Income Taxation

EXERCISES 5-1
1.
None. The entire income is exempt because Minnie is a MWE.

Basic salary
P 48,000
Overtime and night-shift differential pay
14,000
Hazard pay
12,000
Other benefits:
13th month pay
P 4,000
Less: Exemption
30,000
- .
Total (not taxable)
74,000
2.
a.
None. Proceeds of life insurance policy payable upon the death of the
insured are excluded from gross income.
b Fernando must report P20,000 [(P12,000 x 10) 100,000] as income.

.
The rule is "amounts received in excess of the face amount of the policy
are usually taxable as interest; hence, included in the gross income.
c No. It does not matter whether the insured is the mother or the wife of
.
the beneficiary. The exclusion exists because life insurance benefits
closely resemble inheritances which are not taxable.
3.
None, because Angel is not required to pay income tax on the entire
amount he received as proceeds from insurance policy. The reason
being that the insured did not outlive the policy.
If however, his father outlived the life insurance policy, Angel must
report an income of P75,000 (the face amount of P100,000 minus the
premiums paid in the amount of P25,000).
4.
Rodolfo must report an income of P75,000.

Although acquired by him, he is not required to report the value of
the inherited properties in his income tax return because properties
acquired thru inheritance are subject to estate tax; the liability being on
the estate and not on the recipient of the estate.
5.
a.
The P20,000 given to cover medical expenses are actual damages, while
the other P20,000 constitutes moral damages. Both actual and moral
damages are not subject to tax.
b The P150,000 awarded by the court for winning in the libel case is not
. taxable. Libel is included in the phrase "personal injury or sickness,"
which is exempt from income tax.
c.
Not included in the gross income. The amount of P12,000 being given
by the employer to its employees in case of disability are not salaries
but compensation for personal injuries being suffered by its employees.
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Taxable. Salaries received by employees who are unable to work due to

personal injuries or sickness are taxable. It does not make any
difference between receiving the salary while he is working and
receiving the same even while the employee is unable to work.
d.
Not taxable. The P60,000 is in the form of moral damages which is not
capable of pecuniary estimation. Besides, it is in the nature of a return
of capital.
e.
6. 6. No, because all the requisites for exemption from income tax are
present: (1) Tanda retired at age 60 which is more than the required
age of 50 years; (2) a private pension plan is maintained by the
employer; and, (3) he worked with San Jose Corporation for more than
10 years. The law does not require continuous service. Therefore, the
10-year service requirement is satisfied even if he had a broken service
with the company.
7.
The amount is taxable to Nilo. Separation pay is exempt from income

tax if the cause of separation from service is death, sickness, physical
disability, or any cause beyond the control of the employee.
None of the above-mentioned can be pointed out as the very cause
of his separation from service. Inefficiency in service due to frequent
tardiness caused by heavy traffic is not beyond the control of the
employee.
Taxable.
8.
a.
b Taxable.
.
c Not taxable. Kay was awarded without joining the contest and not
.
required to render substantial future services. Moreover, the prize
given was in recognition of an educational attainment.
9.
The prize won by Tornado is taxable. The fight was not sanctioned by a
national sports associations. As a matter of fact, it was held in a very
secluded place. The main purpose of the fight is for the gamblers to bet
on their favorite fighter and not to promote sports.
10.
Answer: P38,000
Salary (P20,000 x 12)
Add: Benefits
Christmas bonus
Productivity bonus
240,0
00
20,000
2,000
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Loyalty award
Cash gift
Anniversary bonus
13th month pay
Total
Less: Exemption
3,000
1,000
2,000
20,000
48,000
30,000
Income subject to tax
18,0
00
258,0
00
EXERCISES 55:
1.
2.
ANSWER: D
The entire amount of proceeds of the insurance policy received by
the beneficiary of Okeze from Filipinas Life Assurance Company is not
taxable because they are more considered as indemnity rather than as
gain or profit.
ANSWER: B
Proceeds of life insurance
Less: Premiums paid (1,000 x 12 x
20)
Subject to tax
3.
ANSWER: C
Total amounts received (50,000 x 12)
Less: Face value of the policy
Deemed interest (taxable)
4.
ANSWER: C
Total amounts received (50,000 x 12)
Less: Amount of premiums paid
(1,000 x 12 x 20)
Subject to tax
500,00
0
240,00
0
260,00
0
600,00
0
500,00
0
100,00
0
600,00
0
240,00
0
360,00
0
Prob 5-5.2
1.
ANSWER: C
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Proceeds of insurance
Less: Premiums paid (P10,000 x
20)
2.
500,0
00
200,00
0
300,00
0
ANSWER: D
None because Sonia died.
Prob 5-5.3
ANSWER: D
Income from coconut land
50,0
00
30,000
80,000
Income from bus operation

Prob 5-5.4:
ANSWER:
Proceeds of life insurance policy

Less: Amounts of premiums paid
Amount subject to tax
P
500,00
0
400,00
0
100,00
0
Prob 5-5.5:
ANSWER:
Proceeds of insurance policy

Less:
Amount paid upon
assignment
Premiums
subsequently paid
Taxable income
P
200,00
0
P
60,000
80,000
140,00
0
60,00
0
Prob 5-6.1
ANSWER:
Applying the principle of beyond the control test, the separation

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from employment of Mr. Jacobo was due to a cause which is within his
control, that is resignation; while the cessation from employment of
Mr. Kintanar was made without his control.
Therefore, the separation pay received by Mr. Jacobo is a taxable
income while the amount received by Mr. Kintanar is not taxable.
Prob 5-6.2
ANSWER:
The retirement benefit of P300,000 is taxable to Jovito because he

retired at the age of 48. To be exempt from the payment of income
tax, the taxpayer must be at least 50 years on the date of his
retirement.
In the case of the proceeds from insurance policy, the amount
exempt is P40,000 (P2,000 x 20) only which represents the return of
the premiums paid.
Prob 5-6.3
ANSWER: B
There is no showing that Mario was in the service of the same
employer for at least ten (10) years, that he is at least fifty(50) years
of age at the time of retirement, that he has never availed of the
benefit of exclusion, and that the retirement gratuity came from a
reasonable retirement plan maintained by his employer.
The amount of P250,000 is taxable because Remus is only 49
years old upon retirement. To be exempt from income tax, the
retirement age of an employee must be at least 50 years.
Prob 5-6.4
ANSWER: D
The money value of the accumulated leave credits given to a
retiring government official or employee is not subject to tax (CIR s.
CA, et.al, 203 SCRA 72).
Prob 5-6.5
ANSWER: A
The P1,000,000 is part of Larry's retirement pay and not a gift.
Considering that the requisites for exemption from payment of tax are
satisfied, the additional P1,000,000 is not taxable.
Prob 5-6.6
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ANSWER: D
The separation pay received by Evelyn is taxable because of the
voluntary action on her part. To be exempt, the causes for separation
must be either death, sickness, physical disability, or any cause
beyond the control of the employee.
The separation pay received by Ling-ling and Gina are exempt
because they are separated from service due to redundancy and
disability, causes which are beyond their control.
EXERCISES 57.
Prob 57.1
ANSWER: C
Only the amount of P300,000 corresponding to the income which was
lost during the period of treatment is taxable because even if he did
not meet an accident, that income would have been taxable.
Prob 5-7.2
ANSWER: A
Two months' salary
Increase in value of car (P600,000 450,000)
Income
40,0
00
150,00
0
190,00
0
Prob 5-7.3
ANSWER: C
Payment for the salaries
60,0
00
Prob 5-7.4
ANSWER:
The amount of P500,000 should not be declared in the income tax

