Exercises 5-1 Taxation Solutions

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. None. Proceeds of life insurance policy payable upon the death of the
a. 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. The P20,000 given to cover medical expenses are actual damages, while
a. 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.
Not included in the gross income. The amount of P12,000 being given
c. 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
d. 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.
Not taxable. The P60,000 is in the form of moral damages which is not
e. capable of pecuniary estimation. Besides, it is in the nature of a return
of capital.
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.
8. Taxable.
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) 240,0
00
Add: Benefits
Christmas bonus 20,000
Productivity bonus 2,000
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Loyalty award 3,000
Cash gift 1,000
Anniversary bonus 2,000
13th month pay 20,000
Total 48,000
Less: Exemption 30,000 18,0
00
Income subject to tax 258,0
00
EXERCISES 55:
1. 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.
2. ANSWER: B
Proceeds of life insurance 500,00
0
Less: Premiums paid (1,000 x 12 x 240,00
20) 0
Subject to tax 260,00
0
3. ANSWER: C
Total amounts received (50,000 x 12) 600,00
0
Less: Face value of the policy 500,00
0
Deemed interest (taxable) 100,00
0
4. ANSWER: C
Total amounts received (50,000 x 12) 600,00
0
Less: Amount of premiums paid 240,00
(1,000 x 12 x 20) 0
Subject to tax 360,00
0
Prob 5-5.2
1. ANSWER: C
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Proceeds of insurance 500,0
00
Less: Premiums paid (P10,000 x 200,00
20) 0
0
2. ANSWER: D
None because Sonia died.
Prob 5-5.3
ANSWER: D
Income from coconut land 50,0
00
Income from bus operation 30,000
Prob 5-5.4:
ANSWER: B
Proceeds of life insurance policy P
Less: Amounts of premiums paid 500,00
Amount subject to tax 0
400,00
0
100,00
0
Prob 5-5.5:
ANSWER: C
Proceeds of insurance policy P
200,00
0
Less: Amount paid upon P
assignment 60,000
Premiums 80,000 140,00
subsequently paid 0
Taxable income 60,00
0
Prob 5-6.1
ANSWER: C
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: C
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 40,0
00
Increase in value of car (P600,000 - 150,00
450,000) 0
Income 190,00
0
Prob 5-7.3
ANSWER: C
Payment for the salaries 60,0
00
Prob 5-7.4
ANSWER: D
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 400,000
Professional fee 1,000,000
Total amount taxable 1,400,000
Cash prize 25,000,00

0
Pay per view 30,000,00
0
Talent fee 12,000,00
0
Taxable amount 67,000,00
0
EXERCISES 5-
8.2
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
return.
c. 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: D
Salary (P25,000 x 12) 300,0
00
Other benefits:
0
Cash gift 2,500
Longevity pay 30,000
Total 57,500
Less: Amount of 30,000 27,5
exemption 00
Proceeds of life insurance (300,000 100,00
200,000) 0
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 95,000

.
Commissions 15,000
Honoraria 10,000
Holiday pay 7,000
Overtime pay 8,500
Hazard pay 6,000
Other benefits (36,000 6,00
30,000) 0
0
EXERCISES 5 10.2
1. ANSWER: D
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) The benefit of exemption can be
availed of only once.
2. ANSWER: C
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: C
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: A
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: A
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: B
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
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tax. However, the amount in excess of P30,000 are taxable to the
employee.
15. ANSWER: B
Exclusion from gross income 1,000,0
00
16. 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 4,5
(P3,500 + 1,000) 00
Months received (January to June 5.5
15)
Actual amount of salaries received 24,750
Net income from trimobile 24,000
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 420,0
00
Less: Personal exemption
Basic personal 50,000
Additional 25,000 75,0
00
00
Tax on P 250,000 50,000

95,000 x 30% 28,500
Income tax 78,500
c. If Carina has no daughter to support, her filing status is

single.
d. Gross compensation income 420,0

00
Less: Basic personal exemption 50,00
0
Taxable compensation income 370,0
00
Tax on P 250,000 P
50,000
120,000 x 36,000
30%
Income tax 86,000
7. a. Compensation income Jim 160,0

00
Less: Personal exemption 50,0
00
Taxable compensation income 110,0
00
Business income Pat 500,0

00
Less: Expenses 275,0
00
Net income 225,0
00
Less: Personal exemptions 50,00
0
00
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b. Compensation income Jim 160,0
00
Less: Personal exemptions
Additional exemptions 25,000 75,00
0
0
Tax on P 70,000 P
8,500
15,000 x 20% 3,000
Income tax due 11,500
Business income Pat 500,0

