Business and Transfer Tax 3rd Ed - TABAG and GARCIA.doc

SOLUTIONS MANUAL

TRANSFER & BUSINESS TAXATION, 3rd Edition By: TABAG & GARCIA

CHAPTER 1 – SUCCESSION & TRANSFER TAXES TRUE OR FALSE 1. T 2. T 3. T 4. T 5. F MULTIPLE CHOICE 1. D 2. A 3. D 4. C 5. C 6. A 7. B 8. A 9. B 10. A 11. D

6. 7. 8. 9. 10.

T F T T T

11. 12. 13. 14. 15.

T T T T F

12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

C C B D C B D C B B B

23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.

D B D D B D A D B A D

34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

D B B D B D D B D B B

45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.

B C D D A B A D D D B

61. 62. 63. 64. 65. 66. 67. 68. 69. 70.

A A A C D B A C C D

CHAPTER 2 – GROSS ESTATE TRUE OR FALSE – SET A 1. T 6. 2. T 7. 3. F 8. 4. T 9. 5. T 10. TRUE OR FALSE – SET B 1. T 6. 2. F 7. 3. F 8. 4. T 9. 5. T 10. MULTIPLE CHOICE 1. A 16. 2. B 17. 3. D 18. 4. B 19. 5. C 20. 6. C 21. 7. A 22. 8. B 23. 9. A 24. 10. A 25. 11. C 26. 12. B 27.

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T T T T T

11. 12. 13. 14. 15.

T F F T T

16. 17. 18. 19. 20.

F T T T T

F T T T F

11. 12. 13. 14. 15.

T F F T F

16. 17. 18. 19. 20.

T T T F T

D C B D A D A B A C C C

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42.

C B B A B B D C B D C C

46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57.

C D C C C D D C C C B D

Transfer & Business Taxation(3

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Edition) by Tabag and Garcia

13. 14. 15.

D A C

28. 29. 30.

D B D

43. 44. 45.

B C B

58. 59. 60.

C C A

Supporting Computations:

23. Bank deposit in the foreign branch of a domestic bank Bank deposit in Makati branch of a foreign bank Shares of stock issued by a domestic corporation (certificate kept in Canada) Franchise exercised in Manila Receivable, debtor from Mindanao Total Exclusion from the gross estate

P500,000 300,000 1,000,000 800,000 200,000 P2,800,000

23. House and lot, family home in Quezon City Bank deposit in Makati branch of a foreign bank Shares of stock issued by a domestic corporation (certificate kept in Canada) Franchise exercised in Manila Receivable, debtor from Mindanao Total Inclusion from the gross estate

P1,500,000 300,000 1,000,000 800,000 200,000 P3,800,000

25. Shares of stocks, domestic corp. (certificate kept in UK) Shares of stocks, domestic corp. (certificate kept in Phils.) Franchise exercised in the Phils. Receivables, debtor is from Phils. Intangibles subject to reciprocity

P250,000 100,000 200,000 50,000 P600,000

26. Land & building, Philippines House and lot, Philippines Shares of stocks, domestic corp. (certificate kept in UK) Shares of stocks, domestic corp. (certificate kept in Phils.) Franchise exercised in the Phils. Receivables, debtor is from Phils. Gross Estate 33. 34. 35. 36.

P2,000,000 3,500,000 250,000 100,000 200,000 50,000 P6,100,000

(P12M/100,000) x 1,000 shares = P120,000 (P10M/100,000) x 1,000 shares = P100,000 P110 x 1,000 shares = P120,000 (P140 + P80/2) x 1,000 shares = P110,000

44.

Land Shares of stock Vintage car Painting

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Consideration received P1,500,000 100,000 50,000 250,000


FMV upon transfer P1,500,000 50,000 80,000 400,000 r d

FMV upon death P2,000,000 150,000 100,000 500,000

Gross Estate None. Valid sale None. Valid sale P50,000 250,000


INCLUSION IN THE GROSS ESTATE

P300,000

44. Bequests to charitable institutions are considered exclusions from the gross estate only if the problem clearly states that not more than 30% were used for administrative purposes. PROBLEM SOLVING: PROBLEM 1 (1) P19,300,000

(2) P19,300,000

(3) P11,800,000

Family home in the Philippines Parcel land of with vacation house in Malaysia Farm land in the Philippines Shares of stock of a domestic corporation deposited in a bank safety deposit box in Malaysia Shares of stock of a foreign corporation the entire business of which is in the Philippines, deposited in a bank safety deposit box in Malaysia Receivable from a friend who has no property whatsoever Receivables under insurance policies:  Life insurance policy, taken by the decedent on his own life, with his estate as revocable beneficiary  Life insurance policy, taken by the decedent, with his daughter as revocable beneficiary  Life insurance policy, taken by the decedent on his own life, with his son as irrevocable beneficiary  Life insurance (group) taken by the employer of the decedent, with the estate as revocable beneficiary  Property insurance, for a loss of property  Accident insurance, for injury sustained TOTAL GROSS ESTATE

(4) P14,300,000 Citizen/ Resident (# 1 & 2) P8,000,000 5,000,000 3,000,000 2,000,000

NRA with R

NRA w/o R

(# 3) P8,000,000

(# 4) P8,000,000

3,000,000

3,000,000 2,000,000

500,000

500,000

300,000

300,000

300,000

200,000

200,000

200,000

300,000

300,000

300,000

-

-

-

-

-

-

50,000 50,000 P19,300,000

50,000 50,000 P11,800,000

50,000 50,000 P14,300,000

PROBLEM 2 To Juan To Pedro To Maria To Sisa Total Gross Estate

P25,000,000 18,000,000 15,000,000 20,000,000 P78,000,000

PROBLEM 3 1. 2. 3. 4. 5.

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P230,0000 P1,100,000 P0 P5,000,000 P1,000,000 + [1M x (1M x 10% x 1.5)] = P1,150,000


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MODIFIED IDENTIFICATION EXERCISE A 1. Included 2. Included 3. Excluded 4. Included 5. Excluded 6. Excluded 7. Included * 8. Excluded 9. Excluded** 10. Excluded

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Included*** Excluded** Excluded** Included Included Included Excluded Excluded** Excluded Included

*Included in the gross estate if the beneficiary is the estate, administrator or executor. In case of doubt, the item should be taxable. **Exclusions from the gross estate. Nonetheless, the tax code requires these items to be included first in the gross estate before deducting the same from the gross estate. *** Bequests to charitable institutions are considered exclusions from the gross estate only if the problem clearly states that not more than 30% were used for administrative purposes. EXERCISE B

EXERCISE C 1. 2. 3. 4. 5.

P0; valid sale P0; valid sale P0; valid sale P4,000,000 P6,000,000

1. 2. 3. 4. 5.

P10M P20M P5M P10M P0

CHAPTER 3 – DEDUCTIONS FROM THE GROSS ESTATE TRUE OR FALSE 1. T 2. T 3. T 4. T 5. T 6. F MULTIPLE CHOICE 1. C 2. D 3. D 4. C 5. C 6. B 7. B 8. D 9. C

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7. 8. 9. 10. 11. 12.

T T T F F F

13. 14. 15. 16. 17. 18.

F F T F T T

19. 20. 21. 22. 23. 24.

T T T F T T

25. 26. 27. 28. 29. 30.

T T F T F T

12. 13. 14. 15. 16. 17. 18. 19. 20.

C B A A A D D D D

23. 24. 25. 26. 27. 28. 29. 30. 31.

A A A B B B C A C

34. 35. 36. 37. 38. 39. 40. 41. 42.

C A C B B C D A D

45. 46. 47. 48. 49. 50. 51. 52. 53.

C B A A C C A A A


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10. A 21. C 32. D 43. D 11. B 22. D 33. C 44. D Supporting Computations: 7. Mourning clothing of the decedent’s surviving spouse Mourning clothing of the decedent’s dependent children Expenses of the wake preceding the burial Publication charges for death notices Telecommunication expenses incurred in informing relatives of the deceased Cost of burial plot Interment fees and charges Expenses for the performance of the rites & ceremonies incident to interment Actual Funeral Expenses Limit: 5% of Gross Estate (P2M x 5%) ALLOWED (Lower Amount) 15. Real property tax for the year 2013 Notarized interest bearing promissory note Accrued interest on the promissory note at the time of death Income tax due for 2013 Allowable deductions (Disregard standard deduction)

54. 55.