returns of the heirs. The amount represents damages received on account
of personal injuries (which includes death), therefore excludible from gross
income [Sec. 32 (B) {1}, TRA). The reason is that life insurance proceeds
represents indemnity and not income.
The proceeds of life insurance policies paid to the beneficiary, in this
case the wife, upon the death of the insured is excluded from gross income.
EXERCISES 58
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EXERCISE 5
8.1:
ANSWER: C
Talent fee
Professional fee
Total amount taxable
Cash prize
Pay per view
Talent fee
Taxable amount
400,000
1,000,000
1,400,000
25,000,00
0
30,000,00
0
12,000,00
0
67,000,00
0
EXERCISES 58.2
a. The P350,000 value of the car is subject to a final tax of 20%.
b. The P5,000 is subject to graduated tax to be reported in the income tax
c.
return.
The cash prize and the equivalent amount of the 100 shares are subject
to 20% final tax because the awards given are not in recognition of
religious, charitable, scientific, educational, artistic, literary or civic
achievement.
EXERCISES 5-8.3
Being a resident citizen, Monique Salonga is taxable on income
within and without the Philippines. Consequently:
a.
The income of $75,000 is taxable to her unless she has acquired the
status of a contract worker. In which case, the $75,000 is not taxable to
her because contract workers are taxable only on income derived from
sources within the Philippines;
b. The talent fees derived from Inter-Island Broadcasting Network

amounting to P100,000 is a professional income subject to graduated
rates of tax.
c.
The $5,000 value of the trophy is not taxable to her because it is in

recognition of an outstanding achievement. An award for outstanding
achievement is a gift, and not a taxable income.
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PROBLEM 5-9.1
ANSWER:
Salary (P25,000 x 12)
300,0
00
Other benefits:
13th month pay
25,00
0
2,500
30,000
57,500
30,000
Cash gift
Longevity pay
Total
Less: Amount of
exemption
Proceeds of life insurance (300,000
200,000)
27,5
00
100,00
0
427,50
0
EXERCISE 5 10
1. None. Holiday pay, overtime pay, night shift differential pay and hazard
pay earned by a minimum wage earner shall likewise be exempt from
income tax.
2 Basic salary
.
Commissions
Honoraria
Holiday pay
Overtime pay
Hazard pay
Other
benefits
(36,000
30,000)
95,000
15,000
10,000
7,000
8,500
6,000
6,00
0
147,50
0
EXERCISES 5 10.2
1.
ANSWER:
Only option D has complied with the requisites for exemption from tax
of retirement benefits, viz: (1) There must be a private pension
maintained by the employer and approved by the BIR; (2) The retiring
official or employee has been in the service of the same employer for
at least ten (10) years; (3) The age must be at least 50 years old at
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the time of retirement; and (4)

availed of only once.
2.
ANSWER:
The benefit of exemption can be
A monthly gratuity of P20,000 to a Medal of Valor awardee is

exempt from income tax (RA 9049).
Terminal leave pay of employees of the government are exempt
from tax (CIR v. Castaeda, GR 96016, Oct. 17, 1991).
Retirement per Collective Bargaining Agreement is considered
voluntary, hence subject to income tax and withholding tax on wages
(BIR Ruling No. 071-98).
Separation benefits consisting of the market value/zonal value of
the residential lot, is tax exempt (BIR Ruling No. 056-95).
3.
ANSWER:
Letter A refers to deductions from gross income.

Letter B refers to tax exemption.
Letter D refers to tax credit.
Exclusion refers to income received or earned but is not taxable
as income because exempted by law or treaty. Such tax free income
are not to be included in the income tax return unless information
regarding it is specifically called for (Sec. 61, Regs.).
4.
ANSWER:
This is a case of key insurance where the company insures the

life of its key employee. The proceeds is not taxable to the corporation
because it is considered as an indemnification for the loss of the
president which is one of the company's key employees.
5.
ANSWER:
The P3,500,000 is exempt from income tax because it is given as

indemnification for the loss on the destruction of the company
building.
6.
ANSWER:
The proceeds of life insurance should be declared for estate tax

purposes if the designation of the beneficiary was revocable.
7.
ANSWER: C
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The provision exempting "interest on government securities" has

been deleted in the Tax Reform Act. Therefore, interest on
government securities are now subject to tax.
8.
ANSWER: D
The pension from GSIS is not taxable while the interest from the
time deposit is subject to a final tax of 20%.
No, the separation due to the economic condition is one which is
beyond the employees control, hence, excluded from gross income
and not subject to withholding tax.
9.
ANSWER: A
The phrase "personal injuries" which are exempt from income tax
includes moral damages awarded by the court on account of mental
anguish experienced by one person due to libelous statements made
against him.
10.
ANSWER: C
Prizes amounting to P10,000 or less are to be included in the
computation of gross income. They are not subject to final tax.
11.
ANSWER: C
The amount of P1,500 given by his mother to Luis is in the form of
a condonation or gift and not a taxable income.
12.
ANSWER: D
Dismissal from employer due to inefficiency in service is a cause
which is not beyond the control of the employee. Under the beyond
the control test, whenever an employee is separated from service for
a cause or causes which is/are beyond his control, the separation pay
received by him is not subject to tax.
13.
ANSWER: D
Damages received by a taxpayer due to physical injuries or
sickness are not taxable to him. However, damages received as
compensation for lost profits are subject to tax.
14.
ANSWER: D
Thirteenth month pay and other benefits are exempt from income
10 | P a g e
tax. However, the amount in excess of P30,000 are taxable to the

employee.
15.
ANSWER: B
Exclusion from gross income
16.
1,000,0
00
ANSWER: D
The exemption from income tax on a qualified senior citizen does
include exemption from value-added tax, estate tax, donors tax and
income tax on passive income.
17.
ANSWER: A
Monthly salary and allowance
(P3,500 + 1,000)
Months received (January to June
15)
Actual amount of salaries received
Net income from trimobile
4,5
00
5.5
24,750
24,000
48,750
EXERCISES
6-1
1.
CLASSIFICATION
SITUS
OF
TAXABLE
INCOME
a. Nonresident citizen
Within only
b. Nonresident
alien
Within only
(NETB)
c. Nonresident citizen
Within only
d. Resident alien
Within only
e. Nonresident
alien
Within only
(NETB)
f. Nonresident
alien
Within only
(ETB)
2. a. Yes, Allen is qualified as head of family because of his mother who is

dependent upon and living with him.
b. No. An aunt is not a qualified dependent for purposes of claiming the
status of head of family. Moreover, the aunt is not living with the
taxpayer.
c. Yes. Cindy is already a widow and she is supporting her daughter who
11 | P a g e
lives with her.

d. No. A taxpayer who is separated in bed and board with the spouse but
not legally separated maintains the status of a married taxpayer.
e. No. A benefactor of a senior citizen would be qualified to acquire the
status of a head of family regardless of whether such senior citizen is a
relative or not if the senior citizen is living with the taxpayer.
3. a. In the absence of an agreement, John has the right to claim the
additional exemption because under Revenue Regulation 2-98,
husbands have the right to claim additional exemption on the
dependent children. Besides, he has actual custody over the two
children.
b. If Marsha could prove that she provided chief support over the
children, both spouses would be disqualified to claim additional
exemption. Marsha is disqualified because the children are not living
with her despite the support she is extending. John is disqualified
because he does not furnish chief support to his children.
c. Yes, because not one of them can claim P50,000 which is the amount
allowed to each married individual taxpayer. At most, they would
acquire only the status of either single or head of family depending
upon the circumstances surrounding the case.
4. a. Julio is the one qualified to claim as head of family because he is
providing chief support to his mother who is also living with him. The
rest are giving only minimal amount of support.
b. None.
Additional personal exemption can be claimed only on
dependent children.
5. a. None. Aunties are not qualified dependents for purposes of claiming
additional exemption.
b. None. The mother is not a qualified dependent.
c. None. The daughter is disqualified because of her age. She is already
more than 21 years old.
d. None.
Both Decepeda and his sister cannot claim additional
exemption on their father.
e. P 100,000. Elantra is allowed to claim dependents on his four children
only.
6. a. Carina is qualified as head of family. She is already a widow and has
one dependent daughter living with her.
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b. Gross compensation income

Less: Personal exemption
Basic personal
Additional
420,0
00
50,000
25,000
Taxable income
Tax on P 250,000
95,000 x 30%
Income tax
75,0
00
345,0
00
50,000
28,500
78,500
c. If Carina has no daughter to support, her filing status is

single.
d. Gross compensation income
420,0
00
50,00
0
370,0
00
Less: Basic personal exemption

Taxable compensation income
Tax on P 250,000
120,000 x
P
50,000
36,000
30%
Income tax
7. a. Compensation income Jim
Taxable compensation income
Business income Pat
Less: Expenses
Net income
Less: Personal exemptions
Taxable income
86,000
160,0
00
50,0
00
110,0
00
500,0
00
275,0
00
225,0
00
50,00
0
175,0
00
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b. Compensation income Jim

