Income Taxation 2015 Edition Solman

SOLUTIONS MANUAL

INCOME TAXATION, 2015 Edition By TABAG & GARCIA

CHAPTER 1 – PRINCIPLES OF TAXATION TRUE OR FALSE-SET A 1. TRUE 2. FALSE 3. TRUE 4. FALSE 5. FALSE TRUE OR FALSE-SET B 1. FALSE 2. TRUE 3. FALSE 4. TRUE 5. TRUE *Nonpayment of “tax” MULTIPLE CHOICE 1. C 2. D 3. C 4. B 5. D 6. C 7. C 8. B 9. D 10. D 11. D 12. C 13. A 14. D 15. C

6. 7. 8. 9. 10.

TRUE FALSE FALSE FALSE FALSE

11. 12. 13. 14. 15.

TRUE FALSE TRUE FALSE TRUE

16. 17. 18. 19. 20.

TRUE TRUE FALSE TRUE TRUE

6. 7. 8. 9. 10.

TRUE TRUE TRUE FALSE TRUE

11. 12. 13. 14. 15.

FALSE FALSE TRUE FALSE TRUE*

16. 17. 18. 19. 20.

TRUE FALSE TRUE TRUE FALSE

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

C A C D C A C D C D A D A A B

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45.

C C B A C D D A B D A A A D C

46. 47. 48. 49. 50.

A C C D A

CHAPTER 2 - INDIVIDUAL TAXPAYERS ERRATUM: PAGE#71, ANSWER FOR Q#6: CGT=P400,000 P24,000 PROBLEMS

2-1 1. 2. 3. 4. 5.

P50,000 6. P125,000 P50,000 7. P150,000** P50,000 8. P0*** P50,000 9. P30,000 P100,000 10. P0 **Assume that all the requirements to qualify for additional exemption under the “Foster Child Act” were complied with ***Reciprocity clause applies to a nonresident alien engaged in trade or business. The taxpayer in the problem is a nonresident alien not engage in trade or business. Dividend income from a domestic corporation is not considered as income derived from trade or business.

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2-2 1.

Taxpayer is a resident citizen 1.1 Taxable income = P720,000 1.2 Income tax payable = P20,400 1.3 Final tax on passive income = P9,000

Gross business income, Philippines Gross business income, USA Compensation income, Philippines Business expenses, Philippines Business expenses, USA Basic personal exemption Taxable income Tax Due Withholding tax on compensation income Crdtble withholding tax on bus. income Income Tax Payable Dividend income – DC Interest income bank deposit Final Tax on Passive Income 2.

P195,400 (50,000) (125,000) P20,400 P5,000 4,000 P9,000

Taxpayer is a nonresident citizen 2.1 Taxable income = P650,000 2.2 Income tax payable = (P2,000) 2.3 Final tax on passive income = P9,000

Gross business income, Philippines Compensation income, Philippines Business expenses, Philippines Basic personal exemption Taxable income Tax Due Withholding tax on compensation income Crdtble withholding tax on bus. income Income Tax Payable Dividend income – DC Interest income bank deposit Final Tax on Passive Income

3.

P1,000,000 500,000 400,000 (700,000) (430,000) (50,000) P720,000

P1,000,000 400,000 (700,000) (50,000) P650,000 P173,000 (50,000) (125,000) (P2,000) P5,000 4,000 P9,000

Taxpayer is a resident alien 3.1 Taxable income = P650,000 3.2 Income tax payable = (P2,000) 3.3 Final tax on passive income = P9,000 (same with resident citizen)

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4.

Taxpayer is a nonresident alien engaged in trade or business 4.1 Taxable income = P700,000 4.2 Income tax payable = P14,000 4.3 Final tax on passive income = P14,000

Gross business income, Philippines Compensation income, Philippines Business expenses, Philippines Taxable income

5.

P1,000,000 400,000 (700,000) P700,000

Tax Due Withholding tax on compensation income Crdtble withholding tax on bus. income Income Tax Payable

P189,000 (50,000) (125,000) P14,000

Dividend income – DC Interest income bank deposit Final Tax on Passive Income

P10,000 4,000 P14,000

Taxpayer is a nonresident alien not-engaged in trade or business 5.1 Taxable income = P470,000 5.2 Income tax payable = P67,500 5.3 Final tax on passive income = P0

Compensation income, Philippines Dividend income – DC Interest income bank deposit, Phls. Total GROSS Income X Income Tax Due Less: Withholding tax on compensation Income Tax Payable

P400,000 50,000 20,000 P470,000 25% P117,500 (50,000) P67,500

2-3 1.

Taxpayer is a resident citizen a. Taxable income = P1,026,100 b. Income tax payable = P293,352 c. Final tax on passive income = P38,030 d. Capital gains tax = P120,600

Solution: From Phils. Income from employment Business income Deductible business expenses Interest income on personal loans**

P180,000 850,000 (610,000) 6,000

From Abroad P280,000 960,000 (730,000) 3,000

Total P460,000 1,810,000 (1,340,000) 9,000

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Dividend income from foreign corp. 6,800 2,000 Prizes from singing contest 5,600 Interest income on bank deposits 4,200 Interest income on money market placements 1,600 Royalty income 50,000 Winnings/ prizes from lotteries, raffles 16,900 Lotto winnings --50,000 Basic Personal exemption Additional exemption Taxable income TAX DUE: First P500,000 Excess @ 32% **All incomes regardless of source are taxable. However, personal expenses are not allowed as deduction from the gross income

8,800 5,600 4,200 1,600 50,000 16,900 50,000 (50,000) P1,026,100 P125,000 168,352 P293,352

Final Tax on Passive income: Interest income on bank deposits Interest income on money market placements Royalty income Winnings/ prizes from lotteries, raffle draws Total @ Dividend income from domestic corp. Royalty income from sale of books Total @ TOTAL FINAL TAX ON PASSIVE INCOME

10,800 7,500 90,000 45,000 P153,300 20% 5,700 68,000 P73,700 10%

P30,660 7,370 P38,030

Capital Gains Tax: Sale of lot (P1,060,000 x 6%) Sale of house and lot (P950,000 x 6%) Total

2.

Taxpayer is a. b. c. d.

P63,600 57,000 P120,600

a non-resident citizen Taxable income = P388,400 Income tax payable = P91,520 Final tax on passive income = P38,030 Capital gains tax = P120,600

Solution: Income from employment Business income Deductible business expenses Interest income on personal loans Dividend income from foreign corp. Prizes from singing contest Basic Personal exemption Additional exemption Taxable income TAX DUE:

From Phils. P180,000 850,000 (610,000) 6,000 6,800 5,600 (50,000) P388,400

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First P250,000 Excess @ 30%

P50,000 41,520 P91,520

Final Tax on Passive income:  As long as there is no interest income from foreign currency bank deposit under FCDS/FCDU, the final tax on passive income of a nonresident citizen is the same with that of a resident citizen. Capital Gains Tax:  CGTs for NRCs = RCs 3.

Taxpayer is a. b. c. d.

a resident alien (Same treatment with a non-resident citizen taxpayer) Taxable income = P388,400 Income tax payable = P91,520 Final tax on passive income = P38,030 Capital gains tax = P120,600

2-4 a.

