SOLUTIONS MANUAL INCOME TAXATION 2018 Edition By: …

1|P a g e S o l u t i o n s M a n u a l - I n c o m e T a x a t i o n ( 2 0 1 8 E d i t i o n ) b y T a b a g & G a r c i a

SOLUTIONS MANUAL INCOME TAXATION

2018 Edition By: TABAG & GARCIA

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. A 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

**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

ERRATUM: (1) PAGE 77, TABLE 2-2;

Citizens and Residents

NRA-ETB NRA-ETB

ROYALTY ON BOOKS AS WELL AS OTHER LITERARY WORKS….. 10% 10% 25% (2)

FROM

PAGE 75 1) 2) Assume the SEP opted to avail the 8% tax under the

TRAIN Law, determine the tax due. v Answer: P364,000

Solution:

On his compensation income: Tax on First P800,000 P130,000 In excess of P400,000 (P100,000 x 30%)

30,000 P160,000

On his business income = **(P2.8M – P250,000) x 8%

204,000

TOTAL Tax Due P364,000

CHANGE TO:

PAGE 75 1) 2) Assume the SEP opted to avail the 8% tax under the

TRAIN Law, determine the tax due. v Answer: P384,000

Solution:

On his compensation income:

Tax on First P800,000 P130,000 In excess of P400,000 (P100,000 x 30%)

30,000 P160,000

On his business income = **(P2.8M – P250,000) x 8%

224,000

TOTAL Tax Due P384,000

PROBLEMS 2-1

1. RC 4. NRA-NETB 2. RC 5. NRC 3. RC 6. RA

2-2

TAX TYPE Tax RATE TAX TYPE Tax RATE 1 FWTx 20% 19 Exempt -

2 FWTx 7.5%/ 15%TL 20 FWT 20% 3 BTx Tax Table 21 FWTx 25% 4 FWTx 20% 22 BTx Tax Table 5 Exempt - 23 Exempt - 6 BTx Tax Table 24 FWTx 25% 7 BTx Tax Table 25 FWTx 20% 8 BTx Tax Table 26 FWTx 20% 9 BTx Tax Table 27 FWTx 10%

10 BTx Tax Table 28 BTx Tax Table 11 FWTx 20% 29 BTX Tax Table

12 FWTx 10% 30 FWTx 20% 13 FWTx 20%* 31 FWTx 25% 14 BTx Tax Table* 32 CGT 5%&10%/15% 15 BTx Tax Table 33 Exempt Sub.to OPT*** 16 FWTx 20% 34 BTx Tax Table 17 FWTx 20% 35 BTx Tax Table**** 18 BTx 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. **PCSO/Lotto winnings under TRAIN Law:


Amount RC, NRC, RA, NRAET NRANET

≤ P10,000 exempt exempt 25% > P10,000 20% FWT 20% FWT 25% FWT

***Stock Transaction Tax on sale of shares of DC listed in the Local Stock Exchange: Prior to TRAIN Law = ½ of 1% of GSP TRAIN Law = 6/10 of 1% of GSP

****CGT on Real Properties Must be pertaining to a real property classified as capital asset located in the Philippines. However, if it is sold to the Government, the tax may either be CGT or Basic Tax at the option of the individual taxpayer.

2-3 1.

a. Exempt b. Exempt c. Income Tax Due = P130,000 d. P746,000 computed as follows:

Tax Due: 1st P2,000,000 P490,000 Excess over P2M = (P800,000 x 32%) 256,000 Total P746,000

2. Income Tax Payable = P95,000 computed as follows:

Gross sales P2,800,000 Cost of sales (1,200,000) Operating expenses (650,000) Taxable net income P950,000 Tax Due: 1st P800,000 P130,000 Excess over P800,000M = (P150,000 x 30%) 45,000 Tax Due P175,000 Less: CWT (80,000) Income Tax Payable P95,000


Gross sales P2,800,000 Less (250,000) Balance subject to 8% tax P2,550,000 x 8% Tax Due P204,000 Less: CWT (80,000) Income Tax Payable P124,000


Gross sales P2,800,000 Rental income (P380,000/95%) 400,000 Cost of sales (1,200,000) Operating expenses (650,000) Taxable net income P1,350,000

Tax Due: 1st P800,000 P130,000 Excess over P800,000M = (P550,000 x 30%) 165,000 Tax Due P295,000 Less: CWT (80,000) Income Tax Payable P215,000

5. The 8% optional tax is not applicable because the total of the gross sales and other operating income exceeded the revised vat threshold of P3,000,000.



Gross receipts P4,000,000 Cost of direct services (1,800,000) Other operating expenses (825,000) Taxable net income P1,375,000 Tax Due: 1st P800,000 P130,000 Excess over P800,000M = (P575,000 x 30%) 172,500 Tax Due P302,500 Less: CWT (80,000) Income Tax Payable P222,500

7. The 8% optional tax is not applicable because the gross receipts exceeded the revised vat threshold of P3,000,000. 8. Income Tax Payable = P212,000 computed as follows:

Compensation income P1,400,000 Gross sales 2,800,000 Cost of sales (1,200,000) Operating expenses (650,000) Taxable net income P2,350,000 Tax Due: 1st P2,000,000 P490,000 Excess over P2M = (P350,000 x 32%) 112,000 Tax Due P602,000 Less: CWT On compensation income (310,000) On business income (80,000) Income Tax Payable P212,000

9. The 8% optional tax is applicable because gross sales did not exceed the revised vat threshold of P3,000,000. The income tax payable shall be computed

as follows: Gross sales 2,800,000 x 8% 8% Tax on sales P224,000 ADD: Tax due on compensation income 1st P800,000 P130,000 Excess over P800,000 = (P600,000 x 30%) 180,000 310,000 Tax Due P,000 P534,000 Less: CWT On compensation income (310,000) On business income (80,000) Income Tax Payable P144,000

& For mixed income earners, P250,000 is not deducted for purposes of computing the 8% tax & The 8% tax is not applicable to compensation income.

2-4

1. Taxpayer is a resident citizen 1.1 Taxable income = P1,050,000 1.2 Income tax payable = P80,000 1.3 Final tax on passive income = P57,500 1.4 Total income tax expense = P262,500


Gross business income, Philippines P1,000,000

Gross business income, USA 500,000 Business expenses, Philippines (700,000) Business expenses, USA (430,000) Compensation income, Philippines 600,000 Dividend income-foreign corp. 40,000 Interest income-bank deposit abroad 30,000 Raffle draw winnings 10,000 Basic personal exemption - Taxable income P1,050,000 Tax Due [(P130,000)+(250,000 x 30%)] P205,000 Creditable withholding tax on bus. income (125,000) Income Tax Payable P80,000 Dividend income – DC (50k x 10%) P5,000 Interest income bank deposit-Phls.@20% 4,000 Interest income FCDS deposit @ 15% 6,000 Royalty income from composition @10% 2,500 PCSO winnings (P200,000 x 20%) 40,000 Final Tax on Passive Income P57,500

Basic income tax due P205,000 The question is tax expense; ignore Final taxes on passive income 57,500 the income tax payable of P80,000. Total income tax expense P262,500

2. Taxpayer is a nonresident citizen

2.1 Taxable income = P910,000 2.2 Income tax payable = P38,000 2.3 Final tax on passive income = P51,500 2.4 Total income tax expense = P214,500

Gross business income, Philippines P1,000,000

Business expenses, Philippines (700,000) ***Assume situs is without the Phls. Compensation income, Philippines 600,000 Dividend income-foreign corp. *** Raffle draw winnings 10,000 Basic personal exemption - Taxable income P910,000 Tax Due [(P130,000)+(110k x 30%)] P163,000 Creditable withholding tax on bus. Income (125,000) Assume the tax withheld pertain to Income Tax Payable P38,000 Income derived in the Phls. Dividend income – DC (50k x 10%) P5,000 Interest income bank deposit-Phls.@20% 4,000 Interest income FCDS deposit @ 15% exempt Royalty income from composition @10% 2,500 PCSO winnings (P200,000 x 20%) 40,000 Final Tax on Passive Income P51,500

Basic income tax due P163,000 Final taxes on passive income 51,500 Total income tax expense P214,500

3. Taxpayer is a resident alien

3.1 Taxable income = P910,000 (same answer with #2.1; nonresident citizen) 3.2 Income tax payable = P38,000 (same answer with #2.2; nonresident citizen) 3.3 Final tax on passive income = P57,500 (same answer with #1.3; resident citizen) 3.4 Total income tax expense = P220,500 computed as follows:



4. Taxpayer is a nonresident alien engaged in trade or business 4.1 Taxable income = P910,000 (same answer with #2.1; nonresident citizen) 4.2 Income tax payable = P38,000 (same answer with #2.2; nonresident citizen) 4.3 Final tax on passive income = P16,500 4.3 Total income tax expense = P179,500

Dividend income – DC (50k x 20%) P10,000 Use 20% rate for DI from DC instead of 10% Interest income bank deposit-Phls.@20% 4,000 Interest income FCDS deposit @ 15% exempt Royalty income from composition @10% 2,500 PCSO winnings Exempt** Final Tax on Passive Income P16,500

& **Unfortunately, unlike RCs, NRCs and RAs, the PCSO exemption of NRAET under TRAIN Law was retained.


