Answer Key Chapters 1 7(1)

CHAPTER 1 – PRINCIPLES OF TAXATION TRUE OR FALSE-SET A 1. FALSE 9. TRUE 17. FALSE 25. FALSE 2. TRUE 10. TRUE 18. FALSE 26. TRUE 3. TRUE 11. TRUE 19. FALSE 27. FALSE 4. TRUE 12. TRUE 20. TRUE 28. TRUE 5. TRUE 13. FALSE 21. TRUE 29. TRUE 6. FALSE 14. FALSE 22. TRUE 30. FALSE 7. TRUE 15. FALSE 23. TRUE 8. FALSE 16. FALSE 24. FALSE MULTIPLE CHOICE 1. D* 21. D 41. D 61. C 2. C 22. D 42. A 62. C 3. B** 23. D 43. A 63. C 4. D 24. D 44. B 64. C 5. C 25. B 45. C 65. A 6. B 26. A 46. C 7. C 27. A 47. B 8. C 28. D 48. A 9. D 29. C 49. C 10. D*** 30. C 50. D 11. A 31. A 51. D 12. D 32. C 52. C 13. D 33. D 53. B 14. C 34. C 54. D 15. C 35. A 55. A 16. D 36. C 56. A 17. A 37. D 57. A 18. A 38. C 58. D 19. C 39. D 59. C 20. B 40. A 60. A *Taxation may be imposed to raise revenue and in the exercised of police power, at the same time. **Statement 1 – False; similarity of tax from license fee, not a distinction. ***Statement 1 – False; should be “jurisdiction” instead of “symbiotic relation”. Statement 2 – False; should be “symbiotic relation” instead of “jurisdiction”

CHAPTER 2 - INDIVIDUAL TAXPAYERS PROBLEMS 1|Pa ge Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 6 E d i t i o n ) by Tabag & Garcia

2-1 1. 2. 3.

RC RC RC

4. 5. 6.

NRA-NETB NRC RA

2-2 1. 2.

3.

4.

5.

P125,000 = BPE + APE for Ana and PWD. The brother shall likewise qualify as PWD within 4 th degree P150,000 = BPE + APE for four dependents. Note: Not entitled for APE for his 20 years old recognized natural child for being gainfully employed. Assume further that all the requirements to qualify for additional exemption under the “Foster Child Act” were complied with. P0 or none; Reciprocity clause applies to a nonresident alien engaged in trade or business. The taxpayer in the problem is a nonresident alien not engage in trade or business. Dividend income from a domestic corporation is not considered as income derived from trade or business. P90,000 = BPE of P40,000 (lower than P50,000 allowed in the Philippines) + APE of P25,000 per dependent (lower than the P30,000 allowed in U.S.A. as provided in the problem). Total personal exemption = P50,000 BPE + P25,000 x 2 additional personal exemption = P90,000 P100,000 = BPE + APE for his 2 minor children.

2-3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

TAX TYPE FWTx FWTx BTx FWTx Exempt BTx BTx BTx BTx BTx FWTx FWTx FWTx BTx BTx FWTx FWTx BTx

Tax RATE 20% 7.5% Tax Table 20% Tax Table Tax Table Tax Table Tax Table Tax Table 20% 10% 20% Tax Table Tax Table 20% 20% Tax Table

19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

TAX TYPE Exempt Exempt FWTx BTx Exempt FWTx FWTx FWTx BTx BTx FWTx FWTx FWTx BTx Exempt BTx BTx

Tax RATE 25% Tax Table 20% 20% 10% Tax Table Tax Table 20% 25% 10% Tax Table Sub.to OPT Tax Table Tax Table

* Prizes received from Philippine sources exceeding P10,000 are subject to 20% final tax rate. On the other hand, Other WINNINGS (regardless of amount) are subject to 20% final tax rate.

2-4 1.

Taxpayer is a resident citizen 1.1 Taxable income = P1,000,000 1.2 Income tax payable = P160,000

2|Pa ge Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 6 E d i t i o n ) by Tabag & Garcia

1.3 Final tax on passive income = P14,500 1.4 Total income tax expense = P299,500

Gross business income, Philippines Gross business income, USA Business expenses, Philippines Business expenses, USA Compensation income, Philippines Dividend income-foreign corp. Interest income-bank deposit abroad Raffle draw winnings Basic personal exemption Taxable income Tax Due [(P125,000)+(.5M x 32%)] Creditable withholding tax on bus. income Income Tax Payable

P285,000 (125,000) P160,000

Dividend income – DC (50k x 10%) Interest income bank deposit-Phls.@20% Interest income FCDS deposit @ 7.5% Royalty income from composition @10% PCSO winnings Final Tax on Passive Income

P5,000 4,000 3,000 2,500 exempt P14,500

Basic income tax due Final taxes on passive income Total income tax expense 2.

P1,000,000 500,000 (700,000) (430,000) 600,000 40,000 30,000 10,000 (50,000) P1,000,00 0

P285,000 14,500 P299,500

The question is tax expense; ignore the income tax payable of P160,000.

Taxpayer is a nonresident citizen 2.1 Taxable income = P860,000 2.2 Income tax payable = P115,200 2.3 Final tax on passive income = P11,500 2.4 Total income tax expense = P251,700

Gross business income, Philippines Business expenses, Philippines Compensation income, Philippines Dividend income-foreign corp. Raffle draw winnings Basic personal exemption Taxable income Tax Due [(P125,000)+(360k x 32%)] Creditable withholding tax on bus. Income Income Tax Payable Dividend income – DC (50k x 10%) Interest income bank deposit-Phls.@20% Interest income FCDS deposit @ 7.5%

P1,000,000 (700,000) 600,000 *** 10,000 (50,000) P860,000 P240,200 (125,000) P115,200

***Assume situs is without the Phls.; refer to page 300 for the determination of the situs of dividend income.

Assume the tax withheld pertain to

Income derived in the Phls.

P5,000 4,000 exempt


Royalty income from composition @10% PCSO winnings Final Tax on Passive Income Basic income tax due Final taxes on passive income Total income tax expense 3.


P240,200 14,500 P254,700


Taxpayer is a nonresident alien engaged in trade or business 4.1 Taxable income = P910,000 4.2 Income tax payable = P131,200 4.3 Final tax on passive income = P16,500 4.3 Total income tax expense = P267,700

Gross business income, Philippines Business expenses, Philippines Compensation income, Philippines Dividend income-foreign corp. Raffle draw winnings Basic personal exemption Taxable income

P1,000,000 (700,000) 600,000 *** 10,000 P910,000

Tax Due [(P125,000)+(410k x 32%)] Creditable withholding tax on bus. Income Income Tax Payable

P256,200 (125,000) P131,200

Dividend income – DC (50k x 20%) Interest income bank deposit-Phls.@20% Interest income FCDS deposit @ 7.5% Royalty income from composition @10% PCSO winnings Final Tax on Passive Income

P10,000 4,000 exempt 2,500 exempt P16,500

Basic income tax due Final taxes on passive income Total income tax expense

5.

P240,200 11,500 P251,700

Taxpayer is a resident alien 3.1 Taxable income = P860,000 (same answer with #2.1; nonresident citizen) 3.2 Income tax payable = P115,200 (same answer with #2.2; nonresident citizen) 3.3 Final tax on passive income = P14,500 (same answer with #1.3; resident citizen) 3.4 Total income tax expense = P254,700 computed as follows:

Basic income tax due Final taxes on passive income Total income tax expense 4.

2,500 exempt P11,500

P256,200 11,500 P267,700

***Assume situs is without the Phls.; refer to page 300 for the determination of the situs of dividend income. The problem is silent as to “reciprocity”

Assume the tax withheld pertain to

Income derived in the Phls. Use 20% rate for DI from DC instead of 10%


Taxpayer is a nonresident alien not-engaged in trade or business


Compensation income, Philippines Dividend income - DC Dividend income from foreign corp. Interest income bank deposit, Phls. Interest income on FCDS deposit Royalty income from composition Raffle draw winnings PCSO winnings Total GROSS Income x Income Tax Due/expense

P600,000 50,000 20,000 Exempt 25,000 10,000 200,000 P905,000 25% P226,250

Assume situs is without

Not exempt under the tax code if the taxpayer is NRA-NETB.

2-5 1.

Taxpayer is a resident citizen a. Taxable net income = P1,026,100 b. Income tax payable = P293,352 c. Final tax on passive income = P38,030 d. Capital gains tax = P120,600 Solution: From Phils.

