Income Tax of Individuals: Income Taxation 6Th Edition (By: Valencia & Roxas) Suggested Answers

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 89
SUGGESTED ANSWERS
Chapter 11: Income Tax of Individuals
CHAPTER 11
INCOME TAX OF INDIVIDUALS
Problem 11 – 1 TRUE OR FALSE
1. False – interest income under expanded foreign currency deposit of a nonresident
alien is exempt from income tax in the Philippines.
2. False – taxable for income within only.
3. True
4. True
5. False – the installment payment of income tax due for individuals is allowed only
when the income tax due is more than P2,000.
6. True
7. False – the income of a senior citizen is to be tax just like a minimum wage earner.
8. True
9. False – the quarterly income tax return of a self-employed taxpayer is not subject to
personal exemption, only his adjusted annual income tax return.
10. True
11. False – No personal exemption is allowed to NRANEBT.
12. True

1. True
2. False – a Filipino special taxpayer has the option to be taxed using final tax of 15% or
normal tax of 5% to 32%.
3. True
4. True
5. False – subject to creditable withholding income tax.
6. True.
7. False – Tax credit of income taxes paid outside the Philippines is allowed only for
resident Filipino citizen and domestic corporation.
8. False – The creditable withholding tax is 15%.
9. False – Gross income includes other income but not compensation income.
10. False – tax-exempt
11. True
12. False – Only Philippine lotto and sweepstakes are tax-exempt.
Problem 11 – 3 Problem 11 – 4 Problem 11 – 5

1. A 1. D 1. C
2. C 2. C 2. B
3. D 3. B 3. A
4. A 4. A 4. D
5. D 5. C 5. D
6. C 6. B 6. B
7. B 7. D 7. B
8. D 8. D 8. D
9. D 9. B 9. D
10. B 10. C 10. A
Problem 11 – 6 C
Basic personal exemption P50,000
Additional exemptions for:
SUGGESTED ANSWERS
Mentally retarded legitimate son (40 years) old P25,000

Illegitimate daughter (10 years old) 25,000
Adopted child (6 years old) 25,000 75,000
Total deductions allowed P125,000
For additional exemption of the taxpayer’s dependent, the Tax Code defines a
“dependent” as a legitimate, illegitimate or legally adopted child chiefly dependent
upon and living with the taxpayer. Subject to the conditions that such dependent is
not more than twenty-one (21) years of age, unmarried and not gainfully employed
or if such dependent, regardless of age, is incapable of self-support because of
mental or physical defect. The additional exemption of P25,000 per child is granted
to a maximum of 4 qualified dependent children. [Sec. 35 (B), NIRC as amended by
R.A. 9504]
A taxpayer supporting a senior citizen is not allowed to claim additional exemption.

The Baybay vs. CIR, CTA Case No. 5280 dated Dec. 20, 1996 is no longer applicable
because the most recent Tax Laws R.A. 8424 of January 1, 1998 and R.A. 9504 of
June 6, 2008 provides that additional exemption shall apply to qualified dependent
children. When the law does not include it excludes. The old CTA decision is
superseded by the two Special Laws – R.A. 8424 & R.A. 9504 which are superior to
CTA decision. Furthermore, Rev. Regs. No. 4 – 2006, Sec. 7 last paragraph provides
that “No personal exemption is allowed for senior citizen.”
It must be noted that the principle of “lex posteriori derogate priori” – the
more recent law governs.
Problem 11 – 7 C
Basic personal exemption P50,000
Additional exemption (a & b only) (P25,000 x 2) 50,000
Total personal and additional exemptions P100,000
Problem 11 – 8 Not in the choices = P70,000.

Basic personal exemption – reciprocity P 50,000
Add: Additional exemption – reciprocity (P10,000 x 2) 20,000
Basic personal exemption – married P 70,000
When there is reciprocity, nonresident alien engaged in business in the Philippines is allowed
of personal exemptions subject to limit. The term “personal exemption” in the Philippines
includes both the basic personal exemption (Sec. 35 (A), NIRC) and additional exemption for
qualified dependent children not exceeding four. (Sec. 35 (B), NIRC)
Problem 11 – 9 D
Zero. Maria has no income.
Problem 11 – 10 A
Income from the Philippines (P10,000 x 12) P120,000
Less: Personal exemption 50,000
Income subject to tax in the Philippines P 70,000
SUGGESTED ANSWERS
Note: Income earned by OFW outside the Philippines is not subject to tax in the Philippines.
The income from the sari-sari store in the Philippines is earned from January to December of
the taxable year.
Problem 11 – 11 Not in the choices =P487,500.

Gross compensation income – Philippines (P250,000 x 12) P3,000,000
Add: 13th month pay 250,000
Total taxable compensation P3,250,000
Multiplied by special income tax rate 15%
Income tax payable P 487,500
The entire compensation income is subjected to 15% tax rate.
Problem 11 – 12 C
Gross compensation income – within (P150,000 x 6) P 900,000
Add: Taxable 13th month pay [(P150,000/2) 75,000
Bonus 50,000
Total amount subject to final tax P1,025,000
Multiplied by special income tax rate 15%
If the special taxpayer is an alien and qualifies to be taxed using 15% special tax rate, all of
his gross compensation income is subject to 15% final tax. Take note that the 13 th month pay
amounting to P30,000 is included as taxable compensation because the tax rate has been
reduced to 15%.
Problem 11 – 13 B
Annual salary (P65,000 x 12 months) P780,000
Annual cost of living allowance (P5,000 x 12 months) 60,000
13th month pay (P780,000/12) 65,000
Gross compensation income P905,000
Less: Nontaxable 13th month pay 30,000
Taxable gross compensation income P875,000
Less: Personal exemption – basic 50,000
Net taxable income P825,000
Tax on P500,000 P125,000

Tax on excess [(P825,000 – P500,000) x 32%] 104,000
Income tax due P229,000
Since the compensation income is below the threshold of P975,000 per year of a Filipino
Citizen Employed by Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies, his compensation income shall be subject to a regular tax for
individuals. (Sec. 1, Rev. Regs. No. 11-2010)
Take note that if the special Filipino taxpayer opted to be tax using normal tax, the 13 th
month pay is deducted as nontaxable income.
Problem 11 – 14 C
Gross compensation income P200,000
Add: Net income from rent
SUGGESTED ANSWERS
Rent income P50,000