B D

P1,500 3,200 40,000 5,000 3,000 20,000 12,000 5,000 P89,700 P100,000 P89,700 P100,000 100,000 20,000 200,000 P420,000

23. Income tax from practice of profession - 2013 Income tax from practice of profession for Jan.-June ‘13 Real property taxes for 2013 Deductible taxes

P300,000 100,000 150,000 P550,000

35.

ERRATUM: Pedro died leaving a car acquired by purchase from Pedro JUAN 41. Value to take/Initial Basis Mortgage paid Initial basis 2nd Deduction: (850/1,000 x P100,000**) Final Basis X Vanishing rate VANISHING DEDUCTION

P900,000 (50,000) 850,000 (85,000) P765,000 40% P306,000

** Mortgage P150,000 – 50,000 54. Shares, domestic corporation Tangible personal property Gross Estate

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P500,000 1,500,000 2,000,000 r d


ELIT (500,000 x 2,000/2,500) Taxable Estate TAX DUE 1st P500,000 In excess of P500,000 = (1,100,00 x 8%) Estate Tax Due

(400,000) P1,600,000

Gross Estate (Tangible property Phils.) ELIT (1,200,000 x 6,000/10,000,000) Taxable Estate

P6,000,000 (720,000) P5,280,000

P15,000 88,000 P103,000

55.

PROBLEM SOLVING Problem 1 Case A: Case B: Case C: Case D: Case E:

P150,000 P200,000 P150,000 P150,000 P0

Problem 2 ASSUME GROSS ESTATE OF P2,000,000 Embalming charges P15,000 Burial apparel of the decedent 3,500 Cost of coffin 125,000 Mourning apparel of the surviving spouse during the burial 5,000 Mourning apparel of the minor child 2,000 Snacks and drinks during the wake 12,500 Honoraria of priest for daily masses before burial 2,000 Telecommunication charges to inform relatives 1,000 Charges for death notice published in a newspaper 8,000 Cost of video footage of the burial and interment 12,000 Funeral car service during interment 4,000 Honorarium of priest who celebrated the mass during interment 2,000 Cost of tombstone 30,000 ACTUAL FUNERAL EXPENSE P232,000 Vs. Limit (P5% of P2M) 100,000 ALLOWABLE FUNERAL EXPENSE P100,000 NOTE: Hospital bills for two months of confinement before decedent’s death should be charged to “medical expenses” Problem 3 Case A: P100,000

Case B: P333,333 computed as follows: Receivable Collectible portion (400/1,200) x 500,000 Uncollectible portion of the claim

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P500,000 (166,667) P333,33


3 Case C: P0. Debtor is not insolvent

Problem 4 DUE FROM PEDRO P200,000 Assets of Pedro P400,000 Less: Due to the BIR for unpaid taxes (200,000) Balance 200,000 Collectible by Juan X 200/600 (66,667) UNCOLLECTIBLE PORTION (Deductible from Juan’s Gross Estate) P133,333 Problem 5 Question 1: P550,000 computed as follows: Unpaid taxes on the estate before death P150,000 Unpaid mortgage on the estate 200,000 Unpaid loans arising from debt instruments 125,000 (notarized) Unpaid loans arising from debt instruments (not 75,000 notarized). The debt instrument was issued by a financial institution not requiring notarizations for debt instruments issued Total Deductible Claim Against the Estate P550,00 0 Question 2: P2,097,000 computed as follows Ordinary Deductions: Claim against insolvent person Unpaid taxes on the estate before death Unpaid mortgage on the estate Funeral expenses Actual = P182,000 + 37,500 = P219,500 Limit = P5M x 5% = P250,000 Maximum = P200,000 Judicial expenses Unpaid loans arising from debt instruments (notarized) Unpaid loans arising from debt instruments (not notarized). The debt instrument was issued by a financial institution not requiring notarizations for debt instruments issued Casualty loss Special Deductions: Standard deduction Medical expenses Total Allowable deduction from the gross estate

P100,000 150,000 200,000 200,000

100,000 125,000 75,000

65,000 1,000,000 82,000 P2,097,00 0

Problem 6 Question 1: P217,500 Question 2: P217,500

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Same answer with question #1. Whether or not the estate was settled judicially is irrelevant in the determination of allowable deduction for judicial expenses.

Solution: Expenditures incurred for the collection of assets and payment of debts Attorneys fees (1/2 were incurred after six months) P40,000 x 1/2 Accountant’s fees Executor’s commission Appraiser’s fees Court fees Cost of preserving and distributing the estate Cost of storing or maintaining the property of the estate Brokerage fees for selling property of the estate Total allowable judicial expenses

Problem 7 Loss due to shipwreck, two (2) months after the decedent’s death. Robbery loss, seven (7) months after the decedent’s death. The decedent’s executor was allowed by the Bureau of Internal Revenue to extend the filing (within the period allowed by the Tax Code) of estate tax return due to a meritorious reason Allowable Deduction

P100,000 20,000

25,000 15,000 2,500 18,000 15,000 12,000 10,000 P217,50 0

P500,000 2,000,000

P2,500,000

Problem 8 Value to take 1st Deduction: Mortgage paid Initial basis 2nd Deduction: Proportionate deduction (750/4,500) x 562,500 Final Basis x Vanishing rate Vanishing Deduction

P937,500 (187,500) P750,000 (93,750) P656,250 40% P262,500

Problem 9 Value to take 1st Deduction: Mortgage paid Initial basis 2nd Deduction: Proportionate deduction (1,500/1,980) x 170,000 Final Basis x Vanishing rate Vanishing Deduction

P1,500,000 -----P1,500,000 (128,788) P1,371,212 80% P1,096,970

Problem 10

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Case A: Case B: Case C: Case D: Case E:

P1,000,000 P1,000,000 P1,000,000 P0 P0

Problem 11 Case A: Case B: Case C: Case D: Case E:

P500,000 P500,000 P150,000 P500,000 P0

Problem 12 Case A: Case B: Case C: Case D: Case E: Case F:

P1,000,000 P500,000 P0 P500,000 P600,000 P750,000; [ (1M/2) + (500,000/2)]

Problem 13 Gross Estate Funeral expenses Actual P300,000 – 120,000 = P180,000 Limit = P3M x 5% = P150,000 Standard deduction Medical expenses Taxable Estate

P3,000,000 (150,000)

(1,000,000) (400,000) P1,450,000

CHAPTER 4 – PROPERTY RELATIONS TRUE OR FALSE 1. T 2. T 3. T 4. T 5. T MULTIPLE CHOICE 1. A 2. B 3. B* 4. C 5. C 6. D

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6. 7. 8. 9. 10.

F F T F F

11. 12. 13. 14. 15.

T F T T F

16. 17. 18. 19. 20.

F T T T T

7. 8. 9. 10. 11. 12.

D D B C D C

13. 14. 15. 16. 17. 18.

B D** A D D C

19. 20. 21. 22. 23. 24.

C C A A D B


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25. 26. 27. 28. 29. 30.