From Abroad

Income from employment P180,000 P280,000 Business income 850,000 960,000 Deductible business expenses (610,000) (730,000) Interest income on personal loans** 6,000 3,000 Dividend income from foreign corp. 6,800 2,000 Prizes from singing contest 5,600 Interest income on bank deposits 4,200 Interest income on money market placements 1,600 Royalty income 50,000 Winnings/ prizes from lotteries, raffles 16,900 Lotto winnings --50,000 Basic Personal exemption Additional exemption Taxable income TAX DUE: First P500,000 Excess @ 32% **All incomes regardless of source are taxable. However, personal expenses are not allowed as deduction from the gross income

Final Tax on Passive income: Interest income on bank deposits Interest income on money market placements Royalty income

Total P460,000 1,810,000 (1,340,000) 9,000 8,800 5,600 4,200 1,600 50,000 16,900 50,000 (50,000) P1,026,100 P125,000 168,352 P293,352

10,800 7,500 90,000


Winnings/ prizes from lotteries, raffle draws Total @ Dividend income from domestic corp. Royalty income from sale of books Total @ TOTAL FINAL TAX ON PASSIVE INCOME

45,000 P153,300 20% 5,700 68,000 P73,700 10%

Capital Gains Tax: Sale of lot (P1,060,000 x 6%) Sale of house and lot (P950,000 x 6%) Total

2.

Taxpayer is a. b. c. d.

P30,660 7,370 P38,030

P63,600 57,000 P120,600

a non-resident citizen Taxable income = P388,400 Income tax payable = P91,520 Final tax on passive income = P38,030 Capital gains tax = P120,600

Solution: Income from employment Business income Deductible business expenses Interest income on personal loans Dividend income from foreign corp. Prizes from singing contest Basic Personal exemption Additional exemption Taxable income TAX DUE: First P250,000 Excess @ 30%

From Phils. P180,000 850,000 (610,000) 6,000 6,800 5,600 (50,000) P388,400 P50,000 41,520 P91,520

Final Tax on Passive income:  As long as there is no interest income from foreign currency bank deposit under FCDS/FCDU, the final tax on passive income of a nonresident citizen is the same with that of a resident citizen. Capital Gains Tax:  All individual taxpayers are subject to the same types of CGTs 3.

Taxpayer is a. b. c. d.

a nonresident alien engaged in trade Taxable income = P388,400 (same with a non-resident citizen taxpayer) Income tax payable = P91,520 (same with a non-resident citizen taxpayer) Final tax on passive income = P38,600 Capital gains tax = P120,600 (all individual taxpayers are subject to the same types of CGTs)

Final Tax on Passive income: Interest income on bank deposits Interest income on money market placements

10,800 7,500


Royalty income Dividend income from domestic corp Winnings/ prizes from lotteries, raffle draws Total @ Dividend income from domestic corp.@ 20% Royalty income from sale of books @ TOTAL FINAL TAX ON PASSIVE INCOME

90,000 5,700 45,000 P159,000 20% 68,000 10%

rate is 20% P31,800 6,800 P38,600

2-6 a. b. c.

Taxable income of the husband = P1,115,000 Taxable income of the wife = P840,000 Consolidated tax due of the husband and the wife = P555,600 Husband

Wife

INCOME: Compensation income

P 850,000

P650,000

Income-Profession [P800,000/2)]

400,000

400,000

Income from trading business

250,000

-

(160,000) (100,000)

(160,000) -

Basic Personal exemption

(50,000)

(50,000)

Additional exemption

(75,000)

-

TAXABLE INCOME

P1,115,000

P840,000

P125,000

P125,000

196,800

108,800

Total

P321,800

P233,800

Consolidated Tax Due

P555,600

LESS: Expenses-practice of profession [ P320,000/2)] Expenses – trading business

Tax due: First P500,000 In excess of P500,000 @ 32%

Note: Personal expenses are not deductible. The Premium payments for health insurance are likewise nondeductible because the total gross income of the family exceeded the threshold of P250,000.


2-7 a.

Total capital gains taxes Sale of shares of domestic corp. directly to a buyer (P100,000 x 5%) + P50,000 x 10% Capital gain on sale of land in the Philippines classified as capital asset (P5M x 6%) Total capital gains tax Note: Sale of shares in the local stock exchange is subject to transaction tax of ½ of 1% of GSP

P10,000 300,000 P310,000

b. Dividend income from domestic corp. @ 10% Interest income on Philippine bank deposit (3,200 + 2,400 + 8,000)/80% x 20% Interest income on Phl. bank deposit under FCDU (4,000 + 4,000 + 2,000) x 7.5% Interest income on government bonds Royalty - literary Royalty other than literary Total Final tax on passive income of Daniel and Kat Note: Interest income on long-term deposit is tax exempt

P4,000 3,400 750 2,000 1,000 2,400 P13,550

c. Business income Rental income net of tax (P200,000/95%)/2 Dividend income from nonresident corp. (P10,000/2) Interest income on notes receivable [P6,000 + (P2,000/2)] Interest income on bank deposit abroad [P5,000 + (P5,000/2)] Capital gain on sale of land abroad (P500,000/2) Gain on sale of shares – New York Stock Exchange P30,000/2 Expenses [P350,000 +(75,000/2)] Personal exemption Taxable net income of Daniel

P600,000 100,000 5,000 7,000 7,500 250,000 15,000 (387,500) (50,000) P547,000

Gross income from practice of profession (P360,000/90%) Rental income net of tax (P190,000/95%)/2 Dividend income from resident corp. Dividend income from nonresident corp. (P10,000/2) Interest income on notes receivable [P4,000 + (P2,000/2)] Interest income on bank deposit abroad [P5,000 + (P5,000/2)] Capital gain on sale of land abroad (P500,000/2) Gain on sale of shares – New York Stock Exchange P30,000/2 Expenses [P200,000 +(75,000/2)] Personal exemption Taxable net income of Kat

P400,000 100,000 20,000 5,000 5,000 7,500 250,000 15,000 (237,500) (50,000) P515,000

d.

2-8 a. b. c. d. e. f.

Income tax payable, first quarter = P32,500 Income tax payable, second quarter = P14,500 Income tax payable, third quarter = P19,233 Income tax payable, fourth quarter = P59,823 Final tax on passive income = P15,800 Capital gains tax = P600,000 x 6% = P36,000

Solution: Gross Profit from Sales Business expenses

1 st Q P300,000 (120,000)

2 nd Q P500,000 (262,000)

3 rd Q P710,000 (405,890)

Q4/Year P980,000 (426,700)


Personal exemption Taxable income

P180,000

Tax Due (Tax Table) P32,500 Less: Tax Paid Q1 Q2 Q3 Income Tax Payable P32,500 Note: The amounts shown above are cumulative. (Amounts are cumulative) Dividend received from domestic corp. Interest income from BPI UCPB Metro Bank Total final tax on passive income

P238,000

P304,110

(50,000) P503,300

P47,000

P66,233

P126,056

(32,500)

(32,500) (14,500)

P14,500

P19,233

(32,500) (14,500) (19,233) P59,823

Amount 30,000

% 10

Tax P3,000

16,000 18,000 30,000

20 20 20

3,200 3,600 6,000 P15,800

2-9 Gross compensation income SSS premium contributions Philhealth contributions Pag-ibig contributions Union dues Basic exemption Premium payment on health insurance Taxable income

P230,000 (3,600) (2,400) (1,800) (2,200) (50,000) (2,400) P167,600

Note: SSS loan is nondeductible

2-10 Gross compensation income SSS premium contributions Philhealth contributions Pag-ibig contributions Union dues Basic exemption Additional exemption Premium payment on health insurance Taxable income

P450,000 (3,600) (2,400) (2,000) (1,000) (50,000) (100,000) P291,000

2-11 a. Special Alien employed by ROHQ = P170,000 computed as follows: On Compensation income: P850,000 x 15% On other Income (Apply rules on NRA-NETB) Dividend Income from a dom. corp. Int. Inc. Phil. bank deposit Int. Inc. fr. Bank dep. under FCDS PCSO winnings

P127,500 P50,000 20,000 exempt 100,000


Total Other Income Tax rate @ TOTAL INCOME TAX EXPENSE 

P170,000 25%

42,500 P170,00 0 Being a nonresident alien-not engaged in trade or business for income taxation purposes, a Special Alien is not entitled to personal exemptions and subject to 25% final tax on other income including PCSO winnings.

b. Filipino Citizen employed by ROHQ = P218,500 computed as follows: Compensation income (Subject to basic tax):** Gross Compensation Less: Personal exemption (50k + 50k) Net Taxable Income

P850,000 (100,000) P750,000

First P500,000 P125,000 Excess of P250,000 @ 32% 80,000 P205,000 Passive Income, Phls. (Subject to Final Tax) Dividend Income from a dom. corp. @ 10% P5,000 Int. Inc. Phil. bank deposit @ 20% 4,000 Int. Inc. fr. Bank dep. under FCDS @ 7.5 4,500 PCSO winnings exempt 13,500 TOTAL INCOME TAX EXPENSE P218,500  **Filipinos employed by ROHQs/RHQs holding managerial or technical position shall have the option to be taxed either at 15% on their gross compensation income or based on Section 24(A) of the tax code. However, Filipinos exercising the option to be taxed at 15% preferential rate must meet all the three (3) requirements as discussed in page 98. In the problem provided, the Filipino counterpart failed to meet the “compensation threshold test” of at least P975,000. Consequently, the taxpayer shall be subject to basic income tax on its “compensation income” under Section 24(A) of the tax code.