00
00
Net income 225,0
00
0
00
Tax on P 140,000 22,500

35,000 x 25% 8,750
Income tax Jim P

11,500
Income tax Pat 31,250
Total income tax 42,750
8. a. Tax on P 40 x 5% 2.00
b. Tax on P 10,000 x 5% 500
c. Tax on P 10,000 500.00

2,245.40 x 10% 224.54
Income tax 724.54
d. Tax on P 250,000 50,000
e. Tax on P 250,000 50,000

206,780 x 30% 62,034
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f. Tax on P 500,000 125,000.

00
623,251.27 x 32% 199,440.
41
Income tax due 324,440.
41
9 a. Salary - Compensation
.
b. Interest on bank deposit
- Passive income tax exempt
c. Honorarium - Compensation income
d. Prizes - 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
(25,000 x 3) 00
0
Tax on P 10,000 500

15,000 x 20% 3,000
Less: Withholding tax 10,100
Income tax payable ( 6,6
00)
b. Maria
Salary 125,0
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00
Less: Basic personal exemptions 50,00
0
0
Tax on P 70,000 8,500

5,000 x 20% 1,000
Income tax payable ( 5,500)
Income tax Juan ( 6,600)

Income tax Maria ( 5,500)
Income tax payable 12,100
11 a Monthly insurance premium 150

. .
Times number of months in a year 12
Deductible health insurance premium 1,800
b Monthly insurance premium (maximum) 200

.
Times number of months in a year 12
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 200

.
Times number of months during the year 8
1 a Compensation income 200,000

2. .
Additional (25,000 x 4) 100,000 150,0
00
Total compensation income 50,000
Tax on P 30,000 2,500

20,000 x 15% 3,000
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b Gross income 200,000
.
Less: Allowable deductions
Expenses 105,000
0
Taxable income (55,00
0)
Tax on P 30,000 2,500

25,000 x 15% 3,750
c 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 28,50

0
Case 1 Case 2
1 Compensation income 125,0 80,000
3. 00
Business income 186,0 230,00
00 0
Gross income 311,0 310,00
00 0
Less: Deductions
Optional (186,000 x 74,40
40%) 0
Itemized 105,00
0
Personal exemption 50,0 50,00
00 0
Total 124,4 155,00
00 0
Taxable income 186,6 155,00
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00 0
EXERCISE 6 5
1. ANSWER: B
Gross receipts 950,00
0
Less: Expenses 120,00 830,00
0 0
Prize, contest 5,000
Salary (37,600 + 2,400) 40,000
Rent income (38,000/95%) 40,000
Less: Depreciation 8,000 32,000
Total 907,00
0
0
0
2. ANSWER: D
Tax on P 500,000 125,00
0
357,000 x 32% 114,24
0
0
Less: Withholding taxes
Profession (950,000 x 15%) 142,50
0
Salary 2,400
Rent (40,000 38,000) 2,00 146,90
0 0
0
3. ANSWER: B
Interest on preterminated deposit (20,000 x 2,400
12%)
Winnings in raffle (100,000 x 20%) 20,000
Dividend from C Corp. (6,000 x 10%) 600
Total final withholding tax 23,000
4. ANSWER: B
Interest on long-term bank deposit 40,000
Winnings in lotto 20,000
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Life insurance benefits 150,00
0
Loan benefits - SSS 20,00
0
Total income exempt from income tax 233,50
0
EXERCISE 6 - 7
Resident or NRA
INCOME
citizen ETB
1. Interest on bank deposit with Banco de 20% 20%
Oro- Php
2. Interest on bank deposit with a bank in the
United States in U.S. dollar Tax table Not
taxable
3. Earnings from interest on money market 20% 20%
4. Royalties on inventions 20% 20%
5. Royalties on books 10% 10%
6. Prizes amounting to P7,500 Tax table Tax
table
7. Prizes amounting to P20,000 20% 20%
8. Winnings in lotto Philippines Exempt Exempt
9. Winnings in lottery 20% 20%
10. Interest on long-term investment Exempt Exempt
11. Interest on deposit for 4 years 5% 5%
12. Cash dividends domestic corp. 10% 20%
13. Share of partner in net income of taxable 10% 20%
partnership
14. Interest income under expanded foreign
currency deposit system 7.5% Exempt
EXERCISES 68.1
1. ANSWER: A
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 RA, NRA(ETB NRA(NET
NRC ) B)
1. Rent on apartment in the YES YES YES YES
Phils.
2. Rent on apartment in YES NO NO NO
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Canada
3. Dividend-domestic YES YES YES YES
corporation
4. Dividend-foreign corporation YES NO NO NO
5. Lotto winnings in the Phils. YES NO NO NO
6. Lotto winnings in U.S.A. NO NO NO NO
7. Cash prize on contest, Phils. YES YES YES YES
8. Cash prize on contest, U.S.A. YES NO NO NO
9. Interest, bank deposit in YES 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, 120,00
Philippines 0
Business income, Philippines 350,00
0
Business income, Canada 5,000,0
($200,000 x P25) 00
Total gross income 5,470,0
00
Less: Deductions
Expenses, Philippines 220,00
0
Expenses, Canada 3,750,00 3,970,0
($150,000 x 25) 0 00
Net income 1,500,0
00
00
Taxable income 1,425,0
00
Tax on P500,000 125,000