C D C A *** D D


*Change Aug. 3, 1998 TO August 3, 1988 ** Under conjugal partnership of gains, fruits earned during marriage, regardless of source, are common properties Supporting Computations No. 22 and 23 Gross Estate: Rest House in Batangas Car Commercial land Income from the commercial land Income from exclusive property of the spouse Jewelry owned before the marriage Other properties at the time of her death Gross Estate

Exclusive P2,500,000 1,000,000 5,000,000

Conjugal

500,000 200,000 300,000 P8,800,000

1,000,000 P1,700,000

No. 24 and 25 Gross Estate: Rest House in Batangas Car Commercial land Income from the commercial land Jewelry owned before the marriage Other properties at the time of her death Gross Estate

Exclusive P2,500,000

P2,500,000

Common 1,000,000 5,000,000 500,000 300,000 1,000,000 P7,800,000

No. 26 Conjugal properties Conjugal Deductions: Funeral expenses Actual = P45,000 Limit = (P500,000 + 200,000) x 5% = 35,000 Judicial expenses Claim against the estate Net Conjugal properties Divide Share of the Surviving Spouse

P200,000 (35,000)

(20,000) (45,000) P100,000 2 P50,000

No. 27 Real property, Philippines Real property, USA Funeral expenses Judicial expenses (200,000 – 50,000)

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P4,000,000 5,000,000 (200,000) (150,000 r d


Claim against insolvent persons Unpaid taxes Balance Standard Deductions Medical expenses (max.allowed) Family Home (P1,500,000/2) Share of the surviving spouse (P8,550,000/2) Net Taxable Estate

(50,000) (50,000) P8,550,000 (1,000,000) (500,000) (750,000) (4,275,000) P2,025,000

No. 28 Exclusive Common Total Conjugal real properties P5,000,000 Conjugal family home 1,500,000 Exclusive properties P2,500,000 Total P2,500,000 P6,500,000 P9,000,000 Ordinary Deductions: Funeral expenses (75,000) Actual P300,000 x 25% = P75,000 Limit = 5% x P9M = P450,000 Casualty losses*** (100,000) Miscellaneous deductions (P1M x 75%) (750,000) (825,000) Net P2,400,000 P5,675,000 P8,075,000 Special Deductions: Standard Deductions (1,000,000) Medical expenses (P500,000 x 50%) (250,00) Family Home (1,500,000/2) (750,000) Share of the surviving spouse (5,675,000/2) (2,837,500) Net Taxable Estate P3,275,000 ERRATUM: DISREGARD ….Exclusive Properties are NET of Casualty Losses*** No. 29 ABSOLUTE COMMUNITY OF PROPERTY Exclusive P2,400,000

Properties-Land Other personal property owned before marriage Other personal property acquired during marriage Gross Estate Ordinary Deductions Funeral expenses Judicial expenses Net conjugal before special deductions Share of surviving spouse (P1,800,000/2)

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P2,400,000

Common 1,600,000 500,000 P2,100,000 (200,000) (100,000) P1,800,000 P900,000

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No. 30 CONJUGAL PARTNERSHIP OF GAINS Exclusive P2,400,000 1,600,000

Properties-Land Other personal property owned before marriage Other personal property acquired during marriage**** Gross Estate Ordinary Deductions Funeral expenses Judicial expenses Vanishing Deductions***** Net Estate Before Special Deductions Standard deductions Medical expenses Share of the surviving spouse (P200,000/2) Share of surviving spouse (P1,800,000/2)

Common P500,000 P500,000

P4,000,000

Total

P4,500,000

(200,000) (100,000)

(1,120,000) P2,880,000

200,000

P3,080,000 (1,000,000) (500,000) (100,000) P1,480,000

****If silent and unless the problem clearly illustrate that it is exclusive, assume the property is common. Value to take 1st Deduction: Mortgage paid Initial basis 2nd Deduction: Proportionate deduction (1,500/4,500) x 300,000 Final Basis x Vanishing rate Vanishing Deduction

P1,500,0 00 P1,500,000 (100,000) P1,400,000 80% P262,500

*****

PROBLEM SOLVING PROBLEM 1: (a)P1,624,773 (b)P4,132,955

(c)P3,691,250

Exclusive properties Conjugal properties* ELIT** Vanishing Deductions *** Transfer for Public Use **** Net Estate Share of the Surviving Spouse (4,132,955/2) Net Taxable Estate 1st P2,000,000 In excess of P2,000,000 @ 11% ESTATE TAX DUE

(d)P321,038 Exclusive P2,000,000 (175,227) (200,000) P1,624,773

Common

Total

P5,000,000 (867,045)

P7,000,000

P4,132,955

P5,757,728 (2,066,478) P3,691,250

P135,000 186,038 P321,038

*The problem is silent as to reciprocity, hence, the gross estate should include tangible and intangible properties within the Philippines.

**ELIT: Funeral expenses Judicial expenses

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P200,000 800,000


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Claim against the estate TOTAL ELIT X ALLOWABLE ELIT

1,725,000 P2,725,000 7,000/22,000 P867,045

**VANISHING DEDUCTIONS: Value to take P500,0 00 1st Deduction: Mortgage paid Initial basis P500,000 2nd Deduction: Proportionate deduction (500/7,000) x 867,045 (61,932) Final Basis P438,068 x Vanishing rate 40% Vanishing Deduction P175,227 **** Since the properties were already classified as exclusive and common, it should be assumed that the exclusive properties were already inclusive of transfer for public use. PROBLEM 2: (Decedent: Resident Citizen) a) Vanishing deduction = P1,676,200 b) Net exclusive property of the decedent = P7,923,800 c) Net community property = P17,800,000 d) Net Taxable estate = P15,323,800

e) Estate tax due = P2,279,760 Exclusive properties Ordinary Deductions: Conjugal properties Funeral expenses Judicial expenses Claims against conjugal properties Claims against exclusive properties* Legacy against exclusive properties ** VANISHING DEDUCTION*** Amount received under RA4917 Net exclusive/conjugal Special Deductions: Standard deduction Medical expenses Share of the surviving spouse NET TAXABLE ESTATE ESTATE TAX DUE


(400,000) (1,676,200) P7,923,800

Conjugal

Total

20,000,000 (200,000) (300,000) (200,000) (1,500,000) P17,800,000

P30,000,000 (200,000) (300,000) (200,000) (400,000) (1,676,200) (1,500,000) P25,723,800 (1,000,000) (500,000) (8,900,000) P15,323,800 P2,279,760

*From the information provided in the problem, the amount of P400,000 as “claim against exclusive property” should pertain to the unpaid mortgage on the land inherited. Therefore, the present decedent paid P100,000 on the original amount of the mortgage (P500,000). This should be taken into consideration in computing the vanishing deduction. ** LEGACY AGAINST EXCLUSIVE PROPERTIES Legacy means bequest or inheritance of personal properties. The deductible legacy/devised (bequests) under the tax code are:

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 

Transfer for “public use” (Rule: Include both in the “Gross Estate” as well as in the “Deductions from the Gross Estate) ; and Bequests to charitable institutions wherein not more than 30% of the bequest was used for administrative purposes (Rule: Same as transfer for public use)

From the information provided above, the problem was silent as to the type of the legacy. In case of doubt, the two types of transfers enumerated above should not be assumed. Therefore, the item should be treated as a simple “legacy” or “transfer in contemplation of death” which is added only in the gross estate. Value to take Mortgage Paid (refer to explanation above) Initial basis 2nd Deduction: 2,900/30,000 x P1.1M Final Basis x rate Vanishing Deduction***

P3,000,000 (100,000) P2,900,000 (106,333) P2,793,667 60% P1,676,200

PROBLEM 3: (Decedent: Resident Alien) (a) Net Taxable estate = P3,570,000; House and lot, USA * Investment in stock, Philippines Investment in stock, USA Investment in bonds, USA Cash in bank, Philippines Cash on hand, Philippines Accounts receivable Car, Philippines Legacy in favor of Philippine National Red Cross** Devise to Quezon City for children’s playground** Total Gross Estate Ordinary Deductions: Funeral expenses Judicial expenses Unpaid Philippine income tax for income in 2011 Loss on December 31, 2012 due to theft Legacy in favor of Philippine National Red Cross Devise to Quezon City for children’s playground Accounts receivable (fully uncollectible) *** Special Deductions: Standard deduction Medical expenses Net Taxable Estate Estate Tax Due

(b)Estate tax due = P307,700 P2,000,000 800,000 1,000 000 700,000 300,000 50,000 200.000 800,000 50,000 70,000 P5,970,000 P150,000 300,000 120,000 10,000 50,000 70,000 200,000

(900,000) (1,000,000) (500,000) P3,570,000 P307,700

NOTE (Problem 3) *Family home is not allowed as a deduction for single decedent **To be deductible, the legacy/devise should be included first in the decedent’s gross estate ***Assume the debtor is an insolvent person.

