chp 12.doc

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

102

Chapter 12: Income Tax of Corporations

CHAPTER 12

INCOME TAX OF CORPORATIONS Problem 12 – 1 TRUE OR FALSE 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 Problem 12 – 2 TRUE OR FALSE 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 Problem 12 – 3 TRUE OR FALSE 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

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

103

Chapter 12: Income Tax of Corporations

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 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 1. C 2. A 3. A 4. D 5. C 6. A 7. A 8. B 9. A 10. C 11. A* 12. A 13. B

Problem 12 – 5 1. B 2. A 3. D 4. A 5. B 6. B 7. A 8. D 9. B 10. C 11. D – Only family-closed corporation is subject to IAET. 12. A 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 Gross income (P8,000,000 + P4,000,000) Business expenses (P5,000,000 + P3,000,000) Gain on sale of warehouse (P3,000,000 – P2,000,000) Net taxable income Corporate income tax (P5,000,000 x 30%) Note: The land and warehouse sold is an ordinary asset. Hence, subject to normal tax.

Taxable income P12,000,000 ( 8,000,000) 1,000,000 P5,000,000

Income tax due

P1,500,000

104

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

Chapter 12: Income Tax of Corporations

2.

Letter B Gross income within Business expenses Gain on sale of warehouse (P3,000,000 – P2,000,000)* Net taxable income

P8,000,000 ( 5,000,000) 1,000,000 P4,000,000

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

P2,800,000 30% P 840,000

Problem 12 – 8 Not in the Choices = P2,700,000. Gross income within Less: Allocated operating expenses (P30,000,000 x 15/75) Net taxable income Multiplied by normal corporate tax rate Income tax due Problem 12 – 9 1. Letter D Domestic corporation: Total net income (P160,000 + P240,000) Multiplied by normal tax rate Income tax due Less: Tax credits: Local Foreign, Actual, P60,000 – lower limit (P120,000 x 240/400) = P72,000 Income tax still due and payable Supporting computation: Gross income – within – without (P180,000 + P75,000 + P190,000) Deductions – within - without (P80,000 + P25,000 + P100,000) Net income 2.

Letter C Resident foreign corporation Gross income within

P15,000,000 6,000,000 P 9,000,000 30% P2,700,000

P400,000 30% P120,000 P42,000 60,000

102,000 P18,000

Philippines P450,000

Foreign P445,000

(290,000) . P160,000

(205,000) P240,000

P445,000

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

105

Chapter 12: Income Tax of Corporations

Deductions within Net income Multiplied by normal corporate income tax Income tax due Less: Local Income tax still due and payable Problem 12 – 10 D Net income from PAGCOR (P30,000,000 - P28,000,000) Net income from NAPOCOR (P10,000,000 – P4,000,000) Total net income Multiplied by normal corporate tax rate Income tax due Problem 12 – 11 C Net income from National Power Corporation Net income from National Books Store Total net income Multiplied by corporate normal tax Income tax due Problem 12 – 12 A Gross profit (P3,000,000 – P1,400,000) Capital gains on sale of paintings Operating expenses before charitable contribution (P800,000 – P100,000) Net income before charitable contribution Charitable contributions - limit (P1,840,000 x 5%), lower Actual – P100,000 Net taxable income Multiplied by corporate normal tax rate Income tax due Problem 12 – 13 C Operating expenses Less: Net operating loss – 4 th year Gross income Multiplied by MCIT rate Minimum corporate income tax

(205,000) P240,000 30% P 72,000 42,000 P 30,000

P2,000,000 6,000,000 P8,000,000 30% P2,400,000

P 8,000,000 5,000,000 P13,000,000 30% P 3,900,000

P1,600,000 940,000 (700,000) P1,840,000 ( 92,000) . P1,748,000 30% P 524,400

P4,000,000 100,000 P3,900,000 2% 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 Operating loss Operating expenses

