Melvian Joko O.

Yanilla
BS Accountancy III-C

TAX01
MWF
10:30-11:30
Chapter 13-A
(Discussion Questions)

2. Rationale of the arbitrage limit

The limit is intended to recover the tax saving at taxpayer who takes advantage of higher regular
tax savings created from interest expense deduction and a lower final tax on deposit interest
income. A deduction cap was set to eliminate the arbitrage savings which was mathematically
computed as:

(Corporate income tax rate - Final tax on interest )

Corporate income tax rate

4. TAXES
Taxes paid or incurred within the taxable year in connection with the taxpayers, trade or
business, or exercise of profession shall be allowed as deduction, except:
I. Philippine income taxes except fringe benefit tax. Final income tax Capital gain tax
Regular income tax
II. Foreign income tax, if claimed as tax credit.
III. Estate tax and donor's tax.
IV. Special Assessment
V. Other non-deductible taxes:
a. Business taxes, in particular, the value added tax (VAT)
b. Surcharges or penalties on delinquent taxes.

5. The foreign tax credit tax credit with one foreign country shall be the lower of the total of the
tax credit allowable per country and the world income tax credit limit which can be computed as
follows:

Total foreign taxable income

( World taxable income ) X Philippine Income Tax due

6. Requisites for deduction of losses

I. It must be incurred in trade, profession or business of the taxpayer.(the loss must be a
business loss, not a personal loss.)
II. It must pertain to property connected with the trade, business or profession it the loss
arises from fires, storms, shipwrecks or other casualties, or from robbery, theft or
embezzlement.(the loss must be an ordinary loss)
III. The loss must not compensated by insurance or indemnity contract.(the loss must be
actually sustained, not temporary)
 IV. A declaration of loss must filed by that taxpayer within 45 days from the date of
discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.
V. The must not have been claimed as a deduction for state tax purposes in the estate tax
return (Double deduction is not be allowed)

9. Taxpayer engaged in wasting asset shall classify their expenditures into:

I. Cost of acquisition or improvement of tangible property.
II. Intangible exploration, drilling and development cost.

11. Based on the taxable income derived from trade, business or profession (i.e. Net income)
before the deduction of any contributions. a. 10% for individuals b. 5% for corporations

12. The rules in computing the deductible pension expense one as follow:
I. The contribution to the fund is first attributed to current service cost. The funding of
current service cost is deductible in full.
II. The excess funding is attributed to any unfunded past service cost. The funding of past
service cost is amortized over 10 years regardless of the actual vesting period of covered
employees.
III. Overfunding of the fund is prepaid pension expense deductible in the future as funding
of future current service cost.

Chapter 13-B Answers:

Discussion Questions)

1. It is considered as a special deduction in assisting and in complying with certain legal

requirements. Special deductions are other items of deductions which may or may not partake
the nature of an expense, but are allowed by the NIRC or by special laws as deductions. Special
deductions includes deduction incentives to taxpayers in assisting and in complying with certain
legal requirement.

2. The Special expenses under the NIRC and special laws are as follows :
I. Income distribution from a taxable estate or trust.
II. Transfer to reserve fund and payments to policies and annuity contracts of insurance
companies.
III. Dividend distribution of a Real Estate Investment Trust (REIT) under RA 9856.
IV. Transfer to reserves funds of taxable cooperatives.
V. Discounts to senior citizens under RA 9257.
VI. Discounts to persons with disability under RA 9442.

3. The Deduction incentives under special law are as follows:

I. Additional compensation expense to senior citizen employees under RA9257
II. Additional compensation expense for persons with disability under RA 9277, as amended
by RA 9442
III. Cost of facilities Improvements for pensions with disability in accordance with RA 7277,
as amended by RA 9442
IV. Additional training expense under the RA 8502 - Jewelry Industry Development Act of
1998
 V. Additional contribution expense under the Adopt-a-School program under RA 8525
VI. Additional deductions for compliance to rooming-in and breast-feeding practices under
RA 7600, as amended by RA 10028
VII. Additional free legal assistance expense under RA 9999
VIII. Additional productivity incentive bonus expense under RA 6971

4. Net operating loss carry-over (NOLCO) can be calculated through the following formula:
Gross income subject to regular tax --------------------
Less:
Total deductions excluding NOLCO from prior years
and deduction incentives under special laws. ---------------------
Net operating loss carry-over --------------------

5. Requisites of deductibility of NOLCO:

I. The taxpayer must not be exempt from income tax during the taxable year when the
NOLCO was incurred.
II. There has been no substantial change in the ownership of the business or enterprise.

A change of at least 75% of either the paid up capital nominal value of the outstanding shares of
a corporation is deemed a substantial change in business ownership.

6. The rules in the carry-over of NOLCO are as follow:

I. NOLCO is claimable in a first-in first-out (FIFO) fashion.
II. NOLCO can be claimed only up to the extent of the business net income in the next three
years. Prior year NOLCO cannot be deducted against a subsequent year net operating
loss.
III. Any NOLCO which remains unused at the end of the three years perspective period will
expire.

7. NOLCO is not one of the assets of the absorbed corporation that can be transferred and
absorbed by the surviving corporation, noting that it is privilege or deduction that can be availed
only by the absorbed corporation.

Chapter 13-C Answers:

(Discussion Questions)

1. Optional Standard Deduction (OSD) is in lieu of the itemized deductions including NOLCO
allowable under the NIRC and special laws. Under this, the allowable deduction of the taxpayer
is simply presumed as a percentage of gross sales or receipt for individuals and gross income for
corporations. Accordingly, it doesn't relieve the taxpayer of the responsibility to deduct
withholding tax on certain income payments as required by the NIRC.

2. OSD is a proxy for itemized deductions, all taxpayers who are subject to tax on taxable
net income can claim deductions, except the following:
Non-resident alien engaged in trade or business (NRA-ETB)
Taxpayers mandated to use itemized deductions.
3. Operating income is simply the amount of revenue left over after accounting for all the
expenses necessary to keep the business running. Among other things, this includes expenses for
rent, cost of goods, utilities, freight and wages. While it includes depreciation, operating income
does not account for interest payments, investment income, taxes or income from secondary
operations. Operating income is simply the revenue net of the cost of keeping the lights on while
in the non-operating income are gains from dealings in properties, distribution from a general
professional partnership exempt co-ownership and taxable estates or trusts, casual active income
and passive income.

4. The individual OSD is based on gross receipts or gross sales, it is deemed to replace all items
of deductions against gross receipts or gross sales in computing net income and the corporate
OSD is based on gross income, it is deemed to replace all items of deductions from gross income
in computing net income.

5. A general professional partnership (GPP) is not a taxable entity. It is merely viewed as a pass
through entity where income is ultimately taxed to the partners. Each partner shall report as
gross income his distributive share actually or constructively received, in the net income of the
GDP.