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PROBLEM 4 (Decedent: Resident Alien) a) Vanishing deduction = P441,463 b) Net Taxable estate = P3,200,000

c) Estate tax due = P386,739 Land House and Lot, furniture and appliances Other tangible personal properties Amount received under RA4917 Claims against insolvent persons Ordinary deductions: Funeral expenses Judicial expenses Other claims against conjugal properties Claims against insolvent persons Unpaid mortgage** VANISHING DEDUCTION* Net exclusive/conjugal Special deductions: Standard deduction Medical expenses Share of the surviving spouse TAXABLE ESTATE Estate Tax Due


Conjugal P5,000,000 1,200,000 1,000,000 50,000

(350,000) (441,463) P2,208,537

Total

P10,250,000

(200,000) (100,000) (500,000) (50,000) P6,400,000

P8,608,537 (1,000,000) (120,000) (3,200,000) P4,288,537 P386,739

Value to take/Initial Basis*** 2nd Deduction: 2,500/10,250 x 1,200,000 Final Basis x rate Vanishing Deduction*

P2,500,000 (292,683) P2,207,317 20% P441,463

** P700,000 – 350,000 = P350,000 ***The amount paid on the mortgage should not be considered in computing the vanishing deduction because the amount pertains to a mortgage entered into by Pedro during his lifetime. To be deductible, the mortgage should have been assumed on the property at the time of inheritance.

PROBLEM 5

1. 2. 3. 4.

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Real Property inherited by the decedent during the marriage. Income earned during marriage from the property in the preceding number. Property acquired by the decedent with cash owned before the marriage Personal belongings used exclusively by the decedent


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Conjugal Partnership E

Absolute Community E

C

E

E

C

E

E


5. 6. 7.

Jewelry for the exclusive use of one of the spouses Property unidentified when and by whom acquired Lot acquired before the marriage by the surviving spouse (surviving spouse had a previous marriage and legitimate children in that previous marriage) 8. Income from the lot above 9. Cash – income during marriage 10. Exclusive property was sold, and was repurchased using conjugal property

C C E

C C E

E C C

E C C

CHAPTER 5 – ESTATE TAX CREDIT AND ESTATE TAX DISTRIBUTABLE MULTIPLE CHOICE 1. B 2. C 3. D 4. C 5. C 6. C 7. C

8. 9. 10. 11. 12. 13. 14.

A D A D D A D

15. 16. 17. 18. 19. 20. 21.

A C C A D A C

22. 23. 24. 25. 26. 27. 28.

C A C D C A B

29. 30. 31. 32.

C D A B


No.5 Estate tax due (for P4M) Estate tax credit (3/4 x P355,000) vs P80,000 Estate tax payable

P355,000 (80,000) P275,000

No. 6 Estate tax due (for P500,000) Less: Estate tax credit Estate tax payable

P55,000 (20,500) P34,500

Limit 1: Singapore: 300/1,000 x P55,000 USA: 100/1,000 x P55,000

Limit P16,500 5,500

Actual P30,000 4,000

Allowed P16,500 4,000 P20,500

P22,000

34,000

22,000 P20,500

Limit 2: 400/1,000 x P55,000 ALLOWED TAX CREDIT (LOWER AMOUNT) No. 7 Gross Estate Deductions Share of the surviving spouse (5,000,000 x 60% x 50%) Net taxable estate Tax Due

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P10,000,000 (5,000,000) (1,500,000) P3,500,000 P300,000 Edition) by Tabag and Garcia

Estate tax credit (2.8/3.5 x P300,000) vs P124,500 (124,500) Estate tax payable P175,500 Net estate France = [(6M -2M) x 0.6 x 1/2] + (6M-2M) x 0.4 = P2,800,000 Net estate R.P. = [(4M-3M) x 0.6 x 1/2] + (4M-3M) x 0.4 = P700,000 No. 8 Estate tax due (for P500,000) Less: Estate tax credit Estate tax payable

P71,000 (41,417) P29,583

Limit 1: Japan: 300/1,200 x P71,000 USA: Exclude for purposes of computing Limit 1 HK: 450/1,200 x P71,000 Limit 2: (Include USA) 700/1,200 x P71,000 ALLOWED TAX CREDIT (LOWER AMOUNT)

Limit P17,750 26,625

Actual P20,000 45,000

Allowed P17,750 26,625 P44,375

P41,417

65,000

41,417 P41,417

No. 9 and 10 Property inherited Property acquired through own labor Funeral expenses Judicial expenses Claims against the estate Notarized Not notarized Standard deduction Net Taxable/Distributable estate

Net Taxable P1,400,000 3,600,000 (200,000) (200,000)

Net Distributable P1,400,000 3,600,000 (240,000) (200,000)

(40,000) (1,000,000) P3,560,000

(40,000) (20,000) P4,500,000

No. 28 Letter “a” ……….The Bureau of Internal Revenue can ask payment from the heirs to whom the estate has been disturbed …….. change to Distributed

PROBLEM SOLVING Problem I: (1)P200,000 (2)P0; not allowed Net Taxable Estate

P10,000,000

Estate Tax Due [P465,000 + (5M x 15%)] Estate tax credit (4/10 x P1,215,000) vs P200,000 Estate tax payable

P1,215,000 (200,000) P1,015,000

Problem II: Net Taxable Estate

P2,000,000

Estate Tax Due Estate tax credit

17 |


P135,000 (67,500) r d


Estate tax payable after tax credit

P67,500

Net Taxable Estate

P2,000,000

Limit 1: Canada: 500/2,000 x P135,000 USA: 500/2,000 x P135,000 Limit 2: 1,000/2,000 x P135,000 ALLOWED TAX CREDIT

Limit P33,750 33,750

Actual P150,000 110,000

Allowed P33,750 33,750 P67,500

P67,500

260,000

67,500 P67,500

Problem III: (a) Net Taxable estate = P3,570,000; (b)Estate tax due after tax credit = P142,770 (c ) Net Distributable Estate = P4,427,230 House and lot, USA * Investment in stock, Philippines Investment in stock, USA Investment in bonds, USA*** Cash in bank, Philippines Cash on hand, Philippines Accounts receivable Car, Philippines Legacy in favor of Philippine National Red Cross** Devise to Quezon City for children’s playground** Total Gross Estate Ordinary Deductions: Funeral expenses Judicial expenses Unpaid Philippine income tax for income in 2011 Loss on December 31, 2012 due to theft Legacy in favor of Philippine National Red Cross Devise to Quezon City for children’s playground Accounts receivable (fully uncollectible) Special Deductions: Standard deduction Medical expenses NET TAXABLE ESTATE Estate Tax Due Estate Tax Credit Limit: [(3,200/5,970) x 307,700 = P164,930 Actual: P250,000 ESTATE TAX DUE AFTER ESTATE TAX CREDIT

P150,000 300,000 120,000 10,000 50,000 70,000 200,000

P2,000,000 800,000 1,000 000 700,000 300,000 50,000 200.000 800,000 50,000 70,000 P5,970,000

(900,000) (1,000,000) (500,000) P3,570,000 P307,700 (164,930)

P142,770

NOTE: *Family home is not allowed as a deduction for single decedent **To be deductible, the legacy/devise should be included first in the decedent’s gross estate *** Considered as Estate “within”

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TOTAL GROSS ESTATE (Refer above) Ordinary Deductions: Funeral expenses Judicial expenses Unpaid Philippine income tax for income in 2011 Loss on December 31, 2012 due to theft Legacy in favor of Philippine National Red Cross Devise to Quezon City for children’s playground Accounts receivable (fully uncollectible) Special Deductions: Standard deduction Medical expenses Estate Tax Due after tax Credit NET DISTRIBUTABLE ESTATE

P5,970,000 P150,000 300,000 120,000 10,000 50,000 70,000 200,000

(900,000) (500,000) (142,770) P4,427,230

Problem IV: Real property, Philippines Claim Against Insolvent Persons Real property, USA Real property, Japan Net estate, Malaysia Total Gross Estate (common) Funeral expenses (maximum) Judicial expenses (P200,000-100,000) Claim against insolvent persons Unpaid taxes Net estate before special deductions X (Share of the surviving spouse) Net estate of the decedent in the conjugal properties Standard Deduction Family Home Medical Expenses NET TAXABLE ESTATE TAX DUE: 1ST P500,000 In excess of P500,000 @ 8% ESTATE TAX DUE Estate Tax Credit (None; No Estate Tax Payments abroad) ESTATE TAX PAYABLE Total Gross Estate (common; as computed above) Funeral expenses (actual)