B (P 200,000) 1,000,000

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

106

Chapter 12: Income Tax of Corporations

Gross income Multiplied by minimum corporate income tax rate Income tax payable 4th year 5th year net income Multiplied by normal tax rate Income tax due Less: Excess of minimum income tax over normal tax Net income tax payable Problem 12 – 15 1. Letter A Net income per GAAP Add: Allowance for bad debts Income before incentive to CHED contribution Less: Incentive to CHED contribution (P300,000 x 50%) Net taxable income Multiply by normal corporate income tax rate Income tax due 2. Letter C Net income per GAAP Add: Operating expenses Gross income Multiply by minimum corporate income tax rate Minimum corporate income tax – higher Normal tax (P5,000,000 x 30%) Problem 12 – 16 1 Letter A . Income tax payable – current year MCIT (P8,000,000 x 2%) 2 .

P 800,000 2% P 16,000 P320,000 30% P 96,000 16,000 P 80,000

P5,000,000 150,000 P5,150,000 150,000 P5,000,000 30% P1,500,000

P 5,000,000 80,000,000 P85,000,000 2% P 1,700,000 P1,500,000

P 160,000

Letter C Net operating income (P8,000,000 – P7,000,000) Multiplied by normal tax rate Normal tax Less: Excess of MCIT Income tax payable

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

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.

107

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

Chapter 12: Income Tax of Corporations

Problem 12 – 18 1. Letter A Income tax payable Divided by MCIT tax rate Gross income 2.

Letter C Income tax expense Divided by corporate normal income tax rate Net taxable income

P

200,000 2% P10,000,000

P P

150,000 30% 500,000

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%) Capital gains Total gross income Operating expenses Net taxable income Multiplied by corporate normal tax Income tax due

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

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

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

Problem 12 – 20 A Gross income (P1,600,000 – P1,200,000) Less: OSD (P400,000 x 40%) Net income Multiplied by normal tax rate Income tax due

P400,000 160,000 P240,000 30% P 72,000

Capital gains tax (P1,600,000 x 6%)

P96,000

Tax advantage using normal tax (P96,000 – P72,000)

P24,000

108

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

Chapter 12: Income Tax of Corporations

Problem 12 – 21 1. Letter 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%

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

5,000 18,000

P 23,000

b. Traded in local exchange (P1,800,000 x .005) c. d.

9,000

150,000 72,000 P254,000 Note: OSD is not applicable to land sold in Japan because the land is a capital asset.

2.

3.

Sale of land abroad (P3,000,000 – P2,500,000) x 30% Sale of land – Philippines (P1,200,000 x 6%)

Letter A Resident Foreign Corporation a. b. c. d. (P1,200,000 x 6%) Total Answer not in the choices = P122,000. Nonresident Foreign Corporation a. b. c. d. (P1,200,000 – P900,000) x 30% Total

Problem 12 – 22 C Interest from savings deposits (P3,000,000 x 20%) Royalty income (P1,000,000 x 20%) Interest from a depository bank EFCD (P1,500,000 x 7.5%) Total passive final tax

P 23,000 9,000 72,000 P104,000

P 23,000 9,000 90,000 P122,000

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 – 23 1. Letter B Domestic Corporation a. ($20,000 @ 7.5% x P50)

P75,000

109

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

Chapter 12: Income Tax of Corporations

b. P300,000 @ 20% c. P100,000 @ 20%* d. P 80,000 @ 20% Total 2.

Letter B = Resident foreign corporation (same as letter 1)

3.

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

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

P90,000 30,000 24,000 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) Interest income on US dollar loans ($3,000 x 10% x P50) 2.

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

Problem 12 – 25 Related income Unrelated income Total revenue Operating expenses Net loss

Exempt P15,000

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

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

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

P50,000

Problem 12 – 26

1. 2.