Basic personal
Additional exemptions
160,0
00
50,000
25,000
Taxable income
Tax on P 70,000
15,000 x 20%
Income tax due
P
8,500
3,000
11,500
Business income Pat
500,0
00
275,0
00
225,0
00
50,00
0
175,0
00
Less: Expenses
Net income
Taxable income
Tax on P 140,000
35,000 x 25%
Income tax due
Income tax Jim
22,500
8,750
31,250
Income tax Pat

Total income tax
P
11,500
31,250
42,750
8. a. Tax on P 40 x 5%
2.00
b. Tax on P 10,000 x 5%
75,00
0
85,00
0
500
c. Tax on P 10,000
2,245.40 x 10%
Income tax
d. Tax on P 250,000
500.00
224.54
724.54
50,000
e. Tax on P 250,000
206,780 x 30%
50,000
62,034
14 | P a g e
Income tax due

f.
112,034
Tax on P 500,000
125,000.
00
199,440.
41
324,440.
41
623,251.27 x 32%
Income tax due
9 a.
.
b.
c.
d.
Salary
- Compensation
Interest on bank deposit

Honorarium
Prizes
- Passive income tax exempt

- Compensation income
- Ordinary business income (not exceeding
P10,000)
e. Lotto winnings
- Tax exempt
f. Income from farming
- Business income
g. Royalties on books
- Passive income (10%)
h. Dividends from domestic - Passive income (10%)
company
i. 13th month pay
- Exempt up to P 30,000
j. Interest on preterminated - Passive income (12%)
deposits
10 a. Juan
.
Salary
150,0
00

Basic personal
(25,000 x 3)
Taxable income
Tax on P 10,000
15,000 x 20%
Income tax due
Less: Withholding tax
Income tax payable
50,000
75,000
125,0
00
25,00
0
500
3,000
3,500
10,100
( 6,6
00)
b. Maria
Salary
125,0
15 | P a g e
00
50,00
0
75,00
0
Less: Basic personal exemptions

Taxable income
11 a
.
.
Tax on P 70,000
5,000 x 20%
Income tax due
Income tax payable
8,500
1,000
9,500
15,000
( 5,500)
Income tax Juan

Income tax Maria
Income tax payable
( 6,600)
( 5,500)
12,100
Monthly insurance premium
150
Times number of months in a year

Deductible health insurance premium
b
.
Monthly insurance premium (maximum)

Times number of months in a year
200
12
2,400
c
.
No amount of health or hospitalization insurance premium is

deductible because the total income of the family exceeds
P250,000.
d
.
Monthly insurance premium (maximum

Times number of months during the year
1
2.
12
1,800
a
.
Compensation income
Basic personal
Additional (25,000 x 4)
Total compensation income
Tax on P 30,000
20,000 x 15%
Income tax due
200
8
1,600
200,000
50,000
100,000
150,0
00
50,000
2,500
3,000
5,500
16 | P a g e
b
.
Gross income
Less: Allowable deductions
Expenses
Basic personal
Taxable income
Tax on P 30,000
25,000 x 15%
Income tax due
c
.
105,000
50,000
100,000 255,00
0
(55,00
0)
2,500
3,750
6,250
Gross income
200,0
00
Less: Optional standard deductions
20,00
(200,000 x 10%)
0
Net income
180,00
0
Less: Basic personal and additional
150,00
exemptions
0
Taxable income
30,0
00
Income tax due P 30,000
1
3.
200,000
Compensation income
Business income
Gross income
Less: Deductions
Optional (186,000 x
40%)
Itemized
Personal exemption
Total
Taxable income
28,50
0
Case 1
125,0
00
186,0
00
311,0
00
Case 2
80,000
230,00
0
310,00
0
74,40
0
50,0
00
124,4
00
186,6
105,00
0
50,00
0
155,00
0
155,00
17 | P a g e
00
EXERCISE 6 5
1. ANSWER: B
Gross receipts
Less: Expenses
Prize, contest
Salary (37,600 + 2,400)
Rent income (38,000/95%)
Less: Depreciation
Total
950,00
0
120,00
0
40,000
8,000

Taxable income
2. ANSWER: D
Tax on P 500,000
Income tax due
Salary
Rent (40,000 38,000)
830,00
0
5,000
40,000
32,000
907,00
0
50,00
0
857,00
0
125,00
0
114,24
0
239,24
0
357,000 x 32%
Less: Withholding taxes

Profession (950,000 x 15%)
142,50
0
2,400
2,00
0
Income tax payable
146,90
0
92,34
0
3. ANSWER: B
Interest on preterminated deposit (20,000 x
12%)
Winnings in raffle (100,000 x 20%)
Dividend from C Corp. (6,000 x 10%)
Total final withholding tax
20,000
600
23,000
4. ANSWER: B
Interest on long-term bank deposit
Winnings in lotto
13th month pay
40,000
20,000
3,500
2,400
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Life insurance benefits
150,00
0
20,00
0
233,50
0
Loan benefits - SSS

Total income exempt from income tax
EXERCISE 6 - 7
INCOME
1. Interest on bank deposit with Banco de
Oro- Php
2. Interest on bank deposit with a bank in the
United States in U.S. dollar
3.
4.
5.
6.
Resident or
citizen
20%
NRA
ETB
20%
Tax table
20%
Exempt
20%
Exempt
5%
10%
10%
Not
taxable
20%
20%
10%
Tax
table
20%
Exempt
20%
Exempt
5%
20%
20%
7.5%
Exempt
Earnings from interest on money market

Royalties on inventions
Royalties on books
Prizes amounting to P7,500
20%
20%
10%
Tax table
7. Prizes amounting to P20,000

8. Winnings in lotto Philippines
9. Winnings in lottery
10. Interest on long-term investment
11. Interest on deposit for 4 years
12. Cash dividends domestic corp.
13. Share of partner in net income of taxable
partnership
14. Interest income under expanded foreign
currency deposit system
EXERCISES 68.1
1.
ANSWER:
Under the Tax Reform Act, only resident citizens are taxable on
income derived from sources within and without the Philippines. All
others are taxable on income within only.
EXERCISE 68.2
INCOME
RC
1. Rent on apartment in the
YES
RA,
NRC
YES
Phils.
2. Rent on apartment in
YES
NO
NRA(ETB NRA(NET
)
B)
YES
YES
NO
NO
19 | P a g e
Canada
3. Dividend-domestic
YES
YES
YES
YES
corporation
4. Dividend-foreign corporation
5. Lotto winnings in the Phils.
6. Lotto winnings in U.S.A.
7. Cash prize on contest, Phils.
8. Cash prize on contest, U.S.A.
9. Interest, bank deposit in
YES
YES
NO
YES
YES
YES
NO
NO
NO
YES
NO
NO
NO
NO
NO
NO
NO
NO
YES
YES
NO
NO
NO
NO
U.S.A.
10. Interest bank deposit Phils.
YES
YES
YES
YES
Problem 6
8.3
1.
ANSWER: C
Taxpayer is resident citizen.
Compensation income,
Philippines
Business income, Philippines
120,00
0
350,00
0
5,000,0
00
5,470,0
00
Business income, Canada

($200,000 x P25)
Total gross income
Less: Deductions
Expenses, Philippines
Expenses, Canada
($150,000 x 25)
Net income
Basic personal
Additional
220,00
0
3,750,00
0
50,000
25,000
Taxable income
Tax on P500,000
925,000 x 32%
Income tax due
Income tax payable
2.
3,970,0
00
1,500,0
00
75,0
00
1,425,0
00
125,000
296,000
421,000
10,000
411,200
ANSWER: C
20 | P a g e
Total final taxes paid:

Dividend from a domestic
company
Final tax rate
Share in income of business
partnership
Final tax rate
Total final tax
3.
40,00
0
10%
50,00
0
10%
4,000
5,000
9,000
ANSWER: A
Resident citizen opted to avail
of OSD.
Compensation income
Business income, Canada
($200,000 x 25)
Total
Less: Optional deductions
(5,350,000 x 40%)
Net income
Taxable income
4.
120,00
0
350,00
0
5,000,00
0
5,350,00
0
2,140,00 3,210,00
0
0
3,330,0
00
50,0
00
3,280,0
00
ANSWER: B
Taxpayer is a resident alien.
Compensation income,
Philippines
120,0
00
350,00
0
470,00
0
220,00
0
250,00
0
Gross income
Less: Expenses, Philippines
Net income
Basic personal
Additional exemption
50,00
0
100,000
150,00
21 | P a g e
(P25,000 x 4)
Taxable income
5.
ANSWER: A
Taxpayer becomes a nonresident
citizen.
Net income
Taxable income
6.
ANSWER: D
Nonresident alien ETB.
Net income
Less: Personal exemption (lower)
Taxable income
7.
250,00
0
50,0
00
200,00
0
350,0
00
220,00
0
130,00
0
20,00
0
110,00
0
ANSWER: D
Taxpayer is NRA NETB.
Dividend from a domestic
company
Shares in net income of a
partnership
Gross income
Rate
Final tax
8.
0
100,00
0
ANSWER: D
Value of inheritance
Lotto winnings
350,0
00
40,000
50,00
0
440,00
0
25%
110,00
0
500,00
0
1,540,0
22 | P a g e
Proceeds of life insurance

Total exemption
00
250,0
00
2,290,0
00
EXERCISE 69.1
ANSWER:
Optional standard deductions are allowed only on professional or

business income of an individual taxpayer, provided that he has
signified in the tax return his intention to avail of said deductions.
Corporations can avail also of optional standard deductions
EXERCISE 69.2
ANSWER:
.
The term gross income means total sales, less cost of goods sold
plus any income from investments and from incidental or outside
operations or sources.
Deductions should not be made for items not ordinarily used in
computing the cost of goods sold.
PROBLEM 6-9.3
1.
ANSWER: A
Salary (99,000 + 5,000)
Professional income (83,000 + 7,000)
Gross income, business
Total
Less: Professional and business expenses
104,00
0
90,00
0
125,00
0
215,00
0
56,50
0
Rent income (57,000/95%)

Net income
Basic personal
158,50
0
60,00
0
322,50
0
50,00
0
23 | P a g e
50,000
Taxable income
Tax on P 140,000
82,500 x 25%
Income tax due
Less: Tax credit
Withholding tax on Wages
P 5,000
Professional income
7,000
Rent (60,000-57,000)
3,000
Income tax payable
2.
ANSWER:
100,00
0
222,50
0
22,50
0
20,625
43,125
15,000
28,125
Salary
104,00
0
Gross receipts on business

Rent income
Professional income
Total
Less: Optional deductions (P275,000 x
40%)
Net income
Basic personal
Additional
P
125,00
0
60,000
90,00
0
275,00
0
110,00
0
50,0
00
50,000
Taxable income
Tax on P 140,000
29,000 x 25%
165,00
0
269,00
0
100,00
0
169,00
0
22,5
00
7,250
24 | P a g e
Income tax due

Income tax payable
29,750
15,000
14,750
PROBLEM 6-9.4
1. ANSWER:
Gross compensation income (7,000 + 300)

x 12
Basic personal
Taxation income
2. ANSWER:
87,600
50,000
25,000
75,000
12,600
Gross business income

Less: Optional deduction (150,000 x 40%)
Net
Taxable income
150,00
0
60,000
90,000
50,000
40,000
EXERCISES 6-10.1: PERSONAL

EXEMPTIONS
1.
ANSWER:
Personal exemptions are arbitrary amounts allowed in the nature

of a deduction from the amount of gross compensation income and/or
net business and/or professional income, as the case may be, for
personal, living or family expenses of an individual (Sec. 9, Regs.).
2.
ANSWER:
Nonresident aliens not engaged in trade or business in the

Philippines are not allowed to claim personal exemptions. They are
subject to final tax based on the entire gross income derived from
sources within the Philippines.
3.
ANSWER:
An illegitimate child is now considered as a qualified dependent for

purposes of claiming the status as head of family.
4.
ANSWER:
B
25 | P a g e
The amount of basic personal exemption allowed to NRA ETB must

not exceed the amount of exemption being allowed in the Philippines.
5.
ANSWER:
Senior citizens are not considered as qualified dependents by its

benefactor for purposes of claiming the additional exemptions.
Illegitimate children are now considered as qualified dependents
for purposes of additional exemption provided that all the other
requisites are complied.
6.
ANSWER:
The husband is the proper claimant of the additional exemptions

except when he does not derive any income from sources within the
Philippines or he explicitly waives his right in favor of his wife.
7.
ANSWER:
No matter how big is the income of the wife as compared to the

husband, if the latter does not waive his right to claim the additional
exemption or he is a nonresident and his income is not purely derived
from sources without, he will always claim the additional exemption.
8.
ANSWER:
In cases of personal exemptions, only NRA ETB are subject to the

law on reciprocity.
Nonresident aliens who shall come to the
Philippines and stay therein for an aggregate period of more than 180
days are deemed NRA ETB.
9.
ANSWER:
A moron, although mentally defective shall not qualify as

dependent because he is not actually financially dependent from the
taxpayer.
A child of a marriage which has been declared void ab initio is a
qualified dependent for purposes of additional exemption.
A child pursuing his studies elsewhere is deemed living with the
taxpayer. He is considered away temporarily from the taxpayers
home.
A dependent receiving a salary of P1,000 monthly is not considered
as gainfully employed.
26 | P a g e
10.
ANSWER:
The term benefactor of a senior citizen pertains to any person

who takes care of a senior citizen as his dependent, whether or not
related to him.
EXERCISES
10.2
1.
ANSWER:
6C
The taxpayer is qualified as head of family because of the legitimate

and recognized natural child.
Only legitimate, illegitimate (which includes recognized natural child)
or legally adopted children can qualify as dependent for purposes of
claiming additional exemptions. Thus, common law husband and widowed
mother of common law husbands are disqualified. The total personal and
additional exemptions is:
Personal exemptions
50,00
0
Additional exemptions:
Legitimate child
Illegitimate child (recognized
natural child)
Total
2.
ANSWER:
25,0
00
25,0
00
50,00
0
100,0
00
A nonresident alien engaged in trade or business is allowed to claim

basic personal exemptions as deduction from gross income. They are not,
however, allowed to claim additional exemption.
The personal exemptions allowed shall be the lesser amount between
that allowed in his country and the amount fixed as exemption for citizens
or residents in the Philippines.
3.
ANSWER:
Basic personal exemptions:

Husband
Wife
50,00
0
50,00
0
64,000
27 | P a g e
Additional exemptions (25,000 x 4)

Total
4.
100,000
164,000
ANSWER: B
Basic personal exemption
Additional exemption (25,000 x 3)
Total personal exemptions
5.
ANSWER: D
Professional fees
Allowances
Total
Less: Expenses
Salaries
Traveling expenses
Office supplies
Rent expense
Taxable income before exemption
Less:
Personal exemption (50,000
+[25,000 x 33])
Taxable income
6.
180,000
24,000
204,000
36,00
0
20,00
0
4,000
36,00
0
96,000
108,000
125,000
.
Answer: A
Gross compensation income
Basic personal
Taxable income
7.
50,000
75,000
125,000
120,000
50,00
0
100,0 150,000
00
270,000
Answer: C
Basic personal
Taxable income
220,000
50,00
0
50,00 100,000
0
120,000
28 | P a g e
EXERCISES 6 11. CLASSIFICATION OF INDIVIDUAL INCOME

TAXPAYERS
1.
ANSWER:
A nonresident alien not engaged in trade or business (NRA NETB)

is not entitled to claim personal exemption.
2.
ANSWER:
An alien who comes to the Philippines for a definite purpose which

in its nature may be promptly accomplished is a transient (Sec. 5,
Regs.).
3.
ANSWER:
The tax base for resident citizens, resident aliens, and nonresident
citizens is taxable income, while nonresident aliens NETB are taxed on
the entire gross income derived from sources within the Philippines.
4.
ANSWER:
5.
ANSWER:
Prizes amounting to more than P10,000 are subject to a final tax of