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

Compensation income, Philippines P600,000 Dividend income - DC 50,000 Dividend income from foreign corp. - Assume situs is “without or abroad” Interest income bank deposit, Phls. 20,000 Interest income on FCDS deposit Exempt Royalty income from composition 25,000 Raffle draw winnings 10,000 PCSO winnings 200,000 Total GROSS Income P905,000 x 25% Income Tax Due/expense P226,250

2-5

1. Taxpayer is a resident citizen a. Taxable net income = P1,076,100 b. Income tax payable = P212,830 c. Final tax on passive income = P68,030 d. Capital gains tax = P120,600

Solution:

From Phils. From Abroad Total

Income from employment P180,000 P280,000 P460,000 Business income 850,000 960,000 1,810,000 Deductible business expenses (610,000) (730,000) (1,340,000) Interest income on personal loans** 6,000 3,000 9,000 Dividend income from foreign corp. 6,800 2,000 8,800 Prizes from singing contest 5,600 - 5,600 Interest income on bank deposits 4,200 4,200 Interest income on money market placements 1,600 1,600 Royalty income 50,000 50,000 Winnings/ prizes from lotteries, raffles 16,900 16,900 Lotto winnings --- 50,000 50,000 Basic Personal exemption - Additional exemption - Taxable income P1,076,100 TAX DUE:

First P800,000 P130,000 Excess = P276,100 @ 30% 82,830

**All incomes regardless of source are taxable. However, personal expenses are not allowed as deduction from the gross income

P212,830


Final Tax on Passive income:

Interest income on bank deposits 10,800 Interest income on money market placements 7,500 Royalty income 90,000 Lotto winnings 150,000 Winnings/ prizes from lotteries, raffle draws 45,000

Total P303,300 @ 20% P60,660

Dividend income from domestic corp. 5,700 - Royalty income from sale of books 68,000 -

Total P73,700 @ 10% 7,370

TOTAL FINAL TAX ON PASSIVE INCOME P68,030

Capital Gains Tax: Sale of lot (P1,060,000 x 6%) P63,600 Sale of house and lot (P950,000 x 6%) 57,000 Total P120,600

2. Taxpayer is a non-resident citizen

a. Taxable income = P438,400 b. Income tax payable = P39,600 c. Final tax on passive income = P68,030 d. Capital gains tax = P120,600

Solution:

From Phils. Income from employment P180,000 Business income 850,000 Deductible business expenses (610,000) Interest income on personal loans 6,000 Dividend income from foreign corp. 6,800 Prizes from singing contest 5,600 Basic Personal exemption - Additional exemption - Taxable income P438,400 TAX DUE:

First P400,000 P30,000 Excess = P38,400 x 25% 9,600

P39,600 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 nonresident alien engaged in trade

a. Taxable income = P438,400 (same with a non-resident citizen taxpayer) b. Income tax payable = P39,600 (same with a non-resident citizen taxpayer) c. Final tax on passive income = P38,600; The exemption on PCSO/Lotto winnings was retained on NRAETB d. 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 10,800 Interest income on money market placements 7,500 Royalty income 90,000 Dividend income from domestic corp 5,700 rate is 20% Winnings/ prizes from lotteries, raffle draws 45,000

Total P159,000 @ 20% P31,800

Dividend income from domestic corp.@ 20% - - Royalty income from sale of books 68,000 -

@ 10% 6,800 TOTAL FINAL TAX ON PASSIVE INCOME P38,600

2-6

a. Taxable income of the husband = P1,165,000 b. Taxable income of the wife = P890,000 c. Consolidated tax due of the husband and the wife = P396,500

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 - LESS:

Expenses-practice of profession [ P320,000/2)] (160,000) (160,000) Expenses – trading business (100,000) - Basic Personal exemption - - Additional exemption (75,000) - TAXABLE INCOME P1,165,000 P890,000 Tax due:

First P800,000 P130,000 P130,000 In excess of P500,000 @ 30% 109,500 27,000

Total P239,500 P157,000 Consolidated Tax Due P396,500

Note: Personal expenses are not deductible. The Personal exemptions and Premium payments for health insurance are no longer deductible beginning Jan. 1, 2018 under TRAIN Law.

2-7

a. Total capital gains taxes Sale of shares of domestic corp. directly to a buyer (P150,000 x 15%*) P22,500 Capital gain on sale of land in the Philippines classified as capital asset (P5M x 6%) 300,000 Total capital gains tax P322,500

& *CGT on shares of DC under TRAIN Law & Sale of shares in the local stock exchange is subject to transaction tax of 6/10 of 1% of GSP under TRAIN Law

b.

Dividend income from domestic corp. P40,000 x 10% P4,000 Interest income on Philippine bank deposit (3,200 + 2,400 + 8,000)/80% x 20% 3,400 Interest income on Phl. bank deposit under FCDU (4,000 + 4,000 + 2,000) x 15% 1,500 Interest income on government bonds = P10,000 x 20% 2,000 Royalty – literary = P10,000 x 10% 1,000 Royalty other than literary = P12,000 x 20% 2,400 Total Final tax on passive income of Daniel and Kat P14,300


c.

Business income P600,000 Rental income net of tax (P200,000/95%)/2 100,000 Dividend income from nonresident corp. (P10,000/2) 5,000 Interest income on notes receivable [P6,000 + (P2,000/2)] 7,000 Interest income on bank deposit abroad [P5,000 + (P5,000/2)] 7,500 Capital gain on sale of land abroad (P500,000/2) 250,000 Gain on sale of shares – New York Stock Exchange P30,000/2 15,000 Expenses [P350,000 +(75,000/2)] (387,500) Personal exemption - Taxable net income of Daniel P597,000

d.

Gross income from practice of profession (P360,000/90%) P400,000 Rental income net of tax (P190,000/95%)/2 100,000 Dividend income from resident corp. 20,000 Dividend income from nonresident corp. (P10,000/2) 5,000 Interest income on notes receivable [P4,000 + (P2,000/2)] 5,000 Interest income on bank deposit abroad [P5,000 + (P5,000/2)] 7,500 Capital gain on sale of land abroad (P500,000/2) 250,000 Gain on sale of shares – New York Stock Exchange P30,000/2 15,000 Expenses [P200,000 +(75,000/2)] (237,500) Personal exemption - Taxable net income of Kat P565,000

2-8

1. Income tax payable, first quarter = P- 2. Income tax payable, second quarter = P17,600 3. Income tax payable, third quarter = P38,427.5 4. Income tax payable, fourth quarter = P67,297.5 5. Final tax on passive income = P15,800 6. Capital gains tax = P600,000 x 6% = P36,000

1st Q 2nd Q 3rd Q Q4/Year Gross Profit from Sales P300,000 P600,000 P910,000 P1,200,000 Business e-xpenses (120,000) (262,000) (405,890) (426,700) Personal exemption - Taxable income P180,000 P338,000 P304,110 P773,300 Tax Due (Tax Table) - P17,600 P56,027 P123,325 Less: Tax Paid

Q1 - - - - Q2 - (17,600) (17,600) Q3 - (38,427.5)

Income Tax Payable P- P17,600 P38,427.5 P67,297.5 Note: The amounts shown above are cumulative.