c. Filipino Citizen employed by an OBU = P141,000 computed as follows: Compensation income (Subject to 15% F.Tax)*** P850,000 x 15%

P127,500

Passive Income, Phls. (Subject to Final Tax) Dividend Income from a dom. corp. @ 10% P5,000 Int. Inc. Phil. bank deposit @ 20% 4,000 Int. Inc. fr. Bank dep. under FCDS @ 7.5% 4,500 PCSO winnings exempt 13,500 TOTAL ICNOME TAX EXPENSE P141,000  ***Filipinos employed by OBUs as well as Petroleum Contractors/Subcontractors shall be subject to 15% Final Tax on their “compensation income”.  The 15% tax rate is a final tax on “gross compensation” income. Hence, personal exemptions shall not be deducted from such income.

d. Filipino Citizen employed by a Petroleum Contractor = P141,000 (refer to computations in assumption “c”)

e. Filipino Citizen employed by ROHQ with gross compensation income of P1,250,000 = P346,500 OR P201,000 computed as follows: Compensation income (Subject to basic tax):**** Gross Compensation Less: Personal exemption (50k + 50k)

P1,250,000 (100,000)

10 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 6 E d i t i o n ) by Tabag & Garcia

Net Taxable Income

P1,150,000

First P500,000 Excess of P650,000 @ 32% Passive Income, Phls. (Subject to Final Tax) Dividend Income from a dom. corp. @ 10% Int. Inc. Phil. bank deposit @ 20% Int. Inc. fr. Bank dep. under FCDS @ 7.5% TOTAL INCOME TAX EXPENSE

P125,000 208,000 P5,000 4,000 4,500

P333,000

13,500 P346,500

OR Compensation income (Subject to final tax):**** Gross Compensation Tax rate

P1,250,000 15%

P187,500

Passive Income, Phls. (Subject to Final Tax) Dividend Income from a dom. corp. @ P5,000 10% Int. Inc. Phil. bank deposit @ 20% 4,000 Int. Inc. fr. Bank dep. under FCDS @ 7.5% 4,500 13,500 TOTAL TAXES P201,000  ****Filipinos employed by ROHQs/RHQs holding managerial or technical position shall have the option to be taxed either at 15% on their gross compensation income or based on Section 24(A) of the tax code, provided, however, that Filipinos exercising the option to be taxed at 15% preferential rate must meet all the three (3) requirements as discussed in page 79.

2-12 1. 2. 3. 4.

P6M x 6% = P360,000 ZV P2.2M vs. SP of P2.5M**; CGT = P2.5M x 6% = P150,000; **SP = Cost + Gain Unutilized Proceeds = none; the proceeds were fully utilized; CGT = P0 Unutilized Proceeds = P5M x 20% = P1M; CGT = 1/5 x 6M x 6% = P72,000

2-13 a. b. c.

2-14 2-15 2-16 2-17

P15M x 6% = P900,000 P20M x 6% = P1,200,000 P0

C.G. Tax = none; the transaction resulted to a loss C.G. Tax = P100,000 x 5% = P5,000 C.G. Tax = (P100,000 x 5%) + (P50,000 x 10%) = P10,000 C.G. Tax = none

TRUE OR FALSE 1. TRUE 2. TRUE 3. TRUE 4. TRUE 5. TRUE 6. FALSE 7. TRUE 8. TRUE

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

TRUE TRUE FALSE TRUE FALSE FALSE TRUE TRUE

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

FALSE TRUE TRUE FALSE TRUE TRUE FALSE FALSE


9. FALSE 10. FALSE MULTIPLE CHOICE 1. D 2. C 3. D 4. D 5. B 6. A 7. B 8. B 9. D 10. B 11. B 12. B 13. A 14. C 15. D

19. 20.

FALSE TRUE

29. 30.

TRUE FALSE

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

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

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45.

A B D D B D A D A B D B D D D

Supporting Computations (Multiple Choice): (9) Gross income, Philippines Gross income, USA Expenses, Philippines Expenses, USA Basic personal exemption Taxable income

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

A B B D B A B C

P800,000 600,000 (400,000) (300,000) (50,000) P650,000

(10 and 11) Gross income, Philippines Expenses, Philippines Basic personal exemption Taxable income

P800,000 (400,000) (50,000) P350,000

Gross income, Philippines Expenses, Philippines Basic personal exemption Taxable income

P800,000 (400,000) (40,000) P360,000

(12)

(16 and 18) (19)

Income Tax Due = P1,200,000 x 15% = P180,000 NOTE: Only SFEs employed in RHQs/ROHQs have the option to be taxed at either 15% Final Tax or Basic Tax

Basic Tax Due = P125,000 + (600,000 x 32%) = P317,000; Taxable Income = P1.2M-Personal exemptions = P1.1M

(32) Copyright (11,250/90%)x10% Royalty (12,000/80%) x 20% Share from Trade Partnership

P1,250 3,000 30,000


(treated as dividend income) (270,000/90%) x10% Taxable income

P34,250

(34) Gross business income, Philippines Business expenses, Philippines Basic personal exemption Taxable income (42)

P1,000,000 (300,000) (50,000) P650,000

CGT = P1.5M/P4M x P4M x 6% = P90,000

(47)

Professional income (gross) Rental income (gross); 2 years Wagering gains Kickbacks received Facilitation fee Insurance expense (1/2 year) Car expense (50%) Professional expenses Premium pay’t on health insurance Basic and APE Taxable income

P175,000 50,000 50,000 40,000 ND (1,000) (15,000) (40,000)) (2,400) (75,000) P181,600

(48)

Subject to preferential tax rate = P750,000 x 15% Subject to 15% FBT = P170,000/85% x 15% CGT (refer to computation below) Income subject to 25% FWT: Dividend income from DC Interest income from peso bank deposit Interest income - FCDS PCSO winnings Raffle draw winnings Total Tax Rate TOTAL INCOME TAX EXPENSE

On shares of stock = P100,000 x 5% + (50,000 x 10%) On real property = P2.5M x 6% TOTAL CGT

P112,500 30,000 160,000 P40,000 50,000 exempt 1,000,000 80,000 P1,170,000 25%

292,500 P595,00 0

P10,000 150,000 P160,00 0

 De minimis benefits are tax exempt  Interest income from bank deposit under FCDS is exempt. SAEs are treated as NRAs-NETB with respect to their other income. Consequently, such interest income is tax exempt.


(49) CGT (as computed in #48) FBT (P170,000/85% x 15%***) FWT on Passive incomes: Dividend income from DC @ 10% Interest income from peso bank deposit @ 20% Interest income-FCDS @ 7.5% PCSO winnings Raffle draw winnings @ 20% BASIC INCOME TAX: Salaries, allowances, honoraria Basic Personal exemption Taxable Net Income Basic Tax under Section 24(A) TOTAL INCOME TAX EXPENSE

P160,000 30,000 P4,000 10,000 1,500 exempt 16,000 P750,000 (50,000) P700,000

31,500

189,000 P410,50 0

 ***The SFE is not qualified for the 15% preferential tax rate. However, the fringe benefits received shall still be subject to 15% FBT because under RR 11-2010, the option to be subject to 15% preferential tax rate and the coverage of fringe benefit tax are independent to each other. Thus, as provided in the aforementioned RR, there would be instances where a Filipino employee shall enjoy 15% preferential tax rate but may not be covered by fringe benefit tax for not being a supervisory/managerial employee. Likewise, there would be instances where such SFE may not be subject to 15% preferential tax rate due to failure to meet any of the three (3) tests discussed earlier but may be subject to 15% FBT for being a “managerial” employee. The taxpayer in this particular case is occupying a managerial position.

CHAPTER 3 – FRINGE BENEFITS PROBLEM SOLVING P3.1 Subject to FBT 1. P120,000 2. 3. 50,000 4. 5. 6. 250,000 7. 8. 9. 60,000 10. -

Subject to Basic Tax -

Exempt P80,000 5,000/ yr. (RR 8-2012) 360,000 45,000 15,000 1,500

P3.2 a) b) c) d) e)

Yes GUMV = P330,000/68%=P485,294 No. FBT is a final tax, hence, nonreturnable FBT = P485,294 x 32% = P155,294 Within 10th day of the month following the end of the calendar quarter in which the fringe benefits were granted to the recipient.


f)

P3.3

No. It is subject to basic tax instead of FBT. P466,000 computed as follows: Compensation income Monthly transportation allowance**

De Minimis Benefits P5,000

Taxable Benefits P40,000 20,000 10,000 6,000 76,000 (82,000)

De Minimis Benefits

Taxable Benefits P30,000 2,500 2,500 2,000 500 2,500 40,000 (40,000)

P480,000 36,000

13th month pay Christmas bonus (P5,000 is de minimis) Christmas bonus (in excess of P5,000) Productivity incentive pay (de minimis under RR 1-2015) 10,000 Uniform allowance (15,000-5,000) 5,000 Medical allowance (entire amount is de minimis) 10,000 Rice subsidy [24,000-(1,500 x 12)] 18,000 Total (known as 13 th Month Pay & Other Benefits) Tax Exempt 13 th Month Pay & Other Benefits Personal exemption (50,000) Taxable income P466,000 **Fixed Allowances received regularly shall be treated as part of basic compensation income

P3.4 P130,000 computed as follows: Compensation income 13th month pay and mid-year bonus Christmas bonus Uniform allowance (7,500-5,000) Actual Medical allowance (P12,000-10,000) Medical allowance to dependents (P2,000-1,500) Rice subsidy [entire amount is de minimis] Monetized vacation leave [7,500-(500x 10)] Total (known as 13 th Month Pay & Other Benefits) Tax Exempt 13 th Month Pay & Other Benefits Personal exemption Taxable income

P3.5 1.

