Northern CPAR: Taxation II – Final Income Tax
NORTHERN CPA REVIEW
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REX B. BANGGAWAN, CPA, MBA TAXATION FINAL INCOME TAXATION PHILIPPINE INCOME TAX SCHEME An identified gross income will be subject to tax as follows: Identified item of gross income Identified item of gross income
Exception Tests: Final Withholding Tax (Certain passive income only)
Taxab le at eithe r
Capital Gains Tax (Certain capital gains only)
Regular Income Tax Individuals: Progressive Taxation (5-32%) Corporations: Proportional Taxation (30%) Catch-all for all item of gross income not subject to final tax and capital gains tax Final tax and capital gains tax are the exceptions rule in the taxation of gross income. If an item of gross income is subject to, or is exempted from, final tax or capital gains tax, it is no longer subject to regular tax. FINAL WITHHOLDING TAX Final withholding tax is imposed to certain passive income. Refer to H004.1 for the list. Under the final withholding tax system, the taxpayer actually shoulders the tax but it is the income payor who withholds and pays the tax. The amount of tax withheld is final. The taxpayer has no more responsibility to file an income tax return for the passive income covered subject to final withholding tax. Nature of Final Income Tax on Certain Passive Income: 1. The final taxes on the passive income are restrictive in application. They are applicable only on the items of passive income that are expressly listed by the NIRC. 2. Final taxes are withheld at source by the income payor; hence, the income received by the taxpayer is net of the final tax. The income taxpayer therefore need not file a return for the passive income. 3. Final taxes apply only on specified passive income by the law earned in the Philippines. Final Withholding Tax vs. Creditable/Expanded Witholding Tax Final Creditable Similarities: Withholding Withholding Tax Tax The income payor withhold a percentage of the income. Serves to avoid cash flow problems to taxpayers by collecting at the moment cash is available. Differences: Income tax withheld Coverage Who remits the tax
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Full Certain passive income Income payor
Only portion Certain passive income and regular income Income payor and the
Tax by Rex B. Banggawan, CPA, MBA
1 Tax – 5 Batch – HQ04 th
Northern CPAR: Taxation II – Final Income Tax Necessity for a consolidated return
None
taxpayer Required
FINAL TAXATION EXAM DRILL QUESTIONS 1. Which is not subject to final tax? a. Gain on sale of shares of stock directly to buyer b. Royalties from musical composition c. Capital gain on sale of real property classified as capital asset d. Share of a partner in the distributive net income after tax of a business partnership 2. Which is subject to final tax? a. Share of the distribute net income of a general professional partnership b. Winnings not exceeding P10,000 c. Prizes not exceeding P10,000 d. Interest income from foreign bank deposits 3. Which of the following passive income is taxed on an annual and net basis? a. Capital gain on sale of domestic stocks directly to buyer b. Capital gain on sale of domestic stocks through the Philippine Stock Exchange c. Capital gain on sale of real property classified as capital asset d. Capital gain on sale of real property classified as ordinary asset 4. Capital gain on the sale of which capital asset below is conclusively presumed a. Real property used in business c. Personal property not used in business b. Real property not used in business d. Personal property used in business 5. The passive income that is subject to a two-tiered final tax structure is a. Capital gain on sale of stocks of a resident foreign corporation directly to buyer b. Capital gain on the sale of capital interest in a partnership c. Capital gain on sale of sale of real property not used in business d. Capital gain on the sale of stocks of a domestic corporation directly to buyer 6. Which is taxed at the lowest final tax rate among the following passive income? a. Interest income received from a depositary bank under the expanded foreign currency deposit system received by a resident citizen b. Cash dividend from a domestic corporation c. Royalties from books and other literary works d. Interest income from long-term deposit with maturity of over five years 7. All of the following are subject to 7 ½% final tax on interest on FCDU Deposit, except a. Resident citizen c. Domestic corporation b. Non-resident citizen d. Resident corporation c. Resident alien 8. Dividends received by which of the following is not subject to dividend tax? a. Resident individual c. Resident corporation b. General professional partnership d. Non-resident foreign corporation 9. Ambiong Bank of Baguio started operation in 1995 with the following information on results of operation and dividend declarations. Year Net Dividends income declared 1996 P 500,000 1997 1,500,00 0 1998 2,000,00 0 1999 1,000,00 0 2000 2,500,00 P 6,500,000 0 How much tax must have been paid in the 2000 dividend declaration of Ambiong Bank? a. P650,000 b. P390,000 c. P450,000 d. P0
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Tax by Rex B. Banggawan, CPA, MBA
2 Tax – 5 Batch – HQ04 th
Northern CPAR: Taxation II – Final Income Tax
10.The prizes on the following award or competition is generally taxable a. Prize in a chess competition sponsored by an organization sanctioned by the Philippine Olympic Committee. b. “Most Charitable Person of the Year” c. “Nobel Prize Winner” d. Pageant competition 11.Interest income from foreign currency deposits made abroad by a resident citizen is subject to a. 20% final tax b. 7 ½% final tax c. 4 ½% final tax d. regular tax 12.Royalties on musical composition is subject to a. 20% final tax b. 10% final tax regular tax
c. 0% final tax
d.