Less: OSD (P50,000 x 40%) 20,000 30,000
Net income before personal exemption P230,000
Less: Basic personal exemption P50,000
Premium payments on hospitalization
insurance, limit 2,400 52,400
For individual taxpayers, only gross sales or gross receipts are allowed as the basis
of OSD (Sec. 34(L), NIRC; RA 9504).
The Baybay vs. CIR, CTA Case No. 5280 dated Dec. 20, 1996 is no longer applicable
because the most recent Tax Laws R.A. 8424 of January 1, 1998 and R.A. 9504 of
June 6, 2008 provides that additional exemption shall apply to qualified dependent
children. When the law does not include it excludes. The old CTA decision is
superseded by the two Special Laws –R.A. 8424 & R.A. 9504 which are superior to
CTA decision. Furthermore, Rev. Regs. No. 4 – 2006, Sec. 7 last paragraph provides
that “No personal exemption is allowed for senior citizen.”
It must be noted that the principle of “lex posteriori derogate priori” – the
more recent law governs.
Problem 11 – 15
Subject to
1. Letter B Tabular tax Final tax
Compensation income P240,000
Business and other income:
Professional income (P300,000 + P200,000) 500,000
Interest income – without 60,000
Dividend income – without 40,000
Total business and other income P600,000
Less: OSD (P600,000 x 40%) ( 240,000)
Net business income P360,000
Total net income before personal exemption P600,000
Less: Basic personal exemption ( 50,000)
Net income to ITR – tabular tax P550,000
Interest income within P100,000

Dividend income within 60,000
Income subject to final tax P160,000
2. Letter A
Business income:
Professional income, net of OSD (P300,000 x 60%) 180,000
Total net income before personal exemption P420,000
Less: Basic personal exemption 50,000
Net income to ITR – tabular tax P370,000
Interest income within P100,000

Dividend income within 60,000
Income subject to final tax P160,000
SUGGESTED ANSWERS
Problem 11 – 16 D
Husband Wife
Net taxable income, net of withholding tax P140,000 P250,000
Tax on P140,000 P22,500

Tax on P250,000 P50,000
Less: Withholding tax 20,000 45,000
Net tax payable P 2,500 P5,000
Problem 11 – 17 B
Compensation as researcher P 600,000
Net taxable compensation income P 550,000
Tax on P500,000 P125,000

Tax on excess (P50,000 x 32%) 16,000
Total income tax from compensation P141,000
Dividend income tax (P120,000 x 10%) 12,000
Interest income tax (P500,000 x 7.5%) 37,500
Total income tax due P190,500
Problem 11 – 18 D
Capital gains tax on shares of stock (P80,000 x 5%) P 4,000
Capital gains tax on sale of land (P2,000,000 x 6%) 120,000
Total capital gains tax paid P124,000
Problem 11 – 19
1. Letter B
Final tax on copyright royalty (P11,250/90%) x 10% P 1,250
Final tax on mineral claim royalty (P12,000/80%) x 20% 3,000
Final tax on share from trading partnership as dividend (P270,000/90%) x 30,000
10%
Total final tax P34,250
2. Letter D
None. All reported earnings are subject to final tax.
Problem 11 – 20 B
Percent of service 100%
Add: Output VAT 12%
Total 112%
Less: Withholding tax 20%
Percent of net proceeds 92%
Net proceeds P 92,000

Divided by percent of net proceeds 92%
Service fee P100,000
Withholding tax (P100,000 x 20%) P 20,000
VAT (P100,000 x 12%) P 12,000
Problem 11 – 21
1. Letter A
Salaries of assistants P 96,000
SUGGESTED ANSWERS
Traveling expenses 11,000

Light and water, Office 7,890
Stationeries and supplies 1,960
Office rent 60,000
Total expenses before contribution P176,850
Add: Contribution subject to limit (P500,000 – P176,850) x 10% 32,315
Total allowable deductions P209,165
2. Letter C
Professional fees P500,000
Less: Allowable deductions 209,165
Net income from business P290,835
Add: Income from compensation:
Allowance as director of Corporation A P25,000
Commissions 5,000 30,000
Net income before personal and additional exemptions P320,835
3. Letter D
Net income before personal and additional exemptions P320,835
Less: Personal and additional exemptions:
Basic – widower P 50,000
Additional exemptions (P25,000 x 3 qualified children) 75,000 125,000
Tax on P140,000 P 22,500

Tax on excess (P55,835) x 30% 13,959
Income tax due P 36,459
Problem 11 – 22
1. Using itemized deduction
Compensation income P 20,000
Gross income from business P 400,000
Less: Itemized deduction 150,000 250,000
Total income before personal exemptions P270,000
Less: Personal exemptions
Basic personal exemptions P 50,000
Additional exemptions (P25,000 x 4) 100,000 150,000
Taxable income P120,000
Computation of income tax:

Tax on P70,000 P 8,500
Tax on excess (P50,000) x 20% 10,000
Income tax before withholding tax P 18,500
Less: Withholding tax 1,000
Income tax due and payable P 17,500
2. Using optional standard deduction

Compensation income P 20,000
Gross income from business P 400,000
Less: Optional standard deduction (40%) 160,000 240,000
Total income before personal exemptions P260,000
Less: Personal exemptions
Basic personal exemptions P 50,000
Additional exemptions (P8,000 x 4) 100,000 150,000
SUGGESTED ANSWERS
Computation of income tax:

Tax on P70,000 P 8,500
Tax on excess (P40,000 x 20%) 8,000
Income tax before withholding tax P 16,500
Less: Withholding Tax 1,000
Income tax due and payable P 15,500
Problem 11 – 23
1. P71,200
Net worth, December 31, 200B P375,000
Less: Net worth, December 31, 200A 325,000
Unadjusted net income for year 200B P 50,000
Add back: Non-deductible expenses 150,000
Contributions (P20,000 + P50,000) 70,000
Total P270,000
Less: Non-taxable income 2,000
Income before contribution P268,000
Less: Contributions:
Deductible in full P 20,000
With limit
Actual, P50,000
Limit, P268,000 x 10% = P26,800
Allowed 26,800 46,800
Net income before personal exemptions P221,200
Less: Personal exemptions (P50,000 +p100,000) 150,000
Net taxable income P 71,200
2. P47,000
Corrected net taxable income P 71,200
Less: Reported net income subject to tax 24,200
Unreported taxable income P 47,000
Problem 11 – 24
200B net income from business P 600,000
Capital gains transactions
Short-term capital gains (P40,000 x 100%) P 40,000
Long-term capital gains (P30,000 x 50%) 15,000
Short-term capital loss (P10,000 x 100%) (10,000)
Net capital gains P45,000
Less: 200A Capital loss carry over – limit 35,000 10,000
Income before personal exemptions P 610,000
Basic personal exemption- married P 50,000
Additional exemption (P25,000 x 3) 75,000 125,000
Taxable income, 200B P 485,000
Note: The applicable capital loss carry-over should only be limited to P35,000, because it
should not exceed the net income from operation of such year (Sec. 39D, NIRC).
Problem 11 – 25
1. Compensation income (P240,000 + P30,000) P270,000
Less: Personal exemption (P50,000 + P25,000) 75,000
Net taxable compensation P195,000
Business income P100,000
SUGGESTED ANSWERS
Less: Business expenses 120,000

Net loss from business (P20,000) 0 -
2. Tax on P140,000 P22,500

Tax on excess (P55,000 x 25%) 13,750
Less: Tax credit 30,000
Income tax still due and payable P 6,250
Problem 11 – 26
1. Salary (P30,000 x 12) P360,000
Add: Taxable 13th month pay (P35,000 – P30,000) 5,000
Total P365,000
Less: SSS contribution P3,000
Medicare/Philhealth contribution 2,000 5,000
Taxable compensation income before personal P360,000
exemption
Less: Personal exemption 50,000
Net taxable compensation income P310,000
Estimated income tax due:

Tax on P250,000 P50,000
Tax on excess (P60,000 x 30%) 18,000
Total income tax due per year P68,000
Divided by number of months in a year 12
Monthly withholding tax P 5,667
2. Quarterly business income tax

Business income per quarter P200,000
Less: Business expense per quarter 120,000
Net income per quarter P 80,000
Tax on P70,000 P 8,500

Tax on excess (P10,000 x 20%) 2,000
Quarterly business income tax per quarter P 10,500
Problem 11 – 27
1. Entertainment fee (P1,700,000/85%) P2,000,000
Business income
Philippines 500,000
Japan 1,000,000
Total gross income P3,500,000
Less: OSD (P3,500,000 x 40%) 1,400,000
Net income before personal exemption P2,100,000
Less: Personal exemption - basic P50,000
Additional (P25,000 x 4) 100,000 150,000
Net taxable income P1,950,000
2. Tax on P500,000 P 125,000

Tax on excess (P1,450,000 x 32%) 464,000
3. Tax credit
Creditable withholding tax on fees
SUGGESTED ANSWERS
(P2,000,000 x 15%) P300,000

Business income tax paid - Philippines 40,000
Japan (P589,000 x 594,000*/2,100,000))
P166,603 vs. actual P300,000, lower 166,603 P 506,603
4. Income tax still due (P589,000 – P506,603) P 82,397
Supporting computation of net taxable income before personal exemptions:
Within Outside Total

Gross receipts 2,500,000 1,000,000 3,500,000
Percent 71% 29% 100%
Allocated OSD x percent 994,000 406,000 1,400,000

Net income before personal exemption 1,506,000 594,000 2,100,000
Problem 11 – 28
Mr. Bravo Mrs. Bravo
Gross professional income (P100,000/90%) P111,111
Rent income (P300,000/2) 150,000 P150,000
Total gross income P261,111 P150,000
Less: OSD (40%) 104,444 60,000
Net income from business P156,667 P 90,000
Add: Gross compensation income 225,000 300,000
Total P381,667 P390,000
Less: Personal exemptions 150,000 50,000
Net taxable income P231,667 P340,000
Tax on P140,000/ P250,000 P 22,500 P 50,000

Tax on excess:
Mr. Bravo (P91,667 x 25%) 22,917
Mrs. Bravo (P90,000 x 30%) . 27,000
Income tax due P 45,417 P 77,000
Withholding tax on compensation ( 25,000) ( 50,000)
Withholding tax on professional income (P111,111 – P100,000) ( 11,111) .
Income tax still due and payable P 9,306 P 27,000
Problem 11 – 29
1. P290,000
Taxable 13th month pay and bonuses (P40,000 – P30,000) 10,000
Net business income (P400,000 – P300,000) 100,000
Capital gains – long-term (P60,000 x 50%) 30,000
Total P440,000
Less: Personal exemptions (P50,000 + P100,000) 150,000
2. (P8,000)
Tax on P250,000 P 50,000
Tax on excess (P40,000 x 30%) 12,000
Total income tax due P 62,000
Less: Income tax paid on:
Compensation P 50,000
Quarterly business income 20,000 70,000
Income tax refund (P 8,000)
SUGGESTED ANSWERS
Problem 11 – 30
1. 13th month pay P25,000
Other benefits:
Excess of clothing allowance (P4,500 – P4,000) P 500
Excess of rice subsidy (P1,600 – P1,500) x 12 1,200 1,700
Total (not exceeding P30,000) – nontaxable P26,700
Allowable de minimis:
Clothing allowance P4,000
Rice subsidy (P1,500 x 12) 18,000 22,000
Total 13th month pay and other benefits – nontaxable P48,700
2. Basic salary (P25,000 x 12) P300,000

Less: Personal exemptions 150,000
Net taxable compensation income P150,000
Tax on P140,000 P22,500

Tax on excess (P10,000 x 25%) 2,500
Withholding tax from January to November 200A

(P25,000/12) x 11 P22,917
3. Net taxable compensation income P150,000

Add: Net business income:
Professional fees (P224,000/1.12) P 200,000
Gross income from sales (P5,000,000 – P3,200,000) 1,800,000
Less: Itemized deductions: P2,000,000
Operating expenses, net of interest expense
(P900,000 – P50,000) P850,000
Interest expense (P50,000 – (P75,000 x 33%) 25,250 824,750
Net income before contribution P1,175,250
Less: Contribution, actual = P100,000, lower
Contribution, limit (P1,175,250 x 10%)= P117,525 100,000 1,075,250
Tax on P500,000 P125,000

Tax on excess (P725,250 x 32%) 232,080
Less: Tax credits:
WTW from Jan to Nov., 200A P22,917
WT on Professional income (P224,000 – P200,000) 24,000 46,917
Income tax still due and payable on December 31, 200A P310,163
Problem 11 – 31
Gross income from business (P1,000,000 – P700,000) P 300,000
Operating expenses (P250,000 – P60,000 – P30,000) ( 160,000)
Deductible interest expense (P30,000) – (P20,000 x 33%) ( 23,400)
Deductible contribution (P300,000 – P160,000 – P23,400) x 10% ( 11,660)
Net business income P 104,940
Capital asset transactions:
Capital gains – short-term (P300,000 x 100%) P 300,000
Capital losses – long-term (P400,000 x 50%) 200,000 100,000
Lotto winning, USA 300,000
Gambling winnings P 200,000
SUGGESTED ANSWERS
Gambling losses (excess cannot be deducted from other 250,000

income)
Gross compensation income (P180,000 + P20,000) 200,000
Taxable 13th month pay (P35,000 – P30,000) 5,000
Net taxable income before exemption P 709,940
Tax on P500,000 P 125,000

Tax on excess (P59,940 x 32%) 19,181
Less: Withholding tax on compensation 20,000
Problem 11 – 32
Note: OSD is not applicable unless the taxpayer signified in his ITR that he opted to use OSD
in lieu of itemized deductions. (Sec. 34 (L), NIRC)
Taxpayer is a resident citizen

a. Normal (tabular) tax:
Salaries: Philippines U. S. A. Total
Within (P180,000/90%) P200,000
Without ($2,250/90%) x P50 P125,000 P325,000
Commissions:
Within (P57,000/ 95%) 60,000
Without ($950/ 95%) x P50 50,000 110,000
Interest income-without 75,000 75,000
($1,200/80%) x P50
Dividend-without ($1,800/90%) x P50 . 100,000 100,000
Totals P260,000 P350,000 P610,000
Tax on P500,000 P125,000