5,000 5,000 10,000 1,500 18,000 5,000

P180,000

(50,000) P130,000

4. a) b)

P165,000 x 50% = P82,500 P82,500/68% x 32% = P38,824

a. b.

P1,200,000 P1,200,000/68% x 32% = P564,705

a. b.

P800,000 P800,000/68% x 32% = P376,470

a. b.

P1,200,000/5 = P240,000 P240,000/68% x 32% = P112,941

5. 2. a. b.

P4.5M x 5% /4 x 50% = P28,125 P28,125/68% x 32% = P13,235

3. a. b.

P4.5M P4.5M/68% x 32% = P2,117,647

6.


TRUE OR FALSE 1. TRUE 6. 2. FALSE 7. 3. TRUE 8. 4. TRUE 9. 5. TRUE 10. MODIFIED IDENTIFICATION 1. B 6. 2. B 7. 3. B 8. 4. B 9. 5. B 10.

MULTIPLE CHOICE 1. C 11. 2. A 12. 3. D 13. 4. D 14. 5. D 15. 6. D 16. 7. B 17. 8. A 18. 9. D 19. 10. D 20.

C A A B B D C B C D

FALSE TRUE TRUE TRUE TRUE

11. 12. 13. 14. 15.

FALSE TRUE TRUE TRUE TRUE

B B B B B

11. 12. 13. 14. 15.

B B B B B

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

D A D C D A D B D A

16. 17. 18. 19. 20.

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

B B B B B

41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53.

Supporting Computations (Multiple Choice): (* #13) The journal entry in letter “a” is the journal entry provided in related revenue regulations. Nonetheless, the authors believe that the journal entry should have been: Compensation expense (@ GUMV) Pxx Cash Pxx Consequently, from the journal entry shown above, the account debited as “fringe benefit tax expense” in revenue regulations should not form part of the employer’s “Taxes Expense” but as a component of the employer’s “Compensation expense”. (23) To managerial – fringe benefit expense Fringe benefit tax expense Rank and File Total

P1,360,000 640,000 5,000,000 P7,000,000

(24) 16 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 6 E d i t i o n ) by Tabag & Garcia

Expenditure attributable to Managerial employees (P1M x 20%) Divide by GUMVF Grossed-up monetary value x FBT rate Fringe Benefit Tax (25) (26)

P200,000 68% P294,118 32% P94,118

Total deductible expense = P1,000,000 + 94,118 = P1,094,118 Salaries and wages gross of CWT P380,000 Fixed monthly allowance** 60,000 Total compensation income subject to graduated rate P440,000 *Fixed Allowances received regularly per payroll are considered part of regular compensation subject to graduated rate (RR 10-2008)

(27) Allowance not subject to liquidation Divide by GUMVF GUMV x FB rate FBT

P48,000 68% P70,588 32% P22,588

Annual rental x Monetary value of housing benefit Divide by GUMVF GUMVF X FBT rate FBT Add: Annual Rental Total Deductible Expense

P637,500 50% P318,750 68% P468,750 32% P150,000 637,500 P787,500

(29)

(30)

(33)  P2,000,000 x 5% x 50% / 12 = P4,1667.67  P4,1667.67 / 68% x 32% = P1,960.78

(31)

 (P5,000,000-2,000,000) / 12 = P250,000  P250,000/ 68% x 32% = P117,647.05 (35)

 P3,000,000 x 5% x 50% / 12 = P6,250  P6,250/ 68% x 32% = P2,941.18 (32)

 P1,000,000 / 68%  P1,470,588 x 32%

= P1,470,588 = P470,588

 P800,000 / 68%  P1,176,471 x 32%

= P1,176,471 = P376,471

(36)  P5,000,000 / 12*  P416,667/ 68% x 32% Monthly monetary value

= P416,667 = P196,078.42 (37)

 (P1,000,000/5) / 68%  P294,118 x 32% (52)

Pedro is not treated as minimum wage earner Salaries Other Benefits (Excess de minimis + bonuses

= P294,118 = P94,118

P144,000 142,000


Tax exempt other benefits Basic exemption Taxable income (53)

(82,000) (50,000) P154,000

Pedro is a minimum wage earner but his business income is taxable Business income P200,000 Basic exemption (50,000) Taxable income P150,00 0

CHAPTER 4 – INCOME TAX FOR CORPORATIONS PROBLEM SOLVING: (P4.1) CASE A (Domestic Corporation): 1. P1,636,500 2. P81,250 3. P550,000 Solution Gross sales Sales returns Cost of goods sold Operating expenses Interest income from trade receivable Interest income from BPI deposits-USA Dividend income-resident foreign corp. Dividend income-nonresident foreign corp. Taxable income Tax rate Normal Corporate Income Tax Due

Interest income from BPI deposits-Phils. @ 20% Interest income from FCDS @ 7.5% Income from money market placement @ 20% Royalty income @ 20% Final tax on passive income Gain on sale of shares sold directly to a buyer [(100,000x 5%) + (50,000 x 10%)] Sale of real property in the Philippines (SP of P9M** x 6%) Total Capital Gains Tax

Philippines P10,000,000 200,000 3,500,000 2,800,000 100,000 45,000 -

Abroad P5,000,000 2,250,000 1,100,000 50,000 80,000 30,000

Total P15,000,000 (200,000) (5,750,000) (3,900,000) 150,000 80,000 45,000 30,000 P5,455,000 30% P1,636,500

Philippines 100,000 150,000 200,000 50,000

Final Tax P20,000 11,250 40,000 10,000 P81,250 Capital Gains Tax P10,000 540,000 P550,000


**SP = Cost + Gain = P4M + 5M = P9M;

SP is higher than FMV

CASE B (Resident Foreign Corporation): 4. P1,093,500 5. P81,250 (Same with Case A) 6. P550,000 (Same with Case A)

Solution: Gross sales Sales returns Cost of goods sold Operating expenses Interest income from trade receivable Dividend income-resident foreign corp. Taxable income Tax rate Normal Corporate Income Tax Due CASE C (Non-Resident Foreign Corporation): 7. P2,038,500 computed as follows: Gross sales Sales returns Cost of goods sold GROSS INCOME ADD: Interest income from trade receivable Dividend income-resident foreign corp. Interest income from BPI deposits-Phils. Income from money market placement Royalty income Total “Gross” Income Tax rate Final Tax Due (Basis: Gross income)

P10,000,000 (200,000) (3,500,000) (2,800,000) 100,000 45,000 P3,645,000 30% P1,093,500

P10,000,000 (200,000) (3,500,000) P6,300,000 100,000 45,000 100,000 200,000 50,000 P6,795,000 30% P2,038,500

(P4.2) P0. A foreign corporation is taxable only on its income derived from sources within the Philippines. The incomes provided in the problem were all derived in U.S. (P4.3) Current account, BDO @ 20% Savings deposit, BPI @ 20% Interest income from government bonds @ 20% Royalty income from various domestic corporations @ 20% US dollar deposit, FCDU @ 7.5% Total final taxes on passive income

P120,000 100,000 40,000 20,000 60,000 P340,000

(P4.4) Gross profit from sales Business expenses Taxable income NCIT

Q1 P1,600,000 (1,200,000) 400,000 120,000

Q2 P3,200,000 (2,400,000) 800,000 240,000

Q3 P4,800,000 (3,400,000) 1,400,000 420,000

Q4 P6,200,000 (4,200,000) P2,000,000 600,000


MCIT (Gross Profit x 2%) TAX DUE (Higher) Less: Income tax withheld Tax Paid Q1 Tax Paid Q2 Tax Paid Q3 Income Tax Payable

32,000

64,000

96,000

124,000

P120,000 (30,000) -

P240,000 (70,000) (90,000)

P90,000

P80,000

P420,000 (130,000) (90,000) (80,000) P120,000

P600,000 (230,000) (90,000) (80,000) (120,000) P80,000

(P4.5)

MCIT NCIT TAX DUE (Higher) Excess MCIT Year 4 Year 7 Income Tax Payable

Year 4 100,000 30,000 P100,000

Year 5 60,000 70,000 P70,000

Year 6 50,000 60,000 P60,000

Year 7 40,000 30,000 P40,000

Year 8 20,000 90,000 P90,000

-

(70,000)

-

-

P100,000

P0

P60,000

P40,000

(10,000) P80,000

(P4.6) 1. 2. 3. 4.