(Amounts are cumulative) Amount % Tax Dividend received from domestic corp. 30,000 10 P3,000 Interest income from BPI 16,000 20 3,200 UCPB 18,000 20 3,600 Metro Bank 30,000 20 6,000 Total final tax on passive income P15,800

2-9 CASE A: 2017 Taxable Year

a. The Taxpayer is a Special Alien Employee (SAE). Income Tax Due = P850,000 x 15% = P127,500


b. The Taxpayer is a Special Filipino Employee (SFE), however, the income tax due is based on the old graduated tax table. The 15% preferential rate is not applicable because the compensation income is lower than P975,000. TNI = 750,000 + 100,000 – basic personal exemption of P50,000 = P800,000 Basic Tax Due (old rate) = 125,000 + (300,000 x 32%) = P221,000

c. The Taxpayer is a Special Filipino Employee (SFE) employed by an OBU. Income Tax Due = P850,000 x 15% = P127,500

d. The Taxpayer is a Special Filipino Employee (SFE) employed by an PC/SC. Income Tax Due = P850,000 x 15% = P127,500

CASE B: 2018 Taxable Year; The Preferential Tax Rate of 15% is no longer applicable

Answers for letters a-d are the same computed as follows: TNI = P850,000 Income Tax Due = P130,000 + (P50,000 x 30%) = P145,000

2-10

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

2-11

a. P15M x 6% = P900,000 b. P20M x 6% = P1,200,000 c. P0

2-12 C.G. Tax = none; the transaction resulted to a loss 2-13 C.G. Tax = P100,000 x 15% = P15,000; TRAIN Law 2-14 C.G. Tax = (P150,000 x 15%) = P22,500; TRAIN Law 2-15 C.G. Tax = none; subject to business tax of 6/10 of 1% of GSP; TRAIN Law

TRUE OR FALSE 1. TRUE 6. FALSE 11. TRUE 2. TRUE 7. FALSE; Train Law 12. TRUE 3. TRUE 8. TRUE 13. FALSE; TRAIN Law 4. TRUE 9. FALSE 14. TRUE; Prior to 2018 5. TRUE 10. FALSE; Abroad 15. FALSE;

MULTIPLE CHOICE 1. D 16. B 31. D 2. C 17. A 32. C 3. A 18. A 33. (P9,500) 4. A 19. B 34. B 5. A 20. D 35. C 6. A 21. C 36. D 7. D 22. B 37. D 8. D 23. D 38. D 9. B 24. D 39. C

10. D 25. A 40. D 11. B 26. B 41. B 12. A 27. D 42. B 13. D 28. B 43. B** 14. D 29. D 44. D 15. C 30. D 45. B

**Under the TRAIN Law, 1st Quarterly payment shall be on or before May 15 of the following year.


Supporting Computations (Multiple Choice): (2)

Gross income, Philippines P800,000 Gross income, USA 600,000 Expenses, Philippines (400,000) Expenses, USA (300,000) Basic personal exemption - Taxable income P700,000

(3 to 5)

Gross income, Philippines P800,000 Expenses, Philippines (400,000) Basic personal exemption - Taxable income P400,000

(19)

Copyright (11,250/90%)x10% P1,250 Royalty (12,000/80%) x 20% 3,000 Share from Trade Partnership (treated as dividend income) (270,000/90%) x10%

30,000

FWT P34,250 (21)

Interest from FCDU (212,500/85%)x15% P37,500 Royalty (94,500/90%) x 10% 10,500 DI from DC (144,000/90%) x10% 16,000 FWT P64,000

(22)

Interest from FCDU (212,500/85%)x15% exempt Royalty (94,500/90%) x 10% 10,500 DI from DC (144,000/80%) x20% 36,000 FWT P46,500

(28) CGT = 1.5/4 X P4M X 6% = P90,0000 (32)

Gross sales P1,650,000 Rental income (P308,750/95%) 325,000 Cost of sales (500,000) Business expenses (425,000) Taxable Net Income P1,050,000

TAX DUE: 1st P800,000 P130,000 In excess = P250,000 x 30% 75,000 Total P205,000 Less: CWTx (65,000)** Quarterly tax payments (82,500) Income Tax Payable P57,500

& Assume inclusive of the CWT from rental income


(33)

Gross sales P1,650,000 Rental income (P308,750/95%) 325,000 Less (250,000) Taxable Net Income P1,725,000 TAX DUE: x 8% Total P138,000 Less: CWTx (65,000) Quarterly tax payments (82,500) Income Tax Payable (P9,500)

(34)

Gross sales P1,650,000 Rental income (P308,750/95%) 325,000 Taxable Net Income P1,975,000 TAX DUE: x 8% Total P158,000 Less: CWTx (65,000) Quarterly tax payments (82,500) Basic Tax on Compensation income [P30,000 + (P200,000 x 25%)] 80,000 Income Tax Payable P90,500

(35)

Professional income, gross P600,000 Rental income, gross 50,000 Wagering gains 50,000 Kickbacks from suppliers 40,000 Professional expenses (325,000) Taxable net income P415,000

(36)

Interest income – BDO; P20,000 x 20% P4,000 Interest income FDCU – P50,000 x 15% 7,500 Total FWT P11,500

(37)

CGT, residential house, P5M x 6% P300,000 CGT, shares = P150,000 x 15% 22,500 Total CGT P322,500

(38)

Gross sales, Phils. P5,000,000 Gross sales, Ukraine 3,000,000 Sales returns and allowances (500,000) Sales returns and allowances-Ukraine (200,000) Cost of sales, Philippines (1,500,000) Cost of sales, Ukraine (800,000) Business expenses, Philippines (500,000) Business expenses, Ukraine (300,000) Taxable net income P4,200,000


CHAPTER 3 – FRINGE BENEFITS

CHANGES IN THE THRESHOLD OF DE MINIMIS in Page 161 (with the publisher already when the RR was issued):

1. 2. 3. Medical cash allowance to dependents of employees not exceeding P1,500 per semester or P250 a month. 4. Rice subsidy of not more than P2,000 per month or 1 sack (50kg.) rice per month. 5. Uniforms given to employees by the employer not exceeding P6,000 per annum (as amended by RR 8-2012).

PROBLEM SOLVING P3.1

Subject to FBT Subject to Basic Tax Exempt 1. P120,000 - - 2. - - P80,000 3. 50,000 - - 4. - - 5,000/ yr. (RR 8-2012) 5. - - 360,000 6. 250,000 - - 7. - - 45,000 8. - - 15,000 9. 60,000 - -

10. - - 1,500 P3.2

a) Yes b) GUMV = P325,000/65%=P500,000 c) No. FBT is a final tax, hence, nonreturnable d) FBT = P500,000 x 35% = P175,000 e) Within 10th day of the month following the end of the calendar quarter in which the fringe benefits were granted to the recipient. f) No. It is subject to basic tax instead of FBT.

P3.3 P957,000 computed as follows:

Compensation income P900,000 Monthly transportation allowance** 36,000 De Minimis

Benefits Other Benefits

13th month pay - P75,000 Christmas bonus (P5,000 is de minimis) P5,000 - Christmas bonus (P5,000 de minimis under RR 1-2015) 5,000 20,000 Productivity incentive pay (de minimis under RR 1-2015) 10,000 - Uniform allowance (15,000-5,000) 5,000 10,000 Medical allowance (entire amount is de minimis) 10,000 - Rice subsidy [24,000-(1,500 x 12)] 18,000 6,000 Total (known as 13th Month Pay & Other Benefits) 111,000 Tax Exempt 13th Month Pay & Other Benefits; TRAIN Law (90,000) 21,000 Taxable income P957,000

**Fixed Allowances received regularly shall be treated as part of basic compensation income Productivity incentive pay not exceeding P10,000 shall be exempt de minimis Christmas Gift/Bonus = 1st P5,000 shall be exempt de minimis

P3.4 P540,000 computed as follows:


Compensation income P540,000 De Minimis

Benefits Taxable Benefits

13th month pay and mid-year bonus P67,500 Christmas gift P5,000 5,000 Uniform allowance (7,500-5,000) 5,000 2,500 Actual Medical allowance (P15,000-10,000) 10,000 5,000 Medical allowance to dependents (P2,000-1,500) 1,500 500 Rice subsidy [entire amount is de minimis] 18,000 - Monetized vacation leave [24,000-(2,000x 10)] 20,000 4,000 Total 13th Month Pay & Other Benefits 84,500 Tax Exempt 13th Month Pay & Other Benefits; TRAIN Law 90,000 - Taxable income P540,000

P3.5

1. a) P165,000 x 50% = P82,500 b) P82,500/65% x 35% = P44,423

2.

a. P4.5M x 5% /4 x 50% = P28,125 b. P28,125/65% x 35% = P15,144

3. a. P4.5M b. P4.5M/65% x 35% = P2,423,077

4. a. P1,200,000 b. P1,200,000/65% x 35% = P646,154

5. a. P800,000 b. P800,000/65% x 35% = P430,769

6. a. P1,200,000/5 = P240,000 b. P240,000/65% x 35% = P129,230

TRUE OR FALSE 1. FALSE 6. FALSE 11. FALSE 2. FALSE 7. TRUE 12. TRUE 3. TRUE 8. TRUE 13. TRUE 4. TRUE 9. TRUE 14. TRUE 5. TRUE 10. TRUE 15. TRUE

MODIFIED IDENTIFICATION 1. B 6. B 11. A 16. A 2. B 7. B 12. A 17. B 3. A 8. B 13. B 18. B 4. B 9. B 14. A 19. B 5. B 10. B 15. B 20. B