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P4,000,000 50,000 3,000,000 2,000,000 (1,000,000) P8,050,000 (200,000) (100,000) (50,000) (50,000) P7,650,000 1/2 P3,825,000 (1,000,000) (1,000,000) (500,000) P1,325,000

P15,000 66,000 P81,000 ---P81,000 P8,050,000 (300,000)


Judicial expenses (actual) Claim against insolvent persons Unpaid taxes Net estate before special deductions X (Share of the surviving spouse) Net estate of the decedent in the conjugal properties Standard Deduction Family Home Medical Expenses (actual) Estate Tax NET DISTRIBUTABLE ESTATE

(200,000) (50,000) (50,000) P7,450,000 1/2 P3,725,000 ----------(650,000) (81,000) P2,994,000

CHAPTER 6 – DONOR’S TAX TRUE OR FALSE 1. T 2. T 3. F 4. T 5. T 6. T MULTIPLE CHOICE 1. A 2. A 3. C 4. C 5. B 6. D 7. D 8. D 9. D 10. C

7. 8. 9. 10. 11. 12.

F T F F T F

13. 14. 15. 16. 17. 18.

F F F F F F

19. 20. 21. 22. 23. 24.

F F F F F T

25. 26. 27. 28. 29. 30.

T T F T F F

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

D B C D D B D* A B C

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

D C A D C C D C D B

31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

B C D A B D C B D** D

41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

A B A A C B B D D A

Supporting computation: No. 17. ERRATUM: Letter “C”:

A gift to the International Rice Research Institute…… is exempt from gift *

No. 19. If the sale is considered fictitious, the entire value at the date of sale is subject to donor’s tax. No. 22. Letter “a” – onerous transfer Letter “b” - To be considered valid donation, the renunciation should be specifically and categorically done in favor of identified heir(s) to the exclusion or disadvantage of the other co-heir(s) in the hereditary estate. Letter “c” – gratuitous transfer, subject to donor’s tax No. 25. Donation to

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Pedro


Clara r d


Gross Gifts (2M/2) /2 Less Dowry Net taxable gift

P500,000 (10,000) P490,000

P500,000 P500,000

No. 28. DONEE Son D. in Law P2,500,000 (10,000) P2,490,000 -

Gross Gifts (5M/2) Less Dowry Net taxable gift No. 32-34. NG (3/1) Tax Due (P25,000 x 2%) GG (5/1) Dowry PNG 3/1 TNG Tax Due Tax Paid 3/1 D.T. Payable GG (7/1) PNG 3/1 and 5/1 TNG Tax Due Total Taxes Paid 7/1

Husband 125,000 P500

Wife 125,000 P500

P100,000 (10,000) 125,000 P215,000

P100,000 (10,000) 125,000 P215,000

P2,600 (500) P2,100

P2,600 (500) P2,100

100,000 100,000 215,000 215,000 P315,000 P315,000 6,600 6,600 P13,200

No. 39. Taxable gift Tax Due Tax Credit P4,500 vs. (200/300 x P6,000=P4,000) D.T.Pyable

P300,000 P6,000 (4,000) P2,000**

**Change Choice “d” from P2,200 to P2,000

PROBLEM SOLVING Problem I: ITEM A B C D E* F G H I Land 1**

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Q#1 P800,000 3,000,000 250,000 100,000 5,000,000 1,500,000 100,000 100,000 500,000 -

Q#2 P800,000 3,000,000 250,000 100,000 5,000,000 1,500,000 100,000 100,000 500,000 -


Q#3 P800,000 3,000,000 250,000 100,000 5,000,000 1,500,000 100,000 100,000 500,000 r d

Q#4 P800,000

Q#5 P800,000

-

250,000 100,000

1,500,000 500,000 -

1,500,000 100,000 500,000 -


Land 2*** Land 3**** Car GROSS GIFT

5,000,000 200,000 P16,550,000

5,000,000 200,000 P16,550,000

5,000,000 200,000 P16,550,000

200,000 P3,000,000

200,000 P3,450,000

*The question is “gross gifts”, hence, disregard the mortgage. **Sale of Land #1 is a transfer with insufficient consideration. However, unlike in Estate Taxation, Transfer with insufficient consideration for donor’s tax purposes is not taxable if the property donated is a real property classified as capital asset subject to capital gains tax. *** Sale of Land # 2 is considered bonafide or valid sale. ****Sale of Land #3 is a transfer with insufficient consideration. Nonetheless, the sale is subject to donor’s tax because the property was not subjected to capital gains tax. Capital gains tax on real properties are applicable only on sale of real properties classified as capital assets located in the Philippines. Problem II: ITEM A B C D E F Car, Alabang Car, Malaysia Land Cebu GROSS GIFT

Q#1 P4,500,00 1,000,000 1,500,000 2,000,000 3,000,000 500,000 200,000 200,000 P12,900,000

Q#2 P4,500,00 3,000,000 200,000 P7,700,000

Problem III: 1.P0

2.P5,000

3.P10,000

43,000

Problem IV: Donation-Red Cross (exempt under a special law)* P100,000 Donation to Manila City Hall * 300,000 Mortgage on the land (400,000 x ¼) 100,000 Total deductions from the gross gifts P500,000 *Exempt donations which partake the nature of deductions and are, therefore , deductible from the gross gifts to arrive at taxable net gifts. Problem V (Donations to Relatives and Strangers) Relative P50,000 46,000

Cash to his son on account of marriage Cash to PPCRV for 2013 election Jewelry to his auntie Shoes and bags to his girlfriend Books to the City of Makati Second hand car to his first cousin

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Stranger 30,000 20,000

500,000 r d


Brand new SUV to his second cousin (subject to revocation) Shares of stocks of a domestic corp. to his best friend Car to his daughter (a donation mortis causa) Forgiven a loan due from his brother(50,000-25,000) Sports equipment to his brother in law Parcel of land to the Philippine government for public use Gross Gifts NOTE:    

25,000 P621,000

150,000 75,000 1,000,000 P1,275,000

Cash to PPCRV. Not considered as donation under the tax code. It is subject to the rules and regulations of the COMELEC under the election code of the Philippines. City of Makati AND Land for Public Use. Although the donation is exempt, it shall be considered in the determination of “gross gifts” Gift subject to revocation is not a gift. Donation mortis causa is a donation subject to estate tax, not donor’s tax.

Problem VI Tax payable on: 1) March 1 = P2,000 2) May 30 = P18,000 3) June 30 = P90,000 4) July 31 = P0 5) September 30 = P447,200

Solution Gross Gifts Dowry Net taxable gift Donor’s Tax Due/ Payable – March 1

P200,000 P200,000 P2,000

Gross gift Less: Mortgage assumed by the donee Add: Prior net gift Taxable gift – May 30

P500,000 (100,000) 200,000 P600,000

Donor’s Tax Due Less: Tax paid Donor’s tax payable-May 30

P20,000 (2,000) P18,000

Donor’s tax payable-June 30 (P300,000 x 30%)

P90,000

Donor’s tax payable-July 31 (Bantay Bata)

P0

September 30 Relative

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 1 year after celebration

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Stranger

Total


Problem VII 1) 2) 3) 4) 5)

Gross Gift Dowry Mortgage assumed Prior net gift Taxable gift

P1,500,000 (10,000) (300,000) 600,000 P1,790,000

Tax Due Less: Tax Payments Tax Payable

P107,200 (20,000) P87,200

P1,500,000 (300,000) P1,200,000 @30% P360,000 360,000

P447,200

January 15, 2012 = P32,000 April 1, 2012 = P6,000 December 25, 2012 = P0 March 30, 2013 = P30,000 May 25, 2013 = P0

Solution Gross Gifts-Jan. 1, 2012 Less: Encumbrance Taxable gift Donor’s tax due/payable-Jan. 1, 2012

P1,000,000 (200,000) P800,000 P32,000

Gross gift – April 1, 2012 Add: Prior net gift Taxable gift Donor’s Tax Due Less: Tax paid Donor’s tax payable-Apr. 1, 2012

P100,000 800,000 P900,000 P38,000 (32,000) P6,000

December 25, 2012

P0

March 30, 2013 P100,000 x 30%

P30,000

May 25, 2013 Gross gift Deductions Taxable gift Tax Due

The rule that gift of not more than P100,000 is exempt is applicable only to donations made to relatives.