Tax on excess (P60,000) x 32% 19,200
Total P144,200
Less: Tax credits:
Compensation (P200,000 x 10%) P20,000
Commission (P60,000 x 5%) 3,000
Allowable tax credit - foreign* 40,000 63,000
Income tax due and payable, after tax credits P 81,200
*Allowable tax credit paid outside the Philippines is lower than tax limit or actual tax
paid. The tax credit is computed as follows:
Limit (P350,000/P610,000) x P144,200 P82,738
Actual foreign taxes paid:
Interest (P75,000 x 20%) P15,000
Compensation (P125,000 x 10%) 12,500
Dividend (P100,000 x 10%) 10,000
Commissions (P50,000 x 5%) 2,500
Total P40,000
Allowable foreign tax credit - lower P40,000

Note: The actual tax paid outside the Philippines is lower than the computed tax limit;
hence, the actual tax paid without is the allowable tax credit.
SUGGESTED ANSWERS
b. Passive income tax:

Interest income within (P50,000/ 80%) x 20% P12,500
Dividend income within (P9,000/ 90%) x 10% 1,000
Total passive income tax for the year P13,500
Note: Philippine Lotto winnings are tax-exempt.
Taxpayer is a nonresident citizen

a. Normal (tabular) tax:
Salaries - within (P180,000/90%) P200,000
Commissions- within (P57,000/95%) 60,000
Net income P260,000
Less: Personal exemption - basic 50,000
Tax on P140,000 P22,500
Tax on excess (P70,000) x 25% 17,500
Total tax due P40,000
Less: Withholding taxes within (P20,000 + P3,000) 23,000
Income tax due and payable P17,000
b. Passive income tax:

Interest income within (P50,000/80%) x 20% P12,500
Dividend income within (P9,000/90%) x 10% 1,000
Total passive income tax for the year P13,500
Note: Nonresident citizens are taxable only on income derived within the Philippines.
Taxpayer is a resident alien. Solution is the same as nonresident citizen.
Taxpayer is a nonresident alien engaged in trade or business in the Philippines.

The taxpayer cannot be regarded as doing business in the Philippines because he
has no business income in the Philippines.
If the taxpayer has stayed more than 180 days in the Philippines, he is regarded as
doing business. The computation of his net income tax payable in the Philippines
will be the same as in number 2 under the assumption that his country is granting
the same privilege of reciprocity to nonresident Filipino doing business in that
foreign country.
Taxpayer is a nonresident alien not engaged in trade or business in the Philippines.

Nonresident aliens are subject to tax of 25% based on their gross income derived
within the Philippines. In our illustration, let us assume that the source of income
has been deducted with 25% tax on the income given to the taxpayer - that is, the
amount shown in the problem is net of 25% final tax.
The income tax of Mr. Ramsay Colorado would be:

Salaries- within (P180,000/75%) P240,000
Commissions- within (P57,000/ 75%) 76,000
Interest income within (P50,000/ 75%) 66,667
Dividend income within (P9,000/ 75%) 12,000
Gross income within P394,667
SUGGESTED ANSWERS
Multiplied by tax rate 25%

Income tax for the taxable year within P 98,667
Note: In computing the income tax, a fractional part of a peso less than P0.50 shall be
disregarded. If the fractional part is P0.50 or more, it shall be rounded up to P1.00 (R.A. 590).
Problem 11 – 33
Gross income from business (P1,000,000 – P700,000) P 300,000
Operating expenses (P250,000 – P60,000 – P30,000) ( 160,000)
Deductible interest expense (P30,000) – (P20,000 x 33%) ( 23,400)
Deductible contribution (P300,000 – P160,000 – P23,400) x 10% ( 11,660)
Net business income P 104,940
Capital asset transactions:
Capital gains – short-term (P300,000 x 100%) P 300,000
Capital losses – long-term (P400,000 x 50%) 200,000 100,000
Lotto winning, USA 300,000
Gambling winnings P 200,000
Gambling losses (excess cannot be deducted from other 250,000
income)
Gross compensation income (P180,000 + P20,000) 200,000
Taxable 13th month pay (P35,000 – P30,000) 5,000
Net taxable income before exemption P 709,940
Tax on P500,000 P 125,000

Tax on excess (P59,940 x 32%) 19,181
Less: Withholding tax on compensation 20,000
SUGGESTED ANSWERS
Chapter 12: Income Tax of Corporations
CHAPTER 12
INCOME TAX OF CORPORATIONS
1. False – for tax purposes, a corporation does not include both general professional
partnership and joint venture with a consortium service contract with the
government.
2. False – domestic corporations refer only to corporations that are created or organized
under Philippine laws. Foreign corporations are also operating in the Philippines but
not created under Philippine laws.
3. False – nonresident corporations are taxed based on gross income within.
4. False – Only domestic corporations are to be taxed for income within and without.
5. True
6. True
7. True
8. False – the MCIT is applicable also to resident foreign corporations for their income
derived within.
9. True
10. False – Not taxable because the corporation is a foreign corporation.
11. False – 30%, but legally, foreign corporations are not allowed to own real property in
the Philippines as provided by anti-dummy law.
12. False – interest income of resident foreign corporation is subject to a final tax of 20%,
but interest income of nonresident foreign corporation is subject to normal corporate
tax.
13. True

1. True
2. True
3. False – MCIT is applicable only to corporation that are subject to normal tax rate.
4. True
5. False – Other fixed or determinable annual, periodic or casual gains, profits and
income are not treated as branch profit.
6. True
7. True
8. True
9. True
10. False – exempt from income tax and VAT.
11. False – not imposed also to insurance companies
12. True

1. False – the net additions to reserve funds are not part of income but instead deducted
from gross income.
2. True
3. False – In general, GOCCs are subject to corporate income tax.
4. True
5. False – royalties received in the active pursuit of business is subject to a normal tax of
30%.
6. True
7. True
8. True
9. True
SUGGESTED ANSWERS
10. False – If the unrelated income of the proprietory educational institution exceeds the
related income, the income tax rate applicable would be the corporate income tax of
30%.
11. False – Sale of real property outside the Philippines by a resident foreign corporation
is not subject to tax in the Philippines.
12. False – 10% based on gross income within
Problem 12 – 4 Problem 12 – 5
1. C 1. B
2. A 2. A
3. A 3. D
4. D 4. A
5. C 5. B
6. A 6. B
7. A 7. A
8. B 8. D
9. A 9. B
10. C 10. C
11. A* 11. D – Only family-closed corporation is subject to IAET.
12. A 12. A
13. B 13. C
*This is on the assumption that a resident foreign corporation acquired a real property and
subsequently sold it without the confiscation of the real property by the Philippine
Government.
As a rule, foreign corporations are not allowed to own and acquire real properties in the
Philippines as provided by the anti-dummy law. (PD 715, May 28, 1975)
Problem 12 – 6
1. Letter C Taxable Income tax
income due
Gross income (P8,000,000 + P4,000,000) P12,000,000
Business expenses (P5,000,000 + P3,000,000) ( 8,000,000)
Gain on sale of warehouse (P3,000,000 – P2,000,000) 1,000,000
Corporate income tax (P5,000,000 x 30%) P1,500,000
Note: The land and warehouse sold is an ordinary asset.