Letter D Letter A Educational income: Tuition and miscellaneous fees Sales of canteen Sales of bookstore Total related income

200A P4,000,000 700,000 300,000 P5,000,000

200B P6,000,000 1,600,000 400,000 P7,000,000

110

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

Chapter 12: Income Tax of Corporations

Non-educational income: Rent income (net/95%) Sale of scrap materials Total unrelated Costs and expenses: Cost of sales – canteen Cost of books sold Operating expenses Purchase of library books Cost of classroom construction Purchase of school furniture Total costs and expenses

P5,200,000 60,000 P5,260,000

(P400,000) ( 240,000) (2,000,000) (1,000,000) ( 500,000) . (P4,140,000)

Net taxable income

P6,120,000

200A Income tax (P6,120,000 x 30%) 200B Income tax (P6,700,000 x 10%) Less: CWT from rent 200A (P5,200,000 - P4,940,000) 200B (P5,500,000 – P5,225,000) Income tax still due and payable

P1,836,000

P5,500,000 20,000 P5,520,000

(

(P 800,000) 320,000) (3,000,000) (1,500,000)

( 200,000) (P5,820,000 ) P6,700,000

P670,000 260,000 . P1,576,000

275,000 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) Problem 12 – 29 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

P17,500

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

111

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

Chapter 12: Income Tax of Corporations

Problem 12 – 30 A Within Gross receipts Multiplied by special tax rate Philippine income taxes

Dragon Films P10,000,000 25% P 2,500,000

American Aircraft P20,000,000 7 ½% 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 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 Tax rate on branch remittance Branch profit remittance tax

P24,000,000 15% P 3,600,000

Branch profit remittance, net of tax (P24,000,000 x 85%) Dividend income from Pharma Co. Total branch profit remittance

P20,400,000 7,000,000 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. 2. 3. 4.

Interest, dividends, rents, royalties; Remuneration for technical services; Salaries, wages, premiums, annuities, emoluments; 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% Less: 1% creditable withholding tax (P495,000/99%) – P495,000 200A excess tax credit used in first quarter 200B Income tax still due and payable – 200B first quarter

P 6,000 P5,000 1,000

6,000 P - 0 -

112

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

Chapter 12: Income Tax of Corporations

2 .

Letter C 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 – 2 nd quarter [(P792,000/99%) – (P495,000/99%) x 1% Remaining excess tax credit – 200A (P10,000 – P1,000) Income tax still due and payable – 2 nd quarter 200B

Problem 12 – 35 C Gross receipts (P2,940,000/98%) Less: OSD (P3,000,000 x 40%) Net taxable income Multiplied by corporate normal tax rate Income tax due Less: Creditable income taxes paid 1st Qtr. (P1,960,000/98%) x 60% x 30% 2% creditable tax 2 nd quarter’s gross receipts (P2,940,000/98%) – (P1,960,000/98%) x 2% Income tax still due and payable – 2 nd Qtr.

P ( ( ( P

30,000 6,000) 3,000) 9,000) 12,000

P3,000,000 1,200,000 P1,800,000 30% P 540,000 P360,000 20,000

380,000 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% 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 – 35 A Income tax on interest income from peso savings bank (P100,000 x 30%) Tax on cash dividend – domestic corporation (P100,000 x 30%) Tax on cash dividend from a resident foreign corporation (P100,000 x 30%) Total income tax Interest income earned by nonresident foreign corporation from EFCD is tax-exempt.

P30,000 20,000 7,500 P57,500

P 30,000 30,000 30,000 P90,000

113

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

Chapter 12: Income Tax of Corporations

Problem 12 – 36

C

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

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

Problem 12 – 37 C Regular tax (P1,000,000 – P900,000) x 30% Final tax on interest income – peso deposit (P100,000 x 20%) Final tax on interest income – EFCD (P100,000 x 7.5%) Total income tax

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

P 30,000 20,000 7,500 P 57,500

Problem 12 – 38 A Interest income from peso savings bank (P100,000 x 30%) Cash dividend from domestic corporation (P100,000 x 30%) Cash dividend from a resident foreign corporation with 100% earnings in the Philippines (P100,000 x 30%) Total income tax

P 30,000 30,000 30,000 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%) Passive income (P60,000/20%) Capital gains (P35,000: 5,000 at 5%, 30,000 at 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