P200,000 (200,000) P0 P0

Problem VIII 1) October 8, 2014 = P9,800 2) November 4, 2014 = P1,200

Gross Gift

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June 6, 2014 Husband P240,000


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Wife P240,000

Total


Dowry Mortgage assumed Taxable gift Donor’s Tax Payable

Gross Gift Dowry Prior Net Gift Taxable gift Donor’s Tax (Tax Table) Tax Paid-June 6 Donor’s Tax Payable

(10,000) (2,000) P228,000

(10,000) (2,000) P228,000

P3,120

P3,120

October 8, 2014 Husband P30,000 --P228,000 @30

Wife P30,000 (10,000) 228,000 P248,000 P3,920 (3,120) P800

P9,0000 November 4, 2014 Husband P7,000 (5,000) P2,000 @30 P600

P6,240

Total

P9,800

Wife P7,000 (5,000) P2,000 @30 P600

Total

Mrs.Ramos P115,000 (90,000) P25,000 @30 P7,500

Total

Donor’s Tax Payable

June 6, 2013 Mr.Ramos P115,000 (90,000) P25,000 @30 P7,500

Mrs.Ramos P191,000 (10,000) (2,500) P178,500

Total

Gross Gifts Dowry Mortgage assumed Prior net gifts Taxable gift

October 10, 2013 Mr.Ramos P191,000 (10,000) (2,500) P178,500

Gross Gifts (strangers) Exempt Prior Net Gift Taxable gift Donor’s Tax Payable

P1,200

Problem IX 1) October 10, 2013 = P3,140 2) April 4, 2014 = P13,500

Gross Gifts (strangers) Exempt Taxable gift

Donor’s Tax Tax paid Donor’s Tax Payable

P1,570 P1,570

P1,570 P1,570

P15,000

P3,140

April 4, 2014

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Gross Gifts Dowry Prior net gifts (none; different year) Taxable gift Donor’s Tax Payable Problem X (1)P7,000

(2)P2,600

(3)P69,800

Gross Gifts Dowry (beyond 1 year) Mortgage assumed Taxable gift Donor’s Tax Payable

Gross Gifts Dowry Prior net gift Taxable gift Donor’s Tax Donor’s tax paid Donor’s Tax Payable

Gross Gifts Dowry Prior net gift Taxable gift Donor’s Tax Donor’s tax paid Donor’s Tax Payable

Mr.Ramos P45,000 -

Mrs.Ramos P45,000 (10,000) -

P45,000 @30 P13,500

P35,000 Exempt

(4)P30,000 Feb. 15, 2014 Mr.Macariola P200,000 (50,000) P150,000 P1,000 March 30, 2014 Mr.Macariola P200,000 150,000 P350,000 8,000 (1,000) P7,000

June 1, 2014 Mr.Macariola P-

Total

P13,500

Mrs.Macariola P200,000 (50,000) P150,000 P1,000

Total

Mrs.Macariola P-

Total

P2,000

P7,000

Mrs.Macariola P100,000 (10,000) 150,000 240,000 P3,600 (1,000) 2,600

Total

P2,600

October 12, 2014

Gross Gifts Dowry (claimed June 1) Mortgage assumed Prior net gift

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Mr.Macariola Donation to Donation to a Stranger Relative P200,000 P200,000 (50,000) 350,000


r d

Mrs.Macariola Donation to a Relative P400,000 (50,000) 240,000

Total


Taxable gift

150,000 @30%

Donor’s Tax Donor’s tax paid Donor’s Tax Payable Total Donation by Clifford: Gross Gifts

P45,000 P54,000

550,000

590,000

P17,000 (8,000) P9,000

P19,400 (3,600) P15,800

P69,800

P100,000 @30%

Donor’s Tax

P30,000

ERRATUM: Ronald

Change to Clifford

CHAPTER 7 – BUSINESS TAXES MULTIPLE CHOICE 1. A 2. D 3. D 4. D 5. D 6. C

7. 8. 9. 10. 11. 12.

B C D C A C

13. 14. 15. 16. 17. 18.

D C B C A D

19. 20. 21. 22. 23. 24.

C D D A D C

25. 26. 27. 28. 29. 30.

A* D C** A A C

* The end-use (person using the communication facility is the one liable for OCT, not the communication company. **3% CCT is applicable only to domestic carriers transporting passengers by land, not by air or sea.

CHAPTER 8 – VALUE ADDED TAX TRUE OR FALSE-PART A 1. T 6. 2. F 7. 3. F 8. 4. T 9. 5. T 10. TRUE OR FALSE-PART B 1. T 6. 2. T 7. 3. T 8. 4. F 9. 5. F 10. MULTIPLE CHOICE 1. D 21. 2. C 22. 3. A 23. 4. D 24. 5. D 25. 6. D 26.

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F F F T T

11. 12. 13. 14. 15.

F F F F F

16. 17. 18. 19. 20.

T F F T T

F F F T F

11. 12. 13. 14. 15.

F F T F T

16. 17. 18. 19. 20.

T T T F F

A B D C A C

41. 42. 43. 44. 45. 46.

B C A B C D

61. 62. 63. 64. 65. 66.

B C A C A B


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21. 22. 23. 24. 25

F F T F F

81. 82. 83. 84. 85. 86.

D C D C B D


7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

D D D B A C C A A D C C A D

27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

C D C D B C B A D A B B B B

47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

D B D D C C D B C B D D C A

67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

B C D A C B D A D D A D B C

87. 88. 89. 90. 91. 92. 93. 94. 95.

A B D D B C D C D

ERRATUM: Illustration #6 …. Medical fees (included in the hospital bills)

Supporting Computations: No. 14 To be exempt, the contributions from each member in item “III” should not exceed P15,000. No. 21 Item “a” is composed of selling price and the applicable output vat

No. 23 Output Vat (P280,550 +P152,400) x 12% Input vat (P110,220+P101,250) x 12% Vat Payable

P51,954 (25,374.6) P26,578

Output Vat, 3rd quarter (P150,000 x 12%) Input vat, 3rd quarter (P120,000 x 12%) Deferred input vat – previous quarter Vat Payable (Carry-over)

P18,000 (14,400) (6,000) (P2,400)

No. 24

No. 40 AR, July 1 Billings, July-Sept. AR, Sept. 30 Collections Output vat @ 12% Input vat on purchases @ 12% Vat Payable

P180,000 850,000 (120,000) P910,000 109,200 (57,600) P51,600

No. 42 Output vat (P10M x 12%) Input vat on materials Input vat on capital goods (P3Mx12%) /60 mos. Vat Payable June 30, 2014

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P1,200,000 (480,000) (36,000) P684,000


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No. 44 Sales, shares held as inventory Cos of shares, held as inventory Gross income Vat rate Output vat Les: Input vat Supplies expense Rent expense Vat payable

P5,000,000 (2,000,000) 3,000,000 12% P360,000 12,000 24,000

(36,000) P324,000

No. 52 Domestic sales (P600,000 x 12%) Add: Transaction deemed sales Jan. 4 consignment (P200,000 x 12%) Goods consumed on Fe. 27 (P50,000 x 12%) Property dividends (P150,000 x 12%) Total Output Vat

P72,000 24,000 6,000 18,000 P120,000

No. 63 Output tax (1,500,00 x 12%) Less: Input taxes Purchases (800,000 x 12%) Machinery (240,000/60 x 3mos.) Carry-over Excess input vat

P180,000 96,000 12,000 97,000

205,000 (P25,000)

No. 64 Output tax on sale (2,000,000x 12%) Output tax on sale of machinery (2,000,000x 12%) Less: Input taxes Purchases 1,000,000x 12%) Unamortized input tax on machinery (240,000- 12,000) Carry-over VAT Payable