P120,000 P690,000 P210,000 P495,000

Tax Due Excess MCIT Prior Yr W/holding tax-Prior Yr W/holding -During the Yr Tax Paid Previous Qtr(s) Tax Payable

Q1 NCIT P300,000 (90,000) (30,000) (60,000) P120,000

Q2 MCIT P990,000 (30,000) (150,00) (120,000) P690,000

Q3 NCIT P1,410,000 (90,000) (30,000) (270,000) (810,000) P210,000

Q4 NCIT P2,010,000 (90,000) (30,00) (375,000) (1,020,000) P495,000

(P4.7) Case A (Taxable Joint Venture) 1. Taxable income of the joint venture = P20M 2. Tax due of the joint venture = P6M 3. Taxable income of ABC Company = P10M 4. Tax due of ABC Company = P3M 5. Taxable income DEF Company = P5M 6. Tax due of DEF Company = P1.5M Gross income Business expenses Taxable income Tax Rate (NCIT)

Joint Venture P50,000,000 (30,000,000) P20,000,000 30%

ABC Co. P30,000,000 (20,000,000) P10,000,000 30%

DEF Co. P20,000,000 (15,000,000) P5,000,000 30%


Tax Due

P6,000,000

P3,000,000

P1,500,000

Joint Venture P50,000,000 (30,000,000) -

ABC Co. P30,000,000 (20,000,000) 14,000,000

DEF Co. P20,000,000 (15,000,000) 6,000,000

P20,000,000 P0

P24,000,000 30% P7,200,000

P11,000,000 30% P3,300,000

Joint Venture P50,000,000

Rico 30,000,000

Earl 20,000,000

(30,000,000) P20,000,000 (6,000,000) P14,000,000

(20,000,000) P10,000,000

(15,000,000) P5,000,000

Case B (Tax Exempt Joint Venture) 7. Taxable income of the joint venture = P0 (tax exempt) 8. Tax due of the joint venture = P0 9. Taxable income of ABC Company = P24M 10. Tax due of ABC Company = P7.2M 11. Taxable income DEF Company = P11M 12. Tax due of DEF Company = P3.3M

Gross income Business expenses Share in the income of the joint venture Net/ Taxable income Tax Rate (NCIT) Tax Due (P4.8) Case A: 1. Taxable income of the joint venture = P20M 2. Tax due of the joint venture = P6,000,000 3. Taxable income of Rico = P10M 4. Taxable income Earl = P5M 5. Final tax due of Rico (10%) = P980,000 6. Final tax due of Earl (10%) = P420,000 Gross income Business expenses Taxable income Less: Tax Due @ 30% Distributable income Share in income Rico @ 70% Earl @ 30%

P9,800,000 4,200,000

Case B: 7. Taxable income of the joint venture = P0 (tax exempt) 8. Tax due of the joint venture = P0 9. Taxable income of Rico = P24,000,000 10. Taxable income Earl = P11,000,000 11. Final tax due of Rico = P0 ; subject to basic and creditable withholding tax 12. Final tax due of Earl = P0 ; subject to basic and creditable withholding tax

Gross income Business expenses


Rico 30,000,000

Earl 20,000,000

(30,000,000)

(20,000,000)

(15,000,000)


Net income

P20,000,000

Distributable income Share in income Rico @ 70% Earl @ 30% Taxable income

P20,000,000

P10,000,000

P14,000,000 6,000,000

P5,000,000

14,000,000 P24,000,000

6,000,000 P11,000,000

(P4.9) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

[(P6M-4M) + (($50,000-$20,000)x45)] = P3,350,000 x 30% = P1,005,000 (P6M-4M) x 30% = P600,000 P6M x 30% = P1,800,000 P6M x 2.5% = P150,000 P6M x 1.5% = P90,000 P6M x 25% = P1,500,000 P6M x 4.5% = P270,000 P6M x 7.5% = P450,000 *P3,350,000 x 10% = P335,000; * from #1 P1,005,000; same computation with #1 P0; exempt

1. 2. 3.

[5M + 3M] x 2.5% = P200,000 [5M x 2.5%) + (3M x 1%)] = P155,000 [5M + 3M] x 2.5% = P200,000; No GPB on Gross receipts from USA to Russia

(P4.10)

(P4.11) 1.Related 2.Related 3.Related

4.Related 5.Related 6.Unrelated

(P4.12) Gross income, related activities Gross income, unrelated activities (excluding rental income) Rental income from commercial spaces (gross of 5% WT) Expenses, related activities Expenses, unrelated activities Taxable income Tax Rate (NCIT); Unrelated income  Related income Tax Due Less: Quarterly tax payments for the first 3 quarters Income Tax Payable

P5,000,000 5,000,000 2,000,000 (2,000,000) (3,000,000) P7,000,000 30% 2,100,000 (500,000) P1,600,000

(P4.13)

Question 1: Tuition fees Miscellaneous fees Income from bookstore Income of school canteen

P9,500,000 1,200,000 350,000 180,000


Salary, allowances and bonus Other operating expenses Depreciation expense-classrooms Depreciation expense-furniture and equipment Taxable income x Tax Rate Tax Due

Question 2: Tuition fees Miscellaneous fees Income from bookstore Income of school canteen Salary, allowances and bonus Other operating expenses Construction of additional classrooms Acquisition of furniture and equipment Taxable income x Tax Rate Tax Due

(6,400,000) (2,600,000) (75,000) (50,000) P2,105,000 10% P210,500

P9,500,000 1,200,000 350,000 180,000 (6,400,000) (2,600,000) (1,300,000) (400,000) P530,000 10% P53,000

(P4.14) 1. 2.

Income Tax Due (Payable) = P249,000 – CWT 15,000 = P234,000 Improperly accumulated earnings tax = P46,425 Solution: Gross income (gross of 1% WT) P1,500,000 Business expenses (600,000) Gain on sale of business asset 60,000 NOLCO in 2011 (130,000) Taxable income ADD: 2011 NOLCO 130,000 Interest on peso bank deposit (P5,000/80%) 6,250 Dividends from a domestic corporation 35,000 Gain on sales of shares, not listed and traded subjected to capital gains tax (P150,000-115,000) 35,000 DEDUCT: NCIT (P830,000 x 30%; higher than MCIT) 249,000 Final Tax on Passive income (6,250 x 20%) 1,250 Capital gains tax on shares (35,000 x 5%) 1,750 Dividends paid during the year 120,000 BALANCE RE Jan. 1 RE Dec. 31, 2015 LESS: Amount that may be retained (Par of Outs. Sh.) IMPROPERLY ACCUMULATED EARNINGS x IAET RATE IMPROPERLY ACCUMULATED EARNINGS TAX

P830,000

206,250

(372,000) P664,250 200,000 P864,250 (400,000) P464,250 10% P46,425

(P4.15) P1.5M x 6% = P90,000


(P4.16) (Sale 3 = P14,000) + (Sale 4 = P2,500) = P16,500

TRUE OR FALSE 1. TRUE 2. FALSE 3. TRUE 4. TRUE 5. FALSE 6. TRUE 7. TRUE 8. TRUE 9. TRUE 10. FALSE

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

TRUE TRUE FALSE TRUE FALSE TRUE FALSE FALSE TRUE TRUE

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

FALSE TRUE FALSE FALSE TRUE TRUE TRUE TRUE TRUE FALSE

(10) it shall be “prolonged labor dispute” resulting from temporary closure of the business (15) treated as inter-corporate dividend, hence, nontaxable (17) should be from “within and without” (17) shall be ROHQ (21) shall be IAET (24) only if the taxpayer is a financial institution (30) passive incomes are not subject to branch remittance tax

MULTIPLE CHOICE 1. D 21. D 2. B 22. B 3. C 23. A 4. B 24. C 5. D 25. D 6. C 26. B 7. D 27. D 8. B 28. D 9. B 29. A 10. B 30. C 11. A 31. B 12. D 32. C 13. B 33. A 14. D 34. D 15. C 35. C 16. B 36. D 17. C 37. C 18. B 38. 19. A 39. B 20. D 40. B Supporting Computations (Multiple Choice): (4). Gross Income, Philippines Expenses, Philippines Gross Income, Malaysia Expenses, Malaysia Interest on bank deposit Taxable income Tax Rate

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

Domestic P975,000 (750,000) 770,000 (630,000) 365,000 30%

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

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.