MULTIPLE CHOICE

1. C 11. C 21. D 31. D 41. D 2. A 12. A 22. A 32. B 42. C 3. D 13. A 23. D 33. A 43. D 4. D 14. B 24. C 34. D 44. D 5. D 15. B 25. D 35. A 45. A 6. D 16. D 26. A 36. C 46. A 7. B 17. C 27. D 37. C 47. A 8. A 18. B 28. B 38. D 48. B 9. D 19. C 29. D 39. B 49. D

10. C 20. D 30. B 40. D 50. A 51. D 52. D 53. C

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”. #22. P97,500/65% = P150,000 (23)

To managerial – fringe benefit expense P1,300,000 Fringe benefit tax expense (P1.3M/68% x 35%) 700,000 Rank and File 5,000,000 Total P7,000,000

(24)

Expenditure attributable to Managerial employees (P1.2M x 20%)

P240,000

Divide by GUMVF 65% Grossed-up monetary value P369,231 x FBT rate 35% Fringe Benefit Tax P129,231

(25) Total deductible expense = P1,200,000 + 129,231 = P1,329,231 (26)

Salaries and wages gross of CWT P816,000 Fixed monthly allowance** 60,000 Total compensation income subject to graduated rate P876,000

*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 P48,000 Divide by GUMVF 65% GUMV P70,588 x FB rate 35% FBT P25,846

(29)

Annual rental P637,500 x 50% Monetary value of housing benefit P318,750 Divide by GUMVF 65% GUMVF P490,385 X FBT rate 35% FBT P171,635 Add: Annual Rental 637,500 Total Deductible Expense P809,135

(30) v P2,000,000 x 5% x 50% = P50,000 v P50,000/ 65% x 35% = P26,923

(33) v (P5,000,000-2,000,000) = P3,000,000 v P3M/ 65% x 35% = P1,615,385


(31)

v P3,000,000 x 5% x 50% / 12 = P6,250 v P6,250/ 65% x 35% = P3,365

(32) v P5,000,000 v P5M/ 65% x 35% = P2,692,308

(35)

v P1,000,000 / 65% = P1,538,462 v P1,538,462 x 35% = P538,462

(36) v P800,000 / 65% = P1,230,769 v P1,230,769 x 35% = P430,769

(37) v (P1,000,000/5) / 65% = P130,000 v P130,000 x 35% = P45,500

(52) Pedro is taxable on excess benefits only (53) Pedro is exempt as a minimum wage earner but his business income is taxable

CHAPTER 4 – CO-OWNERSHIP, ESTATES AND TRUSTS PROBLEM SOLVING P4.1

1. Income tax payable of the estate = P26,000 2. Income tax payable of Louie = P0 3. Income tax payable of Floyd = P8,150

Louie Floyd Estate Gross income (gross of 5% tax) P 325,000 P 380,000 P800,000 Deductible expenses (117,000) (105,000) (420,000) Dividend from foreign corporation 12,000 8,250 Prize, supermarket raffle 7,500 Taxable income P220,000 P290,750 P380,000 Tax Due/Payable (TRAIN Law) P0 P8,150 P26,000

P4.2

1. Income tax payable of the estate = P30,000 2. Income tax payable of Louie = P4,000 3. Income tax payable of Floyd = P18,150 Estate

Rental income of the estate P1,000,000 Deductible operating expenses (estate) (500,000 Income distributed to Louie (50,000) Income distributed to Floyd (50,000) Taxable income P400,000 Tax due/payable P30,000

Louie Floyd Gross Income P 325,000 P 380,000 Deductible expenses (117,000) (105,000) Dividend from foreign corporation 12,000 8,250 Prize, supermarket raffle 7,500 Amount received from the Income of the estate 50,000 50,000 Taxable income P270,000 P340,750 Income Tax Due/Payable P4,000 P18,150

P4.3

1. Income tax payable of the trust = P220,000 2. Income tax payable of Pedro = P113,475


Gross income of the Trust P3,000,000 Deductible business expenses of the trust (1,800,000) Income distributed to Pedro during the year (200,000) Dividend income from resident foreign corporation 100,000 Net Taxable income P1,100,000 Income Tax payable P220,000

Compensation income of Pedro P800,000 Rental income (gross) 500,000 Rental expenses (80,000) Dividend from foreign corporation 8,250 Taxable income P1,228,250 Tax Due P258,475 Tax payments (Quarter 1-3) (120,000) CWTx on rent (25,000) Income Tax Payable-Pedro P113,475

MULTIPLE CHOICE 1. D 16. D 31. B 2. A 17. C 32. D 3. D 18. C 33. D 4. D 19. D 34. C 5. D 20. D 35. C 6. A 21. B 36. D 7. D 22. B 37. B 8. C 23. D 38. D 9. A 24. C 39. D 10. A 25. D 40. D 11. D 26. C 41. B 12. B 27. D 42. D 13. A 28. D 43. C 14. D 29. D 44. B 15. A 30. D 45. A

Supporting Computations (Multiple Choice): 20.

Income of the estate P600,000 Expenses (150,000) Distribution of income to Francis (120,000) Taxable income of Ramos P330,000

21. Francis’ own income P500,000 Income of the estate received by Francis 120,000 Taxable income of Ramos P620,000

39.

Compensation income P1,500,000 Business income 1,000,000 Income of the trust taxable to the grantor 1,000,000 Taxable income of Ramos P3,500,000

41.

Trust’s income P10,000,000 Business expenses (2,000,000) Income distributed to Princess (1,500,000) Taxable income of the Trust P6,500,000

42.

Compensation income (Gross amount) P2,500,000 Income of the trust received Princess 1,500,000


Taxable income of Princess P4,000,000

43-45. # 44 TRUST 1 # 45 TRUST 2 Taxable Net income P4,000,000 Net income P6,000,000 Tax due: Tax due: 1st P2,000,000 P490,000 1st P2,000,000 P490,000 Excess @ 32% 640,000 Excess @ 32% 1,280,000 Tax due/paid 1,130,000 Tax due/paid 1,770,000 Versus allocated tax due 1,244,000* Versus Share 1,866,000** Income Tax Payable-Trust 1 P114,000 Income Tax Payable-Trust 2 P96,000

# 43 Consolidated:

Taxable Net income P10,000,000 Tax Due (Consolidated): 1st P8,000,000 P2,410,000 Excess @ 32% 700,000 Total Consolidated TAX DUE P3,110,000 Less Paid:

Trust 1 (1,130,000) Trust 2 (1,770,000)

Consolidated Income Tax Payable 210,000

Share in the Consolidated Tax due: Trust 1 (4/10) x P3,110,000

1,244,000*

Trust 2 (5,980/9,960)

1,866,000**

CHAPTER 5 – INCOME TAX FOR CORPORATIONS PAGE 234

TABLE 5-3: Capital Gains subject to CAPITAL GAINS TAX (CGT) 1.) CAPITAL gains from sale of shares of stock not

traded in the local stock exchange

DC RFC NRFC UNDER TRAIN LAW, beginning Jan. 1, 2018 Tax Base: Net Capital gain Tax Rate: Prior to Jan. 1, 2018 First P100,000 capital gain Amount in excess of P100,000 capital gain

15%

5%

10%

NC***

5%

10%

NC***

5% 10%

*With tax sparing; 15% - If the country where the NRFC is domiciled allows a credit against the tax due from the NRFC representing deemed paid in the Philippines equivalent to 15%. *Without tax sparing; 30% **The Higher between FMV as provided by City/Provincial Assessors and Zonal Value ***NC (No Changes); apply the old rates; 5% first P100,000 gain + 10% in excess of P100k


PROBLEM SOLVING: (P5.1)

CASE A (Domestic Corporation) – TRAIN Law: 1. P1,674,000 2. P92,500 3. P562,500 Solution

Philippines Abroad Total Gross sales P10,000,000 P5,000,000 P15,000,000 Sales returns 200,000 (200,000) Cost of goods sold 3,500,000 2,250,000 (5,750,000) Operating expenses 2,800,000 1,100,000 (3,900,000) Interest income from trade receivable 100,000 50,000 150,000 Interest income from BPI deposits-USA - 80,000 80,000 Interest income from money market placement 100,000 100,000 Dividend income-resident foreign corp. 45,000 - 45,000 Dividend income-nonresident foreign corp. - 30,000 30,000 Royalty income - 25,000 25,000 Taxable income P5,580,000 Tax rate 30% Normal Corporate Income Tax Due P1,674,000

Philippines Final Tax Interest income from BPI deposits-Phils. @ 20% 100,000 P20,000 Interest income from FCDS @ 15% 150,000 22,500 Income from money market placement @ 20% 200,000 40,000 Royalty income @ 20% 50,000 10,000 Final tax on passive income P92,500