20%.
Interest on dollar deposits are subject also to a final tax of 20%.
Cash dividends received by individuals as stockholders of a
corporation are subject to a final tax of 10%.
6.
ANSWER:
Royalty income on musical compositions are subject to a final tax of

10%.
7.
ANSWER: C
Interest and dividends (taxpayer is
NRA ETB)
Taxable income
EXERCISES
64,00
0
50,000
14,000
612.
PREMIUM
PAYMENTS
ON
HOSPITALIZATION INSURANCE
HEALTH
AND/OR
29 | P a g e
1.
ANSWER:
Premiums paid by the taxpayer for health insurance of his family is

a deduction (but subject to limitations) from the gross income of an
individual taxpayer, regardless of his status, i.e. single, married, or head
of family.
2.
ANSWER:
Premiums paid on health insurance is deductible from gross income

of an individual taxpayer if the income of his family does not exceed
P250,000 during the year regardless of the nature of his income.
3.
ANSWER:
Compensation income earners are not allowed deductions except

personal exemptions and insurance.
The amount of health or
hospitalization insurance allowed is limited to P2,400 or P200 a month.
Less: Deductions
Basic personal
Insurance premiums (200
x 12)
Taxable income
200,0
00
50,000
25,000
2,400
77,40
0
122,6
00
EXERCISE 6.12.2
Case
1:
None because the total gross income of the spouses exceeds

P250,000.
Case
2:
None. The deduction on health insurance can be claimed by the wife

being the claimant of the additional exemption on dependents.
Case
3:
The husband can only claim a maximum amount of P1,600 because

only P200 is allowed as deduction every month, computed as
follows: P200 x 8 = 1,600.
Case
4:
P1,200. The husband is allowed to claim the deduction even if in the

meantime no dependent is qualified for additional exemption.
EXERCISES 6-13
1.
ANSWER:
A
30 | P a g e
Salary being a compensation income is returnable. Hence, part of the

taxpayers gross income. Provided, however, that the employee is not a
minimum wage earner.
Thirteenth month pay, including other benefits, are exempt from tax
up to P30,000. Considering that 13th month pay is P8,000 only, the entire
amount is exempt from income tax.
2.
ANSWER: D
None. Nonresident citizens are taxable only on income within.
3.
ANSWER: D
Basic personal (head of family)
157,756
50,000
75,000
Taxable income
Tax on P 30,000
2,756 x 15%
Income tax due
4.
125,00
0
32,756
2,500.00
413.40
2,913.40
ANSWER: C
Compensation income
Add: Professional income
Less: Expenses
Total
Less: Exemptions
Basic personal
Additional
Taxable income
Tax on P140,000
48,000 x 25%
Income tax due
5.
ANSWER: D
Refer to the solution to Problem 6.
6.
ANSWER: A
Salary (P191,000 + 25,000)
Add: Taxable other benefits
13th month pay
Other benefits
53,000
350,000
140,000
50,000
25,000
210,000
263,000
75,000
188,000
22,500
12,000
34,500
216,000
18,000
15,000
31 | P a g e
Total
Less: Exemption
33,000
30,000
Total
Taxable income
Tax on P 140,000
29,000 x 25%
Income tax due
Income tax payable
7.
22,500
7,250
29,750
25,000
4,750
ANSWER: D
Gross income, restaurant
Taxable other income (200,000
x 80%)
Total
Less: Deductions
Business expenses (900,000 x 60%)
x85%
Basic personal exemption
Taxable income
8.
3,000
219,000
50,000
169,000
900,000
160,000
1,060,0
00
459,000
50,000
25,000
534,000
526,000
ANSWER: A
Basic salary
Cost of living allowance
Hazard pay
210,549.
76
6,000.00
3,600.00

Add: Net income from
profession
Professional income
Less: Expenses
P156,890.00
67,500.00
Total gross income

Taxable income
Tax on P 250,000
9,600.0
0
220,149.
76
89,390.
00
309,539.
76
50,000.
00
259,539.
76
50,000.00
32 | P a g e
9,539.76 x
2,861.93
30%
Income tax due
Less: Withholding tax on
wages
Income tax payable
9.
52,861.93
27,609.50
25,252.37
ANSWER: B
Business income, Phils., 1/1 4/30
Less: Expenses, Phils.
Business income, Phils., 5/1 - 12/31
540,000
247,500
Professional income
Dividend from foreign corporation (1,500 x 60)
Total
Less: Personal exemption (head of family)
Taxable income
Tax on P 250,000
128,000 x 30%
Income tax due
10
.
40,000
17,000
292,50
0
22,500
90,000
23,000
405,000
428,000
50,000
378,000
50,00
0
38,400
88,400
ANSWER: B
Gross compensation income (210,438.24 +
6,000)
Basic personal
Additional
216,438.
24
50,000.
00
75,000.
00
Taxable income
Tax on P 70,000
21,438.24 x 20%
Income tax due
125,000
.00
91,438.
24
8,500.0
0
4,287.
65
12,787.
65
27,246.
40
33 | P a g e
Income tax payable

11
.
(14,458.
75)
ANSWER: B
Basic salary (48,465.25 + 2,500)
50,965.2
5
50,000.0
0
965.25

Taxable income
Tax on P 965.25 x 5%
Income tax payable
12
.
48.26
( 431.
45)
( 383.
19)
ANSWER: B
Income tax due of Alex
(14,458.7
5)
( 383.1
9)
(14,841.
94)
Income tax due of Paloma

Aggregate amount payable/refund
13
.
ANSWER: A
Basic personal
220,00
0
50,00
0
50,000
Taxable income
14
.
100,0
00
120,000
ANSWER: C
Basic personal
200,00
0
50,00
0
34 | P a g e
Additional
Taxable income
15
.
50,000
100,000
100,000
Answer: B
Salary - 1/1 to 6/30 (P8,000 x 6)
Add: Proceeds of insurance
Less: Premium payments (P5,000 x 20)
Gross income
Taxable income
48,000
500,00
0
100,000
400,000
448,000
50,000
398,000
EXERCISE 6-10.
The petition has merit.
Cooperatives are not required to withhold taxes on interest from savings and time deposits of
their members based on a BIR Ruling.
There is nothing in the ruling to suggest that it applies only when deposits are maintained in a
bank. Rather, the ruling clearly states, without any qualification, that since interest from any
Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes
are paid by banks, cooperatives are not required to withhold the corresponding tax on the interest
from savings and time deposits of their members. This interpretation was reiterated in BIR Ruling
[DA-591-2006] dated October 5, 2006, which was issued by Assistant Commissioner James H.
Roldan upon the request of the cooperatives for a confirmatory ruling on several issues, among
which is the alleged exemption of interest income on members deposit (over and above the share
capital holdings) from the 20% final withholding tax. In the said ruling, the BIR opined that:
xxxx
3. Exemption of interest income on members deposit (over and above the share capital holdings) from
the 20% Final Withholding Tax.
The National Internal Revenue Code states that a final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary
benefit from the deposit substitutes and from trust funds and similar arrangement x x x for individuals
under Section 24(B)(1) and for domestic corporations under Section 27(D)(1). Considering the
members deposits with the cooperatives are not currency bank deposits nor deposit substitutes, Section
24(B)(1) and Section 27(D)(1), therefore, do not apply to members of cooperatives and to deposits of
primaries with federations, respectively.
Given that petitioner is a credit cooperative duly registered with the Cooperative Development
Authority (CDA), Section 24(B)(1) of the NIRC must be read together with RA 6938, as amended
by RA 9520.
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to
foster the creation and growth of cooperatives as a practical vehicle for promoting self-reliance and
harnessing people power towards the attainment of economic development and social justice. Thus,
to encourage the formation of cooperatives and to create an atmosphere conducive to their growth
and development, the State extends all forms of assistance to them, one of which is providing
cooperatives a preferential tax treatment.
35 | P a g e
The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles
61 and 62 of RA 6938, which read:
ART. 61. Tax Treatment of Cooperatives. Duly registered cooperatives under this Code which
do not transact any business with non-members or the general public shall not be subject to any
government taxes and fees imposed under the Internal Revenue Laws and other tax laws. Cooperatives
not falling under this article shall be governed by the succeeding section.
ART. 62. Tax and Other Exemptions. Cooperatives transacting business with both members and
nonmembers shall not be subject to tax on their transactions to members. Notwithstanding the provision
of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the
following tax exemptions; x x x.
This exemption extends to members of cooperatives. It must be emphasized that
cooperatives exist for the benefit of their members. In fact, the primary objective of every
cooperative is to provide goods and services to its members to enable them to attain increased
income, savings, investments, and productivity. Therefore, limiting the application of the tax
exemption to cooperatives would go against the very purpose of a credit cooperative. Extending
the exemption to members of cooperatives, on the other hand, would be consistent with the intent
of the legislature. Thus, although the tax exemption only mentions cooperatives, this should be
construed to include the members.
All told, we hold that petitioner is not liable to pay the assessed deficiency withholding taxes
on interest from the savings and time deposits of its members, as well as the delinquency interest
of 20% per annum.
In closing, cooperatives, including their members, deserve a preferential tax treatment
because of the vital role they play in the attainment of economic development and social justice.
CHAPTER 7
EXERCISES 7 1
1 a. By contributing P100,000 each with the intention of dividing
.
whatever profit is obtained, Atienza, Bauzon and Carmona have
formed a business partnership which is taxable as a corporation.
The registration with the Securities and Exchange Commission is
not an indispensable requisite in its formation.
In this case, the business organization formed will fall under the
phrase partnership no matter how created or organized, which is
included in the definition of a corporation.
b. The business organization formed is a corporation. The five
entrepreneurs served as the incorporators.
c.
The two corporations have formed a joint venture because it is clear