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

RFC P975,000 (750,000)

NRFC P975,000

225,000 30%

25,000 P1,000,000 30%


Tax Due

P109,500

67,500

300,000

(5). Gross profit from sales Business expenses Dividend income from a resident corporation Dividend income from a nonresident corporation Capital gain on sale of land in China Interest income from notes receivable Taxable income Tax Due @ 30%

P3,000,000 (1,800,000) 50,000 40,000 200,000 20,000 P1,510,000 P453,000

(6). Sale of land-Phils. P2M x 6% Sale of shares of domestic corp. [(P100,000 x 5%)+(P20,000 x 10%)] Capital gains tax

P120,000 7,000 P127,000

(7). Interest income on peso bank deposit @ 20% Interest income on foreign currency bank deposit Interest income on treasury bills @ 20% Total final taxes on passive income

P6,000 1,875 2,000 P9,875

(8). To Louie @ 10% To Floyd @ 10% To Zeus @ 10% To JJ @ 20% To Francis @ 25% To Chen, a domestic corporation To a resident foreign corporation To a nonresident foreign corporation @ 15% Total withholding taxes

P10,000 10,000 10,000 20,000 25,000 Exempt Exempt 15,000 P90,000

(10). Final W. Tax = $3,000 x P45 x 10% = 13,500 (11). Interest income from loans OPEX (P12M x 10/15) Taxable income Income Tax Rate Income Tax Due

P10,000,000 (8,000,000) P2,000,000 30% P600,000

(12 and 13) Solution:

G Income Expense s TNI NCIT Tax Due


ABC Co. P3,000,000

DEF Co. P2,000,000

(3,000,000)

(2,000,000)

(1,500,000)

P2,000,000 30% P600,000

P1,000,000 30% P300,000

P500,000 30% P150,000

(14). 25 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 6 E d i t i o n ) by Tabag & Garcia

G Income Sh. in Inc. Expenses TNI NCIT Tax Due

Joint Venture P5,000,000 (3,000,000) P2,000,000 -

ABC Co. P3,000,000 1,400,000 (2,000,000) P2,400,000 30% P720,000

(17).

Income Tax Due = (P10M-P4M) x 30% = P1,800,000

(18).

Income Tax Due = P10M x 2.5% = P250,000

DEF Co. P2,000,000 600,000 (1,500,000) P1,100,000 30% P330,000

(20). Income Tax Payable = [5M + 3M] x 2.5% = P200,000 (21). Tax Expense (Income & CCT = ([5M + 3M] x 2.5% )) + CCT = P200,000 + 60,000 = P260,000 (22). Branch Remittance Tax = P2M x 15% = P300,000 (27). Gross income, related activities P5,000,000 Gross income, unrelated activities (except rental income) 5,000,000 Rental income from commercial spaces (gross of 5% WT) 2,000,000 Expenses, related activities Expenses, unrelated activities Taxable income Tax rate (unrelated income>related income) Tax due Less: Quarterly tax payments Withholding tax on rental income Tax payable

2,000,000 3,000,000

P500,000 100,000

P12,000,000 (5,000,000) P7,000,000 30% P2,100,000 (600,000) P1,500,000

(28). Income from tuition fees Miscellaneous school fees Dividend income from foreign corp. Rental income (gross of 5% WT) OPEX Taxable income Tax rate (related income>unrelated income) Tax due Less: Withholding tax on rental income Tax payable

P3,500,000 1,500,000 2,000,000 2,000,000

P9,000,000 (4,000,000) P,000,000 10% P500,000 (100,000) P400,000

(29). Tuition and other fees Rental income (gross of 5% WT) OPEX CAPEX Taxable income Tax rate (related income>unrelated income) Tax due Less: Withholding tax on rental income Tax payable

P5,000,000 50,000 (1,500,000) (2,000,000) P1,550,000 10% P155,000 (2,500) P152,500

Gross Receipts

P8,500,000

(30).


Rental income (gross of 5% WT) OPEX Taxable income Tax rate (not a non-profit hospital) Tax due Less: Withholding tax on rental income Tax payable

1,500,000 (8,200,000) P1,800,000 30% P540,000 (75,000) P465,000

Tuition fees Rental income (gross of 5% WT) OPEX Taxable income Tax rate (unrelated income is higher) Tax due Less: Withholding tax on rental income Tax payable

P4,800,000 5,200,000 (9,450,000) P550,000 30% P165,000 (260,000) (P95,000)

(30).

(#s 39 TO 46). ERRATUM: Change year of commencement of operations to 2003 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 NCIT MCIT DUE (Higher) EXCESS MCIT TAX DUE MCITCO ‘08 ‘09 ‘11 TAX PAYABLE

P25,000 100,000 100,000 75,000 P100,000 -

P130,000 150,000 150,000 20,000 P150,000

P200,000 190,000 200,000 P200,000

P0 300,000 300,000 300,000 P300,000

P100,000 50,000 100,000 P100,000

P150,000 60,000 150,000 P150,000

‘14 P8,000 40,000 40,000 32,000 P40,000

‘15 P1,000 50,000 50,000 49,000 P50,000

(75,000) (20,000) P100,000

P150,000

P105,000

P300,000

(100,000) P0

(150,000) P0

P40,000

P50,000

CHAPTER 5 – PARTNERSHIPS, ESTATES AND TRUSTS PROBLEM SOLVING

P5.1 1. 2.

Income tax due of the partnership = P0 (tax exempt) Income tax due of LJ = P397,000 LJ’s gross income from his trading business LJ’s expenses from his trading business Share from the net income of a GPP Royalty, books published in USA Salaries, gross of withholding tax Basic exemption Taxable income Tax Due (Tax Table)

LJ P1,000,000 (600,000) 400,000 150,000 450,000 (50,000) P1,350,000 P397,000

P5.2 Case A (Ordinary Partnership): 1. Tax due of the partnership = P240,000 2. Tax due of Rivera = P0 3. Tax due of Reyes = P50,000 27 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 6 E d i t i o n ) by Tabag & Garcia

Gross Income Allowed Deductions Basic exemption Taxable income Tax Rate Tax Due

RR Partnership P2,000,000 (1,200,000) P800,000 30% P240,000

Rivera P800,000 (900,000) (50,000) (P150,000) Tax Table P0

Reyes P1,000,000 (700,000) (50,000) P250,000 Tax Table P50,000

Note: The partners’ share in the net income of the partnership is treated as dividend income subject to a final tax rate of 10%.

Case B (General Professional Partnership): 3. Tax due of the partnership 4. Tax due of Rivera 5. Tax due of Reyes Gross Income Allowed Deductions Basic exemption Share in partnership income Taxable income Tax Rate Tax Due

RR Partnership P2,000,000 (1,200,000) P800,000 EXEMPT P0

Rivera P800,000 (900,000) (50,000) 320,000 P170,000 Tax Table P14,500

Reyes P1,000,000 (700,000) (50,000) 480,000 P730,000 Tax Table P198,600

P5.3 1. 2. 3. 4. 5. 6. 7. 8. 9.

Income tax payable/(refundable) of the partnership = P352,500 Income tax payable/(refundable) of Villamin = P40,150 Income tax payable/(refundable) of Francis = P0 Final tax on passive income of the partnership = P7,750 Final tax on passive income of Villamin = P40,908 Final tax on passive income of Francis = P97,317 Capital gains tax of the partnership = P150,000 Capital gains tax of Villamin = P0 Capital gains tax of Francis = P7,000

Partnership: Gross profit from sale of services Direct cost of services Business Expenses Rental Income in business assets (gross) (P142,500/95%) Taxable income X tax rate Tax due Quarterly tax payments Withholding tax on rent Income tax payable Interest Income on peso bank deposits @ 20% Interest income-FCDS @ 7.5% Final Tax on passive income of the partnership Capital gains tax on real property (2.5M x 6%) DISTRIBUTABLE INCOME: Taxable income Total income subject to final tax Capital gain Less: Basic tax due

P3,500,000 (1,500,000) (700,000) 150,000 P1,450,000 30% P435,000 (75,000) (7,500) P352,500 P4,000 3,750 P7,750 150,000 P1,450,000 70,000 300,000 (435,000)


Final tax due Capital gains tax DISTRIBUTABLE INCOME

(7,750) (150,000) P1,227,250

Villamin: Gross income from sole-proprietorship business Allowable business expenses Dividend Income-resident foreign corp. Basic exemption Taxable income Tax due (tax table) Quarterly tax payments Income tax payable Final Tax – (P1,227,250/3 X 10%) Capital gains tax - Villamin

925,000 (670,000) 120,500 (50,000) P325,500 P72,650 (32,500) P40,150 P40,908 P0

Francis: Income Tax payable (No income subject to basic tax)

P0

Dividend Income @ 10% Royalty Income @ 20% Share in the distributive share of the partnership income (P1,227,250/3 X 2 x 10%) Total final tax on passive income Capital gains tax on shares of stock [(P100,000 x 5%) + (20,000 x 10%)]

P8,500 7,000 81,817 P97,317 7,000

P5.4 1. 2. 3. 4.

Income tax payable of the business partnership = P114,000 Income tax payable of the GPP = P0 Income tax payable of Louie = P26,875 Income tax payable of Floyd = P44,563

Gross income Deductible expenses Net or Taxable income Tax rate Income tax due/payable

Louie and Floyd Gross Income Deductible expenses Dividend from foreign corporation Prize, supermarket raffle Share in income of GPP Basic exemption

Business Partnership P800,000 (420,000) P380,000 30% P114,000

Louie P 325,000 (117,000) 12,000 37,500 (50,000)

GPP P500,000 (375,000) P125,000 EXEMPT

Floyd P 380,000 (205,000) 8,250 7,500 87,500 (50,000)


Additional exemption Taxable income Income tax payable (tax table)

(50,000) P157,500 P26,875

P228,250 P44,563

NOTE:  The share in the net income of the business partnership, the dividend income from a domestic corporation and royalty from books are subject to a final tax rate of 10%.  The prize in a supermarket raffle by Louie (more than P10,000) is subject to 20% final tax

P5.5 1. 2. 3.