Capital Gains Tax Gain on sale of shares sold directly to a buyer [(150,000x 15%)

P22,500

Sale of real property in the Philippines (SP of P9M** x 6%)

540,000

Total Capital Gains Tax P562,500 **SP = Cost + Gain = P4M + 5M = P9M; SP is higher than FMV

CASE B (Resident Foreign Corporation) – TRAIN Law:

4. P1,093,500 5. P81,250 6. P10,000 Solution:

Gross sales P10,000,000 Sales returns (200,000) Cost of goods sold (3,500,000) Operating expenses (2,800,000) Interest income from trade receivable 100,000 Dividend income-resident foreign corp. 45,000 Taxable income P3,645,000 Tax rate 30% Normal Corporate Income Tax Due P1,093,500

Philippines Final Tax Interest income from BPI deposits-Phils. @ 20% 100,000 P20,000 Interest income from FCDS @ 7.5% (not amended) 150,000 11,250 Income from money market placement @ 20% 200,000 40,000 Royalty income @ 20% 50,000 10,000 Final tax on passive income P81,250

Capital Gains Tax

Gain on sale of shares sold directly to a buyer [(100,000 x 5%) + (50,000 x 10%)]

P10,000


CASE C (Non-Resident Foreign Corporation) – TRAIN Law: 7. P2,059,750 computed as follows:

Gross sales P10,000,000 Sales returns (200,000) Cost of goods sold (3,500,000) GROSS INCOME P6,300,000 ADD: Interest income from trade receivable 100,000 Interest income from BPI deposits-Phils. 100,000 Income from money market placement 200,000 Dividend income-resident foreign corp. 45,000 Royalty income 50,000 Total “Gross” Income P6,795,000 Tax rate 30% P2,038,500 ADD: Dividend income from DC = P75,000 x 15% 11,250 CGT on shares of DC: [(P100k x 5%) + P50k x 10%)]

10,000

TOTAL FINAL TAXES P2,059,750 (P5.2) 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. (P5.3) RFC –TRAIN Law:

Current account, BDO @ 20% P120,000 Savings deposit, BPI @ 20% 100,000 Interest income from government bonds @ 20% 40,000 Royalty income from various domestic corporations @ 20% 20,000 US dollar deposit, FCDU @ 7.5% 60,000 Total final taxes on passive income P340,000

(P5.4) – TRAIN Law

Q1 Q2 Q3 Q4 Gross profit from sales P1,600,000 P3,200,000 P4,800,000 P6,200,000 Business expenses (1,200,000) (2,400,000) (3,400,000) (4,200,000) Taxable income 400,000 800,000 1,400,000 P2,000,000 RCIT 120,000 240,000 420,000 600,000 MCIT (Gross Profit x 2%) 32,000 64,000 96,000 124,000 TAX DUE (Higher) P120,000 P240,000 P420,000 P600,000 Less: Income tax withheld (30,000) (70,000) (130,000) (230,000) Tax Paid Q1 - (90,000) (90,000) (90,000) Tax Paid Q2 (80,000) (80,000) Tax Paid Q3 - (120,000) Income Tax Payable P90,000 P80,000 P120,000 P80,000

(P5.5)

Year 4 Year 5 Year 6 Year 7 Year 8 MCIT 100,000 60,000 50,000 40,000 20,000 RCIT 30,000 70,000 60,000 30,000 90,000 TAX DUE (Higher) P100,000 P70,000 P60,000 P40,000 P90,000 Excess MCIT Year 4 - (70,000) - - - Year 7 (10,000) Income Tax Payable P100,000 P0 P60,000 P40,000 P80,000

(P5.6)

1. P120,000 2. P690,000 3. P210,000 4. P495,000


Q1 Q2 Q3 Q4 Tax Due 2018 NCIT P300,000 MCIT P990,000 NCIT P1,410,000 NCIT P2,010,000 Excess MCIT 2017 (90,000) - (90,000) (90,000) Excess W/holding Tax 2017 (30,000) (30,000) (30,000) (30,00) W/holding - 2018 (60,000) (150,00) (270,000) (375,000) Quarterly Tax Payments (120,000) (810,000) (1,020,000) Tax Payable P120,000 P690,000 P210,000 P495,000

(P5.7)

Case A (Taxable Joint Venture) 1. Taxable income of the joint venture = P20M 2. Income tax payable of the joint venture = P6M 3. Taxable income of ABC Company = P10M 4. Income tax payable of ABC Company = P3M 5. Taxable income DEF Company = P5M 6. Income tax payable of DEF Company = P1.5M

Joint Venture ABC Co. DEF Co. Gross income P50,000,000 P30,000,000 P20,000,000 Business expenses (30,000,000) (20,000,000) (15,000,000) Taxable income P20,000,000 P10,000,000 P5,000,000 Tax Rate (RCIT) 30% 30% 30% Tax Due P6,000,000 P3,000,000 P1,500,000

Case B (Tax Exempt Joint Venture)

7. Taxable income of the joint venture = nil; tax exempt 8. Income tax payable of the joint venture = nil; tax exempt 9. Taxable income of ABC Company = P24M 10. Income tax payable of ABC Company = P7.2M 11. Taxable income DEF Company = P11M 12. Income tax payable of DEF Company = P3.3M

Joint Venture ABC Co. DEF Co. Gross income P50,000,000 P30,000,000 P20,000,000 Business expenses (30,000,000) (20,000,000) (15,000,000) Share in the income of the joint venture - 14,000,000 6,000,000 Net/ Taxable income P20,000,000 P24,000,000 P11,000,000 Tax Rate (NCIT) 30% 30% Tax Due P0 P7,200,000 P3,300,000

(P5.8)

Case A: 1. Taxable income of the joint venture = P20M 2. Tax due of the joint venture = P6,000,000 3. Taxable income of Bryan = P10M 4. Taxable income Rianne = P5M 5. Final tax due of Bryan (10%) = P980,000 6. Final tax due of Rianne (10%) = P420,000

Joint Venture Bryan Rianne Gross income P50,000,000 30,000,000 20,000,000

Business expenses (30,000,000) (20,000,000) (15,000,000) Taxable income P20,000,000 P10,000,000 P5,000,000 Less: Tax Due @ 30% (6,000,000) Distributable income P14,000,000 Share in income

Bryan @ 70% P9,800,000 Rianne @ 30% 4,200,000


Case B: 7. Taxable income of the joint venture = nil; tax exempt 8. Income tax payable of the joint venture = nil; tax exempt 9. Taxable income of Bryan = P24,000,000 10. Taxable income Rianne = P11,000,000 11. Final tax due of Bryan = P0 ; subject to basic and creditable withholding tax 12. Final tax due of Rianne = P0 ; subject to basic and creditable withholding tax

Joint Venture Bryan Rianne Gross income P50,000,000 30,000,000 20,000,000

Business expenses (30,000,000) (20,000,000) (15,000,000) Net income P20,000,000 P10,000,000 P5,000,000 Distributable income P20,000,000 Share in income

Bryan @ 70% P14,000,000 14,000,000 Rianne @ 30% 6,000,000 6,000,000

Taxable income P24,000,000 P11,000,000 (P5.9)

1. [(P6M-4M) + (($50,000-$20,000)x45)] = P3,350,000 x 30% = P1,005,000 2. (P6M-4M) x 30% = P600,000 3. P6M x 30% = P1,800,000 4. P6M x 2.5% = P150,000 5. P6M x 1.5% = P90,000 6. P6M x 25% = P1,500,000 7. P6M x 4.5% = P270,000 8. P6M x 7.5% = P450,000 9. *P3,350,000 x 10% = P335,000; * from #1 10. P1,005,000; same computation with #1 11. nil; exempt

(P5.10)

1. [8M] x 2.5% = P200,000 2. [8M x 1%) = P80,000 3. nil; tax exempt on the basis of reciprocity

(P5.11)

1.Related 4.Related 2.Related 5.Related 3.Related 6.Unrelated

(P5.12) Proprietary Educational Institution:

Gross income, related activities P5,000,000 Gross income, unrelated activities (excluding rental income) 5,000,000 Rental income from commercial spaces (gross of 5% WT) – unrelated 2,000,000 Expenses, related activities (2,000,000) Expenses, unrelated activities (3,000,000) Taxable income P7,000,000 Tax Rate (RCIT); Unrelated income > Related income 30% Tax Due 2,100,000 Less: CWT on rental income (P2M x 5%) (100,0000) Quarterly tax payments for the first 3 quarters (500,000) Income Tax Payable P1,500,000


(P5.13) Question 1:

Tuition fees P9,500,000 Miscellaneous fees 1,200,000 Income from bookstore 350,000 Income of school canteen 180,000 Salary, allowances and bonus (6,400,000) Other operating expenses (2,600,000) Depreciation expense-classrooms (75,000) Depreciation expense-furniture and equipment (50,000) Taxable income P2,105,000 x Tax Rate 10% Tax Due P210,500

Question 2:

Tuition fees P9,500,000 Miscellaneous fees 1,200,000 Income from bookstore 350,000 Income of school canteen 180,000 Salary, allowances and bonus (6,400,000) Other operating expenses (2,600,000) Construction of additional classrooms (1,300,000) Acquisition of furniture and equipment (400,000) Taxable income P530,000 x Tax Rate 10% Tax Due P53,000

(P5.14)

1. Income Tax Due (Payable) = P249,000 – CWT 15,000 = P234,000 2. 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 2016 (130,000) Taxable income P830,000 ADD: 2016 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

206,250

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 (372,000) BALANCE P664,250 RE Jan. 1 200,000 RE Dec. 31, 2017 P864,250 LESS: Amount that may be retained (Par of Outs. Sh.) (400,000) IMPROPERLY ACCUMULATED EARNINGS P464,250 x IAET RATE 10% IMPROPERLY ACCUMULATED EARNINGS TAX P46,425


(P5.15)

1. P103,000 2. P117,000

Solution: 2017:

CGT on Land = P1.5M x 6% P90,000 CGT on shares: 1st P100,000 capital gain @ 5% P5,000 In excess of P100,000 capital gain @ 10% 8,000 13,000 Total capital gains tax P103,000

2018:

CGT on Land = P1.5M x 6% P90,000 CGT on shares = P180,000 x 15% 27,000 Total capital gains tax P117,000

(P5.16)

1. P16,500 2. P36,000

Solution: 2017:

Sale#3; capital gain = P190,000: 1st P100,000 capital gain @ 5% P5,000 In excess of P100,000 capital gain @ 10% 9,000 P14,000 Sale#4; capital gain = P50,000; CGT@ 5% 2,500 Sale#5; capital loss = P30,000; CGT = none - Total capital gains tax P16,500

2018:

Sale#3; capital gain = P190,000: CGT = P190,000 x 15% P28,500

Sale#4; capital gain = P50,000; CGT@ 5% CGT = P50,000 x 15% 7,500

Sale#5; capital loss = P30,000; CGT = none - Total capital gains tax P36,000

TRUE OR FALSE

1. TRUE 11. TRUE 21. FALSE 2. FALSE 12. TRUE 22. TRUE 3. TRUE 13. FALSE 23. FALSE 4. TRUE 14. TRUE 24. FALSE 5. FALSE 15. FALSE 25. TRUE 6. TRUE 16. TRUE 26. TRUE 7. TRUE 17. FALSE 27. TRUE 8. TRUE 18. FALSE 28. TRUE 9. TRUE 19. TRUE 29. TRUE

10. FALSE 20. TRUE 30. 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 41. A 61. A 2. B 22. B 42. D 62. A 3. C 23. A 43. D 63. A 4. B 24. C 44. B 64. A 5. D 25. D 45. B 65. B 6. D 26. B 46. C 66. C 7. C 27. D 47. C 67. C 8. B 28. D 48. A 68. B 9. B 29. A 49. D 69. A 10. B 30. C 50. D 70. A 11. A 31. B 51. D 71. A 12. D 32. C 52. A 72. D 13. B 33. A 53. B 73. A 14. D 34. D 54. B 74. A 15. C 35. C 55. D 16. B 36. D 56. C 17. C 37. C 57. B 18. B 38. B 58. C 19. C 39. B 59. B 20. D 40. C 60. D

Supporting Computations (Multiple Choice): (4).

Domestic RFC NRFC Gross Income, Philippines P975,000 P975,000 P975,000 Expenses, Philippines (750,000) (750,000) Gross Income, Malaysia 770,000 Expenses, Malaysia (630,000) Interest on bank deposit - - 25,000 Taxable income 365,000 225,000 P1,000,000 Tax Rate 30% 30% 30% Tax Due P109,500 67,500 300,000

(5).

Gross profit from sales P3,000,000 Business expenses (1,800,000) Dividend income from a resident corporation 50,000 Dividend income from a nonresident corporation 40,000 Capital gain on sale of land in China 200,000 Interest income from notes receivable 20,000 Taxable income P1,510,000 Tax Due @ 30% P453,000

(6).

Sale of land-Phils. P2M x 6% P120,000 Sale of shares of DC = P120,000 x 15% 18,000 Capital gains tax P138,000

(7).

Interest income on peso bank deposit @ 20% P6,000 Interest income on foreign currency bank deposit @ 15% 3,750 Interest income on treasury bills @ 20% 2,000 Total final taxes on passive income P11,750


(8). To Louie @ 10% P10,000 To Floyd @ 10% 10,000 To Zeus @ 10% 10,000 To JJ @ 20% 20,000 To Francis @ 25% 25,000 To Chen, a domestic corporation Exempt To a resident foreign corporation Exempt To a nonresident foreign corporation @ 15% 15,000 Total withholding taxes P90,000

(10).

Final W. Tax = $3,000 x P45 x 10% = 13,500

(11). Interest income from loans P10,000,000 OPEX (P12M x 10/15) (8,000,000) Taxable income P2,000,000 Income Tax Rate 30% Income Tax Due P600,000

(12 and 13) Solution:

Joint Venture ABC Co. DEF Co. G Income P5,000,000 P3,000,000 P2,000,000 Expenses (3,000,000) (2,000,000) (1,500,000) TNI P2,000,000 P1,000,000 P500,000 NCIT 30% 30% 30% Tax Due P600,000 P300,000 P150,000

(14). Joint Venture ABC Co. DEF Co. G Income P5,000,000 P3,000,000 P2,000,000 Sh. in Inc. 1,400,000 600,000 Expenses (3,000,000) (2,000,000) (1,500,000)

TNI P2,000,000 P2,400,000 P1,100,000 NCIT - 30% 30% Tax Due - P720,000 P330,000

(17). Income Tax Due = (P10M-P4M) x 30% = P1,800,000 (18). Income Tax Due = P10M x 2.5% = P250,000 (20). Income Tax Payable = P8M x 2.5% = P200,000 (21). Tax Expense (Income Tax & Common carrier’s tax):

= (P8M x 2.5% ) + (P8M x 25% x 3%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 P12,000,000 Expenses, related activities 2,000,000 Expenses, unrelated activities 3,000,000 (5,000,000) Taxable income P7,000,000 Tax rate (unrelated income>related income) 30% Tax due P2,100,000 Less: Quarterly tax payments P500,000

Withholding tax on rental income 100,000 (600,000) Income Tax payable P1,500,000


(28). Income from tuition fees P3,500,000 Miscellaneous school fees 1,500,000 Dividend income from foreign corp. 2,000,000 Rental income (gross of 5% WT) 2,000,000 P9,000,000 OPEX (4,000,000) Taxable income P,000,000 Tax rate (related income>unrelated income) 10% Tax due P500,000 Less: Withholding tax on rental income (100,000) Income Tax payable P400,000

(29).

Tuition and other fees P5,000,000 Rental income (gross of 5% WT) 50,000 OPEX (1,500,000) CAPEX (2,000,000) Taxable income P1,550,000 Tax rate (related income>unrelated income) 10% Tax due P155,000 Less: Withholding tax on rental income (2,500) Income Tax payable P152,500

(30). Gross Receipts P8,500,000 Rental income (gross of 5% WT) 1,500,000 OPEX (8,200,000) Taxable income P1,800,000 Tax rate (not a non-profit hospital) 30% Tax due P540,000 Less: Withholding tax on rental income (75,000) Tax payable P465,000

(31).

Tuition fees P4,800,000 Rental income (gross of 5% WT) 5,200,000 OPEX (9,450,000) Taxable income P550,000 Tax rate (unrelated income is higher) 30% Tax due P165,000 Less: Withholding tax on rental income (260,000) Tax payable (P95,000)

(#s 38 TO 45).