925,000 x 32% 296,000
2. ANSWER: C
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Total final taxes paid:
Dividend from a domestic 40,00
company 0
Final tax rate 10% 4,000
Share in income of business 50,00
partnership 0
Final tax rate 10% 5,000
Total final tax 9,000
3. ANSWER: A
Resident citizen opted to avail
of OSD.
Compensation income 120,00
0
0
Business income, Canada 5,000,00
($200,000 x 25) 0
Total 5,350,00
0
Less: Optional deductions 2,140,00 3,210,00
(5,350,000 x 40%) 0 0
Net income 3,330,0
00
00
00
4. ANSWER: B
Taxpayer is a resident alien.
Compensation income, 120,0
Philippines 00
0
Gross income 470,00
0
Less: Expenses, Philippines 220,00
0
Net income 250,00
0
0
Additional exemption 100,000 150,00
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(P25,000 x 4) 0
0
5. ANSWER: A
Taxpayer becomes a nonresident
citizen.
Net income 250,00
0
00
0
6. ANSWER: D
Nonresident alien ETB.
00
0
Net income 130,00
0
Less: Personal exemption (lower) 20,00
0
0
7. ANSWER: D
Taxpayer is NRA NETB.
00
Dividend from a domestic 40,000
company
Shares in net income of a 50,00
partnership 0
Gross income 440,00
0
Rate 25%
Final tax 110,00
0
8. ANSWER: D
Value of inheritance 500,00
0
Lotto winnings 1,540,0
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00
Proceeds of life insurance 250,0
00
Total exemption 2,290,0
00
EXERCISE 6-
9.1
ANSWER: D
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 6-
9.2
ANSWER: B
. 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) 104,00
0
Professional income (83,000 + 7,000) 90,00
0
Gross income, business 125,00
0
Total 215,00
0
Less: Professional and business expenses 56,50 158,50
0 0
Rent income (57,000/95%) 60,00
0
Net income 322,50
0
0
23 | P a g e
Additional (25,000 x 2) 50,000 100,00
0
0
Tax on P 140,000 22,50

0
82,500 x 25% 20,625
Less: Tax credit
Withholding tax on -
Wages
P 5,000
Professional income
7,000
Rent (60,000-57,000) 15,000
3,000
2. ANSWER: D
Salary 104,00
0
Gross receipts on business P
125,00
0
Rent income 60,000
Professional income 90,00
0
Total 275,00
0
Less: Optional deductions (P275,000 x 110,00 165,00
40%) 0 0
Net income 269,00
0
Basic personal 50,0
00
0
0
Tax on P 140,000 22,5

00
29,000 x 25% 7,250
24 | P a g e
PROBLEM 6-9.4
1. ANSWER: C
Gross compensation income (7,000 + 300) 87,600
x 12
Taxation income 12,600
2. ANSWER: C
Gross business income 150,00
0
Less: Optional deduction (150,000 x 40%) 60,000
Net 90,000
EXERCISES 6-10.1: PERSONAL

EXEMPTIONS
1. ANSWER: B
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: A
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: C
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: C
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: C
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: D
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: B
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: D
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: D
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 6-
10.2
1. ANSWER: C
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 25,0
00
Illegitimate child (recognized 25,0 50,00
natural child) 00 0
Total 100,0
00
2. ANSWER: B
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: D
Basic personal exemptions:

Husband 50,00
0
Wife 50,00 64,000
0
27 | P a g e
Additional exemptions (25,000 x 4) 100,000
Total 164,000
4. ANSWER: B
Basic personal exemption 50,000

Additional exemption (25,000 x 3) 75,000
Total personal exemptions 125,000
5. ANSWER: D
Professional fees 180,000

Allowances 24,000
Total 204,000
Less: Expenses
Salaries 36,00
0
Traveling expenses 20,00
0
Office supplies 4,000
Rent expense 36,00 96,000
0
Taxable income before exemption 108,000
Less: Personal exemption (50,000 125,000
+[25,000 x 33])
Taxable income .
6. Answer: A
Gross compensation income 120,000
0
Additional (25,000 x 4) 100,0 150,000
00
7. Answer: C

0
Additional (25,000 x 2) 50,00 100,000
0
28 | P a g e
EXERCISES 6 11. CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS
1. ANSWER: D
A nonresident alien not engaged in trade or business (NRA NETB)
is not entitled to claim personal exemption.
2. ANSWER: A
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: D
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: D
5. ANSWER: B
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: A
Royalty income on musical compositions are subject to a final tax of
10%.
7. ANSWER: C
Interest and dividends (taxpayer is 64,00
NRA ETB) 0
EXERCISES 612. PREMIUM PAYMENTS ON HEALTH AND/OR

HOSPITALIZATION INSURANCE
1. ANSWER: D
29 | P a g e
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: D
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: C
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.

00
Less: Deductions
Additional exemption 25,000
Insurance premiums (200 2,400 77,40
x 12) 0
00
EXERCISE 6.12.2
Case None because the total gross income of the spouses exceeds
1: P250,000.
Case None. The deduction on health insurance can be claimed by the wife
2: being the claimant of the additional exemption on dependents.
Case The husband can only claim a maximum amount of P1,600 because
3: only P200 is allowed as deduction every month, computed as
follows: P200 x 8 = 1,600.
Case P1,200. The husband is allowed to claim the deduction even if in the
4: meantime no dependent is qualified for additional exemption.
EXERCISES 6-13
1. ANSWER: A
Salary being a compensation income is returnable. Hence, part of the
30 | P a g e
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) 50,000
Additional (25,000 x 3) 75,000 125,00
0
Tax on P 30,000 2,500.00
2,756 x 15% 413.40
Income tax due 2,913.40
4. ANSWER: C
Compensation income 53,000
Add: Professional income 350,000
Less: Expenses 140,000 210,000
Total 263,000
Less: Exemptions
Tax on P140,000 22,500
48,000 x 25% 12,000
5. ANSWER: D
Refer to the solution to Problem 6.
6. ANSWER: A
Salary (P191,000 + 25,000) 216,000
Add: Taxable other benefits
Other benefits 15,000
Total 33,000
Less: Exemption 30,000 3,000
31 | P a g e
Total 219,000
Tax on P 140,000 22,500

29,000 x 25% 7,250
7. ANSWER: D
Gross income, restaurant 900,000
Taxable other income (200,000 160,000
x 80%)
Total 1,060,0
00
Less: Deductions
Business expenses (900,000 x 60%) 459,000
x85%
Basic personal exemption 50,000
8. ANSWER: A
Basic salary 210,549.
76
Cost of living allowance 6,000.00
Hazard pay 3,600.00 9,600.0
0
Gross compensation income 220,149.
76
Add: Net income from
profession
Professional income P156,890.00
Less: Expenses 67,500.00 89,390.
00
Total gross income 309,539.
76
Less: Personal exemption 50,000.
00
Taxable income 259,539.
76
Tax on P 250,000 50,000.00
9,539.76 x 2,861.93
30%
32 | P a g e
Income tax due 52,861.93
Less: Withholding tax on 27,609.50
wages
Income tax payable 25,252.37
9. ANSWER: B
Business income, Phils., 1/1 - 40,000
4/30
Less: Expenses, Phils. 17,000 23,000
Business income, Phils., 5/1 - 12/31
540,000
Less: Expenses, Phils. 292,50
247,500 0
Professional income 22,500
Dividend from foreign corporation (1,500 x 60) 90,000 405,000
Total 428,000
Less: Personal exemption (head of family) 50,000
Tax on P 250,000 50,00
0
128,000 x 30% 38,400
10 ANSWER: B
.
Gross compensation income (210,438.24 + 216,438.
6,000) 24
Basic personal 50,000.
00
Additional 75,000. 125,000
00 .00
Taxable income 91,438.
24
Tax on P 70,000 8,500.0

