Chapt-12 Income Tax - Corporations

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 12: Income Tax of Corporations

CHAPTER 12

INCOME TAX OF CORPORATIONS Problem 12 – 1 TRUE OR FALSE 1. True 2. True 3. False – Only domestic corporations are to be taxed for income within and without. 4. True 5. False – 30% normal tax effective 2009. 6. True 7. True 8. True 9. True 10. False – Not taxable because the corporation is a foreign corporation/ 11. False – 30%. 12. False – applicable only to resident Offshore Banking Unit on gross receipts of OBU. 13. False – final tax of 10% Problem 12 – 2 TRUE OR FALSE 1. 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 35%. 2. False – Sale of real property outside the Philippines by a resident foreign corporation is not subject to tax in the Philippines. 3. False – 10% based on gross income within 4. True 5. True 6. False – In general, GOCCs are subject to corporate income tax. 7. True 8. True 9. True 10. True 11. True 12. True Problem 12 – 3 1. A 2. D 3. D 4. B 5. A 6. D 7. D 8. C 9. A 10. 11. 12. 13.

A D B A

Problem 12 – 4 1. C or D 2. B 3. D 4. A 5. C 6. B & D 7. B 8. Not in the choices = normal tax of 30% 9. Not in the choices = normal tax of 30% 10. B 11. B 12. C

Problem 12 – 5 1. D Gross income (P8,000,000 + P4,000,000) Business expenses (P5,000,000 + P3,000,000) Net taxable income

Taxable income P12,000,000 8,000,000 P4,000,000

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

P1,200,000

Note: The land sold is a capital asset. Hence, not subject to corporate income tax but for final tax of 6% based on sales price or zonal value, whichever is higher. 2.

C Gross income Business expenses

Income tax due

P8,000,000 5,000,000

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 12: Income Tax of Corporations

Net taxable income

P3,000,000

Corporate income tax (P3,000,000 x 30%)

P900,000

Note: The land sold is a capital asset. Hence, not subject to corporate income tax but for final tax of 6% based on sales price or zonal value, whichever is higher. Problem 12 – 6 B Gross income within Less: Deductions within Net taxable income Multiplied by normal corporate tax rate Income tax due

P2,800,000 1,300,000 P1,500,000 30% P 450,000

Problem 12 – 7 D Gross income within Multiplied by normal corporate tax rate Income tax due

P5,000,000 30% P1,500,000

Problem 12 – 8 1. Domestic corporation Gross income – within and without (P450,000 + P180,000 + P75,000 + P160,000) Deductions – within and without (P290,000 + P80,000 + P25,000 + P100,000) Net income Multiplied by normal corporate income tax Income tax due and payable 2.

P865,000 (495,000) P370,000 30% P129,500

Resident foreign corporation Gross income within Deductions within Net income Multiplied by normal corporate income tax Income tax due and payable

P450,000 290,000 P160,000 30% P 56,000

Problem 12 – 9 C Net income from PAGCOR (P30,000,000 x P28,000,000) Multiplied by normal corporate tax rate Income tax due

P2,000,000 30% P 600,000

Problem 12 – 10 B Net income from National Power Corporation Net income from National Books Store

P10,000,000 8,000,00 0 P18,000,000 30 % P 5,400,000

Total net income Multiplied by corporate normal tax Income tax due Problem 12 – 11 D Gross profit Operating expenses before charitable contribution Net income before charitable contribution Charitable contributions - limit (P1,050,000 x 5%) Actual – lower Net taxable income Multiplied by corporate normal tax rate Income tax due and payable Problem 12 – 12 D Operating loss Operating expenses Gross income Multiplied by minimum corporate income tax rate Income tax payable Problem 12 – 13 1. D

YEAR 2005 use 35% normal tax rate

P1,600,000 (550,000) P1,050,000 P52,500 50,000 P1,000,000 30% P 300,000 (P 200,000) 1,000,000 P 800,000 2% P 16,000

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 12: Income Tax of Corporations

Net income per GAAP Add: Allowance for bad debts Contribution Income before allowable contribution Less: Deductible contribution (P5,450,000 x 5%) Net taxable income Multiply by normal corporate income tax rate Income tax due and payable

P5,000,000 150,000 300,000 P5,450,000 272,500 P5,177,500 35% P1,812,125

2. D Net income per GAAP Add: Operating expenses Gross income Multiply by minimum corporate income tax rate Minimum corporate income tax

P 5,000,000 80,000,000 P85,000,000 2% P 1,700,000

Normal tax (P5,000,000 x 35%)

P1,812,125

Problem 12 – 14 1 A . Tax payable – current year (P8,000,000 x 2%) 2 .