13.The interest income on long-term deposit that is pre-terminated on the third year is subject to a. 0% b. 12% c. 20% d. 5% 14.Armando is a partner in a business partnership. At the end of 2010, he has a total of P300,000 profit sharing on the after tax income of the partnership inclusive of P120,000 salaries as a managing partner. Compute the amount final tax to be withheld from Armando’s profit sharing. a. P12,000 c. P30,000 b. P18,000 d. P 0 15.Assuming the same information above except that the partnership is a general professional partnership, compute the final tax to be withheld? ______ 16.Final taxes are generally withheld at source and does not require an income tax return, which is an exception a. Final tax on interest income from deposit b. Final tax on royalties c. Final tax on capital gain on sale of domestic shares of stock directly to buyer d. Final tax on dividends 17.Which of the following is not subject to 20% final tax? a. Interest income on long-term deposit of domestic corporation b. Interest income on foreign loans c. Interest income from money market placements or trust funds d. Lotto winnings 18.Compute the total amount of income subject to final tax. Yield from deposit substitute P 10,000 Interest income from bonds of a domestic 23,000 corporation Property dividend declared by a foreign 40,000 corporation Stock dividend declared by a domestic 50,000 corporation Compensation income, net of P10,000 80,000 withholding tax Prize on “Search for Mr. Sexy Body” 15,000 Royalties from books 24,000 Interest income on personal loans granted 8,000 to a friend Salaries from a general professional 30,000 partnership Salaries from a business partnership 20,000 a. P89,000 b. P99,000 c. P49,000
d. P69,000
19.Determine the total amount of income tax withheld if the taxpayer received the following passive income during the year: Interest on Peso bank deposit P 90,000 Royalties 36,000 Dividends 63,000
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Tax by Rex B. Banggawan, CPA, MBA
3 Tax – 5 Batch – HQ04 th
Northern CPAR: Taxation II – Final Income Tax Share in the distributive income of a joint venture a. P46,000 b. P53,000
72,000 c. P38,700
d. P46,500
20.On January 1, 2008, Kevin purchased 1,000 P1,000 face value bonds of a domestic corporation at face value. The bonds were dated January 1, 2007 and mature on January 1, 2011. The bonds pay 12% annual interest every January 1. If Kevin disposed of this investment directly to buyer on December 31, 2008 at 102, how much is the total final tax due? a. P24,000 b. P25,000 c. P1,000 d. P0 21.On January 1, 2005, Helen invested P1,000,000 to RCBC Commercial Bank’s 5-year, tax-free time deposit. The long-term deposit pays 15% annual interest every January 1. In need of cash, Helen pre-terminated her investment on July 1, 2008. How much is the final tax due and the proceeds of Helen’s investment? a. P9,000; P1,066,000 c. P18,750; P1,056,250 b. P63,000; P1,012,000 d. P30,000; P1,345,000 22.How much final tax is withheld in the interest income paid by the bank on January 1, 2006? a. P0 b. P18,000 c. P30,000 d. P7,500 23.Assuming the same information in the problem above, except that the investment was made by a domestic corporation, how much final tax is withheld in the year of pretermination and the proceeds to the corporation? a. P15,000; P1,060,000 c. P18,750; P1,056,250 b. P45,000; P1,030,000 d. P30,000; P1,345,000 20.Benito Mojica invested in an 8-year long-term deposit in Rizal Commercial Banking Corporation amounting to P2,000,000 paying 10% interest semi-annually. How much is the final tax to be withheld by Rizal Commercial Banking Corporation if Benito Mojica pre-terminated his investment at the just after the end of the third year? a. P0 c. P30,000 b. P72,000 d. P120,000 21.What if Benito Mojica pre-terminates it just after the end of the fifth year? a. P0 c. P50,000 b. P72,000 d. P200,000 22.Benedict rendered advisory services to Alexander in connection with the latter’s tax compliance from May 2, to July 2, 2006. In July 2, 2006, Alexander paid him a note with a face value of P100,000 payable a year after. The same note could be discounted at the bank for 15% at the time of receipt. How much compensation income and