Special Alien employed by ROHQ = P145,000 computed as follows: On Compensation income: P850,000 x 15% P127,500 On other Income (Apply rules on NRA-NETB) Dividend Income from a dom. corp. P50,000 Int. Inc. Phil. bank deposit 20,000 Int. Inc. fr. Bank dep. under FCDS exempt Total Other Income P70,000 Tax rate @ 25% 17,500 TOTAL TAXES P145,000  Being a nonresident alien-not engaged in trade or business for income taxation purposes, a Special Alien is not entitled to personal exemptions.

b.

Filipino Citizen employed by ROHQ = P218,500 computed as follows: Compensation income (Subject to basic tax):** Gross Compensation P850,000 Less: Personal exemption (50k + 50k) (100,000) Net Taxable Income P750,000 First P500,000 P125,000 Excess of P250,000 @ 32% 80,000 P205,000 Passive Income, Phls. (Subject to Final Tax) Dividend Income from a dom. corp. @ 10% P5,000 Int. Inc. Phil. bank deposit @ 20% 4,000 Int. Inc. fr. Bank dep. under FCDS @ 7.5% 4,500 13,500 TOTAL TAXES P218,500  **Filipinos employed by ROHQs/RHQs holding managerial or technical position shall have the option to be taxed either at 15% on their gross compensation income or based on Section

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24(A) of the tax code. However, Filipinos exercising the option to be taxed at 15% preferential rate must meet all the three (3) requirements as discussed in page 79. In the problem provided, the Filipino counterpart failed to meet the “compensation threshold test” of at least P975,000. Consequently, the taxpayer shall be subject to tax base on Section 24(A) of the tax code. c.

Filipino Citizen employed by an OBU = P141,000 computed as follows: Compensation income (Subject to 15% F.Tax)*** P850,000 x 15% P127,500 Passive Income, Phls. (Subject to Final Tax) Dividend Income from a dom. corp. @ 10% P5,000 Int. Inc. Phil. bank deposit @ 20% 4,000 Int. Inc. fr. Bank dep. under FCDS @ 7.5% 4,500 13,500 TOTAL TAXES P141,000  ***Filipinos employed by OBUs as well as Petroleum Contractors/Subcontractors shall be subject to 15% Final Tax on their “compensation income”.  The 15% tax rate is a final tax on “gross compensation” income. Hence, personal exemptions shall not be deducted from such income.

d.

Filipino Citizen employed by a Petroleum Contractor = P141,000 (refer to computations in assumption “c”)

e.

Filipino Citizen employed by ROHQ with gross compensation income of P1,250,000 = P346,500 OR P201,000 computed as follows: Compensation income (Subject to basic tax):**** Gross Compensation P1,250,000 Less: Personal exemption (50k + 50k) (100,000) Net Taxable Income P1,150,000 First P500,000 Excess of P650,000 @ 32% Passive Income, Phls. (Subject to Final Tax) Dividend Income from a dom. corp. @ 10% Int. Inc. Phil. bank deposit @ 20% Int. Inc. fr. Bank dep. under FCDS @ 7.5% TOTAL TAXES

P125,000 208,000

P333,000

P5,000 4,000 4,500

13,500 P346,500

OR

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Compensation income (Subject to final tax):**** Gross Compensation Tax rate

P1,250,000 15%

P187,500

Passive Income, Phls. (Subject to Final Tax) Dividend Income from a dom. corp. @ P5,000 10% Int. Inc. Phil. bank deposit @ 20% 4,000 Int. Inc. fr. Bank dep. under FCDS @ 7.5% 4,500 13,500 TOTAL TAXES P201,000  ****Filipinos employed by ROHQs/RHQs holding managerial or technical position shall have the option to be taxed either at 15% on their gross compensation income or based on Section 24(A) of the tax code, provided, however, that Filipinos exercising the option to be taxed at 15% preferential rate must meet all the three (3) requirements as discussed in page 79.

2-5 a. b. c.

Taxable income of the husband = P1,260,000 Taxable income of the wife = P1,075,000 Consolidated tax due of the husband and the wife = P677,200

Solution: Husband INCOME: Compensation income [P.6M + (.5M/2)] Compensation income [P.4M + (.5M/2)] Income-Profession(H): [200,000+(400,000/2)] Income-Profession(W): [100,000+(400,000/2)] Income from business (P800,000/2) LESS: Expenses-profession(H):[P80,000 +(120,000/2)] Expenses-profession(W): [P40,000 +(120,000/2)] Business expenses (P250,000/2) Basic Personal exemption Additional exemption TAXABLE INCOME

Wife

P 850,000 400,000 400,000

P650,000 300,000 400,000

(140,000)

(100,000) (125,000) (50,000) P1,075,000

(125,00) (50,000) (75,000) P1,260,000

Tax due: 7|Pa ge Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

First P500,000 In excess of P500,000 @ 32% Total Consolidated Tax Due

P125,000 243,200 P368,200 P677,200

P125,000 184,000 P309,000

Note: Personal expenses are not deductible. The Premium payments for health insurance are likewise nondeductible because the total gross income of the family exceeded the threshold of P250,000.

2-6 a.

Total capital gains taxes Sale of shares of domestic corp. directly to a buyer (P100,000 x 5%) + P50,000 x 10% P10,000 Capital gain on sale of land in the Philippines classified as capital asset (P5M x 6%) 300,000 Total capital gains tax P310,000 Note: Sale of shares in the local stock exchange is subject to transaction tax of ½ of 1% of gross selling price

b. Dividend income from domestic corp. @ 10% Interest income on Philippine bank deposit (3,200 + 2,400 + 8,000)/80% x 20% Interest income on Phl. bank deposit under FCDU (4,000 + 4,000 + 2,000) x 7.5% Interest income on government bonds Royalty – literary Royalty other than literary Total Final tax on passive income of Daniel and Kat Note: Interest income on long-term deposit is tax exempt

P4,000 3,400 750 2,000 1,000 2,400 P13,550

c. Business income Rental income net of tax (P200,000/95%)/2 Dividend income from nonresident corp. (P10,000/2) Interest income on notes receivable [P6,000 + (P2,000/2)] Interest income on bank deposit abroad [P5,000 + (P5,000/2)] Capital gain on sale of land abroad (P500,000/2) Gain on sale of shares – New York Stock Exchange P30,000/2 Expenses [P350,000 +(75,000/2)] Personal exemption Taxable income of Daniel

P600,000 100,000 5,000 7,000 7,500 250,000 15,000 (387,500) (50,000) P547,000

Gross income from practice of profession (P360,000/90%) Rental income net of tax (P190,000/95%)/2 Dividend income from resident corp. Dividend income from nonresident corp. (P10,000/2) Interest income on notes receivable [P4,000 + (P2,000/2)] Interest income on bank deposit abroad [P5,000 + (P5,000/2)] Capital gain on sale of land abroad (P500,000/2) Gain on sale of shares – New York Stock Exchange P30,000/2 Expenses [P200,000 +(75,000/2)] Personal exemption Taxable income of Kat

P400,000 100,000 20,000 5,000 5,000 7,500 250,000 15,000 (237,500) (50,000) P515,000

d.