2008 2009 2010 2011 2012 2013 2014 2015 NCIT P25,000 P130,000 P200,000 P0 P100,000 P150,000 P8,000 P1,000 MCIT 100,000 150,000 190,000 300,000 50,000 60,000 40,000 50,000 DUE (Higher) 100,000 150,000 200,000 300,000 100,000 150,000 40,000 50,000 EXCESS MCIT 75,000 20,000 - 300,000 - - 32,000 49,000

TAX DUE P100,000 P150,000 P200,000 P300,000 P100,000 P150,000 P40,000 P50,000 MCITCO -

2008 (75,000) 2009 (20,000) 2011 (100,000) (150,000) -

TAX PAYABLE P100,000 P150,000 P105,000 P300,000 P0 P0 P40,000 P50,000


CHAPTER 6 – PARTNERSHIPS, ESTATES AND TRUSTS PROBLEM SOLVING P6.1

1. Income tax due of the partnership = P0 (tax exempt) 2. Income tax due of LJ = P310,000

LJ LJ’s gross income from his trading business P1,000,000 LJ’s expenses from his trading business (600,000) Share from the net income of a GPP 400,000 Royalty, books published in USA 150,000 Salaries, gross of withholding tax 450,000 Basic exemption NA Taxable income P1,400,000 Tax Due (TRAIN Law); P130k + (P600k x 30%) P310,000

P6.2 Case A (Ordinary Partnership):

1. Tax due of the partnership = P240,000 2. Tax due of Rivera = P30,000 3. Tax due of Reyes = P55,000

RR Partnership Rivera Reyes Gross Income P2,000,000 P800,000 P1,000,000 Allowed Deductions (1,200,000) (400,000) (500,000) Basic exemption - - - Taxable income P800,000 P400,000 P500,000 Tax Rate 30% TRAIN Table TRAIN Table Tax Due P240,000 P30,000 P55,000

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 = P0; exempt 4. Tax due of Rivera = P110,000 5. Tax due of Reyes = P184,000

RR Partnership Rivera Reyes Gross Income P2,000,000 P800,000 P1,000,000 Allowed Deductions (1,200,000) (400,000) (500,000) Basic exemption - Share in partnership income - 320,000 480,000 Taxable income P800,000 P720,000 P980,000 Tax Rate EXEMPT TRAIN Table TRAIN Table Tax Due P0 P110,000 P184,000

P6.3 1. Income tax payable/(refundable) of the partnership = P352,500 2. Income tax payable/(refundable) of Villamin = P12,600 3. Income tax payable/(refundable) of Francis = P0 4. Final tax on passive income of the partnership = P11,500 5. Final tax on passive income of Villamin = P40,783 6. Final tax on passive income of Francis = P95,767 7. Capital gains tax of the partnership = P150,000 8. Capital gains tax of Villamin = P0 9. Capital gains tax of Francis = P18,000


Partnership: Gross profit from sale of services P3,500,000 Direct cost of services (1,500,000) Business Expenses (700,000) Rental Income in business assets (gross) (P142,500/95%)

150,000

Taxable income P1,450,000 X tax rate 30% Tax due P435,000 Quarterly tax payments (75,000) Withholding tax on rent (7,500) Income tax payable P352,500 Interest Income on peso bank deposits @ 20% P4,000 Interest income-FCDS @ 15% 7,500 Final Tax on passive income of the partnership P11,500 Capital gains tax on real property (2.5M x 6%) 150,000 DISTRIBUTABLE INCOME: Taxable income P1,450,000 Total income subject to final tax 70,000 Capital gain 300,000 Less: Basic tax due (435,000) Final tax due (11,500) Capital gains tax (150,000) DISTRIBUTABLE INCOME P1,223,500

Villamin:

Gross income from sole-proprietorship business 925,000 Allowable business expenses (670,000) Dividend Income-resident foreign corp. 120,500 Basic exemption - Taxable income P375,500 Tax due (TRAIN Table) P25,100 Quarterly tax payments (12,500) Income tax payable P12,600 Final Tax; share in partnership income = (P1,223,500 x 3/9 X 10%) P40,783 Capital gains tax - Villamin P0

Francis:

Income Tax payable (No income subject to basic tax)

P0

Dividend Income @ 10% P8,500 Royalty Income @ 20% 7,000 Share in partnership income (P1,223,5003 X 6/9 x 10%) 81,567 Total final tax on passive income P95,767 Capital gains tax on shares of stock (P120,000 x 15%)

18,000

P6.4 1. Income tax payable of the business partnership = P114,000 2. Income tax payable of the GPP = P0 3. Income tax payable of Louie = P- 4. Income tax payable of Floyd = P-


Business

Partnership

GPP Gross income P800,000 P500,000 Deductible expenses (420,000) (375,000) Net or Taxable income P380,000 P125,000 Tax rate 30% Income tax due/payable P114,000 EXEMPT Louie and Floyd Louie Floyd Gross Income P 325,000 P 380,000 Deductible expenses (117,000) (205,000) Dividend from foreign corporation 12,000 8,250 Prize, supermarket raffle - 7,500 Share in income of GPP 37,500 87,500 Basic exemption - - Additional exemption - - Taxable income P57,500 P178,250 Income tax payable (TRAIN Law) P- P-

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

Supporting Computations (Multiple Choice): 15. (P2M-1M) x 30% = P300,000 16. P0; Subject to 10% final tax 17.

Partnership net profit (net of 30% tax) (P800,000 x 70%)

P560,000

Other Income: Interest income, net 8,000 Dividend income (tax exempt) 20,000 Total distributive income P588,000 Share of T (50%) P294,000 Applicable tax (10% final tax) P29,400

18. P600,000 – P350,000 x 50% = P125,000 19.

Share in GPP’s income P125,000 Own income (P150,000-70,000) 80,000 Basic exemption - Taxable income of Ramos P205,000

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


20.

Gross income P750,000 Expenses (200,000) x 70% Net income after corporate tax 385,000 Add:

Dividend received from a domestic corp. (tax exempt) 20,000 Bank interest income, Metrobank (net of final tax) 80,000

Distributable net income P485,000 Juan: P485,000 x 55% x 10% P26,675 Ponce: P485,000 x 45% x 10% P21,285

CHAPTER 7 – CONCEPT OF INCOME

MULTIPLE CHOICE 1. C 13. C 25. D 37. C 2. D 14. D 26. B 38. D 3. B 15. C 27. B 39. D 4. A 16. B 28. A 40. C 5. D 17. D 29. D 41. C 6. D 18. A 30. A 42. C 7. A 19. C 31. D 43. D 8. D 20. C 32. D 44. A 9. B 21. A 33. B 10. D 22. D 34. B 11. C 23. D 35. B 12. A 24. D 36. B

Supporting Computations: 32. P300,000 4/12 = P100,000 33.

Gain on sale of personal property purchased in the Philippines and sold in Hongkong

P-

Compensation received for personal services in the Philippines 200,000 Rent income from real property in Malaysia - Gain from sale in the Philippines of shares of a foreign corporation 100,000 Deductions identified with: Philippine income (80,000) Foreign income - Deductions unidentified with any particular income (P30,000 x 300,000/1,000,000) (9,000) Philippine Net Income P211,000

34.

Gross Receipts P600,000 Rental expenses (120,000) Salaries expense (100,000) Basic exemption (50,000) Taxable income P330,000

35. (Resident Alien)

Gross Income P2,000,000 Business expenses (1,200,000) Dividend income from foreign corp. (50,000 x 60%) 30,000 Basic exemption - Taxable income P830,000


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 P10,000,000 Allowable deductions (4,000,000) Dividend income from domestic corp. exempt Dividend income foreign corp. (95% from R.P.) 1,000,000 Dividend income foreign corp. (60% from R.P.) 800,000 Dividend income foreign corp. (25% from R.P.) 400,000 Taxable income P8,200,000

38. (Resident Foreign Corp = Taxable on income from Philippine sources only

Gross Income P10,000,000 Allowable deductions (4,000,000) Dividend income from domestic corp. exempt Dividend income foreign corp. (80% from R.P.)

(P1M X 80%=considered from Phil. sources) 800,000

Dividend income foreign corp. (60% from R.P.) (P800,000 x 60%)

480,000

Dividend income foreign corp. (25% from R.P.) (entire amount is considered income from sources outside of the Phils.)

-

Taxable income P7,280,000 39.

DI-Microsoft - DI-Intel (P400,000 x 60% x 30%) P72,000 DI - IBM - Interest income – BDO @ 20% 120,000 FCDS deposit @ 7.5% 60,000 Royalty income @ 20% 20,000 Total final taxes on passive income P272,000

40.