0
21,438.24 x 20% 4,287.
65
Income tax due 12,787.
65
Less: Withholding tax 27,246.
40
Income tax payable (14,458.
75)
33 | P a g e
11 ANSWER: B
.
Basic salary (48,465.25 + 2,500) 50,965.2
5
Less: Personal exemption 50,000.0
0
Taxable income 965.25
Tax on P 965.25 x 5% 48.26

Less: Withholding tax ( 431.
45)
Income tax payable ( 383.
19)
12 ANSWER: B
.
Income tax due of Alex (14,458.7
5)
Income tax due of Paloma ( 383.1
9)
Aggregate amount payable/refund (14,841.
94)
13 ANSWER: A
.
0
0
Additional (25,000 x 2) 50,000 100,0
00
14 ANSWER: C
.
0
0
34 | P a g e
15 Answer: B
.
Salary - 1/1 to 6/30 (P8,000 x 6) 48,000
Add: Proceeds of insurance 500,00
0
Less: Premium payments (P5,000 x 20) 100,000 400,000
Gross income 448,000
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.
The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles
61 and 62 of RA 6938, which read:
35 | P a g e
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).
d. Gigi and Jayjay have formed a general professional partnership. By

organizing an accounting and auditing firm, they shall exercise a
36 | P a g e
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 Situs of Income Tax Base

.
a. Domestic corporation Within and Taxable
without income
b. Resident foreign Within only Taxable
corporation * income
c. Nonresident foreign Within only Gross
corporation income
*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 2008 2009

. .
Sales domestic 3,000,0 3,000,0
00 00
Sales abroad 7,000, 7,000,
000 000
Gross sales 10,000, 10,000,
000 000
Less: Cost of goods 5,000, 5,000,
sold 000 000
Gross income 5,000,0 5,000,0
00 00
Less: Expenses
Domestic 1,000,0 1,000,0
00 00
Foreign 2,000,0 2,000,0
00 00
Total expenses 3,000,0 3,000,0
00 00
Taxable income 2,000,0 2,000,0
00 00
Rate 35 30
% %
Income tax 700,00 600,00
0 0
b Resident foreign
37 | P a g e
. corporation
00 00
Less: Cost of goods sold (3/10 x 1,500,0 1,500,0
5,000,000) 00 00
Gross income 1,500,0 1,500,0
00 00
Less: Expenses on domestic 1,000,0 1,000,0
sales 00 00
Taxable income 500,000 500,000
Rate of tax 35 30%
%
Income tax 175,00 150,000
0
c Nonresident foreign
.
corporation
00 00
Yield from deposit 400,00 400,00
substitute 0 0
Gross income 3,400,0 3,400,0
00 00
Rate 35 30
% %
Income tax 1,190,0 1,020,0
00 00
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 5,000,0

00
Less: Expenses 4,700,0
00
Rate 30
%
Normal income tax 90,000
Less: Minimum income tax (5,000,000 100,000
x 2%)
38 | P a g e
Excess MCIT ( 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 2007 2008 2009

.
Gross sales 4,580,0 5,250,0 2,850,0
00 00 00
Sales returns and discounts 200,00 175,00 295,00
0 0 0
Cost of goods sold 860,0 620,0 1,200,0
00 00 00
Total 1,060,0 795,0 1,495,0
00 00 00
Net 3,520,0 4,455,0 1,355,0
00 00 00
Add: Capital gain 30,0 35,0
00 . 00
Gross income 3,550, 4,455,0 1,390,
000 00 000
Less: Deductions 3,480,4 4,200,0 850,0
00 00 00
Taxable income 69,600 255,00 540,00
0 0
Rate of tax 35 35 30
% % %
Normal Income tax 24,360 89,250 162,00
0
MCIT:
2007 (3,550,000 x 2%) 71,000
2008 (4,455,000 x 2%) 89,100
2009 (1,390,000 x 2%) 27,80
. . 0
Income tax 71,00 89,250 162,00
0 0
Excess MCIT 2007 (71,000 46,64
24,360) 0
Less: Carry forward of excess 46,64 ______
MCIT 0
39 | P a g e
Income tax payable 71,00 42,61 162,00
0 0 0
6 a Sales 6,000,0
. . 00
Sales returns and allowances 200,00
0
Sales discounts 15,00 215,0
0 00
Net sales 5,785,0
00
Less: Cost of goods sold
Inventory, January 1 2,400,0
00
Purchases 1,500,0
00
Freight-in 35,000
Purchase returns and ( 30,00
allowances 0)
Purchase discounts ( 7,00
0)
Goods available for sale 3,898,0
00
Inventory, December 31 1,900,0 1,998,0
00 00
Gross income 3,787,0
00
Less: Operating expenses 1,600,0
00
00
Rate of tax 35
%
Normal Income tax 765,4
50
b MCIT (3,787,000 x 2%) 75,7