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2-7 2-8 a. b. c. d. e. f.

Income tax payable, first quarter = P32,500 Income tax payable, second quarter = P14,500 Income tax payable, third quarter = P19,233 Income tax payable, fourth quarter = P59,823 Final tax on passive income = P15,800 Capital gains tax = P600,000 x 6% = P36,000

Solution: 1 st Q P300,000 (120,000)

2 nd Q P500,000 (262,000)

3 rd Q P710,000 (405,890)

P180,000

P238,000

P304,110

Q4/Year P980,000 (426,700) (50,000) P503,300

Tax Due (Tax Table) P32,500 P47,000 Less: Tax Paid Q1 (32,500) Q2 Q3 Income Tax Payable P32,500 P14,500 Note: The amounts shown above are cumulative amounts

P66,233

P126,056

(32,500) (14,500)

(32,500) (14,500) (19,233) P59,823

Gross Profit from Sales Business expenses Personal exemption Taxable income

(Amounts are cumulative) Dividend received from domestic corp. Interest income from BPI UCPB Metro Bank Total final tax on passive income

P19,233

Amount 30,000

% 10

Tax P3,000

16,000 18,000 30,000

20 20 20

3,200 3,600 6,000 P15,800

2-9 Gross compensation income SSS premium contributions Philhealth contributions Pag-ibig contributions Union dues Basic exemption HHIP (P200 x 6 mos.) Taxable income

P180,000 (3,600) (2,400) (1,800) (2,200) (50,000) (1,200) P118,800

Gross compensation income SSS premium contributions Philhealth contributions Pag-ibig contributions Union dues Basic exemption Additional exemption HHIP (max.) Taxable income

P250,000 (3,600) (2,400) (2,000) (1,000) (50,000) (100,000) (2,400) P88,600

Note: SSS loan is nondeductible

2-10

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2-11 P6M x 6% = P360,000

2-12 a. b. c.

P15M x 6% = P900,000 P25M x 6% = P1,500,000 P0

2-13 CGT = P0; the sale resulted to a capital loss

2-14 MV using the Adjusted Net Asset Method (RR 6-2013) Less: Purchase price Expenses on the acquisition Expenses on sale Net capital gain

P350,000 P200,000 20,000 10,000

(P230,000) P120,000

Capital Gains Tax: (P100,000 x 5%) + (P20,000 x10%)

P7,000

2-15 Selling Price Less: Purchase price Expenses on the acquisition Expenses on sale Net capital gain

P550,000 P320,000 30,000 20,000

(P370,000) P180,000

Capital Gains Tax: (P100,000 x 5%) + (P80,000 x10%)

P13,000

2-16 1 2 3 4 5

Final tax? Y Y N N Y

Tax % 20% 7.5% Graduated Graduated 20%

16 17 18 19 20

Final tax? Y N Y Y Y

Tax % 7.5% Exempt 10% 10% 10%

* Prizes received from Philippine sources exceeding P10,000 are

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6 7 8 9 10 11

N Y Y Y N N

Graduated 20% 10% 20% Graduated Graduated

12 13

Y

20%

Y*

20%

N

Graduated

N

Exempt

14 15

21 22 23 24 25 26 27 2 8 2 9 3 0

N N N N Y Y Y

Graduated Graduated Exempt Exempt 25% 20% 5%;10% CGT

Y

20%

N

Graduated

N

Graduated

subject to 20% final tax rate. On the other hand, Other WINNINGS (regardless of amount) are subject to 20% final tax rate. Refer to Table 2-3

TRUE OR FALSE-SET A 1. TRUE 6. FALSE 11. FALSE 2. FALSE 7. FALSE 12. FALSE* 3. TRUE 8. TRUE 13. TRUE 4. TRUE 9. TRUE 14. FALSE 5. TRUE 10. FALSE *Filipino counterparts of Special Aliens are subject to either 15% Final Tax or Basic Tax on their Gross “compensation” income, at their option. TRUE OR FALSE-SET B 1. TRUE 6. TRUE 11. TRUE 2. TRUE 7. TRUE 12. TRUE 3. TRUE 8. FALSE** 13. TRUE 4. TRUE 9. FALSE 14. TRUE 5. FALSE 10. TRUE 15. FALSE **NRA-NETB are subject to 25% “final tax”, not CWT MULTIPLE CHOICE 1. A 16. A 31. D 46. D 2. D 17. C 32. C 47. B 3. B 18. D 33. B 48. D 4. D 19. B 34. A 49. D 5. D 20. D 35. A 50. D 6. D 21. B 36. B 7. D 22. C 37. D 8. D 23. D 38. D 9. A 24. D 39. B 10. C 25. B 40. A 11. D 26. D 41. B 12. D 27. B 42. D 13. B 28. A 43. A 14. B 29. D 44. C 15. B 30. D 45. B

Supporting Computations (Multiple Choice): 11 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

(12) Gross income, Philippines Gross income, USA Expenses, Philippines Expenses, USA Basic personal exemption Taxable income

P800,000 600,000 (400,000) (300,000) (50,000) P650,000

Gross income, Philippines Expenses, Philippines Basic personal exemption Taxable income

P800,000 (400,000) (50,000) P350,000

Gross income, Philippines Expenses, Philippines Basic personal exemption Taxable income

P800,000 (400,000) (40,000) P360,000

(13 and 14)

(15)

(36) Copyright (11,250/90%)x10% Royalty (12,000/80%) x 20% Share from Trade Partnership (treated as dividend income) (270,000/90%) x10% Taxable income

P1,250 3,000 30,000

P34,250

(38) Gross business income, Philippines Business expenses, Philippines Basic personal exemption Taxable income

P1,000,000 (300,000) (50,000) P650,000

CHAPTER 3 – FRINGE BENEFITS PROBLEM SOLVING P3.1 Subject to FBT 1. P120,000 2. 3. 50,000 4. 5. 6. 250,000 7. 8. 9. 60,000 10. -

Subject to Basic Tax -

Exempt P80,000 5,000/ yr. (RR 8-2012) 360,000 45,000 15,000 1,500

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P3.2 (a)P65,176 Payment for the groceries of the manager P90,000 Manager’s tuition fee* 48,500 Total monetary value of the F. Benefits P138,500 Divide by GUMVF 68% GUMV P203, 676 x FBT Rate 32% Total Fringe Benefit Tax P65,176 * cost of educational assistance, as a general rule, is subject to FBT except in instances as provided for in page 127. (b)January 10, 2016 or within 10th day of the month following the end of the calendar quarter in which the fringe benefits were granted to the recipient. (c)P2,900,000 computes as follows: Salary per quarter (net of CWT) Add: CWT per quarter Total gross compensation income per quarter X Total gross compensation income in 2015 Less: Basic personal exemption Additional personal exemption (2 x P25,000) Taxable Income for 2015

P510,000 240,000 P750,000 4 quarters P3,000,000 (50,000) (50,000) P2,900,00 0

P3.3 a) b) c) d) e) f)

P3.4

Yes GUMV = P330,000/68%=P485,294 No. FBT is a final tax, hence, nonreturnable FBT = P485,294 x 32% = P155,294 Within 10th day of the month following the end of the calendar quarter in which the fringe benefits were granted to the recipient. No. It is subject to basic tax instead of FBT.