Hence, subject to normal tax.
2. Letter B
Gross income within P8,000,000
Business expenses ( 5,000,000)
Gain on sale of warehouse (P3,000,000 – P2,000,000)* 1,000,000
Corporate income tax (P4,000,000 x 30%) P1,200,000
*This is on the assumption that a resident foreign corporation acquired a real property and
subsequently sold it without the confiscation of the real property by the Philippine
Government.
SUGGESTED ANSWERS
Problem 12 – 7 D
Multiplied by normal corporate tax rate 30%
Problem 12 – 8 Not in the Choices = P2,700,000.

Less: Allocated operating expenses (P30,000,000 x 15/75) 6,000,000
Net taxable income P 9,000,000
Income tax due P2,700,000
Problem 12 – 9
1. Letter D
Domestic corporation:
Total net income (P160,000 + P240,000) P400,000
Multiplied by normal tax rate 30%
Less: Tax credits:
Local P42,000
Foreign, Actual, P60,000 – lower 60,000 102,000
limit (P120,000 x 240/400) = P72,000
Income tax still due and payable P18,000
Supporting computation: Philippines Foreign

Gross income – within P450,000
– without (P180,000 + P75,000 + P445,000
P190,000)
Deductions – within (290,000)
- without (P80,000 + P25,000 + P100,000) . (205,000)
Net income P160,000 P240,000
2. Letter C
Resident foreign corporation
Gross income within P445,000
Deductions within (205,000)
Net income P240,000
Multiplied by normal corporate income tax 30%
Less: Local 42,000
Problem 12 – 10 D
Net income from PAGCOR (P30,000,000 - P28,000,000) P2,000,000
Net income from NAPOCOR (P10,000,000 – P4,000,000) 6,000,000
Total net income P8,000,000
Problem 12 – 11 C
Net income from National Power Corporation P 8,000,000
Net income from National Books Store 5,000,000
Total net income P13,000,000
Multiplied by corporate normal tax 30%
Income tax due P 3,900,000
SUGGESTED ANSWERS
Problem 12 – 12 A
Gross profit (P3,000,000 – P1,400,000) P1,600,000
Capital gains on sale of paintings 940,000
Operating expenses before charitable contribution (P800,000 – (700,000)
P100,000)
Net income before charitable contribution P1,840,000
Charitable contributions - limit (P1,840,000 x 5%), lower ( 92,000)
Actual – P100,000 .
Multiplied by corporate normal tax rate 30%
Problem 12 – 13 C
Operating expenses P4,000,000
Less: Net operating loss – 4th year 100,000
Gross income P3,900,000
Multiplied by MCIT rate 2%
Minimum corporate income tax P 78,000
Domestic and resident foreign corporation taxed during the taxable year with MCIT
cannot enjoy the benefit of NOLCO. Nevertheless, the running of the three (3) year
period for the expiry of NOLCO is not interrupted by the fact that such corporation is
subject to MCIT. (Rev. Reg. 14-2001)
Problem 12 – 14 B
Operating loss (P 200,000)
Operating expenses 1,000,000
Gross income P 800,000
Multiplied by minimum corporate income tax rate 2%
Income tax payable 4th year P 16,000
5th year net income P320,000

Less: Excess of minimum income tax over normal tax 16,000
Net income tax payable P 80,000
Problem 12 – 15
1. Letter A
Net income per GAAP P5,000,000
Add: Allowance for bad debts 150,000
Income before incentive to CHED contribution P5,150,000
Less: Incentive to CHED contribution (P300,000 x 50%) 150,000
Multiply by normal corporate income tax rate 30%
2. Letter C
Net income per GAAP P 5,000,000
Add: Operating expenses 80,000,000
Multiply by minimum corporate income tax rate 2%
Minimum corporate income tax – higher P 1,700,000
SUGGESTED ANSWERS
Normal tax (P5,000,000 x 30%) P1,500,000
Problem 12 – 16
1 Letter A
.
Income tax payable – current year MCIT (P8,000,000 x 2%) P 160,000
2 Letter C
.
Net operating income (P8,000,000 – P7,000,000) P1,000,000
Normal tax P 300,000
Less: Excess of MCIT 100,000
Problem 12 – 17 A
None. There is no excess corporate MCIT over NCIT in year 3 to be applied on year 4 because
the MCIT is not yet applicable for the company as it only has 3 years of operation in year 3.
Problem 12 – 18
1. Letter A
Divided by MCIT tax rate 2%
2. Letter C
Income tax expense P 150,000
Divided by corporate normal income tax rate 30%
The excess of MCIT over NCIT shall be recorded in the corporation’s books as an asset under
the account title “Deferred Charges, MCIT.” This asset account shall be carried forward and
may be credited against the normal tax due for a period not exceeding three taxable years
immediately succeeding the taxable year(s) in which the same has been paid. (Rev. Regs. No.
9-98)
Problem 12 – 19 C
Rental income (P1,900,000/95%) P2,000,000
Capital gains 500,000
Total gross income P2,500,000
Operating expenses (2,350,000)
Multiplied by corporate normal tax 30%
Excess of MCIT over NCIT P 40,000

Add: Expanded withholding tax (P2,000,000 – P1,900,000) 100,000
Total creditable income tax P140,000
Less: Income tax due 45,000
Tax refund P 95,000
SUGGESTED ANSWERS
Problem 12 – 20 A
Gross income (P1,600,000 – P1,200,000) P400,000
Less: OSD (P400,000 x 40%) 160,000
Net income P240,000
Capital gains tax (P1,600,000 x 6%) P96,000
Tax advantage using normal tax (P96,000 – P72,000) P24,000
Problem 12 – 21
1. Letter D
Domestic Corporation:
a. Not traded in local exchange:
Selling price P1,600,000
Cost (P110 x 12,000 shares) 1,320,000
Capital gain P 280,000
Tax on P100,000 x 5% P 5,000

Tax on excess (P280,000 – P100,000) x 10% 18,000 P 23,000
b. Traded in local exchange (P1,800,000 x .005) 9,000
c. Sale of land abroad (P3,000,000 – P2,500,000) x 30% 150,000

d. Sale of land – Philippines (P1,200,000 x 6%) 72,000
P254,000
Note: OSD is not applicable to land sold in Japan because the land is a capital asset.
2. Letter A
Resident Foreign Corporation
a. P 23,000
b. 9,000
c.
d. (P1,200,000 x 6%) 72,000
Total P104,000
3. Answer not in the choices = P122,000.

Nonresident Foreign Corporation
a. P 23,000
b. 9,000
c.
d. (P1,200,000 – P900,000) x 30% 90,000
Total P122,000
Problem 12 – 22 C
Interest from savings deposits (P3,000,000 x 20%) P 600,000
Royalty income (P1,000,000 x 20%) 200,000
Interest from a depository bank EFCD (P1,500,000 x 7.5%) 112,500
Total passive final tax P 912,500
Dividend from a domestic corporation received by a domestic corporation is tax exempt.