P240,000 240,000 120,000 25,000 228,000

(373,000) P107,000

No. 71 & 72 Output vat (P592,480 x 3/28) Less: Input Vat Purchases of goods (P100,000 x 12%) Purchases of services (P20,000 x 12%) Transitional input vat VAT Payable

P63,480 P12,000 2,400 4,800

(19,200) P44,280

No. 77 Change the year from 2010 to 2012 Output Vat for October 2012 = P3M x 12 = P360,000  Ratio of Initial Pay’t over Gross S.P. = P900,000/P3,000,000 = 30%

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 If initial payment is more than 25% of Selling Price, the sale is classified as Deferred Sale which is treated as Cash Sale. Therefore, the entire output vat is due on the month of sale. No. 78 Output Vat for 2013 = P0;

The entire output vat was paid in 2012

No. 80 Downpayment 1st installment payment Total (vat inclusive) Less: VAT (P224,000 x 3/28) Initial Payment (exclusive of vat) Divide by contract Price (P1,120,000 x 3/28) Ratio of Initial Payment over SP Output vat for 2012 (P200,000 x 12%)

P112,000 112,000 224,000 (24,000) P200,000 1,000,000 20% P24,000

No. 80 VAT ON CASH SALE: (FMV is higher than SP) (P600,000 x 12%) VAT ON DEFERRED SALE: (Ratio of Initial payment over SP  25% (Not qualifying under installment method) (Treated as cash sale; SP is higher than FMV) [(P336,000/1.12) x 12%] TOTAL OUTPUT VAT

P72,000 36,000

P108,000

No. 83 and 84 Output vat (P336,000 x 3/28) Input vat (56,000 + 11,200) x 3/28 x 300/500 Vat Payable

P36,000 (4,320) P31,680

No. 85 OUTPUT VAT (P896,000 x 3/28) INPUT VAT Purchases of goods, vat business, vat included (P224,000 x 3/28) MIXED Transactions: Purchases of supplies, for vat & non vat business [(112,000 x 3/28) x (800,000/1,000,000)] Purchase of depreciable asset, for use in vat and non vat business [(P2,240 x 3/28) x (800,000/1,000,000)] VAT PAYABLE

P96,000 (24,000)

(9,792)

P62,208

No. 86 and 87 OUTPUT VAT Domestic sales (P330,000 + P274,996) x 3/28 Export sales (zero rated) INPUT VAT Purchases of goods, supplies and services for domestic sales and for export

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P64,821 0


(374,000 + 69,848 + 154,000 + 55,000) x 3/28 Vat Payable

(69,948) (P5,127)

No. 88 Raw Materials (P560,000 x 3/28) x 400,000/1M Supplies (P448,000 x 3/28) x 400,000/1M Equipment (P300,000 x 12% x 400,000/1M) INPUT VAT ATTRIBUTED TO EXPORT SALES

P24,000 19,200 14,400 P57,600

PROBLEM SOLVING Problem 1: a) P0 b) P134,400 x 3/28 = P14,400 c) PP201,600 x 3/28 = P201,600 (regardless of whether or not Abi is a vat registered exporter) Not zero rated. To be zero rated, the problem should provide that Abi exported more than 70% of its annual production d) Vat exempt

Problem 2: Cash sales (P660,800 x 3/28) Sales on account (P246,400 x 3/28) Transaction deemed sales: (P22,400 + 16,800 + 19,040 + 8,960) x 3/28 Total output vat Input vat (P291,200 x 3/28) Vat Payable

P70,800 26,400 7,200 P104,400 (31,200) P73,200

Problem 3: OUTPUT: Sales (P8M – 400,000) x 12% Sales from consignment (March and Feb.) (20+10) x P10,000 x 12% Transactions deemed sales January 8 consignment (20 x P10,000) x 12% Goods withdrawn Goods taken as payment to creditors INPUT VAT Purchase of goods, supplies, freight/insurance) Capital goods (ASSUME USEFUL LIFE OF 4 YEARS) (P1,100,000 x 12%) / 48 mos. VAT PAYABLE

P912,000 36,000

24,000 6,000 3,600

P981,600

82,080 2,750

(84,830) P896,770

Problem 4: Business tax Gross receipts (collections) from:

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VAT

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OPT


Hotel rooms Dining hall Other revenues Total VAT Gross receipts (collections) from disco operations @18% TOTAL Business Taxes

P1,800,000 3,150,000 700,000 P5,650,000 12%

P678,000 P504,000 P1,182,000

Problem 5: Output vat on gross receipts (collections) from construction contracts with: Bobads, City Condo & Urban Dev’t. (P30M x 12%) Less: Input vat on payments/advances made to: Alpha (P12M x 90% x 12%) Charlie (P4M-P1M) x 12% Delta (P2M x 12%) VAT PAYABLE, 1st Quarter 2014

P3,600,000 (1,296,000) (360,000) (240,000) P1,704,000

Problem 6: Ratio of Initial Payment over Selling Price: Lot A = 50/250 = 20% ; Installment Sale Lot B = 70/200 = 35%; Deferred Sale; Treated as Cash Sale Lot C = 60/300 = 20%; Installment Sale

Lot A: P25,000 x 12%; P25,000 x 12% Lot B: P200,000 x 12% Lot C: P40,000 x 12%; P20,000 x 12% Vat Payable

No. 2013 P3,000 24,000 4,800 P31,800

Dec. 2013 P3,000 2,400 P5,400

Problem 7: Output vat: school supplies and gift items (P560,000 + 336,000) x 3/28 Input vat:  Directly attributable to vatable sales (P406,000 x 3/28)  Not directly attributable to vatable sales (P21,112 x 3/28 x 800*/1,000**) VAT PAYABLE

P96,000 (43,500) (1,809.60) P50,690.40

*(560,000/1.12) + (P336,000/1.12) = P800,000 vatable sales **vatable sales + vat exempt sales (sale of books) = P1,000,000

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CHAPTER 9 – OTHER PERCENTAGE TAXES TRUE OR FALSE-SET A 1. F 6. F 2. T 7. F 3. T 8. T 4. F 9. T 5. F 10. F TRUE OR FALSE-SET B 1. T 6. F 2. T 7. F 3. F 8. T 4. T 9. F 5. T 10. F MODIFIED IDENTIFICATION 1. A 6. C 2. A 7. A 3. E 8. A 4. C 9. C 5. C 10. C MULTIPLE CHOICE 1. C 21. -----2. D 22. A 3. D 23. B 4. C 24. D 5. A 25. B 6. A 26. C 7. D 27. B 8. A 28. C 9. A 29. C 10. C 30. A 11. D 31. B 12. A 32. D 13. B 33. D 14. C 34. D 15. D 35. D 16. B 36. A 17. B 37. A 18. D 38. A 19. A 39. D 20. B 40. A

11. 12. 13. 14. 15.

T F F T T

16. 17. 18. 19. 20.

T F (False, should be 20 days) F T F

11. 12. 13. 14. 15.

T F F T T

16. 17. 18. 19. 20.

T T T T T

11. 12. 13. 14. 15.

C A A A A

16. 17. 18. 19. 20.

A C C C C

21. 22. 23. 24. 25.

C A A A B

41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

D C A D D C B C B B A C C C A A ----C C A

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

A D D B C D A A B C** A C C C C D D D C A

81. 82. 83. 84. 85. 86. 87. 88. 89. 90.