P466,000 computed as follows: Compensation income Monthly transportation allowance** 13th month pay Christmas bonus (P5,000 is de minimis) Christmas bonus (in excess of P5,000) Productivity incentive pay (de minimis under RR 1-2015) Uniform allowance (15,000-5,000) Medical allowance (entire amount is de minimis) Rice subsidy [24,000-(1,500 x 12)] Total (known as 13 th Month Pay & Other Benefits) Tax Exempt 13 th Month Pay & Other Benefits Personal exemption Taxable income

De Minimis Benefits P5,000 10,000 5,000 10,000 18,000

Taxable Benefits P40,000 20,000 10,000 6,000 76,000 (82,000)

P480,000 36,000

(50,000) P466,000

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**Fixed Allowances received regularly shall be treated as part of basic compensation income

P3.5 P130,000 computed as follows: Compensation income

De Minimis Benefits

13th month pay and mid-year bonus Christmas bonus Uniform allowance (7,500-5,000) Actual Medical allowance (P12,000-10,000) Medical allowance to dependents (P2,000-1,500) Rice subsidy [entire amount is de minimis] Monetized vacation leave [7,500-(500x 10)] Total (known as 13 th Month Pay & Other Benefits) Tax Exempt 13 th Month Pay & Other Benefits Personal exemption Taxable income

P3.6 P152,000 computed as follows: 3-month piano lesson Personal car insurance Salaries of Bobby’s driver and maids Tuition fee Bobby’s 18-yearold child Bobby’s Taxable benefit P3.7 1.

5,000 5,000 10,000 1,500 18,000 5,000

Taxable Benefits P30,000 2,500 2,500 2,000 500 2,500 40,000 (40,000)

P180,000

(50,000) P130,000

P45,000 20,000 30,000 75,000 P152,000

4. a) b)

P165,000 x 50% = P82,500 P82,500/68% x 32% = P38,824

a. b.

P1,200,000 P1,200,000/68% x 32% = P564,705

a. b.

P800,000 P800,000/68% x 32% = P376,470

a. b.

P1,200,000/5 = P240,000 P240,000/68% x 32% = P112,941

5. 2. a. b.

P4.5M x 5% /4 x 50% = P28,125 P28,125/68% x 32% = P13,235

a. b.

P4.5M P4.5M/68% x 32% = P2,117,647

6.

3.

TRUE OR FALSE 1. TRUE 6. 2. FALSE 7. 3. TRUE 8. 4. TRUE 9. 5. TRUE 10. MODIFIED IDENTIFICATION 1. B 6. 2. B 7.

FALSE TRUE TRUE TRUE TRUE

11. 12. 13. 14. 15.

FALSE TRUE TRUE TRUE TRUE

B B

11. 12.

B B

16. 17.

B B

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3. 4. 5.

B B B

MULTIPLE CHOICE 1. C 11. 2. A 12. 3. D 13. 4. D 14. 5. D 15. 6. D 16. 7. B 17. 8. A 18. 9. D 19. 10. C 20.

8. 9. 10.

C A A* B B D C B C D

B B B

13. 14. 15.

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

D A D C D A D A B P787,500

B B B

18. 19. 20.

31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

A D A C D A C C D B

B B B

41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

D D C D D C A B B D

Explanations (Modified Identification) 4. Vacation leave exceeding “10” days for “private” employees are subject to basic and creditable withholding tax, NOT fringe benefit tax. 5. Vacation and sick leave credits of government employees regardless of the # of days are treated as de minimis benefits. 6 and 7. Sick leave credits of private employees, regardless of the # of days, are subject to basic and creditable withholding tax. Sick leave credit, regardless of the number of days shall be subject to basic and creditable withholding tax unless the sick leave credits were provided to government employees. If the problem is silent, assume the sick leave credits were provided to private employees. Supporting Computations (Multiple Choice): (2) Statement 2: False. Fringe benefits are other benefits in addition to basic compensation (salaries) (* #13) The journal entry in letter “a” is the journal entry provided in related revenue regulations. Nonetheless, the authors believe that the journal entry should have been: Compensation expense (@ GUMV) Pxx Cash Pxx Consequently, from the journal entry shown above, the account debited as “fringe benefit tax expense” in revenue regulations should not form part of the employer’s “Taxes Expense” but as a component of the employer’s “Compensation expense”. (23) To managerial – fringe benefit expense Fringe benefit tax expense Rank and File Total

P1,360,000 640,000 5,000,000 P7,000,000

(24) Expenditure attributable to Managerial employees (P1M x 20%) Divide by GUMVF Grossed-up monetary value x FBT rate Fringe Benefit Tax

P200,000 68% P294,118 32% P94,118

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(25) (26)

Total deductible expense = GUMV of P294,188 Salaries and wages gross of CWT P380,000 Fixed monthly allowance** 60,000 Total compensation income subject to graduated rate P440,000 *Fixed Allowances received regularly per payroll are considered part of regular compensation subject to graduated rate (RR 10-2008)

(27) Allowance not subject to liquidation Divide by GUMVF GUMV x FB rate FBT

P48,000 68% P70,588 32% P22,588

Groceries Plumbing materials Clothes and shoes Total monetary value of fringe benefits Divide by GUMVF GUMV X FBT rate FBT

P10,000 5,000 15,000 P30,000 68% P44,118 32% P14,118

(28)

(30) Annual rental x Monetary value of housing benefit Divide by GUMVF GUMVF X FBT rate FBT Add: Annual Rental Total Deductible Expense (31)

P637,500 50% P318,750 68% P468,750 32% P150,000 637,500 P787,500 (34)

 P2,000,000 x 5% x 50% / 12 = P4,1667.67  P4,1667.67 / 68% x 32% = P1,960.78 (32)

 (P5,000,000-2,000,000) / 12 = P250,000  P250,000/ 68% x 32% = P117,647.05 (36)

 P3,000,000 x 5% x 50% / 12 = P6,250  P6,250/ 68% x 32% = P2,941.18 (33)

 P1,000,000 / 68%  P1,470,588 x 32%

= P1,470,588 = P470,588

 P800,000 / 68%  P1,176,471 x 32%

= P1,176,471 = P376,471

(37)  P5,000,000 / 12*  P416,667/ 68% x 32% Monthly monetary value

= P416,667 = P196,078.42 (38)

 (P1,000,000/5) / 68%  P294,118 x 32%

= P294,118 = P94,118

CHAPTER 4 – INCOME TAX FOR CORPORATIONS 16 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

PROBLEM SOLVING: (P4.1) CASE A (Domestic Corporation): 1. P1,636,500 2. P81,250 3. P550,000

Solution Gross sales Sales returns Cost of goods sold Operating expenses Interest income from trade receivable Interest income from BPI deposits-USA Dividend income-resident foreign corp. Dividend income-nonresident foreign corp. Taxable income Tax rate Normal Corporate Income Tax Due

Philippines P10,000,000 200,000 3,500,000 2,800,000 100,000 45,000 -

Abroad P5,000,000 2,250,000 1,100,000 50,000 80,000 30,000

Total P15,000,000 (200,000) (5,750,000) (3,900,000) 150,000 80,000 45,000 30,000 P5,455,000 30% P1,636,500