that their intention is to accomplish a single project which upon
completion, the joint undertaking will be automatically dissolved.
The joint venture is not taxable as a corporation (BIR Ruling 83-03).
36 | P a g e
d. Gigi and Jayjay have formed a general professional partnership. By

organizing an accounting and auditing firm, they shall exercise a
common profession for certified public accountants. A general
professional partnership is not subject to income tax.
e. The business organization formed possesses the feature applicable
to a joint stock company. It is taxable as a corporation.
2
.
Classification
a. Domestic corporation
b. Resident foreign
corporation *
c. Nonresident foreign
corporation
Situs of Income
Tax Base
Within and
without
Within only
Taxable
income
Taxable
income
Gross
income
Within only
*It is an international carrier (See Comm vs. BOAC, et al, GR Nos.

65773-74, April 30, 1987). In which case, the tax base can be Gross
Philippine Billings.
3 a
. .
Domestic corporation
Sales domestic
Sales abroad
Gross sales
Less: Cost of goods
sold
Gross income
Less: Expenses
Domestic
Foreign
Total expenses
Taxable income
Rate
Income tax
2008
2009
3,000,0
00
7,000,
000
10,000,
000
5,000,
000
5,000,0
00
3,000,0
00
7,000,
000
10,000,
000
5,000,
000
5,000,0
00
1,000,0
00
2,000,0
00
3,000,0
00
2,000,0
00
35
%
700,00
0
1,000,0
00
2,000,0
00
3,000,0
00
2,000,0
00
30
%
600,00
0
37 | P a g e
b
.
Resident foreign
corporation
Sales domestic
Less: Cost of goods sold (3/10 x
5,000,000)
Gross income
Less: Expenses on domestic
sales
Taxable income
Rate of tax
Income tax
c
.
3,000,0
00
1,500,0
00
1,500,0
00
1,000,0
00
500,000
35
%
175,00
0
3,000,0
00
1,500,0
00
1,500,0
00
1,000,0
00
500,000
30%
3,000,0
00
400,00
0
3,400,0
00
35
%
1,190,0
00
3,000,0
00
400,00
0
3,400,0
00
30
%
1,020,0
00
150,000
Nonresident foreign
corporation
Sales domestic
Yield from deposit
substitute
Gross income
Rate
Income tax
4 a. Bago Corporation shall be covered by the application of the MCIT

. effective 2010.
b. Yes, the corporation shall be subject to a minimum income tax in 2010
because the normal income tax is P90,000 while the 2% of the gross
income which represents the minimum corporate income tax is
P100,000, computed as follows:
Gross income 2010
Less: Expenses
Taxable income
Rate
5,000,0
00
4,700,0
00
300,000
30
%
38 | P a g e
Normal income tax

Less: Minimum income tax (5,000,000
x 2%)
Excess MCIT
90,000
100,000
( 10,00
0)
The counting of the four (4) year period shall commence in 2006 a
year following the year in which the corporation was registered with the
BIR.
The corporation is not covered by the MCIT from 2005 to 2009. It
shall be covered only in 2010 or on the 4th year following the year in
which it was registered with the Bureau of Internal Revenue.
5
.
Gross sales
Sales returns and discounts
Cost of goods sold
Total
Net
Add: Capital gain
Gross income
Less: Deductions
Taxable income
Rate of tax
Normal Income tax
MCIT:
2007 (3,550,000 x 2%)
2008 (4,455,000 x 2%)
2009 (1,390,000 x 2%)
Income tax
Excess MCIT 2007 (71,000
2007
2008
2009
4,580,0
00
200,00
0
860,0
00
1,060,0
00
3,520,0
00
30,0
00
3,550,
000
3,480,4
00
69,600
5,250,0
00
175,00
0
620,0
00
795,0
00
4,455,0
00
2,850,0
00
295,00
0
1,200,0
00
1,495,0
00
1,355,0
00
35,0
00
1,390,
000
850,0
00
540,00
0
30
%
162,00
0
35
%
24,360
.
4,455,0
00
4,200,0
00
255,00
0
35
%
89,250
71,000
89,100
.
71,00
0
46,64
.
89,250
27,80
0
162,00
0
39 | P a g e
24,360)
Less: Carry forward of excess
MCIT
Income tax payable
6 a
. .
0
71,00
0
Sales
Sales returns and allowances
Sales discounts
Purchases
Freight-in
Purchase returns and
allowances
Purchase discounts
Goods available for sale
Inventory, December 31
Gross income
Less: Operating expenses
Taxable income
Rate of tax
Normal Income tax
b MCIT (3,787,000 x 2%)
.
c
.
Income tax due
7 Gross sales
______
162,00
0
6,000,0
00
200,00
0
15,00
0
Net sales
Less: Cost of goods sold
Inventory, January 1
46,64
0
42,61
0
2,400,0
00
1,500,0
00
35,000
( 30,00
0)
(
7,00
0)
3,898,0
00
1,900,0
00
215,0
00
5,785,0
00
1,998,0
00
3,787,0
00
1,600,0
00
2,187,0
00
35
%
765,4
50
75,7
40
765,4
50
2,000,
40 | P a g e
000
1,600,
000
400,00
0
Less: Cost of sales

Gross income
Less:
Optional
deduction
Gross income
Rate
standard
400,000
40%
Taxable net income

8
.
160,00
0
240,00
0
a
.
The rate of tax applicable to the educational institution is 10%

because the income from unrelated activity does not exceed 50% of
the entire gross income.
b
.
If the income from unrelated activity is more than the income from
related the Arts University would be subject to a tax rate of 35%
until 2008 and 30% effective 2009.
9
.
2006
a
.
Provision for income tax
50,000
Income tax payable
50,0
00
To record income tax liability using normal

income tax.
b
.
Deferred charges MCIT
15,000
Income tax payable
15,0
00
To record excess MCIT (65,000

50,000)
c. Income tax payable
Cash in bank
65,000
65,0
00
To record payment of income tax due

for 2006.
a
.
2007
The corporation is not allowed to carry forward and credit the 2006
excess MCIT against the income tax liability for 2007, since the
41 | P a g e
2007 MCIT is greater than the normal income tax for said year.
b
.
To record income tax liability using the normal

income tax rate.
Provision for income tax
Income tax payable
85,000
85,000
c. To record application of excess MCIT.