. 40
c Income tax due 765,4

. 50
7 Gross sales 2,000,

. 000
Less: Cost of sales 1,600,
000
40 | P a g e
Gross income 400,00
0
Less: Optional standard
deduction
Rate 40% 160,00
0
Taxable net income 240,00
0
8 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
.
00
To record income tax liability using normal
income tax.
b Deferred charges MCIT 15,000

.
00
To record excess MCIT (65,000
50,000)
c. Income tax payable 65,000

Cash in bank 65,0
00
To record payment of income tax due
for 2006.
2007
a The corporation is not allowed to carry forward and credit the 2006
. excess MCIT against the income tax liability for 2007, since the
2007 MCIT is greater than the normal income tax for said year.
b To record income tax liability using the normal
41 | P a g e
. income tax rate.
Provision for income tax 85,000

c. To record application of excess MCIT.
Deferred charges MCIT 15,000

d To record payment of income tax due for

. 2007.
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 15,000
10 1 Tuition fees 1,560,0

. . 00
School canteen 250,000
Dormitories 95,000
Bookstores 48,000
Car stickers 8,30
0
Total 1,961,3
00
2 If Fatima University is a non-stock, non-profit educational institution

. no income shall be reported for income tax purposes because non-
stock non-profit schools are not subject to income tax.
42 | P a g e
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.
11 a Gross receipts 4,500,0

. . 00
Less: Cost of sales 1,200,0
00
00
Less: Deductions 680,0
00
00
Rate 35
%
Income tax 917,0
00
b Taxable income 2,620,0

. 00
Yield from deposit substitutes 75,000
Interest income 42,00
0
Total 2,737,0
00
Less: Dividends paid 375,000
Income tax paid 917,000
Tax on deposit substitutes (75,000 x 15,000
20%)
Tax on interest (42,000 x 20%) 8,400
Reserved for building construction 1,500,0 2,815,4
00 00
Improperly accumulated earnings ( 78,4
00)
12 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) P