interest income is to be included in gross income? a. P85,000; P0 c. P85,000; P7,500 b. P100,000; P15,000 d. P100,000; P0 23.Andromeda, a non-resident alien, rendered professional services to Philippine company, a domestic corporation. The total consultancy fees agreed were P1,000,000. How much should Philippine company withhold? a. P100,000 b. P200,000 c. P250,000 d. P 0 24.Andromeda, a non-resident alien, invests in the 60-day Peso time deposit of Metro Pilipino Bank. Andromeda earned P100,000 interest income. How much final tax should Metro Pilipino Bank withhold? a. P 0 b. P20,000 c. P25,000 d. P 30,000 25.Assuming the same information in the preceding problem except that Andromeda is a non-resident corporation. How much final tax is to be withheld? a. P 0 b. P20,000 c. P25,000 d. P 30,000 26.Andromeda, a non-resident alien, deposited $100,000 in the FCDU unit of Universal Bank, a resident foreign bank. During the period, Andromeda earned $1,000 total interest. The relevant exchange rate between the Peso and the Dollar was P50:$1. How much final tax should Metro Pilipino Bank withhold? b. P50,000 b. P100,000 c. P125,000 d. P 0 27.Sunrise Bank, a non-resident foreign bank, has substantial foreign currency deposit at the FCDU unit of Banco Italiano, a resident foreign bank, totaling $5,000,000. Total
Driven for real excellence!
Tax by Rex B. Banggawan, CPA, MBA
4 Tax – 5 Batch – HQ04 th
Northern CPAR: Taxation II – Final Income Tax
interest credited to Sunrise Bank was $600,000 equivalent to P28,800,000 at the time of payment. How much is the final tax on the interest received by Sunrise Bank? a. P10,080,000 b. P5,760,000 c. P2,880,000 d. Exempt
28.The Gambling World, Inc. a foreign corporation, Inc. has been trying its luck with the Philippine Charity Sweepstakes lotto. It spent P800,000 for losing PCSO lotto tickets. Luckily, one ticket costing P10 won the P218,000,000 Superlotto 6/49 draw on July 24, 2007. How much is the deductible expense and the taxable amount of winnings? a. P10; P47,999,990 c. P800,000; P0 b. P800,000; P47,999,990 d. P0; P0 29.Which statement is incorrect? a. Prize results from an effort. b. Winning results from transaction dependent upon chance. c. Prizes is subject to either regular tax or final tax d. Winnings from the Philippines is always subject to final tax 30.The system of tax compliance wherein the employees does not have to make computations nor file an income tax return at the end of the year a. Final withholding tax scheme c. Substituted Filing of Tax Returns b. Creditable withholding tax scheme d. Self-Assessment Method 31.The substituted Filing of Tax Return is applicable where (choose the exception) a. The employee earns pure compensation income b. The employee has only one employer c. The tax withheld by the employer is correct d. The employee is also engaged in the exercise of a profession 32.Creditable withholding tax rates shall not be less than ____ but not more than ____ a. 5%; 20% c. 1%; 32% b. 1%; 20% d. 2%; 15% 33.Which is subject to final withholding taxes? a. Interest on loans of by banks c. Dividends from foreign corporations b. Prizes from abroad d. Book royalties 34.Which is subject to creditable withholding taxes? a. Rent income c. Winnings from PCSO b. Dividends from domestic corporations d. Interest income from long-term deposits by corporations 35.The return for final withholding tax by withholding agent shall be filed not later than a. 20 days from the close of each calendar quarter b. 25 days from the close of each calendar quarter c. 23 days from the close of each calendar quarter d. 60 days from the close of each calendar quarter 36.The return for creditable withholding tax by withholding agent shall be filed not later than a. the first day of the month following the close of the quarter during which withholding was made b. the 15th day of the month following the close of the quarter during which withholding was made c. the 25th day of the month following the close of the quarter during which withholding was made d. the last day of the month following the close of the quarter during which withholding was made --- End of Handouts ---
Driven for real excellence!
Tax by Rex B. Banggawan, CPA, MBA
5 Tax – 5 Batch – HQ04 th