Dividend from a nonresident foreign corporation is subject to normal tax.
SUGGESTED ANSWERS
Problem 12 – 23
1. Letter B
Domestic Corporation
a. ($20,000 @ 7.5% x P50) P75,000
b. P300,000 @ 20% 60,000
c. P100,000 @ 20%* 20,000
d. P 80,000 @ 20% 16,000
Total P171,000
2. Letter B = Resident foreign corporation (same as letter 1)
3. Letter C
Nonresident foreign corporation
a. Exempted
b. (P300,000 @ 30%) P90,000
c. (P100,000 @ 30%) 30,000
d. (P 80,000 @ 30%) 24,000
Total P144,000
*It is assumed that the royalty income from franchising is a passive income.
Problem 12 – 24
1. Letter B
Dividend income - (PCB and Magnolia are both domestic corporations) Exempt
Interest income on US dollar loans ($3,000 x 10% x P50) P15,000
2. Letter C
Interest on Philippine peso loans P2,000,000
Operating expenses ( 900,000)
Taxable income P1,100,000
Multiplied by normal corporate tax 30%
Problem 12 – 25 A
Related income P1,000,000
Unrelated income 1,500,000
Total revenue P2,500,000
Operating expenses (3,000,000)
Net loss (P 500,000)
Minimum corporate income tax (P2,500,000 x 2%) P50,000
Problem 12 – 26
1 Letter D
.
2 Letter A
.
Educational income: 200A 200B
Tuition and miscellaneous fees P4,000,000 P6,000,000
Sales of canteen 700,000 1,600,000
Sales of bookstore 300,000 400,000
Total related income P5,000,000 P7,000,000
Non-educational income:
SUGGESTED ANSWERS
Rent income (net/95%) P5,200,000 P5,500,000

Sale of scrap materials 60,000 20,000
Total unrelated P5,260,000 P5,520,000
Costs and expenses:

Cost of sales – canteen (P400,000) (P 800,000)
Cost of books sold ( 240,000) ( 320,000)
Operating expenses (2,000,000) (3,000,000)
Purchase of library books (1,000,000) (1,500,000)
Cost of classroom construction ( 500,000)
Purchase of school furniture . ( 200,000)
Total costs and expenses (P4,140,000) (P5,820,000
)
Net taxable income P6,120,000 P6,700,000
200A Income tax (P6,120,000 x 30%) P1,836,000

200B Income tax (P6,700,000 x 10%) P670,000
Less: CWT from rent
200A (P5,200,000 - P4,940,000) 260,000
200B (P5,500,000 – P5,225,000) . 275,000
Income tax still due and payable P1,576,000 P395,000
A proprietory educational institution has an option to either deduct its capital

expenditures on depreciable assets during the year for the expansion of school facilities
(outright expense) or deduct allowances for depreciation on such assets, [Sec. 34 (A) (2),
NIRC]. In this case, it is more advantageous for BCU to treat capital expenditures on
depreciable assets as outright expense.
The non-educational income in 200A is greater than the educational income; therefore,
the tax rate to be used in 200A should be the normal corporate income tax of 30%. On the
other hand, a special tax rate of 10% should be used in 200B because the educational
income is greater than the non-educational income. [Sec. 27 (B), NIRC]
Problem 12 – 27 D
P-0-, Government educational institutions are tax-exempt.
Problem 12 – 28 B
Income tax payable (P700,000 x 0.025) P17,500
Problem 12 – 29 A
Manila to Beijing (P5,000 x 2,000) P10,000,000
Manila – Hong Kong – Beijing (P6,000 x 4,000) x P3,000/P6,000 12,000,000
Manila to Hong Kong (P3,000 x 2,000) 6,000,000
Total reportable gross income within P28,000,000
Multiplied by applicable rate 2.5%
Income tax P 700,000
Problem 12 – 30 A
Within Dragon Films American Aircraft
Gross receipts P10,000,000 P20,000,000
Multiplied by special tax rate 25% 7 ½%
Philippine income taxes P 2,500,000 P 1,500,000
Note: Gross income means gross receipts. The aforementioned resident foreign corporations
are subject special tax rates (final taxes). They are not allowed to deduct costs or expenses
SUGGESTED ANSWERS
from their gross receipts. The cost of service is only applicable for MCIT purposes. (Sec. 27(E)
(4), NIRC)
Problem 12 – 31 A
Operating net income after tax P24,000,000
Tax rate on branch remittance 15%
Branch profit remittance tax P 3,600,000
Branch profit remittance, net of tax (P24,000,000 x 85%) P20,400,000

Dividend income from Pharma Co. 7,000,000
Total branch profit remittance P27,400,000
Note: Sec. 28 (A) (4) of NIRC provides that the following income within of a foreign
corporation shall not be treated as branch profit for tax purposes unless the same
are effectively connected with the conduct of the trade or business in the
Philippines:
1. Interest, dividends, rents, royalties;