P 160,000

C Operating income (P8,000,000 – P7,000,000) Multiplied by normal tax rate Normal tax Less: Excess of MCIT Tax payable

P1,000,000 30% P 300,000 100,000 P 200,000

Problem 12 – 15 A None. There is no excess corporate MCIT over NCIT in 2005 to be applied on 2006 because the MCIT is not yet applicable for the company as it only has 3 years of operation in 2005. Problem 12 – 16 C Rental income (P1,900,000/95%) Capital gains Total gross income Operating expenses Net taxable income Multiplied by corporate normal tax Income tax payable

P2,000,000 500,000 P2,500,000 (2,350,000) P 150,000 30% P 45,000

Excess of MCIT over NCIT Expanded withholding tax (P2,000,000 – P1,900,000) Total creditable income tax Income tax due Tax refund

P 40,000 100,000 P140,000 45,000 P 95,000

Problem 12 – 17 C Capital gains tax (P1,500,000 x 6%) Problem 12 – 18 1. D Domestic Corporation: a. Not traded in local exchange: Selling price Cost (P110 x 12,000 shares) Capital gain Tax on P100,000 x 5% Tax on excess (P280,000 – P100,000) x 10% b. Traded in local exchange (P1,800,000 x .005)

c.

Sale of land abroad (P3,000,000 – P2,500,000) x 30%

P 90,000

P1,600,000 1,320,000 P 280,000 P

5,000 18,000

P 23,000 9,000 150,000

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 12: Income Tax of Corporations

d. 2.

Sale of land – Philippines (P1,200,000 x 6%)

A Resident Foreign Corporation a. b. c. d. (P1,200,000 x 6%) Total

Problem 12 – 19 C Interest from savings deposits (P3,000,000 x 20%) Royalty income (P1,000,000 x 20%) Interest from a depository bank (P1,500,000 x 7.5%) Total passive final tax

72,00 0 P254,000 P 23,000 9,000 72,000 P104,000 P 600,000 200,000 112,500 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. Problem 12 – 20 1. B Domestic Corporation a. ($20,000 @ 7.5% x P50) b. P300,000 @ 20% c. P100,000 @ 20% d. P 80,000 @ 20% Total

2.

B = Resident foreign corporation (same as letter 1)

3.

C Nonresident foreign corporation a. Exempted b. (P300,000 @ 30%) c. (P100,000 @ 30%) d. (P 80,000 @ 30%) Total

Problem 12 – 21 1. A Dividend income - (PCB and Magnolia are both domestic corporations) Interest income on US dollar loans ($3,000 x 10% x P50) 2.

C Interest on Philippine peso loans Operating expenses Taxable income Multiplied by normal corporate tax Income tax due

Problem 12 – 22 Related income Unrelated income Total revenue Operating expenses Net loss

P75,000 60,000 20,000 16,000 P171,000

P90,000 30,000 24,000 P144,000

Exempt P15,000 P2,000,000 ( 900,000) P1,100,000 30% P 330,000

D

Minimum corporate income tax (P2,500,000 x 2%)

P1,000,000 1,500,000 P2,500,000 (3,000,000) (P 500,000) P50,000

Problem 12 – 23 A Nonprofit educational institutions are tax-exempt. Problem 12 – 24 D Government educational institutions are tax-exempt. Problem 12 – 25 B Income tax payable (P700,000 x 0.025)

P17,500

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 12: Income Tax of Corporations

Problem 12 – 26 A Manila to Beijing (P5,000 x 2,000) Manila – Hong Kong – Beijing (P6,000 x 4,000) x P3,000/P6,000 Manila to Hong Kong (P3,000 x 2,000) Total reportable gross income within Multiplied by applicable rate Income tax

P10,000,000 12,000,000 6,000,000 P28,000,000 2.5% P 700,000

Problem 12 – 27 Not in the Choices = P2,500,000 & P1,500,000 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 corporation are subject special tax rates (final taxes). They are not allowed to deduct costs or expenses from their gross receipts. The cost of service is only applicable for MCIT purposes. (Sec. 27(E) (4), NIRC) Problem 12 – 28 B Income tax (P80,000/80%) x 20%

P20,000

Note: Although cooperatives are tax-exempt, they still subject to final income taxes on interest income. Problem 12 – 29 A All of the transactions of Unlad Cooperative are exempted from income taxes. Problem 12 – 30 Not in the choices = P6,000 Income tax due – 2nd quarter [(P792,000/99%) – P700,000) x 30% Income tax due – 1st quarter [(P495,000/99%) – P480,000) x 30% Withholding tax – 2nd quarter [(P792,000/99%) x 1% Excess tax credit – 2009 Income tax still due and payable – 2nd quarter