Philippines 100,000 150,000 200,000 50,000

Final Tax P20,000 11,250 40,000 10,000 P81,250 Capital Gains Tax

Interest income from BPI deposits-Phils. @ 20% Interest income from FCDS @ 7.5% Income from money market placement @ 20% Royalty income @ 20% Final tax on passive income Gain on sale of shares sold directly to a buyer [(100,000x 5%) + (50,000 x 10%)] Sale of real property in the Philippines (SP of P9M** x 6%) Total Capital Gains Tax

P10,000 540,000 P550,000

**SP = Cost + Gain = P4M + 5M = P9M;

SP is higher than FMV

CASE B (Resident Foreign Corporation): 4. P1,093,500 5. P81,250 (Same with Case A) 6. P550,000 (Same with Case A)

Solution: Gross sales Sales returns Cost of goods sold Operating expenses Interest income from trade receivable Dividend income-resident foreign corp. Taxable income Tax rate Normal Corporate Income Tax Due

P10,000,000 (200,000) (3,500,000) (2,800,000) 100,000 45,000 P3,645,000 30% P1,093,500

17 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

CASE C (Non-Resident Foreign Corporation): 7. P2,038,500 computed as follows: Gross sales Sales returns Cost of goods sold GROSS INCOME ADD: Interest income from trade receivable Dividend income-resident foreign corp. Interest income from BPI deposits-Phils. Income from money market placement Royalty income Total “Gross” Income Tax rate Final Tax Due (Basis: Gross income)

P10,000,000 (200,000) (3,500,000) P6,300,000 100,000 45,000 100,000 200,000 50,000 P6,795,000 30% P2,038,500

(P4.2) P0. A foreign corporation is taxable only on its income derived from sources within the Philippines. The incomes provided in the problem were all derived in U.S. (P4.3) Current account, BDO @ 20% Savings deposit, BPI @ 20% Interest income from government bonds @ 20% Royalty income from various domestic corporations @ 20% US dollar deposit, FCDU @ 7.5% Total final taxes on passive income

P120,000 100,000 40,000 20,000 60,000 P340,000

(P4.4) Gross profit from sales Business expenses Taxable income NCIT MCIT (Gross Profit x 2%) TAX DUE (Higher) Less: Income tax withheld Tax Paid Q1 Tax Paid Q2 Tax Paid Q3 Income Tax Payable

Q1 P1,600,000 (1,200,000) 400,000 120,000 32,000

Q2 P3,200,000 (2,400,000) 800,000 240,000 64,000

Q3 P4,800,000 (3,400,000) 1,400,000 420,000 96,000

Q4 P6,200,000 (4,200,000) P2,000,000 600,000 124,000

P120,000 (30,000) -

P240,000 (70,000) (90,000)

P90,000

P80,000

P420,000 (130,000) (90,000) (80,000) P120,000

P600,000 (230,000) (90,000) (80,000) (120,000) P80,000

(P4.5)

18 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

MCIT NCIT TAX DUE (Higher) Excess MCIT Year 4 Year 7 Income Tax Payable

Year 4 100,000 30,000 P100,000

Year 5 60,000 70,000 P70,000

Year 6 50,000 60,000 P60,000

Year 7 40,000 30,000 P40,000

Year 8 20,000 90,000 P90,000

-

(70,000)

-

-

P100,000

P0

P60,000

P40,000

(10,000) P80,000

(P4.6) 1. 2. 3. 4.

P120,000 P690,000 P210,000

P495,000

Tax Due Excess MCIT Prior Yr W/holding tax-Prior Yr W/holding -During the Yr Tax Paid Previous Qtr(s) Tax Payable

Q1 NCIT P300,000 (90,000) (30,000) (60,000) P120,000

Q2 MCIT P990,000 (30,000) (150,00) (120,000) P690,000

Q3 NCIT P1,410,000 (90,000) (30,000) (270,000) (810,000) P210,000

Q4 NCIT P2,010,000 (90,000) (30,00) (375,000) (1,020,000) P495,000

(P4.7) Case A (Taxable Joint Venture) 1. Taxable income of the joint venture = P20M 2. Tax due of the joint venture = P6M 3. Taxable income of ABC Company = P10M 4. Tax due of ABC Company = P3M 5. Taxable income DEF Company = P5M 6. Tax due of DEF Company = P1.5M Joint Venture ABC Co. DEF Co. Gross income P50,000,000 P30,000,000 P20,000,000 Business expenses (30,000,000) (20,000,000) (15,000,000) Taxable income P20,000,000 P10,000,000 P5,000,000 Tax Rate (NCIT) 30% 30% 30% Tax Due P6,000,000 P3,000,000 P1,500,000 Note: The co-venturer’s share in the income of the joint venture is treated as inter-corporate dividends, hence, nontaxable. Case B (Tax Exempt Joint Venture) 7. Taxable income of the joint venture = P0 (tax exempt) 8. Tax due of the joint venture = P0 9. Taxable income of ABC Company = P24M 10. Tax due of ABC Company = P7.2M 11. Taxable income DEF Company = P11M 12. Tax due of DEF Company = P3.3M Joint Venture Gross income P50,000,000 Business expenses (30,000,000) Share in the income of the -

ABC Co. P30,000,000 (20,000,000) 14,000,000

DEF Co. P20,000,000 (15,000,000) 6,000,000

19 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

joint venture Net/ Taxable income Tax Rate (NCIT) Tax Due

P20,000,000 P0

P24,000,000 30% P7,200,000

P11,000,000 30% P3,300,000

Joint Venture P50,000,000

Rico 30,000,000

Earl 20,000,000

(30,000,000) P20,000,000 (6,000,000) P14,000,000

(20,000,000) P10,000,000

(15,000,000) P5,000,000

(P4.8) Case A: 1. Taxable income of the joint venture = P20M 2. Tax due of the joint venture = P6,000,000 3. Taxable income of Rico = P10M 4. Taxable income Earl = P5M 5. Final tax due of Rico (10%) = P980,000 6. Final tax due of Earl (10%) = P420,000 Gross income Business expenses Taxable income Less: Tax Due @ 30% Distributable income Share in income Rico @ 70% Earl @ 30%

P9,800,000 4,200,000

Case B: 7. Taxable income of the joint venture = P0 (tax exempt) 8. Tax due of the joint venture = P0 9. Taxable income of Rico = P24,000,000 10. Taxable income Earl = P11,000,000 11. Final tax due of Rico = P0 ; subject to basic and creditable withholding tax 12. Final tax due of Earl = P0 ; subject to basic and creditable withholding tax Joint Venture Rico Gross income P50,000,000 30,000,000 Business expenses Net income

(30,000,000) P20,000,000

Distributable income Share in income Rico @ 70% Earl @ 30% Taxable income

P20,000,000

(20,000,000) P10,000,000

P14,000,000 6,000,000

Earl 20,000,000 (15,000,000) P5,000,000

14,000,000 P24,000,000

6,000,000 P11,000,000

(P4.9) 1. 2. 3. 4. 5.