2. Remuneration for technical services;
3. Salaries, wages, premiums, annuities, emoluments;
4. Other fixed or determinable annual, periodic or casual gain, profits, income
and capital gains.
Problem 12 – 32 B
Income tax (P80,000/80%) x 20% P20,000
Note: Although cooperatives are tax-exempt, they are still subject to final income taxes on
interest income.
Problem 12 – 33 A
All of the transactions of Unlad Cooperative are exempt from income taxes.
Problem 12 – 34 B
1 Letter A
.
Income tax due – 1st quarter [(P495,000/99%) – P480,000) x 30% P 6,000
Less: 1% creditable withholding tax (P495,000/99%) – P5,000
P495,000
200A excess tax credit used in first quarter 200B 1,000 6,000
Income tax still due and payable – 200B first quarter P - 0 -
2 Letter C
.
Income tax due – 2nd quarter [(P792,000/99%) – P700,000) x 30% P 30,000
Income tax due – 1st quarter [(P495,000/99%) – P480,000) x 30% ( 6,000)
Withholding tax – 2nd quarter [(P792,000/99%) – (P495,000/99%) x ( 3,000)
1%
Remaining excess tax credit – 200A (P10,000 – P1,000) ( 9,000)
Income tax still due and payable – 2 nd quarter 200B P 12,000
SUGGESTED ANSWERS
Problem 12 – 35 C
Gross receipts (P2,940,000/98%) P3,000,000
Less: OSD (P3,000,000 x 40%) 1,200,000
Multiplied by corporate normal tax rate 30%
Less: Creditable income taxes paid
1st Qtr. (P1,960,000/98%) x 60% x 30% P360,000
2% creditable tax 2nd quarter’s gross receipts
(P2,940,000/98%) – (P1,960,000/98%) x 2% 20,000 380,000
Income tax still due and payable – 2 nd Qtr. P 160,000
With the issuance by the BIR of RMC No. 16-2010 in relation to RR No. 2-2010, the taxpayers
are no longer allowed to change methods (OSD to Itemized Deductions or vice versa) from
quarter to quarter within the same taxable year. The said RMC provides that the method
adopted for the 1st quarter shall be the same method to be applied to the succeeding quarters
of the same taxable year as well as in the preparation of the annual ITR of the said taxable
year.
Problem 12 – 36 C
Income tax from ordinary net income (P1,000,000 – P900,000) x 30% P30,000
Final income taxes:
Interest income on peso savings (P100,000 x 20%) 20,000
Expanded foreign currency deposit (P100,000 x 7.5%) 7,500
Total income taxes P57,500
Problem 12 – 35 A
Income tax on interest income from peso savings bank (P100,000 x 30%) P 30,000
Tax on cash dividend – domestic corporation (P100,000 x 30%) 30,000
Tax on cash dividend from a resident foreign corporation (P100,000 x 30,000
30%)
Total income tax P90,000
Interest income earned by nonresident foreign corporation from EFCD is tax-exempt.
Problem 12 – 36 C
3rd Quarter 4th Quarter
Gross income - cumulative P880,000 P1,120,000
Itemized deductions - cumulative (704,000) (896,000)
Net taxable income P176,000 P 224,000
Multiplied by normal corporate income tax 30% 30%
Income tax due P 52,800 P 67,200
Total income tax paid in previous quarters - tax credit ( 52,800)
Problem 12 – 37 C
Regular tax (P1,000,000 – P900,000) x 30% P 30,000
Final tax on interest income – peso deposit (P100,000 x 20%) 20,000
Final tax on interest income – EFCD (P100,000 x 7.5%) 7,500
Total income tax P 57,500
SUGGESTED ANSWERS
Problem 12 – 38 A
Interest income from peso savings bank (P100,000 x 30%) P 30,000
Cash dividend from domestic corporation (P100,000 x 30%) 30,000
Cash dividend from a resident foreign corporation
with 100% earnings in the Philippines (P100,000 x 30%) 30,000
Total income tax P 90,000
Problem 12 – 39 C
Cash dividend from a domestic corporation (P100,000 x 30%) P 30,000
The cash dividend received from a resident foreign corporation is considered income outside
the Philippines because its earnings within does not reached 50%.
Problem 12 – 40 D
Zero because the earnings of the said resident foreign corporation have no tax situs in the
Philippines.
Problem 12 – 41 C
Income subject to normal tax rate (P300,000/30%) P1,000,000
Passive income (P60,000/20%) 300,000
Capital gains (P35,000: 5,000 at 5%, 30,000 at 10%) 400,000
Total income P1,700,000
Less: Income taxes paid:
Income tax per annual tax return P300,000
Final tax on passive income 60,000
Capital gains tax 35,000 395,000
Amount subject to 10% surtax P1,305,000
Problem 12 – 42 A
Net taxable income (P300,000/30%) P1,000,000
Add: Passive income (P60,000/20%) 300,000
Capital gains (P100,000) + (P35,000/10%) 450,000
Total P1,750,000
Less: Income tax per ITR P300,000
Passive income final tax 60,000
Capital gain tax 40,000 400,000
IAET base P1,350,000
Multiplied by IAET tax rate 10%
IAET P 135,000
Problem 12 – 43
1. Letter A
Reserve funds, beginning P1,000,000
Add: Net additions to reserve funds during the year 500,000
Total P1,500,000
Less: Reserve funds, ending 900,000
Amount of reserve funds released P 600,000
2. Letter B
Gross premium collected P10,000,000
Add: Reserve funds release 600,000
Less: Operating expenses P4,600,000
Net additions to reserve funds 500,000 5,100,000
Net income P 5,500,000
SUGGESTED ANSWERS
In the case of insurance companies, whether domestic or foreign doing business in the
Philippines, the net additions, if any, required by law to be made within the year to
reserve funds and the sums other than dividends paid within the year on policy and
annuity contracts may be deducted from their gross income: Provided, however, that the
released reserve be treated as income for the year of release. [Sec. 37 (A), NIRC; Sec.
129, Rev. Regs. No. 2]
Problem 12 – 44
1. Letter D
Franchise fee P10,000,000
Less: Creditable withholding tax (P10,000,000 x 2%) 200,000
Net amount of franchise fee P 9,800,000
2. Letter B
Franchise fee P10,000,000
Less: Pre-operating and training costs 6,000,000
Gross income P 4,000,000
Less: OSD (P4,000,000 x 40%) 1,600,000
Net taxable income P 2,400,000
Less: Creditable withholding tax (P10,000,000 x 2%) 200,000
When royalties are received in active pursuit of business, it is subject to 30% regular
corporate income tax. If royalties are derived from passive income, these are generally
subject to 20% final tax. (BIR Ruling No. DA (C-101) dated October 17, 2008)
Problem 12 – 45
Year 201A
Within Without Total
Gross income:
Philippines P1,000,000 P1,000,000
USA P 400,000 400,000
Japan 300,000 300,000
Deductions:
Philippines (800,000) (800,000)
USA (200,000) (200,000)
Japan . (200,000) (200,000)
Net income P 200,000 P300,000 P 500,000
Multiply by tax rate 30%
Tax credit allowed – see supporting computation ( 90,000)
Income tax still due P 60,000
Supporting computation:
Tax credits:
US (P200,000/P500,000) x P150,000 = P60,000 vs. P80,000
Allowed, lower P 60,000
Japan (P100,000/P500,000) x P150,000 = P30,000 vs. P30,000
Allowed, lower 30,000
P90,000 90,000
Total (P300,000/P500,000) x P150,000 = P90,000 vs. P100,000
Allowed, lower P90,000
SUGGESTED ANSWERS
Problem 12 – 46
Interest from savings deposit – Metrobank (P3,000,000 x 20%) P 600,000
Royalty income – Philippine Mining Company (P1,000,000 x 20%) 200,000
Interest from a depository bank under expanded foreign currency
deposit - PCI Bank ($30,000 x P50 x 7.5%) 112,500
Dividends from Zerxes, a resident foreign corporation (P500,000 x 30%) 150,000
Total final passive income taxes P1,062,500
Problem 12 – 47
Reported income before tax P10,000,000
Add: Loss from sale of shares of stock outside stock market 5,000
Total P10,005,000
Less: Gains subject to final income tax:
(1) Gain from sale of stock in the stock market P 25,000
(2) Gain from sale of short-term debt securities 10,000
(3) Gain from sale of real property
(P9,400,000 – P4,400,000) 5,000,000 5,035,000
Adjusted income subject to corporate income tax P 5,630,000
Multiply by normal corporate income tax 30%
Correct amount of income tax P 1,689,000
Total reported income before tax P10,000,000

Less: Normal corporate income tax 1,689,000
Total accounting income after tax P 8,311,000
Problem 12 – 48
Total revenue P1,000,000
Operating expenses ( 10,000)
Service charge – credit card (P1,000,000/5%) x 3% ( 600,000)
Net income P 380,000
Multiplied by normal corporate tax 30%
Less: Creditable expanded withholding tax (P1,000,000/5%) x ½ 100,000
%
Problem 12 – 49
Taxable income (normal tax) P 900,000
Add: Income subject to final tax P 60,000
Income exempt from tax 50,000
Income excluded from gross income 10,000
Amount of NOLCO deducted 50,000 170,000
Total P1,070,000
Less: Dividends P150,000
Income tax paid for the year 200,000 350,000
Improperly accumulated income P 720,000
Multiply by tax rate 10%
Tax on improperly accumulated income P 72,000
Problem 12 – 50
Tuition fees P2,843,100
Miscellaneous fees 362,600
Income from rents 60,000
Net income, school canteen 36,200
Net income, book store 24,800
SUGGESTED ANSWERS

