

1. Interest, dividends, rents, royalties;

2. Remuneration for technical services;
3. Salaries, wages, premiums, annuities, emoluments;
4. 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 tax due 1st quarter [(P495,000/99%) P480,000) x 30% P 6,000
Less: 1% creditable withholding tax (P495,000/99%) P495,000 P5,000
200A excess tax credit used in first quarter 200B 1,000 6,000
Income tax still due and payable 200B first quarter P - 0 -

2 Letter C
.
Income tax due 2nd quarter [(P792,000/99%) P700,000) x 30% P 30,000
Income tax due 1st quarter [(P495,000/99%) P480,000) x 30% ( 6,000)
Withholding tax 2 nd quarter [(P792,000/99%) (P495,000/99%) x ( 3,000)
1%
Remaining excess tax credit 200A (P10,000 P1,000) ( 9,000)
Income tax still due and payable 2 nd quarter 200B P 12,000

Problem 12 35 C
Gross receipts (P2,940,000/98%) P3,000,000
Less: OSD (P3,000,000 x 40%) 1,200,000
Net taxable income P1,800,000
Multiplied by corporate normal tax rate 30%
Income tax due P 540,000
Less: Creditable income taxes paid
1st Qtr. (P1,960,000/98%) x 60% x 30% P360,000
2% creditable tax 2nd quarters gross receipts
(P2,940,000/98%) (P1,960,000/98%) x 2% 20,000 380,000
Income tax still due and payable 2 nd Qtr. P 160,000

With the issuance by the BIR of RMC No. 16-2010 in relation to RR No. 2-2010, 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.
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 111
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Chapter 12: Income Tax of Corporations

Problem 12 36 C
Income tax from ordinary net income (P1,000,000 P900,000) x 30% P30,000
Final income taxes:
Interest income on peso savings (P100,000 x 20%) 20,000
Expanded foreign currency deposit (P100,000 x 7.5%) 7,500
Total income taxes P57,500

Problem 12 35 A
Income tax on interest income from peso savings bank (P100,000 x 30%) P 30,000
Tax on cash dividend domestic corporation (P100,000 x 30%) 30,000
Tax on cash dividend from a resident foreign corporation (P100,000 x 30%) 30,000
Total income tax P90,000

Interest income earned by nonresident foreign corporation from EFCD is tax-exempt.

Problem 12 36 C
3rd Quarter 4th Quarter
Gross income - cumulative P880,000 P1,120,000
Itemized deductions - cumulative (704,000) (896,000)
Net taxable income P176,000 P 224,000
Multiplied by normal corporate income tax 30% 30%
Income tax due P 52,800 P 67,200
Total income tax paid in previous quarters - tax credit ( 52,800)
Income tax still due and payable P 14,400

Problem 12 37 C
Regular tax (P1,000,000 P900,000) x 30% P 30,000
Final tax on interest income peso deposit (P100,000 x 20%) 20,000
Final tax on interest income EFCD (P100,000 x 7.5%) 7,500
Total income tax P 57,500

Problem 12 38 A
Interest income from peso savings bank (P100,000 x 30%) P 30,000
Cash dividend from domestic corporation (P100,000 x 30%) 30,000
Cash dividend from a resident foreign corporation
with 100% earnings in the Philippines (P100,000 x 30%) 30,000
Total income tax P 90,000

Problem 12 39 C
Cash dividend from a domestic corporation (P100,000 x 30%) 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%) P1,000,000
Passive income (P60,000/20%) 300,000
Capital gains (P35,000: 5,000 at 5%, 30,000 at 10%) 400,000
Total income P1,700,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 112
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Chapter 12: Income Tax of Corporations

Less: Income taxes paid:

Income tax per annual tax return P300,000
Final tax on passive income 60,000
Capital gains tax 35,000 395,000
Amount subject to 10% surtax P1,305,000

Problem 12 42 A
Net taxable income (P300,000/30%) P1,000,000
Add: Passive income (P60,000/20%) 300,000
Capital gains (P100,000) + (P35,000/10%) 450,000
Total P1,750,000
Less: Income tax per ITR P300,000
Passive income final tax 60,000
Capital gain tax 40,000 400,000
IAET base P1,350,000
Multiplied by IAET tax rate 10%
IAET P 135,000

Problem 12 43
1. Letter A
Reserve funds, beginning P1,000,000
Add: Net additions to reserve funds during the year 500,000
Total P1,500,000
Less: Reserve funds, ending 900,000
Amount of reserve funds released P 600,000

2. Letter B
Gross premium collected P10,000,000
Add: Reserve funds release 600,000
Gross income P10,600,000
Less: Operating expenses P4,600,000
Net additions to reserve funds 500,000 5,100,000
Net income 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 P10,000,000
Less: Creditable withholding tax (P10,000,000 x 2%) 200,000
Net amount of franchise fee P 9,800,000

2. Letter B
Franchise fee P10,000,000
Less: Pre-operating and training costs 6,000,000
Gross income P 4,000,000
Less: OSD (P4,000,000 x 40%) 1,600,000
Net taxable income P 2,400,000
Multiplied by normal tax rate 30%
Income tax due P 720,000
Less: Creditable withholding tax (P10,000,000 x 2%) 200,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 113
SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations

Income tax still due and payable P 520,000

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
Within Without Total
Gross income:
Philippines P1,000,000 P1,000,000
USA P 400,000 400,000
Japan 300,000 300,000
Deductions:
Philippines (800,000) (800,000)
USA (200,000) (200,000)
Japan . (200,000) (200,000)
Net income P 200,000 P300,000 P 500,000
Multiply by tax rate 30%
Income tax payable P 150,000
Tax credit allowed see supporting computation ( 90,000)
Income tax still due P 60,000