DI-Microsoft & Intel @ 30% basic tax P270,000 DI - IBM - Interest income – BDO @ 20% 120,000 Interest income U.K. @ 30% 210,000 FCDS deposit @ 15% 120,000 Royalty income @ 20% 20,000 Total final taxes on passive income P740,000

CHAPTER 8 – INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME

PROBLEM SOLVING: P8.1

INCOME SUBJECT TO BASIC TAX: Basic salary (P900,000+P300,000) P1,200,000 Director’s fee 200,000 Business income:

Retail business 250,000 Apartment rental (P190,000/95%) 200,000

Dividend income from a resident corporation 50,000 13th, Xmas and MidYear Bonus = (P180,000 – 1st 5,000 as de minimis – P90,000 exclusions)

85,000

Gross Income subject to basic tax (Q#1) P1,985,000 LESS: Business expenses (125,000) Basic exemption - Net Taxable income P1,860,000 Income tax due – TRAIN Law (Q#4); [P130k + (P860k x 30%)] P448,000


INCOME SUBJECT TO FINAL TAX: Cash dividend from a domestic corporation @ 10% P5,000 Interest from savings deposit @ 20% 4,000 Royalties from book publications @ 10% 5,000 Prizes from contest won @ 20% 10,000 PCSO winnings @ 20% 10,000 Total final taxes on passive income (Q2) P34,000 INCOME EXEMPT FROM TAX: Xmas Bonus and other benefits (P5k de minimis + 90,000) P95,000 Stock dividend from a domestic corporation 25,000 Damages received from injuries and sickness 85,000 Proceeds-life insurance coverage of his father 300,000 Total income exempt from tax (Q3) P505,000

P8.2

1) P10,000 2) P15,000 3) P715,000 computed as follows:

Gross profit from sales (P2.5M – P1.5M) P1,000,000 Taxable recovery-receivables 10,000 Taxable tax refunds (P30,000 x 50%) 15,000 Rent income excluding security deposit 250,000 Operating expenses excluding bad debts (500,000) Write-off during the year (60,000) Taxable income P715,000

P8.3

1) 2016 income = (P240,000 x 2) + 60,000 = P540,000 2) 2017 income = only the annual real property tax of P60,000 3) 2018 income (lump-sum) = P240,000 + 60,000 + P3,000,000 = P3,300,000 4) 2018 income (spread-out) = P400,000 computed as follows:

Annual rental P240,000 Annual real property tax 60,000 Annual income from leasehold improvement: Cost P3,000,000 x 5/10 Remaining BV after lease term P1,000,000 Divide by remaining lease term 10 years P100,000 Total income 2018 P400,000

P8.4

Ramon Magsaysay award P50,000 Athlete of the year award 100,000 Prize for winning an Olympic Medal 500,000 Gift from Mayor Erap 250,000 Gift from Honda Cars 1,000,000 Total amount exempt from income tax P1,900,000

P8.5 P0; The P800,000 should be exempt from income tax P8.6 P1,000,000; The interest income from expanded foreign currency deposit P8.7 Taxable Proceeds = P1,000,000 – P600,000 = P400,000 P8.8 Income within = None. The ratio of income within over total income for the past 3 years < 50%.


P8.9

Salary for the first quarter P180,000 Honorarium as speaker in one of ABC’s team building activities 10,000 Retirement pay; (Taxable; failed to meet the age requirement) 2,500,000 Commissions 30,000 Fee as a member of ABC’s board of directors (compensation income if he is an employee at the same time)

50,000

10 days monetized vacation leave Exempt Interest income from time deposit FW Tax/E Productivity incentive pay and 13th month pay Exempt (Productivity pay= 1st P10,000 is de minimis under RR 1-2015) (Total of excess of productivity of P10,000 + 60,000 bonus is not more than P90,000, hence tax exempt)

Total compensation income subject to tax P2,770,000 P7.10

INCOME Q#1 Q#2 Q#3 Q#4 Income within Income without Taxable

income (RC) Taxable

income (NRC) A. Rental income (gross)

• From an apartment unit in USA, - P240,000 P240,000 • From a parcel of land in Makati P180,000 180,000 P180,000

B. Royalties from book • Published in the Philippines 30,000 FWT FWT • Published in USA 20,000 20,000

C. Interest income earned on notes receivable • From a debtor who resides in USA 15,000 15,000 • From a debtor who resides in Manila 25,000 25,000 25,000

D. Net profit from sales, merchandising business • From Philippine outlet 300,000 300,000 - • From USA outlet 200,000 200,000 200,000

E. Dividend income from two domestic corporations. Gross income from the Phils. for the past 3 years

• 60% of its world income 60,000 - FWT FWT • 85% of its world income 80,000 - FWT FWT

F. 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 - 40,000 40,000 - • 60% of its world income 12,000 8,000 20,000 12,000

G. Prizes received from Supermarket raffle: From the Philippines: • ABC Supermarket 8,000 - 8,000 8,000 • DEF Superstore 12,000 - FWT FWT From USA: • UVW Supermarket - 6,000 6,000 - • XYZ Supersavers - 14,000 14,000 -

H. Prizes and winnings from lotto • Philippine lotto 200,000 - Exempt Exempt • USA lotto 100,000 100,000 - BASIC EXEMPTION (assume 2018 taxable year) - - TOTAL P907,000 P643,000 P1,168,000 P425,000


P7.11

DIVIDEND INJURIES/DAMAGES PRIZES/AWARDS 1. 10% F.Tax 8. Exempt 15. Basic tax

2. 10% F.Tax 9. Exempt 16. Exempt 3. Basic Tax 10. Basic Tax 17. Exempt 4. Exempt 11. Exempt 18. Exempt 5. Basic Tax 12. Basic Tax 19. Exempt 6. Exempt 13. Exempt 20. Basic Tax/FWT Depending on the

amount 7. N.taxable 14. Basic Tax 21. Basic Tax/FWT 22. 20% FWT; TRAIN Law 23. Basic Tax 24. 20% final tax (individual taxpayer) 25. Basic Tax (abroad)

VARIOUS PROCEEDS/INCOME 26. Final Tax 27. Exempt 28. Exempt 29. Exempt 30. Exempt

TRUE OR FALSE

1. TRUE 8. TRUE 15. FALSE 22. TRUE 2. FALSE 9. TRUE 16. FALSE 23. FALSE 3. TRUE 10. TRUE 17. TRUE 24. TRUE 4. FALSE 11. TRUE 18. FALSE 25. FALSE 5. FALSE 12. TRUE 19. FALSE 6. TRUE 13. TRUE 20. FALSE 7. FALSE 14. FALSE 21. FALSE

#7 – should be CWT not FWT #14 – should be upon recovery #20 - if not in single sum (like installment or annuity), it may include an interest, subject to tax #21 – the interest is subject to tax

MULTIPLE CHOICE 1. C 16. A 31. D*** 46. A 2. B 17. D* 32. C**** 47. D 3. D 18. C 33. C 48. D 4. D 19. B 34. A 49. B 5. B 20. C** 35. D 50. B****** 6. B 21. D 36. C 51. C 7. B 22. C 37. C 52. B 8. B 23. A 38. D 53. C 9. C 24. C 39. D***** 54. D 10. A 25. C 40. A (TRAIN Law) 55. D 11. C 26. D 41. D 56. D 12. C 27. D 42. B 57. C 13. B 28. D 43. D 58. A 14. C 29. C 44. D 59. B 15. B 30. D 45. D 60. B 61. C

*the P40,000 is subj. to FWT **should be from banks only ***indirect dividends are subj. to FWT **** Statement “II” is subject to FWT *****ERRATUM: letter “D” shall be real property not used in business ******The interest is subject to FWT


Supporting Computations (Multiple Choice): No. 13.

Write-off 2013 2013 Income (Loss) before write off

2014 Recovery 2014 TAXABLE RECOVERY

P50,000 P350,000 P20,000 P20,000 10,000 (50,000) 10,000 - 30,000 20,000 30,000 20,000

P40,000 No. 14.

Case A Case B Case C 2013 Income(loss) before write-off P120,000 P60,000 (P40,000) Write-off 40,000 40,000 50,000 2014 Recovery P40,000 P10,000 P50,000 TAXABLE RECOVERY P40,000 P10,000 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)

P3,600,000

Annual real property tax 30,000 Total annual income P3,630,000

No. 26.

2016 2017 2018 Rent - P2,400,000 P2,400,000 Annual real property tax P30,000 30,000 30,000 Income from improvement [(P36M x **5/15) / 10]

None; completed only end of 2017

1,200,000

Total annual income P2,430,000 P3,630,000

Lease Term: 12.5 years Remaining Lease term after completion of the improvement: 10 years Useful life of the improvement: 15 years Remaining useful life of the improvement after termination of the lease: 5 years**

No. 27 – LUMP SUM METHOD

2017 Annual Rent 2017 P2,400,000 Annual real property tax 30,000 Income from improvement 36,000,000 Total annual income P38,430,000

No. 28.

Royalty – as an author @ 10% P10,000 Other royalties P800,000 x 20% 160,000 Total final tax on royalty income P170,000

No. 47.

Proceeds from the taxpayers life insurance P2,000,000 Less premiums paid (P15,000 x 25) (375,000) P1,625,000 Rent income from inherited properties 200,000 Taxable income P1,825,000

Documents

SOLUTIONS MANUAL INCOME TAXATION 2018 Edition By: …