Less: Allowable deductions:
Payroll and administrative salary P1,425,420
Other operating expenses 762,330
Interest expense 82,100
Outright expense of capital expenditures for new six rooms 750,000 3,019,850
Multiply by the applicable tax rate 10%
Income tax P 30,685
Note: The tax differential on interest income shall now be used because under R.A. 9337
specifically requires that the interest expense is to be reduced by 33% of the interest income
subjected to final tax during the taxable year. It is assumed that the educational institution
opted to treat the capital expenditures as outright expense to avail of a lower tax.
Problem 12 – 51
(1)
Taxable income from operation (P1050,000/70%) P1,500,000
Add: NOLCO deducted 100,000
Interest income (P120,000/80%) 150,000
Capital gain (P230,000 – P5,000)/90% 250,000
Total income for GAAP reporting, before tax P2,000,000
(2)
Tax on income from operation (P1,500,000 x 30%) P450,000
Tax on interest income (P150,000 x 20%) 30,000
Tax on capital gain (P250,000 – P230,000) 20,000
Total income tax paid P500,000
(3)
GAAP income P2,000,000
Less: Total income tax (see 2) 500,000
Net income after tax – GAAP P1,500,000
(4)
Taxable income from operation P1,500,000
Add: NOLCO P100,000
Income subjected to final tax (P150,000 + P250,000) 400,000 500,000
Total P2,000,000
Less: Income tax paid 500,000
Net income after income tax P1,500,000
Multiplied by surtax rate 10%
IAET = Surtax P 150,000
Problem 12 – 52
1. 3rd year 4th year 5th year 6th year
Sales P1,000,000 P2,500,000 P4,000,000 P5,000,000
Cost of sales ( 600,000) (1,200,000 (2,400,000 (2,700,000
) ) )
Rent income 200,000 300,000 100,000 50,000
Gross income P 600,000 P1,600,000 P1,700,000 P2,350,000
SUGGESTED ANSWERS
Operating expenses allowed ( 300,000 (1,300,000 (1,400,000 (1,500,000

) ) ) )
Net taxable income P 300,000 P 300,000 P 300,000 P 850,000
Multiplied by NCIT rate 30% 30% 30% 30%
Income tax due P 90,000 P 90,000 P 90,000 P 255,000
Quarterly tax paid ( 10,000 ( 20,000 ( 30,000 ( 40,000
) ) ) )
Income tax still due and payable P 80,000 P 70,000 P 60,000 P 215,000
2. 3rd year 4th year 5th year 6th year

Royalty income, net of tax P 80,000 P160,000 P120,000 P 40,000
Interest income, net of tax 20,000 32,000 16,000 24,000
Total passive income, net of tax P100,000 P192,000 P136,000 P 64,000
Divide by 80% 80% 80% 80%
Total gross passive income P125,000 P240,000 P170,000 P 80,000
Multiplied by final tax rate 20% 20% 20% 20%
Final taxes P 25,000 P 48,000 P 34,000 P 16,000
Problem 12 – 53
1. Sales P10,000,000
Less: Cost of sales 6,000,000
Reportable gross income per ITR P 4,000,000
2. Gross profit P4,000,000

Less: Operating expenses:
Salaries P1,000,000
Depreciation 300,000
Supplies 200,000
Interest expense [P50,000 – (P32,000/80% x 36,800 1,536,800
33%)
Net taxable income per ITR P2,463,200
Note:
• Interest income is subject to final tax of 20%
• Inter-corporate dividend is tax-exempt.
• Losses on investment in securities is not deductible – capital loss
3. Final withholding tax paid (P32,000/80%) x 20% P 8,000
4. Net income before tax per GAAP P2,200,000

Less: Income tax (P2,463,200 x 30%) 738,960
Net income P1,461,040

Income Tax of Individuals: Income Taxation 6Th Edition (By: Valencia & Roxas) Suggested Answers

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Income Tax of Individuals: Income Taxation 6Th Edition (By: Valencia & Roxas) Suggested Answers

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INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 89

Problem 11 – 2 TRUE OR FALSE

Problem 11 – 3 Problem 11 – 4 Problem 11 – 5

Mentally retarded legitimate son (40 years) old P25,000

A taxpayer supporting a senior citizen is not allowed to claim additional exemption.

Problem 11 – 8 Not in the choices = P70,000.

Problem 11 – 11 Not in the choices =P487,500.

The entire compensation income is subjected to 15% tax rate.

Tax on P500,000 P125,000

Rent income P50,000

Interest income within P100,000

Interest income within P100,000

Tax on P140,000 P22,500

Tax on P500,000 P125,000

Net proceeds P 92,000

Withholding tax (P100,000 x 20%) P 20,000

VAT (P100,000 x 12%) P 12,000

Traveling expenses 11,000

Tax on P140,000 P 22,500

Computation of income tax:

2. Using optional standard deduction

Taxable income P110,000

Computation of income tax:

Less: Business expenses 120,000

2. Tax on P140,000 P22,500

Estimated income tax due:

2. Quarterly business income tax

Tax on P70,000 P 8,500

2. Tax on P500,000 P 125,000

(P2,000,000 x 15%) P300,000

4. Income tax still due (P589,000 – P506,603) P 82,397

Supporting computation of net taxable income before personal exemptions:

Within Outside Total

Allocated OSD x percent 994,000 406,000 1,400,000

Tax on P140,000/ P250,000 P 22,500 P 50,000

2. Basic salary (P25,000 x 12) P300,000

Tax on P140,000 P22,500

Withholding tax from January to November 200A

3. Net taxable compensation income P150,000

Tax on P500,000 P125,000

Gambling losses (excess cannot be deducted from other 250,000

Tax on P500,000 P 125,000

Taxpayer is a resident citizen

Tax on P500,000 P125,000

Allowable foreign tax credit - lower P40,000

b. Passive income tax:

Taxpayer is a nonresident citizen

b. Passive income tax:

Taxpayer is a resident alien. Solution is the same as nonresident citizen.

Taxpayer is a nonresident alien engaged in trade or business in the Philippines.

Taxpayer is a nonresident alien not engaged in trade or business in the Philippines.

The income tax of Mr. Ramsay Colorado would be:

Multiplied by tax rate 25%

Tax on P500,000 P 125,000

Problem 12 – 2 TRUE OR FALSE

Problem 12 – 3 TRUE OR FALSE

Corporate income tax (P5,000,000 x 30%) P1,500,000

Note: The land and warehouse sold is an ordinary asset.

Corporate income tax (P4,000,000 x 30%) P1,200,000

Problem 12 – 8 Not in the Choices = P2,700,000.

Supporting computation: Philippines Foreign

5th year net income P320,000

Normal tax (P5,000,000 x 30%) P1,500,000