P 30,000 ( 6,000) ( 8,000) ( 10,000) P 6,000

Note: The withholding tax for the 1st quarter is already included in the income tax due in the first quarter. Problem 12 – 31 C Income tax from ordinary net income (P1,000,000 – P900,000) x 30% Final income taxes: Interest income on peso savings (P100,000 x 20%) Expanded foreign currency deposit (P100,000 x 7.5%) Total income taxes Problem 12 – 32 B Income tax on interest income from peso savings bank (P100,000 x 30%)

P30,000 20,000 7,500 P57,500 P 30,000

Interest income earned by nonresident foreign corporation from EFCD is tax-exempt. Problem 12 – 33 C Tax on cash dividend from a resident foreign corporation (P100,000 x P 30,000 30%) Dividend received by a resident foreign corporation from a domestic corporation is taxexempt. Problem 12 – 34 C Cash dividend from a domestic corporation (P100,000 x 30%)

P 30,000

Cash dividend received by a domestic corporation from another domestic corporation is taxexempt because it is considered earned outside the Philippines since only 40% of its business is done within. Problem 12 – 35 D Zero because the earnings of the said resident foreign corporation have no tax situs in the Philippines. Problem 12 – 36 Interest from saving deposit – Metrobank (P3,000,000 x 20%) Royalty income – Philippine Mining Company (P1,000,000 x 20%) Interest from a depository bank under expanded foreign currency

P 600,000 200,000

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 12: Income Tax of Corporations

deposit - PCI Bank ($30,000 x P50 x 7.5%) Dividends from Zerxes, a resident foreign corporation (P500,000 x 30%) Total final passive income taxes Problem 12 – 37

112,500 150,000 P1,062,500

C 3rd Quarter P880,000 (704,000) P176,000 30% P 52,800

Gross income - cumulative Itemized deductions - cumulative Net taxable income Multiplied by normal corporate income tax Income tax due Total income tax paid in previous quarters - tax credit Income tax still due and payable Problem 12 – 38 A Income subject to normal tax rate (P300,000/ 30%) Passive income (P60,000/20%) Capital gains (P35,000: 5,000 @5%, 30,000@10%) Total income Less: Income taxes paid: Income tax per annual tax return Final tax on passive income Capital gains tax Amount subject to 10% surtax

4th Quarter P1,120,000 (896,000) P 224,000 30% P 67,200 ( 52,800) P 14,400 P1,000,000 300,000 400,000 P1,700,000

P300,000 60,000 35,000

395,000 P1,305,000

Problem 12 – 39 Year 2009 Within Gross income: Philippine USA Japan Deductions: Philippine USA Japan Net income Multiply by tax rate Income tax payable Tax credit allowed – see supporting computation Income tax still due

Without

Total

P 400,000 300,000

P1,000,000 400,000 300,000

P1,000,000

(800,000) . P 200,000

(200,000) (200,000) P300,000

(800,000) (200,000) (200,000) P 500,000 30% P 150,000 ( 90,000) P 60,000

Supporting computation: US Japan Total

Tax credits: (P200,000/P500,000) x P150,000 = P60,000 vs. P80,000 Allowed, lower (P100,000/P500,000) x P150,000 = P30,000 vs. P30,000 Allowed, lower

P60,000 30,000 P90,000

(P300,000/P500,000) x P150,000 = P90,000 vs. P100,000 Allowed, lower

P90,000

Problem 12 – 40

Reported income before tax Add: Loss from sale of shares of stock outside stock market Total Less: Gains subject to final income tax: (1) Gain from sale of stock in the stock market (2) Gain from sale of short-term debt securities (3) Gain from sale of real property (P9,400,000 – P4,400,000) Adjusted income subject to corporate income tax Multiply by normal corporate income tax Correct amount of income tax

90,000

P10,000,000 5,000 P10,005,000 P

25,000 10,000

5,000,000

5,035,000 P 5,630,000 30% P 1,689,000

Total reported income before tax Less: Normal corporate income tax Net income after tax

P10,000,000 1,689,000 P 8,311,000

Problem 12 – 41 Total revenue Operating expenses

P1,000,000 ( 10,000)

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 12: Income Tax of Corporations