P1,000,000 300,000 400,000 P1,700,000 P300,000 60,000 35,000

395,000 P1,305,000

114

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

Chapter 12: Income Tax of Corporations

Problem 12 – 42 A Net taxable income (P300,000/30%) Add: Passive income (P60,000/20%) Capital gains (P100,000) + (P35,000/10%) Total Less: Income tax per ITR Passive income final tax Capital gain tax IAET base Multiplied by IAET tax rate IAET

P1,000,000 300,000 450,000 P1,750,000 P300,000 60,000 40,000

Problem 12 – 43 1. Letter A Reserve funds, beginning Add: Net additions to reserve funds during the year Total Less: Reserve funds, ending Amount of reserve funds released 2.

Letter B Gross premium collected Add: Reserve funds release Gross income Less: Operating expenses Net additions to reserve funds Net income

400,000 P1,350,000 10% P 135,000

P1,000,000 500,000 P1,500,000 900,000 P 600,000

P10,000,000 600,000 P10,600,000 P4,600,000 500,000

5,100,000 P 5,500,000

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 Less: Creditable withholding tax (P10,000,000 x 2%) Net amount of franchise fee 2.

Letter B Franchise fee Less: Pre-operating and training costs Gross income Less: OSD (P4,000,000 x 40%) Net taxable income

P10,000,000 200,000 P 9,800,000

P10,000,000 6,000,000 P 4,000,000 1,600,000 P 2,400,000

115

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

Chapter 12: Income Tax of Corporations

Multiplied by normal tax rate Income tax due Less: Creditable withholding tax (P10,000,000 x 2%) Income tax still due and payable

P P

30% 720,000 200,000 520,000

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 Gross income: Philippines USA Japan Deductions: Philippines 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 (P300,000/P500,000) x P150,000 = P90,000 vs. P100,000 Allowed, lower

Problem 12 – 46 Interest from savings 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 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 – 47

Reported income before tax Add: Loss from sale of shares of stock outside stock market Total

P 60,000 30,000 P90,000

90,000 P90,000 P 600,000 200,000 112,500 150,000 P1,062,500

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

116

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

Chapter 12: Income Tax of Corporations

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

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 Total accounting income after tax

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

Problem 12 – 48 Total revenue Operating expenses 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

P1,000,000 ( 10,000) ( 600,000) P 380,000 30% P 114,000 100,000 P 14,000

Problem 12 – 49 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

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

Problem 12 – 50

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

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

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

117

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

Chapter 12: Income Tax of Corporations

Outright expense of capital expenditures for new six rooms Taxable income Multiply by the applicable tax rate Income tax

750,000

3,019,850 P306,850 10% 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%) 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: Total income tax (see 2) Net income after tax – GAAP

P2,000,000 500,000 P1,500,000

(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

Problem 12 – 52 1. Sales Cost of sales

3rd year P1,000,000 ( 600,000)

4th year P2,500,000 (1,200,000)

P1,500,000 P100,000 400,000

5th year P4,000,000 (2,400,000)

500,000 P2,000,000 500,000 P1,500,000 10% P 150,000

6th year P5,000,000 (2,700,000)

118

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

Chapter 12: Income Tax of Corporations

Rent income Gross income Operating expenses allowed Net taxable income Multiplied by NCIT rate Income tax due Quarterly tax paid 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

200,000 P 600,000 ( 300,000) P 300,000 30% P 90,000 ( 10,000) P 80,000

300,000 P1,600,000 (1,300,000) P 300,000 30% P 90,000 ( 20,000) P 70,000

100,000 P1,700,000 (1,400,000) P 300,000 30% P 90,000 ( 30,000) P 60,000

50,000 P2,350,000 (1,500,000) P 850,000 30% P 255,000 ( 40,000) P 215,000

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

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

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 – 53 1. Sales Less: Cost of sales Reportable gross income per ITR 2.

Gross profit Less: Operating expenses: Salaries Depreciation Supplies Interest expense [P50,000 – (P32,000/80% x 33%) Net taxable income per ITR

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