Income tax payable
d
.
To record payment of income tax due for

2007.
Income tax payable
15,000
15,000
100,00
0
Cash in bank
100,00
0
2008
The corporation is not allowed to carry forward and credit the
2006 and 2007 excess MCIT against the normal income tax liability
for 2008 and 2009 since the 2008 and 2009 MCIT are greater than
the Normal Income Tax for said year.
The accounting entries in 2008 and 2009 shall be similar to
2006 and 2007 above.
For taxable year 2010 when the expired portion of excess MCIT
(65,000 50,000) for taxable year 2006 is closed to Retained
Earnings account due to its non-application the entry is:
Retained earnings
10
.
1
.
Tuition fees
School canteen
Dormitories
Bookstores
Car stickers
Total
15,000
15,000
1,560,0
00
250,000
95,000
48,000
8,30
0
1,961,3
00
If Fatima University is a non-stock, non-profit educational institution

42 | P a g e
11
.
no income shall be reported for income tax purposes because nonstock non-profit schools are not subject to income tax.
3
.
If Fatima University is a government educational institution it will

not report any income for income tax purposes because government
educational institutions are exempt from income tax.
a
.
Gross receipts
4,500,0
00
1,200,0
00
3,300,0
00
680,0
00
2,620,0
00
35
%
917,0
00
Less: Cost of sales

Gross income
Less: Deductions
Taxable income
Rate
Income tax
b
.
Taxable income
2,620,0
00
75,000
42,00
0
2,737,0
00
Yield from deposit substitutes

Interest income
Total
Less: Dividends paid
Income tax paid
Tax on deposit substitutes (75,000 x
20%)
Tax on interest (42,000 x 20%)
Reserved for building construction
Improperly accumulated earnings
12
.
375,000
917,000
15,000
8,400
1,500,0
00
2,815,4
00
( 78,4
00)
The final withholding tax to be paid by the corporation (whether

domestic, resident foreign or nonresident foreign) is uniformly
computed as follows
Gross selling price (P110 x 1,000)
Less: Cost (P100 x 1,000)
P
110,000
100,000
43 | P a g e
Net capital gain

Rate of tax
Capital gains tax (final tax)
10,000
5%
500
EXERCISES 72
72.1
1.
ANSWER: A
2.
ANSWER: C
3.
Answer: D
For purposes of MCIT, the taxable year in which business
operations commenced shall be the year in which the domestic
corporation is registered with the Bureau of Internal Revenue.
Firms registered with BIR in any year shall be covered by MCIT
after the lapse of three calendar years.
The corporation is registered with BIR in 2004. Therefore, it
shall be subject to MCIT effective 2008.
4.
ANSWER: D
Gross income
Less: Deductions
Taxable income
Rate of tax
Normal income tax
MCIT (P852,000 x 2%)
Income tax payable (higher)
5.
Answer: C
Gross income
Less: Deductions
Taxable income
Rate of tax
Normal income tax
852,
000
800,00
0
52,000
30
%
15,600
17,040
17,040
632,00
0
610,00
0
22,000
35
%
7,70
44 | P a g e
0
12,640
12,640
MCIT (P632,000 x 2%)

Income tax payable (higher)
PROBLEM 7-2.2
1.
2.
3.
ANSWER: C
Minimum Corporate Income Tax
Less: Normal income tax
Excess of MCIT over NIT
50,000
20,000
30,000
Entry:
Deferred charges - MCIT
Income tax payable
30,000
ANSWER: A
Retained earnings
Deferred charges - MCIT
30,000
ANSWER: B
2005
2006
2007
Total excess of MCIT over NIT
Journal entry:
Income tax payable
30,000
30,000
27,000
5,000
10,000
42,000
42,000
42,000
PROBLEM 72.3:
1. ANSWER: B
Income tax, 1st Qtr (NIT higher)
Less: Taxes withheld Prior year
Taxes withheld 1st qtr
Excess MCIT prior year
Income tax due, 1st Qtr (normal
income tax)
2.
100,00
0
10,000
20,000
30,000
ANSWER: B
Income tax, 2nd Qtr (MCIT higher)
60,000
40,000
330,00
0
10,000
20,000
45 | P a g e
Taxes withheld 2nd qtr

Net income tax payment 1st
30,000
40,000
Qtr
Income tax due, 2nd Qtr MCIT
3.
ANSWER: C
Income tax, 3rd Qtr (NIT higher)
Taxes withheld 3rd qtr
Qtr
MCIT paid in the 2nd Qtr
Excess MCIT in prior year
470,00
0
10,000
20,000
30,000
40,000
40,000
230,000
30,000
Income tax due, 3rd Qtr - NIT

4.
ANSWER: C
Annual income tax (NIT higher)
Taxes withheld 4th qtr
Qtr
Net income tax payment 3rd
Qtr
Excess MCIT in prior year
10,000
20,000
30,000
40,000
35,000
40,000
70,000
230,000
30,000
ANSWER: A
Annual income tax (MCIT higher)
Taxes withheld 4th qtr
400,00
0
70,00
0
670,00
0
Income tax due, Final Qtr - NIT

5.
100,00
0
230,00
0
505,00
0
165,0
00
550,00
0
10,000
20,000
30,000
40,000
35,000
46 | P a g e
Qtr
Qtr
40,000
Net income tax payment 3rd
70,000
230,000
Income tax due, Final Qtr - NIT
EXERCISE 73
1. ANSWER: A
Gross income
Less: Deductions
Expenses
NOLCO
2,950,0
00
1,750,0
00
300,00
0
Taxable income
Rate of tax
Income tax due
2.
ANSWER: D
Taxable income
Add: Interest on bank deposit
(16,000/80%)
Proceeds of insurance
NOLCO
Dividends from ABB
Improperly accumulated earnings

tax
2,050,0
00
900,000
35
%
315,00
0
900,000
20,000
1,200,0
00
300,00
0
75,00
0
Total
Less: Dividends paid
Income tax paid
Interest on bank deposit
(20,000 16,000)
Improperly accumulated taxable
income
Rate
475,00
0
75,0
00
500,000
315,000
4,000
1,595,0
00
2,495,0
00
819,00
0
1,676,0
00
10
%
167,60
0
47 | P a g e
3.
4.
5.
ANSWER: D
ANSWER: D
ANSWER: C
PROBLEM
7-
4.1
1. ANSWER: C
Gross income
11,230,0
00
Less: Expenses
Salary, allowances and bonus
6,400,000
Other operating expenses
2,600,000
Depreciation of additional
school facilities:
Classrooms (1,300,000/20 x 48,750
9/12)
Furniture & equipment
10,0
(400,000/20 x 6/12)
00
Taxable income
Rate of tax
Income tax
2.
ANSWER: D
Tuition fees
9,500,00
0
1,200,00
0
350,000
180,00
0
11,230,0
00
Miscellaneous fees
Income of bookstore
Income of school canteen
Gross income
Less: Expenses
Salary, allowances and
bonus
Other operating expenses
Construction of additional
classrooms
Furniture and equipment
Taxable income
Rate of tax
9,058,75
0
2,171,25
0
10%
217,12
5
6,400,000
2,600,000
1,300,000
400,000
10,700,0
00
530,000
10
48 | P a g e
%
53,00
0
Income tax
3.
ANSWER: B
A public elementary school is also a government educational
institution. They are exempt from income tax under Sec. 30 of the
National Internal Revenue Code.
A non-stock, non-profit educational institution is exempt from
tax under Article XIV, Sec. 4[3], [4] of the Constitution.
A non-profit educational institution is subject to an income tax
rate of 10%.
4.
ANSWER:
PROBLEM 74.2
1. ANSWER: A
Gross income
Less: Deductions
Operating expenses
Cost of building
10,000,0
00
6,400,0
00
2,500,0
00
Taxable income
Rate of tax
Income tax due
2.
ANSWER: C
Gross income
Less: Deductions
Operating expenses
Depreciation(2,500,000/50x6/
12)
Taxable income
Rate of tax
Income tax due
3.
ANSWER:
8,900,00
0
1,100,00
0
10%
110,00
0
10,000,0
00
6,400,0
00
25,00
0
6,425,00
0
3,575,00
0
10%
357,50
0
B
49 | P a g e
The importation of laboratory equipments are exempt from customs

duties if the school is a private educational institutions.
The school building, even if rented only by the school, if being used
actually, directly and exclusively for educational purpose is exempt from
real property tax.
The portion of the school building is subject to real estate tax
because it is not being used actually, directly and exclusively for
educational purpose.
The income from operation is taxable. Only income received by
non-stock non-profit educational institutions and government
educational institutions are exempt.
4.
ANSWER:
EXERCISES 7 5
PROBLEM 75.1.
1. ANSWER: A
Gross income, Philippines
Gross income, U.S.A.
Less: Expenses, USA
Royalties, USA
Taxable income
Rate of tax (2008)
Income tax
2.
P
740,00
0
425,00
0
690,00
0
450,00
0
P
315,00
0
240,00
0
50,00
0
605,00
0
35%
211,75
0
ANSWER: C
Gross income, Phils.
Less: Expenses
Taxable income
Rate of tax (2008)
Income tax
740,00
0
425,00
0
315,00
0
35%
110,25
50 | P a g e
0
3.
ANSWER: A
740,00
0
10,00
0
750,00
0
35%
262,50
0
Interest on bank deposit, PNB