Service charge – credit card (P1,000,000/5%) x 3% Net income Multiplied by normal corporate tax Income tax due Less: Creditable expanded withholding tax (P1,000,000/5%) x ½ % Income tax still due and payable Problem 12 – 42 Taxable income (normal tax) Add: Income subject to final tax Income exempt from tax Income, excluded from gross income Amount of NOLCO deducted Total Less: Dividends Income tax paid for the year Improperly accumulated income Multiply by tax rate Tax on improperly accumulated income

( 600,000) P 380,000 30% P 114,000 100,000 P

14,000

P 900,000 P 60,000 50,000 10,000 50,000 P150,000 200,000

Problem 12 – 43 Income tax per ITR (P450,000/30%) Income subject to final tax (P37,500/7.5%) Capital gains: P5,000/5% P35,000/10% Total Less: Income tax paid (P450,000 + P37,500 + P40,000) Basis of IAET Multiplied by IAET rate IAET

170,000 P1,070,000 350,000 P 720,000 10% P 72,000

P1,500,000 500,000 P100,000 350,000

450,000 P2,450,000 527,500 P1,922,500 10% P 192,250

Problem 12 – 44 Government educational institutions are exempted from tax. (Sec. 30(I), NIRC.) Problem 12 – 45

Tuition fees Miscellaneous fees Income from rents Net income, school canteen Net income, book store Gross income Less: Allowable deductions: Payroll and administrative salary Other operating expenses Interest expense Depreciation, net six room building Taxable income Multiply by the applicable tax rate Income tax

P2,843,100 362,600 60,000 36,200 24,800 P3,326,700 P1,425,420 762,330 82,100 37,500

2,307,350 P1,019,350 10% P 101,935

Note: The tax differential on interest income shall not be used because the tax applicable is 10% not 30% normal tax. Problem 12 – 46 1. Sales Cost of sales Rent income Gross income Operating expenses allowed Net taxable income Multiplied by NCIT rate Income tax due Quarterly tax paid

3rd year P1,000,000 ( 600,000) 200,000 P 600,000 ( 300,000 ) P 300,000 30% P 90,000 ( 10,000

4th year P2,500,000 (1,200,000 ) 300,000 P1,600,000 (1,300,000 ) P 300,000 30% P 90,000 ( 20,000

5th year P4,000,000 (2,400,000 ) 100,000 P1,700,000 (1,400,000 ) P 300,000 30% P 90,000 ( 30,000

6th year P5,000,000 (2,700,000 ) 50,000 P2,350,000 (1,500,000 ) P 850,000 30% P 255,000 ( 40,000

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INCOME TAXATION 5TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 12: Income Tax of Corporations

Income tax still due and payable 2. Royalty income, net of tax Interest income, net of tax Total passive income, net of tax Divide by Total gross passive income Multiplied by final tax rate Final taxes

) 80,000

P

P

3rd year P 80,000 20,000 P100,000 80% P125,000 20% P 25,000

) 70,000 4th year P160,000 32,000 P192,000 80% P240,000 20% P 48,000

P

) 60,000

) P 215,000

5th year P120,000 16,000 P136,000 80% P170,000 20% P 34,000

6th year P 40,000 24,000 P 64,000 80% P 80,000 20% P 16,000

Problem 12 – 47 (1) Taxable income from operation (P1050,000/70%) Add: NOLCO deducted Interest income (P120,000/80%) Capital gain (P230,000 – P5,000)/90% Total income for GAAP reporting, before tax

P1,500,000 100,000 150,000 250,000 P2,000,000

(2) Tax on income from operation (P1,500,000 x 30%) Tax on interest income (P150,000 x 20%) Tax on capital gain (P250,000 – P230,000) Total income tax paid

P450,000 30,000 20,000 P500,000

(3) GAAP income Less: Income tax Net income after tax – GAAP (4) Taxable income from operation Add: NOLCO Income subjected to final tax (P150,000 + P250,000) Total Less: Income tax paid Net income after income tax Multiplied by surtax rate IAET = Surtax

P2,000,000 500,000 P1,500,000 P1,500,000 P100,000 400,000

Problem 12 – 48 1. Sales Less: Cost of sales Reportable income per ITR 2.

Gross profit Less: Operating expenses: Salaries Depreciation Supplies Interest expense [P50,000 – (40,000 x 33%) Net taxable income per ITR

500,000 P2,000,000 500,000 P1,500,000 10% P 150,000 P10,000,000 6,000,000 P 4,000,000 P4,000,000

P1,000,000 300,000 200,000 36,800

1,536,800 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%

4.

Net income before tax per GAAP Less: Income tax (P2,463,200 x 30%) Net income

P 8,000 P2,200,000 738,960 P1,461,040