C B D D B B A D D D


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No. 5 No. 6

(P280,000 + P220,000) x 3% = P15,000 (P50,000 + 100,000 – 75,000) x 3% = P2,250

No. 7 Gross receipts (refer to #6) x vat rate Output vat Input vat (P11,200 x 3/28) Vat Payable No. 16 No. 17 No. 18 No. 22 No. 22 No. 26 No. 27 No. 30 No. 34

P75,000 12% P9,000 (1,200) P7,800

P6.5M x 12% = P780,000 P660,00 x 3% = P19,800 (P400,000 + P100,000) x 12% = P60,000 P10M x 2.5% = P250,000 P10M x 1.5% = P150,000 (P10M x 40%) 3% = P120,000 (P10M – P6M) X 30% = P1,800,000 Subject to vat, not franchise tax AR, beg. Revenues (P4M + P1M) AR, end Gross receipts Vat rate Business tax due

P600,000 5,000,000 (960,000) P4,640,000 12% P556,800

No. 35 Covered by the Franchise AR, beg. Revenues AR, end Gross receipts Franchise tax rate Business tax due Total Business Taxes

P600,000 4,000,000 (800,000) P3,800,000 2% P76,000 P176,800

NOT Covered by the Franchise AR, beg. Revenues AR, end Gross receipts Franchise tax rate Business tax due

P---1,000,000 (160,000) P840,000 12% P100,800

No. 42 P3M x 10% = P300,000 No. 34 Output vat (P5M x 12%) Input Vat  P300,000 x 12%  P800,000 x 12% x 5/8 Vat Payable

P600,000 (36,000) (60,000) P504,000

No. 48 OPT% Interest income from lending activities from inst1uments with remaining terms of: Five years and less

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5,000,000


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5%

GRT P250,000


More than five years Dividends & equity shares from subsidiaries Rental income Net trading gains Total Gross Receipts Tax

3,000,000 1,000,000 500,000 300,000

1% 0% 7% 7%

30,000 0 35,000 21,000 P336,000

Rentals from safety deposit boxes Net foreign exchange gains Net trading gains from trading of securities Trust fees Dividends from domestic corporations Other service fees Interest income from lending activities from inst1uments with remaining terms of: Five years and less More than five years Total Gross Receipts Tax

P880,000 220,000 660,000 110,000 30,000 220,000

OPT% 7% 7% 7% 7% 0% 7%

GRT P61,600 15,400 46,200 7,700 0 15,400

700,000 800,000

5% 1%

35,000 8,000 P189,300

No. 49

No. 50 Interest income with maturity of less than 5 years (P500,000 x 5%) Rentals (P500,000 x 7%) Net trading loss = none; if net trading gain, tax is 7% Gross receipt tax (GRT)

P25,000 35,000 P60,000

No. 51 Interest income with maturity of less than 5 years (P1M x 5%) Rentals (P500,000 x 7%) Net trading gain [200,000 – (100,000 net trading loss previous month) x 7%] Gross receipt tax (GRT)

P50,000 35,000 7,000 P92,000

No. 52 Interest withheld and paid (P100,000 x 5 years x 1%) Adjusted amount of tax due to pretermination (P100,000 x 5 years x 5%) Tax Payable

P5,000 25,000 P20,000

No. 55 P2M x 10% = P200,000 No. 56 [(P500,000 x 12%)-(300,000x12%)] = P24,000 No. 58 P2M x 2% = P40,000 No. 64 P7.5M x 18% = P1,350,000 No. 65 P5M x 18% = P900,000 No. 66 Not subject to OPT. Gross Receipts > 1,919,500, therefore, JC is subject to vat, not OPT No. 70** ERRATUM: CHANGE THE QUESTION TO : WHICH OF THE FOLLOWING IS SUBJECT TO PERCENTAGE TAX? “a” - not subject to percentage tax or any business tax…… Overseas communication into the Philippines.

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“b” and “d” - subject to vat “c” – not world or oriental championship. Subject to 10% OPT No. 75 No. 77 No. 79 No. 80 No. 81

P350,000 x .005 = P1,750 [(P1,500,000 - P1,000,000) x 12] = P60,000 (120,000 – 30,000) x ½ x P30 x 1% = P13,500; Ratio = 45/75 = 60%; IPO rate = 1% (2,000 x P25 x 4% = P2,000; Ratio = 2/75 = 2.67%; IPO rate = 4% (6,000 x P40 x .005% = P1,200

PROBLEM SOLVING Problem I: Gross receipts-passenger operations (P8,000,000 x 3% CCT) Gross receipts cargo operations (P5M x 75% x 12%vat) Rentals (P2M x 12%vat) Total business taxes

P240,000 450,000 240,000 P930,000

Problem II: 1) 3% OPT on vat exempt sales (GR<1,919,500 & non-vat registered) =P1.4M x 3% = P42,000 2) VAT = P1,400,000 x 12% = P168,000 Problem III: 1) Income tax due = P625,000 Subject to 2.5% GPB:  GR Passenger operations-Phils.  GR cargo operations-Phils. Total GPB rate Subject o NCIT (RR 15-2013):  Demurrage, detention and Other fees  Expenses on demurrage fees Income subject to NCIT NCIT rate Total income tax due

P10,000,000 6,000,000 16,000,000 2.5% 1,000,000 (250,000) 750,000 30%

P400,000

225,000 P625,000

EXCLUDED FROM GPB: RR15-2003 provides that demurrage fees, detention fees, and other charges relating to inbound and outbound cargoes are considered as income derived from sources “within” the Philippines subject to regular tax rates.

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2) Income tax due = P545,000 Subject to 2% GPB (Under a tax treaty):  GR Passenger operations-Phils.  GR cargo operations-Phils. Total GPB rate Subject o NCIT (RR 15-2013):  Demurrage, detention and Other fees

P10,000,000 6,000,000 16,000,000 2%


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P320,000

1,000,000 Edition) by Tabag and Garcia

Expenses on demurrage fees Income subject to NCIT NCIT rate Total income tax due

(250,000) 750,000 30%



225,000 P545,000

3) Business tax due = 3% CCT on cargo operations originating in the Philippines = 3% x P6M = P180,000 4) Income tax due = P3,225,000  An offline carrier is not an international carrier. Assume therefore that the income provided were in the nature of commission income from international carriers.  ***An offline carrier may be a domestic or resident foreign corporation. Since the original problem pertains to an international carrier (resident foreign corporation), the offline carrier provided in the problem should be treated as a resident foreign corporation taxable only on its income from sources within the Philippines. Solution: Net income subject to NCIT:  GR Passenger operations-Phils. P10,000,000  GR cargo operations-Phils. 6,000,000  Demurrage, detention and Other fees 1,000,000  Expenses-passenger operations-Phils. (4,000,000)  Expenses-cargo operations-Phils. (2,000,000)  Expenses on demurrage fees (250,000) P10,750,000*** NCIT rate 30% Income tax due P3,225,000 5) Business tax due (offline carrier) = P2,040,000  GR from Passenger operations-Phils. P10,000,000  GR from cargo operations-Phils. 6,000,000  Demurrage, detention and Other fees 1,000,000 Vat rate Business tax due

P17,000,000 12% P2,040,000

Problem IV:

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1.

P0. Not subject to business tax but subject to a capital gains tax of P2,500. [(5,000 sh. X P50) – P200,000 = P50,000 capital gain x 5%CGT = P2,500 CGT

2.

P0. Not subject to business tax as well as income tax (CGT). The transaction resulted to a loss amounting to P75,000, hence, not subject to CGT. Purchase Price = P50/share; S.P.=P35/share; Loss = P15/share

3.

Subject to P6,000 value added tax [(5,000 sh. X P50) – P200,000 = P50,000 capital gain x 12% = P6,000

4.

Subject to OPT (stock transaction tax) of P600 computed as follows: P120,000 x .005 = P600

5.

OPT = 5,000 shares x P18 x .005 = P450


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Problem V: 1. 2.

P3,000 OPT. P100 OPT.

ratio=10/35=28.5%; IPO rate= 2%; Tax due on=P150,000 x 2% = P3,000 P20,000 x .005

1. 2. 3. 4. 5.

P1,053,000 OPT (amusement tax). P5,850,000 x 18% P1,053,000 OPT. Subject only to a business tax due of 18% OPT. P720,000 OPT P4,000,000 x 18% P55,500 OPT. P1,850,000 x 3% P108,000 Vat. (P1850,000 x 12%) – [P750,000 x 12% + (P224,000 x 3/28)]

1.

P651,250 (P4M + 3.5M + 775,000) x 7% = P579,250 (P6M + 1.2M) x 1% = P72,000

2.

P578,500 [(P2.8M + 3.3M + 825,000) + (325,000 – 150,000)] x 7% = P497,000 (P7.2M + 950,000) x 1% = P81,500

Problem VI:

Problem VII:

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Business and Transfer Tax 3rd Ed - TABAG and GARCIA.doc

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