110,000
Less: Cost (P100 x 1,000) 100,000
Net capital gain 10,000
Rate of tax 5%
Capital gains tax (final tax) 500
43 | P a g e
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 852,
000
0
Rate of tax 30
%
MCIT (P852,000 x 2%) 17,040
Income tax payable (higher) 17,040
5. Answer: C
Gross income 632,00
0
0
Rate of tax 35
%
0
MCIT (P632,000 x 2%) 12,640
Income tax payable (higher) 12,640
44 | P a g e
PROBLEM 7-2.2
1. ANSWER: C
Minimum Corporate Income Tax 50,000
Less: Normal income tax 20,000
Excess of MCIT over NIT 30,000
Entry:
Deferred charges - MCIT 30,000
2. ANSWER: A
Retained earnings 30,000
Deferred charges - MCIT 30,000
3. ANSWER: B
2005 27,000
2006 5,000
2007 10,000
Total excess of MCIT over NIT 42,000
Journal entry:
PROBLEM 7-
2.3:
1. ANSWER: B
Income tax, 1st Qtr (NIT higher) 100,00
0
Less: Taxes withheld Prior year 10,000
Taxes withheld 1st qtr 20,000
Excess MCIT prior year 30,000 60,000
Income tax due, 1st Qtr (normal 40,000
income tax)
2. ANSWER: B
Income tax, 2nd Qtr (MCIT higher) 330,00
0
Taxes withheld 2nd qtr 30,000
Net income tax payment 1st 40,000 100,00
Qtr 0
45 | P a g e
Income tax due, 2nd Qtr MCIT 230,00
0
3. ANSWER: C
Income tax, 3rd Qtr (NIT higher) 470,00
0
Taxes withheld 3rd qtr 40,000
Net income tax payment 1st 40,000
Qtr
MCIT paid in the 2nd Qtr 230,000
Excess MCIT in prior year 30,000 400,00
0
Income tax due, 3rd Qtr - NIT 70,00
0
4. ANSWER: C
Annual income tax (NIT higher) 670,00
0
Taxes withheld 4th qtr 35,000
Qtr
Net income tax payment 3rd 70,000
Qtr
MCIT paid in the 2nd Qtr 230,000
Excess MCIT in prior year 30,000 505,00
0
Income tax due, Final Qtr - NIT 165,0
00
5. ANSWER: A
Annual income tax (MCIT higher) 550,00
0
Taxes withheld 4th qtr 35,000
Qtr
Net income tax payment 3rd 70,000
46 | P a g e
Qtr
MCIT paid in the 2nd Qtr 230,000 475,00
0
Income tax due, Final Qtr - NIT 75,0
00
EXERCISE 73
1. ANSWER: A
00
Less: Deductions
Expenses 1,750,0
00
NOLCO 300,00 2,050,0
0 00
Rate of tax 35
%
0
2. ANSWER: D
Add: Interest on bank deposit 20,000
(16,000/80%)
Proceeds of insurance 1,200,0
00
NOLCO 300,00
0
Dividends from ABB 75,00 1,595,0
0 00
Total 2,495,0
00
Less: Dividends paid 500,000
Income tax paid 315,000
Interest on bank deposit 4,000 819,00
(20,000 16,000) 0
Improperly accumulated taxable 1,676,0
income 00
Rate 10
%
Improperly accumulated earnings 167,60
tax 0
3. ANSWER: D
4. ANSWER: D
47 | P a g e
5. ANSWER: C
PROBLEM 7-
4.1
1. ANSWER: C
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 9,058,75
(400,000/20 x 6/12) 00 0
0
Rate of tax 10%
Income tax 217,12
5
2. ANSWER: D
Tuition fees 9,500,00
0
Miscellaneous fees 1,200,00
0
Income of bookstore 350,000
Income of school canteen 180,00
0
00
Less: Expenses
Salary, allowances and 6,400,000
bonus
Other operating expenses 2,600,000
Construction of additional 1,300,000
classrooms
Furniture and equipment 400,000 10,700,0
00
Rate of tax 10
%
Income tax 53,00
0
48 | P a g e
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: D
PROBLEM 74.2
1. ANSWER: A
00
Less: Deductions
Operating expenses 6,400,0
00
Cost of building 2,500,0 8,900,00
00 0
0
Rate of tax 10%
0
2. ANSWER: C
00
Less: Deductions
Operating expenses 6,400,0
00
Depreciation(2,500,000/50x6/ 25,00 6,425,00
12) 0 0
0
Rate of tax 10%
0
3. ANSWER: B
The importation of laboratory equipments are exempt from customs
duties if the school is a private educational institutions.
49 | P a g e
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: C
EXERCISES 7 5
PROBLEM 75.1.
1. ANSWER: A
Gross income, Philippines P
740,00
0
Less: Expenses, Philippines 425,00 P
0 315,00
0
Gross income, U.S.A. 690,00
0
Less: Expenses, USA 450,00 240,00
0 0
Royalties, USA 50,00
0
0
Rate of tax (2008) 35%
Income tax 211,75
0
2. ANSWER: C
Gross income, Phils. 740,00
0
0
0
Income tax 110,25
0
50 | P a g e
3. ANSWER: A
Gross income, Philippines 740,00
0
Interest on bank deposit, PNB 10,00
0
Total 750,00
0
Final tax 262,50
0
4. ANSWER: A
PROBLEM 7
5.2
ANSWER: D
Gross income, Phils. 200,00
0
Less: Deductions 80,000 120,00
0
Gross income, USA 60,00
0
Less: Deductions 30,000 30,00
0
0
Rate (2009) 30%
Income tax 45,000
PROBLEM 7
5.3
ANSWER: C
Gross income, Philippines 2,800,0
00
Less: Deductions 1,300,0
00
00
Rate of tax (2008) 35
%
Income tax 525,0
00
PROBLEM 7
5.4
51 | P a g e
1. ANSWER: B
Less: Expenses, Phils. 800,000 400,00
0
Gross income, U.S. ($125,000 x P40)
P5,000,000
Less: Expenses, U.S. ($62,000 x P40) 2,520,0
2,480,000
00
Gross income, HK ($345,000/5x40)
2,760,000
Less: Expenses, HK ($230,000/5 x 40) 920,00 3,440,0
1,840,000 0 00
00
Rate of tax 30
%
Income tax 1,152,0
00
2. ANSWER: C
00
0
Rate of tax 30%
Income tax 120,000
3. ANSWER: D
00
Rate of tax 30
%
Final tax 360,00
0
4 ANSWER: A
00
Rate of tax 2.5
%
Income tax 30,00
0
52 | P a g e
5. ANSWER: B
00
0
Rate of tax 30
%
Income tax 120,00
0
Amount remitted to mother company 280,000