Total
Rate of tax (2008)
Final tax
4.
ANSWER: A
PROBLEM 7
5.2
ANSWER: D
Gross income, Phils.
Less: Deductions
Gross income, USA
Less: Deductions
Taxable income
Rate (2009)
Income tax
PROBLEM 7
5.3
ANSWER:
60,00
0
30,000
120,00
0
30,00
0
150,00
0
30%
45,000

Less: Deductions
Taxable income
Rate of tax (2008)
Income tax
200,00
0
80,000
2,800,0
00
1,300,0
00
1,500,0
00
35
%
525,0
00
51 | P a g e
PROBLEM 7
5.4
1. ANSWER: B
1,200,000
800,000
Gross income, U.S. ($125,000 x P40)

P5,000,000
Less: Expenses, U.S. ($62,000 x P40)
2,480,000
Gross income, HK ($345,000/5x40)
2,760,000
Less: Expenses, HK ($230,000/5 x 40)
1,840,000
Taxable income
Rate of tax
Income tax
2.

Taxable income
Rate of tax
Income tax
00
920,00
0
3,440,0
00
3,840,0
00
30
%
1,152,0
00
1,200,0
00
800,00
0
400,000
30%
120,000
ANSWER: D
Rate of tax
Final tax
2,520,0
ANSWER: C
3.
400,00
0
1,200,0
00
30
%
360,00
0
ANSWER: A
Gross income
Rate of tax
Income tax
1,200,0
00
2.5
%
30,00
52 | P a g e
0
5.
ANSWER: B
Taxable income
Rate of tax
Income tax
Amount remitted to mother company
(400,000 - 120,000)
Rate of tax
Branch profit remittance tax
6.
1,200,0
00
800,00
0
400,000
30
%
120,00
0
280,000
15%
42,000
ANSWER: A
Exempt from branch profit remittance
tax.
7.
ANSWER: B
Gross income
Rate of tax
Final tax
8.
1,200,0
00
25
%
300,00
0
ANSWER: B
Gross income
Rate of tax
Final tax
1,200,0
00
4.5
%
54,00
0
EXERCISE 7 6
1. ANSWER: A
2.
ANSWER:
3.
ANSWER: B
53 | P a g e
Net income after tax

Rate of tax
Branch profit remittance tax
4.
ANSWER: C
Net income after tax
Royalty
Dividend
Total
Less: Branch profit remittance tax
Amount to be remitted to head office
5.
ANSWER: B
6.
ANSWER: D
40,000,0
00
15%
6,000,00
0
40,000,0
00
3,500,00
0
4,000,0
00
47,500,0
00
6,000,0
00
41,500,0
00
GSIS, SSS, and PHIC are exempt from income tax.

PAGCOR is now subject to income tax per RA 9727.
7.
ANSWER:
8.
ANSWER: C
All assets of a non-stock non-profit educational institution are
exempt from customs duties on importation.
EXERCISE 77. MULTIPLE CHOICE THEORY

1.
ANSWER: B
Cuentas en participacion is considered as a corporation subject to
corporate tax.
General professional partnerships and co-ownerships are not
subject to income tax.
A joint venture which is formed for the purpose of undertaking
energy operations with the government are exempt from tax.
54 | P a g e
2.
ANSWER: A
An individual permanently residing in the Philippines is classified
as resident regardless of whether he is a citizen or not.
3.
ANSWER: D
Domestic corporations and resident foreign corporations are taxed
based on taxable income.
Non-profit cemeteries are exempt from income tax.
Nonresident foreign corporations are not allowed to claim
deductions for purposes of income taxation. They are taxed based
entirely on gross income derived from sources within the Philippines.
4.
ANSWER:
5.
ANSWER: D
6.
ANSWER: D
Dividends received by individuals from a domestic company are
subject to final tax of 10%.
The rule on tax sparing credit applies only when the dividends are
received by nonresident foreign from a domestic corporations.
7.
ANSWER: B
Sales (2,968,000 /112%)
P2,650,
000
1,725,0
00
925,000
Less: Cost of sales

Gross income
Less: Expenses
Inclusive (386,400 / 112%)
Exclusive
Taxable income
Rate of tax (2008)
Income tax
345,000
450,000
795,000
130,000
35%
45,500
EXERCISE 78. CASE PROBLEM
Excess income taxes paid in a year that could not be applied as tax credit to
taxes due the following year may be refunded the next year.
Thus, if the excess income taxes paid in 2005 have not been entirely used by
a taxable corporation against its quarterly income tax liabilities for 2006,
the unused amount of the excess may still be refunded, provided that the
claim for such a refund is made within two years after payment of the tax.
55 | P a g e
If a taxpayer suffered a net loss in 2006, incurring no tax liability to

which a previous years tax credit could be applied, there is no reason for
the BIR to withhold a tax refund which rightfully belongs to the taxpayer.
Technicalities and legalisms, however exalted, should not be misused
by the government to keep money not belonging to it, thereby enriching
itself at the expense of its law-abiding citizens (solutio indebiti).
Thus:
Excess tax (TY 04, filed 4/15/05)
TY 2005 (filed 2006):
Income tax due
Less: Tax credit (excess tax 05)
Balance (may be refunded)
13,929,793.
51
4,187,523.0
0
13,929,793.
51
9,742,270.5
1*
* Claim for refund should be made not later that April 15, 2007.
56 | P a g e

Income Taxation

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EXERCISES 5-1

None. The entire income is exempt because Minnie is a MWE.

b Fernando must report P20,000 [(P12,000 x 10) 100,000] as income.

Rodolfo must report an income of P75,000.

Taxable. Salaries received by employees who are unable to work due to

The amount is taxable to Nilo. Separation pay is exempt from income

Income subject to tax

Income from bus operation

Proceeds of life insurance policy

Proceeds of insurance policy

Applying the principle of beyond the control test, the separation

The retirement benefit of P300,000 is taxable to Jovito because he

The amount of P500,000 should not be declared in the income tax

b. The talent fees derived from Inter-Island Broadcasting Network

The $5,000 value of the trophy is not taxable to her because it is in

Salary (P25,000 x 12)

the time of retirement; and (4)

The benefit of exemption can be

A monthly gratuity of P20,000 to a Medal of Valor awardee is

Letter A refers to deductions from gross income.

This is a case of key insurance where the company insures the

The P3,500,000 is exempt from income tax because it is given as

The proceeds of life insurance should be declared for estate tax

The provision exempting "interest on government securities" has

tax. However, the amount in excess of P30,000 are taxable to the

2. a. Yes, Allen is qualified as head of family because of his mother who is

lives with her.

b. Gross compensation income

c. If Carina has no daughter to support, her filing status is

Less: Basic personal exemption

b. Compensation income Jim

Business income Pat

Income tax Pat

Income tax due

Interest on bank deposit

- Passive income tax exempt

Less: Personal exemptions

Less: Basic personal exemptions

Income tax Juan

Monthly insurance premium

Times number of months in a year

Monthly insurance premium (maximum)

No amount of health or hospitalization insurance premium is

Monthly insurance premium (maximum

Less: Basic personal exemption

Income tax due

Less: Withholding taxes

Income tax payable

Life insurance benefits

Loan benefits - SSS

Earnings from interest on money market

7. Prizes amounting to P20,000

1. Rent on apartment in the

Business income, Canada

Total final taxes paid:

Proceeds of life insurance

Optional standard deductions are allowed only on professional or

Rent income (57,000/95%)

Gross receipts on business

Income tax due

Gross compensation income (7,000 + 300)

Gross business income

EXERCISES 6-10.1: PERSONAL