[(P6M-4M) + (($50,000-$20,000)x45)] = P3,350,000 x 30% = P1,005,000 (P6M-4M) x 30% = P600,000 P6M x 30% = P1,800,000 P6M x 2.5% = P150,000 P6M x 1.5% = P90,000

20 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

6. 7. 8. 9. 10. 11.

P6M x 25% = P1,500,000 P6M x 4.5% = P270,000 P6M x 7.5% = P450,000 *P3,350,000 x 10% = P335,000; * from #1 P1,005,000; same computation with #1 P0; exempt

1. 2. 3.

[5M + 3M] x 2.5% = P200,000 [5M x 2.5%) + (3M x 1%)] = P155,000 [5M + 3M] x 2.5% = P200,000; No GPB on Gross receipts from USA to Russia

(P4.10)

(P4.11) 1.Related 2.Related 3.Related

4.Related 5.Related 6.Unrelated

(P4.12) Gross income, related activities Gross income, unrelated activities (excluding rental income) Rental income from commercial spaces (gross of 5% WT) Expenses, related activities Expenses, unrelated activities Taxable income Tax Rate (NCIT); Unrelated income  Related income Tax Due Less: Quarterly tax payments for the first 3 quarters Income Tax Payable

P5,000,000 5,000,000 2,000,000 (2,000,000) (3,000,000) P7,000,000 30% 2,100,000 (500,000) P1,600,000

(P4.13)

Question 1: Tuition fees Miscellaneous fees Income from bookstore Income of school canteen Salary, allowances and bonus Other operating expenses Depreciation expense-classrooms Depreciation expense-furniture and equipment Taxable income x Tax Rate Tax Due

P9,500,000 1,200,000 350,000 180,000 (6,400,000) (2,600,000) (75,000) (50,000) P2,105,000 10% P210,500

Question 2: Tuition fees Miscellaneous fees Income from bookstore Income of school canteen Salary, allowances and bonus Other operating expenses Construction of additional classrooms

P9,500,000 1,200,000 350,000 180,000 (6,400,000) (2,600,000) (1,300,000)

21 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

Acquisition of furniture and equipment Taxable income x Tax Rate Tax Due

(400,000) P530,000 10% P53,000

(P4.14) 1. 2.

Income Tax Due (Payable) = P249,000 – CWT 15,000 = P234,000 Improperly accumulated earnings tax = P46,425

Solution: Gross income (gross of 1% WT) Business expenses Gain on sale of business asset NOLCO in 2011 Taxable income ADD: 2011 NOLCO Interest on peso bank deposit (P5,000/80%) Dividends from a domestic corporation Gain on sales of shares, not listed and traded subjected to capital gains tax (P150,000-115,000) DEDUCT: NCIT (P830,000 x 30%; higher than MCIT) Final Tax on Passive income (6,250 x 20%) Capital gains tax on shares (35,000 x 5%) Dividends paid during the year BALANCE RE Jan. 1 RE Dec. 31, 2015 LESS: Amount that may be retained (Par of Outs. Sh.) IMPROPERLY ACCUMULATED EARNINGS x IAET RATE IMPROPERLY ACCUMULATED EARNINGS TAX

P1,500,000 (600,000) 60,000 (130,000) P830,000 130,000 6,250 35,000 35,000 249,000 1,250 1,750 120,000

206,250

(372,000) P664,250 200,000 P864,250 (400,000) P464,250 10% P46,425

(P4.15) P1.5M x 6% = P90,000 (P4.16) (Sale 3 = P14,000) + (Sale 4 = P2,500) = P16,500

TRUE OR FALSE - SET A 1. TRUE 6. 2. TRUE 7. 3. FALSE* 8. 4. TRUE 9. 5. TRUE 10. *Imposed only if MCIT > NCIT TRUE OR FALSE – SET B 1. FALSE 6. 2. FALSE 7. 3. TRUE 8. 4. TRUE 9.

FALSE FALSE TRUE TRUE FALSE

11. 12. 13. 14. 15.

FALSE TRUE FALSE TRUE TRUE

FALSE** TRUE FALSE FALSE

11. 12. 13. 14.

TRUE TRUE TRUE TRUE

16. 17. 18. 19. 20.

TRUE TRUE FALSE FALSE FALSE

22 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

5. TRUE 10. TRUE 15. FALSE **If the labor dispute will result to a temporary closure of a business, it may be a valid ground for the suspension of MCIT. MULTIPLE CHOICE 1. D 14. C 27. C 40. D 2. B 15. B 28. 41. D 3. C 16. A 29. B 42. D 4. B 17. C 30. B 43. B 5. D 18. D 31. C 44. B 6. C 19. B 32. A 45. D 7. D 20. D 33. D 46. C 8. B 21. D 34. D 47. B 9. B 22. A 35. B 48. C 10. B 23. C 36. B 49. B 11. A 24. D 37. C 50. D 12. C 25. C 38. C 13. B 26. D 39. A Supporting Computations (Multiple Choice): (4). Domestic RFC NRFC Gross Income, Philippines P975,000 P975,000 P975,000 Expenses, Philippines (750,000) (750,000) Gross Income, Malaysia 770,000 Expenses, Malaysia (630,000) Interest on bank deposit 25,000 Taxable income 365,000 225,000 P1,000,000 Tax Rate 30% 30% 30% Tax Due P109,500 67,500 300,000 (5) . Gross profit from sales P3,000,000 Business expenses (1,800,000) Dividend income from a resident corporation 50,000 Dividend income from a nonresident corporation 40,000 Capital gain on sale of land in China 200,000 Interest income from notes receivable 20,000 Taxable income P1,510,000 Tax Due @ 30% P453,000 (6) . Sale of land-Phils. P2M x 6% Sale of shares of domestic corp. [(P100,000 x 5%)+(P20,000 x 10%)] Capital gains tax

P120,000 7,000 P127,000

(7). Interest income on peso bank deposit @ 20% Interest income on foreign currency bank deposit Interest income on treasury bills @ 20% Total final taxes on passive income

P6,000 1,875 2,000 P9,875

(8) . To Louie @ 10% To Floyd @ 10% To Zeus @ 10% To JJ @ 20%

P10,000 10,000 10,000 20,000

23 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

To Francis @ 25% To Chen, a domestic corporation To a resident foreign corporation To a nonresident foreign corporation @ 15% Total withholding taxes

25,000 Exempt Exempt 15,000 P90,000

(10). Final W. Tax = $3,000 x P45 x 10% = 13,500 (11). Interest income from loans OPEX (P12M x 10/15) Taxable income Income Tax Rate Income Tax Due

P10,000,000 (8,000,000) P2,000,000 30% P600,000

(20). Gross income, related activities Gross income, unrelated activities (except rental income) Rental income from commercial spaces (gross of 5% WT) Expenses, related activities Expenses, unrelated activities Taxable income Tax rate (unrelated income>related income) Tax due Less: Quarterly tax payments Withholding tax on rental income Tax payable

P5,000,000 5,000,000 2,000,000 2,000,000 3,000,000

P500,000 100,000

P12,000,000 (5,000,000) P7,000,000 30% P2,100,000 (600,000) P1,500,000

(21). Income from tuition fees Miscellaneous school fees Dividend income from foreign corp. Rental income (gross of 5% WT) OPEX Taxable income Tax rate (related income>unrelated income) Tax due Less: Withholding tax on rental income Tax payable