Supporting computation:
Tax credits:
US (P200,000/P500,000) x P150,000 = P60,000 vs. P80,000
Allowed, lower P 60,000
Japan (P100,000/P500,000) x P150,000 = P30,000 vs. P30,000
Allowed, lower 30,000
P90,000 90,000
Total (P300,000/P500,000) x P150,000 = P90,000 vs. P100,000
Allowed, lower P90,000
Problem 12 46
Interest from savings deposit Metrobank (P3,000,000 x 20%) P 600,000
Royalty income Philippine Mining Company (P1,000,000 x 20%) 200,000
Interest from a depository bank under expanded foreign currency
deposit - PCI Bank ($30,000 x P50 x 7.5%) 112,500
Dividends from Zerxes, a resident foreign corporation (P500,000 x 30%) 150,000
Total final passive income taxes P1,062,500

Problem 12 47
Reported income before tax P10,000,000
Add: Loss from sale of shares of stock outside stock market 5,000
Total P10,005,000
Less: Gains subject to final income tax:
(1) Gain from sale of stock in the stock market P 25,000
(2) Gain from sale of short-term debt securities 10,000
(3) Gain from sale of real property
(P9,400,000 P4,400,000) 5,000,000 5,035,000
Adjusted income subject to corporate income tax P 5,630,000
Multiply by normal corporate income tax 30%
Correct amount of income tax P 1,689,000

Total reported income before tax P10,000,000

Less: Normal corporate income tax 1,689,000
Total accounting income after tax P 8,311,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 114
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Chapter 12: Income Tax of Corporations

Problem 12 48
Total revenue P1,000,000
Operating expenses ( 10,000)
Service charge credit card (P1,000,000/5%) x 3% ( 600,000)
Net income P 380,000
Multiplied by normal corporate tax 30%
Income tax due P 114,000
Less: Creditable expanded withholding tax (P1,000,000/5%) x % 100,000
Income tax still due and payable P 14,000

Problem 12 49
Taxable income (normal tax) P 900,000
Add: Income subject to final tax P 60,000
Income exempt from tax 50,000
Income excluded from gross income 10,000
Amount of NOLCO deducted 50,000 170,000
Total P1,070,000
Less: Dividends P150,000
Income tax paid for the year 200,000 350,000
Improperly accumulated income P 720,000
Multiply by tax rate 10%
Tax on improperly accumulated income P 72,000

Problem 12 50
Tuition fees P2,843,100
Miscellaneous fees 362,600
Income from rents 60,000
Net income, school canteen 36,200
Net income, book store 24,800
Gross income P3,326,700
Less: Allowable deductions:
Payroll and administrative salary P1,425,420
Other operating expenses 762,330
Interest expense 82,100
Outright expense of capital expenditures for new six rooms 750,000 3,019,850
Taxable income P306,850
Multiply by the applicable tax rate 10%
Income tax P 30,685
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 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%) P1,500,000
Add: NOLCO deducted 100,000
Interest income (P120,000/80%) 150,000
Capital gain (P230,000 P5,000)/90% 250,000
Total income for GAAP reporting, before tax P2,000,000

(2)
Tax on income from operation (P1,500,000 x 30%) P450,000
Tax on interest income (P150,000 x 20%) 30,000
Tax on capital gain (P250,000 P230,000) 20,000
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 115
SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations

Total income tax paid P500,000

(3)
GAAP income P2,000,000
Less: Total income tax (see 2) 500,000
Net income after tax GAAP P1,500,000

(4)
Taxable income from operation P1,500,000
Add: NOLCO P100,000
Income subjected to final tax (P150,000 + P250,000) 400,000 500,000
Total P2,000,000
Less: Income tax paid 500,000
Net income after income tax P1,500,000
Multiplied by surtax rate 10%
IAET = Surtax P 150,000

Problem 12 52
1. 3rd year 4th year 5th year 6th year
Sales P1,000,000 P2,500,000 P4,000,000 P5,000,000
Cost of sales ( 600,000) (1,200,000) (2,400,000) (2,700,000)
Rent income 200,000 300,000 100,000 50,000
Gross income P 600,000 P1,600,000 P1,700,000 P2,350,000
Operating expenses allowed ( 300,000) (1,300,000) (1,400,000) (1,500,000)
Net taxable income P 300,000 P 300,000 P 300,000 P 850,000
Multiplied by NCIT rate 30% 30% 30% 30%
Income tax due P 90,000 P 90,000 P 90,000 P 255,000
Quarterly tax paid ( 10,000) ( 20,000) ( 30,000) ( 40,000)
Income tax still due and payable P 80,000 P 70,000 P 60,000 P 215,000

2. 3rd year 4th year 5th year 6th year

Royalty income, net of tax P 80,000 P160,000 P120,000 P 40,000
Interest income, net of tax 20,000 32,000 16,000 24,000
Total passive income, net of tax P100,000 P192,000 P136,000 P 64,000
Divide by 80% 80% 80% 80%
Total gross passive income P125,000 P240,000 P170,000 P 80,000
Multiplied by final tax rate 20% 20% 20% 20%
Final taxes P 25,000 P 48,000 P 34,000 P 16,000

Problem 12 53
1. Sales P10,000,000
Less: Cost of sales 6,000,000
Reportable gross income per ITR P 4,000,000

2. Gross profit P4,000,000

Less: Operating expenses:
Salaries P1,000,000
Depreciation 300,000
Supplies 200,000
Interest expense [P50,000 (P32,000/80% x 33%) 36,800 1,536,800
Net taxable income per ITR P2,463,200
INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 116
SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations

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% P 8,000

4. Net income before tax per GAAP P2,200,000

Less: Income tax (P2,463,200 x 30%) 738,960
Net income P1,461,040