Income tax payable of the estate = P43,000 Income tax payable of Louie = P2,250 Income tax payable of Floyd = P3,688 Gross income (gross of 5% tax) Deductible expenses Dividend from foreign corporation Prize, supermarket raffle Basic exemption Additional exemption Taxable income Tax Due (Tax Table) Less CWTax (5%) Income Tax Payable

Louie P 325,000 (117,000) 12,000

Estate P800,000 (420,000)

(50,000) (50,000) P120,000

Floyd P 380,000 (205,000) 8,250 7,500 (50,000) P140,750

P18,500 (16,250) P2,250

P22,688 (19,000) P3,688

P83,000 (40,000) P43,000

(20,000) P360,000

P5.6 1. 2. 3.

Income tax payable of the estate = P49,000 Income tax payable of Louie = P42,500 Income tax payable of Floyd = P35,188

Estate Rental income of the estate (gross 5% tax) Deductible operating expenses (estate) Income distributed to Louie Income distributed to Floyd Basic exemption Taxable income Tax due (tax table) Less: CWtx Income Tax Payable Gross Income Deductible expenses Dividend from foreign corporation Prize, supermarket raffle Amount received from the Income of the estate Basic exemption Taxable income

P1,000,000 (500,000 (50,000) (50,000) (20,000) P380,000 P89,000 (50,000) P49,000 Louie P 325,000 (117,000) 12,000 50,000 (50,000) P220,000

Floyd P 380,000 (205,000) 8,250 7,500 50,000 (50,000) P190,750


Tax Due

P42,500

P35,188

P5.7 1. 2.

Income tax payable of the trust = P310,600 Income tax payable of Pedro = P131,640 Gross income of the trust Deductible business expenses of the trust Income distributed to EDT during the year Dividend income from resident foreign corporation Basic exemption Taxable income Income Tax payable (tax table) Compensation income Rental income (gross) Rental expenses Dividend from foreign corporation Basic exemption Taxable income Tax Due Tax payments (Quarter 1-3) CWTx on rent Income Tax Payable-Pedro

P3,000,000 (1,800,000) (200,000) 100,000 (20,000) P1,080,000 P310,600 P800,000 500,000 (80,000) 8,250 (20,000) P1,208,250 P351,640 (120,000) (100,000) P131,640

P5.8 1. 2. 3. 4. 5. 6. 7.

Taxable income of Trust 1 = P780,000 Taxable income of Trust 2 = P1,280,000 Consolidated taxable income of the Trust 1 and 2 = P2,080,000 Income tax payable of Trust 1 = P14,860 Income tax payable of Trust 2 = P26,540 Taxable income of Juan = P1,950,000 Taxable income of Pedro = P1,350,000 Trust 1 Gross income of the trust P3,000,000 Deductible business expenses of the trust (1,800,000) Income distributed to Rico during the year (500,000) Dividend income-resident corporation 100,000 Basic exemption (20,000) Taxable income P780,000 TAX DUE (PAID) P214,600 Total consolidated income TAX DUE (Allocated Income Tax Due) Trust #1=214,600/589,200 x P630,600 Trust #1=374,600/589,200 x P630,600 Less: Tax Paid INCOME TAX PAYABLE

Compensation income Gross business income Business expenses Dividend from foreign corporation Amount received from the income of the trust Basic exemption

Trust 2 P3,000,000 (1,800,000) 100,000 (20,000) P1,280,000 P374,600

P229,460

P401,140

P214,600 P14,860

P374,600 P26,540

Juan P1,000,000 1,000,000 (550,000) 50,000 500,000 (50,000)

Consolidated P6,000,000 (3,600,000) (500,000) 200,000 (20,000)

P2,080,000 P630,600

Pedro 1,200,000 600,000 (400,000) (50,000)


Taxable income MULTIPLE CHOICE 1. A 2. C 3. B 4. B 5. B 6. A 7. A 8. D 9. B 10. C 11. B 12. A 13. B 14. C 15. B 16. A 17. D 18. B 19. C 20. B

P1,950,000

21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

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

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

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

P1,350,000

61. 62. 63. 64. 65.

C B C D D

Supporting Computations (Multiple Choice): 15. (P2M-1M) x 30% = P300,000 16. Subject to 10% final tax 17.

18.

Partnership net profit (net of 30% tax) (P800,000 x 70%) Other Income: Interest income, net Dividend income (tax exempt) Total distributive income

P560,000

Share of T (50%) Applicable tax (10% final tax)

P294,000 P29,400

8,000 20,000 P588,000

P600,000 – P350,000 x 50% = P125,000

19. Share in GPP’s income Own income (P150,000-70,000) Basic exemption Taxable income of Ramos

P125,000 80,000 (50,000) P155,000

20. Gross income Expenses x Net income after corporate tax Add: Dividend received from a domestic corp. (tax exempt)

P750,000 (200,000) 70% 385,000 20,000


32. 40.

Bank interest income, Metrobank (net of final tax) Distributable net income

80,000 P485,000

Tita: P485,000 x 55% x 10% Ghore: P485,000 x 45% x 10%

P26,675 P21,285

Statement IV – subject to creditable withholding tax, not final tax Income of the estate Expenses Distribution of income to Francis Basic exemption Taxable income of Ramos

P600,000 (150,000) (120,000) (50,000) P280,000

Francis’ own income Income of the estate received by Francis Basic exemption Taxable income of Ramos

P500,000 120,000 (50,000) P570,000

41.

60. Compensation income Business income Basic exemption Taxable income of Ramos

P1,500,000 1,000,000 (50,000) P2,450,00 0

61. Trust’s income Income distributed to Atty. Lo Yer (Gross) (P8.5M / 85%) Business expenses Basic exemption Taxable income of Ramos

P40,000,000 (10,000,000) (10,000,000) (50,000) P19,980,000

62. Compensation income (Gross amount) Income of the trust received by Niah (Gross) Basic exemption Taxable income of Ramos

P3,000,000 10,000,000 (50,000) P12,950,000

63 – 65. # 64 TRUST 1 Net income Personal exemption Taxable income Tax due: 1st P500,000 Excess @ 32% Tax due/paid Versus Share Tax Payable

P125,000 1,113,600 1,238,600 1,262,171* P23,571***

# 63 Consolidated: Net income

P10,000,000

P4,000,000 (20,000) P3,980,000

# 65 TRUST 2 Net income Personal exemption Taxable income Tax due: 1st P500,000 Excess @ 32% Tax due/paid Versus Share Tax Payable

P6,000,000 (20,000) P5,980,000 P125,000 1,753,600 1,878,600 1,896,429** P17,829****


Personal exemption Taxable income Tax Due (Consolidated): 1st P500,000 Excess @ 32% Total Less Paid: Trust 1 Trust 2 Income Tax Payable

(20,000) P9,980,000 P125,000 3,033,600 P3,158,600 (1,238,600) (1,878,600) 41,400

Share in the Tax due: Trust 1 (3,980/9,960***) x P1,238,600 Trust 2 (5,980/9,960)

41,400 x 3,980/9,960***** =23,571***

1,262,171*

1,896,429**

41,400 x 5,980/9,960 =17,829****

3,980+5,980 = 9,960*****

CHAPTER 6 – CONCEPT OF INCOME MULTIPLE CHOICE 1. B 2. D 3. B 4. A 5. D 6. D 7. A 8. D 9. B 10. D 11. C 12. A

13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

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

25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36.

D B B A D A D D B B B B

37. 38. 39. 40. 41. 42. 43. 44. 45.

Supporting Computations: 32. P300,000 4/12 = P100,000 23. Gain on sale of personal property purchased in the Philippines and sold in Hongkong Compensation received for personal services in the Philippines Rent income from real property in Malaysia Gain from sale in the Philippines of shares of a foreign corporation Deductions identified with: Philippine income Foreign income Deductions unidentified with any particular income (P30,000 x 300,000/1,000,000) Philippine Net Income

C D D C C C D A

P200,000 100,000 (80,000) (9,000) P211,000

34. Gross Receipts Rental expenses Salaries expense Basic exemption

P600,000 (120,000) (100,000) (50,000)


Taxable income 35.

P330,000

(Resident Alien) Gross Income Business expenses Dividend income from foreign corp. (50,000 x 60%) Basic exemption Taxable income

P2,000,000 (1,200,000) 30,000 (50,000) P780,000

36.

Final Tax Withheld on dividend income from domestic corp. = (P90,000 + 72,000)/ 90% x 10% = P18,000

37.

(Domestic Corp = Taxable on income within and without Gross Income Allowable deductions Dividend income from domestic corp. Dividend income foreign corp. (95% from R.P.) Dividend income foreign corp. (60% from R.P.) Dividend income foreign corp. (25% from R.P.) Taxable income

38.