P3,500,000 1,500,000 2,000,000 2,000,000

P9,000,000 (4,000,000) P,000,000 10% P500,000 (100,000) P400,000

(22). Tuition and other fees Rental income (gross of 5% WT) OPEX CAPEX Taxable income

P5,000,000 50,000 (1,500,000) (2,000,000) P1,550,000

24 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

Tax rate (related income>unrelated income) Tax due Less: Withholding tax on rental income Tax payable

10% P155,000 (2,500) P152,500

(#s 28 TO 36). ‘08 NCIT MCIT DUE (Higher) EXCESS MCIT TAX DUE MCITCO ‘06 ‘07 ‘09 TAX PAYABLE

P25,000 100,000 100,000 75,000 P100,000 -

‘09 P130,000 150,000 150,000 20,000 P150,000

‘10 P200,000 190,000 200,000 P200,000

‘11 P0 300,000 300,000 300,000 P300,000

‘12

‘13

P100,000 50,000 100,000 P100,000

P150,000 60,000 150,000 P150,000

‘14 P8,000 40,000 40,000 32,000 P40,000

‘15 P1,000 50,000 50,000 49,000 P50,000

(75,000) (20,000) P100,000

P150,000

P105,000

P300,000

(100,000) P0

(150,000) P0

P40,000

P50,000

CHAPTER 5 – PARTNERSHIPS, ESTATES AND TRUSTS PROBLEM SOLVING

P5.1 1. 2.

Income tax due of the partnership = P0 (tax exempt) Income tax due of LJ = P397,000 LJ’s gross income from his trading business LJ’s expenses from his trading business Share from the net income of a GPP Royalty, books published in USA Salaries, gross of withholding tax Basic exemption Taxable income Tax Due (Tax Table)

LJ P1,000,000 (600,000) 400,000 150,000 450,000 (50,000) P1,350,000 P397,000

P5.2 Case A (Ordinary Partnership): 25 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

1. 2.

Tax due of the partnership = P240,000 Tax due of Rivera = P0

3. Tax due of Reyes = P50,000 RR Partnership Rivera Reyes Gross Income P2,000,000 P800,000 P1,000,000 Allowed Deductions (1,200,000) (900,000) (700,000) Basic exemption (50,000) (50,000) Taxable income P800,000 (P150,000) P250,000 Tax Rate 30% Tax Table Tax Table Tax Due P240,000 P0 P50,000 Note: The partners’ share in the net income of the partnership is treated as dividend income subject to a final tax rate of 10%. Case B (General Professional Partnership): 3. Tax due of the partnership 4. Tax due of Rivera

5. Tax due of Reyes Gross Income Allowed Deductions Basic exemption Share in partnership income Taxable income Tax Rate Tax Due

RR Partnership P2,000,000 (1,200,000) P800,000 EXEMPT P0

Rivera P800,000 (900,000) (50,000) 320,000 P170,000 Tax Table P14,500

Reyes P1,000,000 (700,000) (50,000) 480,000 P730,000 Tax Table P198,600

P5.3 1. 2. 3. 4. 5. 6. 7. 8. 9.

Income tax payable/(refundable) of the partnership = P352,500 Income tax payable/(refundable) of Villamin = P40,150 Income tax payable/(refundable) of Francis = P0 Final tax on passive income of the partnership = P7,750 Final tax on passive income of Villamin = P40,908 Final tax on passive income of Francis = P97,317 Capital gains tax of the partnership = P150,000 Capital gains tax of Villamin = P0 Capital gains tax of Francis = P7,000

Partnership: Gross profit from sale of services Direct cost of services Business Expenses Rental Income in business assets (gross) (P142,500/95%) Taxable income X tax rate Tax due Quarterly tax payments Withholding tax on rent Income tax payable Interest Income on peso bank deposits @ 20% Interest income-FCDS @ 7.5% Final Tax on passive income of the partnership

P3,500,000 (1,500,000) (700,000) 150,000 P1,450,000 30% P435,000 (75,000) (7,500) P352,500 P4,000 3,750 P7,750

26 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

Capital gains tax on real property (2.5M x 6%) DISTRIBUTABLE INCOME: Taxable income Total income subject to final tax Capital gain Less: Basic tax due Final tax due Capital gains tax DISTRIBUTABLE INCOME

150,000 P1,450,000 70,000 300,000 (435,000) (7,750) (150,000) P1,227,250

Villamin: Gross income from sole-proprietorship business Allowable business expenses Dividend Income-resident foreign corp. Basic exemption Taxable income Tax due (tax table) Quarterly tax payments Income tax payable Final Tax – (P1,227,250/3 X 10%) Capital gains tax - Villamin

925,000 (670,000) 120,500 (50,000) P325,500 P72,650 (32,500) P40,150 P40,908 P0

Francis: Income Tax payable (No income subject to basic tax)

P0

Dividend Income @ 10% Royalty Income @ 20% Share in the distributive share of the partnership income (P1,227,250/3 X 2 x 10%) Total final tax on passive income Capital gains tax on shares of stock [(P100,000 x 5%) + (20,000 x 10%)]

P8,500 7,000 81,817 P97,317 7,000

P5.4 1. 2. 3.

Income tax payable of the business partnership = P114,000 Income tax payable of the GPP = P0 Income tax payable of Louie = P26,875

4. Income tax payable of Floyd = P44,563 Gross income Deductible expenses Net or Taxable income Tax rate Income tax due/payable

Business Partnership P800,000 (420,000) P380,000 30% P114,000

GPP P500,000 (375,000) P125,000 EXEMPT

27 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

Louie and Floyd Gross Income Deductible expenses Dividend from foreign corporation Prize, supermarket raffle Share in income of GPP Basic exemption Additional exemption Taxable income Income tax payable (tax table)

Louie P 325,000 (117,000) 12,000 37,500 (50,000) (50,000) P157,500 P26,875

Floyd P 380,000 (205,000) 8,250 7,500 87,500 (50,000) P228,250 P44,563

NOTE:  The share in the net income of the business partnership, the dividend income from a domestic corporation and royalty from books are subject to a final tax rate of 10%.  The prize in a supermarket raffle by Louie (more than P10,000) is subject to 20% final tax

P5.5 1. 2.

Income tax payable of the estate = P43,000 Income tax payable of Louie = P2,250

3. Income tax payable of Floyd = P3,688 Gross income (gross of 5% tax) Deductible expenses Dividend from foreign corporation Prize, supermarket raffle Basic exemption Additional exemption Taxable income Tax Due (Tax Table) Less CWTax (5%) Income Tax Payable

Louie P 325,000 (117,000) 12,000

Estate P800,000 (420,000)

(50,000) (50,000) P120,000

Floyd P 380,000 (205,000) 8,250 7,500 (50,000) P140,750

P18,500 (16,250) P2,250

P22,688 (19,000) P3,688

P83,000 (40,000) P43,000

(20,000) P360,000

P5.6 1. 2. 3.