(400,000 - 120,000)
Rate of tax 15%
Branch profit remittance tax 42,000
6. ANSWER: A
Exempt from branch profit remittance
tax.
7. ANSWER: B
00
Rate of tax 25
%
Final tax 300,00
0
8. ANSWER: B
00
Rate of tax 4.5
%
Final tax 54,00
0
EXERCISE 7 6
1. ANSWER: A
2. ANSWER: C
3. ANSWER: B
Net income after tax 40,000,0
00
53 | P a g e
Rate of tax 15%
Branch profit remittance tax 6,000,00
0
4. ANSWER: C
Net income after tax 40,000,0
00
Royalty 3,500,00
0
Dividend 4,000,0
00
Total 47,500,0
00
Less: Branch profit remittance tax 6,000,0
00
Amount to be remitted to head office 41,500,0
00
5. ANSWER: B
6. ANSWER: D
GSIS, SSS, and PHIC are exempt from income tax.

PAGCOR is now subject to income tax per RA 9727.
7. ANSWER: C
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.
2. ANSWER: A
An individual permanently residing in the Philippines is classified
54 | P a g e
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: B
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
Less: Cost of sales 1,725,0
00
Less: Expenses
Inclusive (386,400 / 112%) 345,000
Exclusive 450,000 795,000
Income tax 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) 13,929,793.
51
TY 2005 (filed 2006):
Income tax due 4,187,523.0
0
Less: Tax credit (excess tax 05) 13,929,793.
51
Balance (may be refunded) 9,742,270.5
1*
* Claim for refund should be made not later that April 15, 2007.
56 | P a g e

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EXERCISES 5-1

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

4. Rodolfo must report an income of P75,000.

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

10. Answer: P38,000

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

There is no showing that Mario was in the service of the same

The amount of P250,000 is taxable because Remus is only 49

The money value of the accumulated leave credits given to a

The P1,000,000 is part of Larry's retirement pay and not a gift.

The separation pay received by Evelyn is taxable because of the

Cash prize 25,000,00

a. The P350,000 value of the car is subject to a final tax of 20%.

Being a resident citizen, Monique Salonga is taxable on income

2 Basic salary 95,000

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

4. a. Julio is the one qualified to claim as head of family because he is

5. a. None. Aunties are not qualified dependents for purposes of claiming

6. a. Carina is qualified as head of family. She is already a widow and has

Tax on P 250,000 50,000

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

d. Gross compensation income 420,0

7. a. Compensation income Jim 160,0

Business income Pat 500,0

Business income Pat 500,0

Tax on P 140,000 22,500

Income tax Jim P

b. Tax on P 10,000 x 5% 500

c. Tax on P 10,000 500.00

e. Tax on P 250,000 50,000

f. Tax on P 500,000 125,000.

Tax on P 10,000 500

Tax on P 70,000 8,500

Income tax Juan ( 6,600)

11 a Monthly insurance premium 150

b Monthly insurance premium (maximum) 200

c No amount of health or hospitalization insurance premium is

d Monthly insurance premium (maximum 200

1 a Compensation income 200,000

Tax on P 30,000 2,500

Tax on P 30,000 2,500

c Gross income 200,0

Income tax due P 30,000 28,50

Tax on P500,000 125,000

Tax on P 140,000 22,50

Tax on P 140,000 22,5

EXERCISES 6-10.1: PERSONAL

In cases of personal exemptions, only NRA ETB are subject to the

A dependent receiving a salary of P1,000 monthly is not considered

Personal exemptions 50,00

Basic personal exemptions:

Basic personal exemption 50,000

Professional fees 180,000

Gross compensation income 220,000

EXERCISES 612. PREMIUM PAYMENTS ON HEALTH AND/OR

Gross compensation income 200,0

Tax on P 140,000 22,500

Tax on P 70,000 8,500.0

Tax on P 965.25 x 5% 48.26

b. The business organization formed is a corporation. The five

c. The two corporations have formed a joint venture because it is clear

d. Gigi and Jayjay have formed a general professional partnership. By

e. The business organization formed possesses the feature applicable