(Resident Foreign Corp = Taxable on income from Philippine Gross Income Allowable deductions Dividend income from domestic corp. Dividend income foreign corp. (80% from R.P.) (P1M X 80%=considered from Phil. sources) Dividend income foreign corp. (60% from R.P.) (P800,000 x 60%) Dividend income foreign corp. (25% from R.P.) (entire amount is considered income from sources outside of the Phils.) Taxable income

P10,000,000 (4,000,000) exempt 1,000,000 800,000 400,000 P8,200,000 sources only P10,000,000 (4,000,000) exempt 800,000 480,000 -

P7,280,000

39.

DI-Microsoft DI-Intel (P400,000 x 60% x 30%) DI - IBM Interest income – BDO @ 20% FCDS deposit @ 7.5% Royalty income @ 20% Total final taxes on passive income

P72,000 120,000 60,000 20,000 P272,000

DI-Microsoft & Intel @ 30% basic tax DI - IBM Interest income – BDO @ 20% FCDS deposit @ 7.5% Royalty income @ 20% Total final taxes on passive income

P270,000 120,000 60,000 20,000 P470,000

40.


CHAPTER 7 – INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME PROBLEM SOLVING:

P7.1 INCOME SUBJECT TO BASIC TAX: Basic salary (P900,000+P300,000) Director’s fee Business income: Retail business Apartment rental (P190,000/95%) Dividend income from a resident corporation 13th, Xmas and MidYear Bonus (net of P82,000 exclusions) Gross Income subject to basic tax (Q#1) LESS: Business expenses Basic exemption Net Taxable income (Q#4) Income tax due (Q#5)

P1,200,000 200,000 250,000 200,000 50,000 98,000 P1,998,000 (125,000) (50,000) P1,823,000 P548,360

INCOME SUBJECT TO FINAL TAX: Cash dividend from a domestic corporation Interest from savings deposit Royalties from book publications Prizes from contest won Winnings town lottery Total Income subject to final tax (Q2)

P50,000 20,000 50,000 50,000 50,000 P220,000

INCOME EXEMPT FROM TAX: Stock dividend from a domestic corporation Damages received from injuries and sickness Proceeds-life insurance coverage of his father Total income exempt from tax (Q3)

P25,000 85,000 300,000 P410,000

P7.2 1) 2) 3)

P10,000 P15,000 P715,000 computed as follows: Gross profit from sales Taxable recovery-receivables Taxable tax refunds

P1,000,000 10,000 15,000


Rent income excluding security deposit Operating expenses Write-off during the year Taxable income

250,000 (500,000) (60,000) P715,000

P7.3 1) 2) 3)

4)

P240,000 + 24,000 = P264,000 P240,000 + 24,000 = P264,000 P1,000,000 Income from improvement (Remaining BV after lease term) (P3M x 5/15) Remaining Lease Term after completion = 10 years Remaining life after lease term = 5 years

P1,000,000

P100,000 Income from improvement (Remaining BV after lease term) (P3M x 5/15) Remaining Term after completion = 10 years Remaining life after lease term = 5 years

P1,000,000 /10 years =P100,000

P7.4 Ramon Magsaysay award Athlete of the year award Prize for winning an Olympic Medal Winnings – Philippine lotto Total Winnings and Awards exempt from income tax

P50,000 100,000 500,000 100,000 P750,000

If the Question was total amount exempt from income tax, the answer would have been: Total Winnings and Awards exempt from income tax P750,000 Gift from Mayor Alfredo Lim 250,000 Car from Honda as a gift 1,000,000 Total Amount exempt from income tax P2,000,000

P7.5 P7.6 P7.7 P7.8

P0; The P800,000 should be exempt from income tax P1,000,000; The interest income from expanded foreign currency deposit Taxable Proceeds = P1,000,000 – P600,000 = P400,000 Income within = None. The ratio of income without over total income for the past 3 years < 50%.

P7.9 Salary for the first quarter Honorarium as speaker in one of ABC’s team building activities Retirement pay Commissions Fee as a member of ABC’s board of directors 10 days monetized vacation leave Interest income from time deposit Productivity incentive pay and 13th month pay (Productivity pay=P10,000 de minimis under RR 1-2015) (Total of excess of productivity of P10,000 + 60,000 bonus is not more than P82,000, hence tax exempt)

P180,000 10,000 Exempt 30,000 50,000 Exempt F. Tax Exempt


Total compensation income subject to tax

P270,000

P7.10 INCOME

A.

B.

C.

D.

E.

F.

G.

H.

Rental income (gross)  From an apartment unit in USA,  From a parcel of land in Makati Royalties from book  Published in the Philippines  Published in USA Interest income earned on notes receivable  From a debtor who resides in USA  From a debtor who resides in Manila Net profit from sales, merchandising business  From Philippine outlet  From USA outlet Dividend income from two domestic corporations. Gross income from the Phils. for the past 3 years  60% of its world income  85% of its world income Dividend income from two resident foreign corporations. Gross income from the Philippines for the past 3 years was equivalent to:  40% of its world income  60% of its world income Prizes received from Supermarket raffle: From the Philippines:  ABC Supermarket  DEF Superstore From USA:  UVW Supermarket  XYZ Supersavers Prizes and winnings from lotto  Philippine lotto  USA lotto BASIC EXEMPTION TOTAL

Q#1 Income within

Q#2 Income without

P180,000

P240,000

30,000 20,000 15,000

Q#3 Taxable income (Resident Citizen)

Q#4 Taxable income (Nonresident Citizen)

P240,000 180,000

P180,000

20,000

-

15,000 25,000

25,000

200,000

300,000 200,000

200,000

60,000 80,000

-

-

-

12,000

40,000 8,000

40,000 20,000

12,000

8,000 12,000

-

8,000 -

8,000 -

-

6,000 14,000

6,000 14,000

-

200,000

100,000

-

-

P907,00 0

P643,00 0

(50,000) P1,018,000

(50,000) P375,000

25,000 300,000


P7.11 DIVIDEND 1. 10% F.Tax 2. 3. 4. 5. 6. 7.

26. 27. 28. 29. 30.

10% F.Tax Basic Tax Exempt Basic Tax Exempt N.taxable

INJURIES/DAMAGES 8. Exempt 9. 10. 11. 12. 13. 14.

Exempt Basic Tax Exempt Basic Tax Exempt Basic

PRIZES/AWARDS 15. Basic 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

Exempt Exempt Exempt Exempt Basic Tax Basic Tax Exempt Basic Tax 20% final tax (individual taxpayer) Basic Tax

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

FALSE FALSE TRUE FALSE FALSE FALSE FALSE

VARIOUS PROCEEDS/INCOME Final Tax Exempt Exempt Exempt Exempt

TRUE OR FALSE 1. TRUE 2. FALSE 3. TRUE 4. FALSE 5. FALSE 6. TRUE 7. FALSE MULTIPLE CHOICE 1. C 2. B 3. D 4. D 5. B 6. B 7. B 8. B 9. C 10. A 11. C 12. C 13. B 14. C 15. B

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

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

TRUE TRUE TRUE TRUE TRUE TRUE FALSE

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

Supporting Computations (Multiple Choice): No. 13. Write-off 2013 Income (Loss) 2013 before write off P50,000 P350,000 10,000 (50,000)

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45.

2014 Recovery P20,000 10,000

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

22. 23. 24. 25.

46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

FALSE FALSE TRUE TRUE

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

2014 TAXABLE RECOVERY P20,000 -


30,000

20,000

30,000

20,000 P40,000

No. 14. 2013 Income(loss) before write-off Write-off 2014 Recovery TAXABLE RECOVERY

Case A P120,000 40,000 P40,000 P40,000

Case B P60,000 40,000 P10,000 P10,000

Case C (P40,000) 50,000 P50,000 P0

No. 17. Interest from Philippine Currency Certificate = subject to 20% final tax; non-returnable income Refund of income tax = not an income No. 25. Rent for 2015 and 2016 (prepaid rent is taxable yr. of receipt regardless of accounting method) Annual real property tax Total annual income

P3,600,000 30,000 P3,630,000

No. 26. Rent for 2016 (already reported in 2015) Annual real property tax Income from improvement [(P36M x **3/15) / 12] Total annual income

P0 30,000 600,000 P630,000

Lease Term: 12.5 years Remaining Lease term after completion of the improvement: 12 years Useful life of the improvement: 15 years Remaining useful life of the improvement after termination of the lease: 3 years** No. 27. Royalty – as an author @ 10% Other royalties x Total final tax on royalty income

P10,000 P800,000 20%

160,000 P170,000

No. 38.

Letter “B” is subject to 20% final withholding tax while letter “C” is subject to CGT.

No. 39.

Exclude lotto winnings

No. 46. Proceeds from the taxpayers life insurance Less premiums paid (P15,000 x 25) Rent income from inherited properties Taxable income

P2,000,000 (375,000)

P1,625,000 200,000 P1,825,000


Answer Key Chapters 1 7(1)

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