Income tax payable of the estate = P49,000 Income tax payable of Louie = P42,500 Income tax payable of Floyd = P35,188

Estate Rental income of the estate (gross 5% tax) Deductible operating expenses (estate) Income distributed to Louie Income distributed to Floyd Basic exemption Taxable income

P1,000,000 (500,000 (50,000) (50,000) (20,000) P380,000

28 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

Tax due (tax table) Less: CWtx Income Tax Payable

P89,000 (50,000) P49,000 Louie P 325,000 (117,000) 12,000

Gross Income Deductible expenses Dividend from foreign corporation Prize, supermarket raffle Amount received from the Income of the estate Basic exemption Taxable income Tax Due

Floyd P 380,000 (205,000) 8,250 7,500 50,000 (50,000) P190,750 P35,188

50,000 (50,000) P220,000 P42,500

P5.7 1. 2.

Income tax payable of the trust = P310,600 Income tax payable of Pedro = P131,640 Gross income of the trust Deductible business expenses of the trust Income distributed to EDT during the year Dividend income from resident foreign corporation Basic exemption Taxable income Income Tax payable (tax table) Compensation income Rental income (gross) Rental expenses Dividend from foreign corporation Basic exemption Taxable income Tax Due Tax payments (Quarter 1-3) CWTx on rent Income Tax Payable-Pedro

P3,000,000 (1,800,000) (200,000) 100,000 (20,000) P1,080,000 P310,600 P800,000 500,000 (80,000) 8,250 (20,000) P1,208,250 P351,640 (120,000) (100,000) P131,640

P5.8 1. 2. 3. 4. 5. 6. 7.

Taxable income of Trust 1 = P780,000 Taxable income of Trust 2 = P1,280,000 Consolidated taxable income of the Trust 1 and 2 = P2,080,000 Income tax payable of Trust 1 = P14,860 Income tax payable of Trust 2 = P26,540 Taxable income of Juan = P1,950,000 Taxable income of Pedro = P1,350,000 Trust 1 Gross income of the trust P3,000,000

Trust 2 P3,000,000

Consolidated P6,000,000

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Deductible business expenses of the trust Income distributed to Rico during the year Dividend income-resident corporation Basic exemption Taxable income TAX DUE (PAID) Total consolidated income TAX DUE (Allocated Income Tax Due) Trust #1=214,600/589,200 x P630,600 Trust #1=374,600/589,200 x P630,600 Less: Tax Paid INCOME TAX PAYABLE

21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

D A D D D A D C A A D B A D A D C C D D

(1,800,000)

P229,460

P401,140

P214,600 P14,860

P374,600 P26,540

100,000 (20,000) P1,280,000 P374,600

Juan P1,000,000 1,000,000 (550,000) 50,000 500,000 (50,000) P1,950,000

Compensation income Gross business income Business expenses Dividend from foreign corporation Amount received from the income of the trust Basic exemption Taxable income MULTIPLE CHOICE 1. A 2. C 3. B 4. B 5. B 6. A 7. A 8. D 9. B 10. C 11. B 12. A 13. B 14. C 15. B 16. A 17. D 18. B 19. C 20. B

(1,800,000) (500,000) 100,000 (20,000) P780,000 P214,600

41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

B B D C D C D D D D B D D C C D B D D C

61. 62. 63. 64. 65.

(3,600,000) (500,000) 200,000 (20,000)

P2,080,000 P630,600

Pedro 1,200,000 600,000 (400,000) (50,000) P1,350,000

C B C D D

Supporting Computations (Multiple Choice): 15. (P2M-1M) x 30% = P300,000 16. Subject to 10% final tax 17. Partnership net profit (net of 30% tax)

P560,000

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18.

(P800,000 x 70%) Other Income: Interest income, net Dividend income (tax exempt) Total distributive income

8,000 20,000 P588,000

Share of T (50%) Applicable tax (10% final tax)

P294,000 P29,400

P600,000 – P350,000 x 50% = P125,000

19. Share in GPP’s income Own income (P150,000-70,000) Basic exemption Taxable income of Ramos

P125,000 80,000 (50,000) P155,000

20.

32.

Gross income Expenses x Net income after corporate tax Add: Dividend received from a domestic corp. (tax exempt) Bank interest income, Metrobank (net of final tax) Distributable net income

P750,000 (200,000) 70% 385,000

Tita: P485,000 x 55% x 10% Ghore: P485,000 x 45% x 10%

P26,675 P21,285

20,000 80,000 P485,000

Statement IV – subject to creditable withholding tax, not final tax

40. Income of the estate Expenses Distribution of income to Francis Basic exemption Taxable income of Ramos

P600,000 (150,000) (120,000) (50,000) P280,000

Francis’ own income Income of the estate received by Francis Basic exemption Taxable income of Ramos

P500,000 120,000 (50,000) P570,000

41.

60. Compensation income Business income Basic exemption Taxable income of Ramos

P1,500,000 1,000,000 (50,000) P2,450,00 0

61. Trust’s income Income distributed to Atty. Lo Yer (Gross) (P8.5M / 85%) Business expenses Basic exemption

P40,000,000 (10,000,000) (10,000,000) (50,000)

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Taxable income of Ramos

P19,980,000

62. Compensation income (Gross amount) Income of the trust received by Niah (Gross) Basic exemption Taxable income of Ramos

P3,000,000 10,000,000 (50,000) P12,950,000

63 – 65. # 64 TRUST 1 Net income Personal exemption Taxable income Tax due: 1st P500,000 Excess @ 32% Tax due/paid Versus Share Tax Payable # 63 Consolidated: Net income Personal exemption Taxable income Tax Due (Consolidated): 1st P500,000 Excess @ 32% Total Less Paid: Trust 1 Trust 2 Income Tax Payable Share in the Tax due: Trust 1 (3,980/9,960***) x P1,238,600 Trust 2 (5,980/9,960)

P4,000,000 (20,000) P3,980,000 P125,000 1,113,600 1,238,600 1,262,171* P23,571***

# 65 TRUST 2 Net income Personal exemption Taxable income Tax due: 1st P500,000 Excess @ 32% Tax due/paid Versus Share Tax Payable

P6,000,000 (20,000) P5,980,000 P125,000 1,753,600 1,878,600 1,896,429** P17,829****

P10,000,000 (20,000) P9,980,000 P125,000 3,033,600 P3,158,600 (1,238,600) (1,878,600) 41,400

1,262,171*

1,896,429**

41,400 x 3,980/9,960***** =23,571***

41,400 x 5,980/9,960 =17,829****

3,980+5,980 = 9,960*****

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CHAPTER 6 – CONCEPT OF INCOME MULTIPLE CHOICE 1. B 2. D 3. D 4. D 5. A 6. D 7. B 8. D 9. C 10. A

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

C D D A B D A D D D

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

D B B B D A D D B E

31. 32. 33. 34. 35.

Supporting Computations: 28. P300,000 4/12 = P100,000 29. Gain on sale of personal property purchased in the Philippines and sold in Hongkong Compensation received for personal services in the Philippines Rent income from real property in Malaysia Gain from sale in the Philippines of shares of a foreign corporation Deductions identified with: Philippine income Foreign income Deductions unidentified with any particular income (P30,000 x 300,000/1,000,000) Philippine Net Income 32.

33. 34.

(Resident Alien) Gross Income Business expenses Dividend income from foreign corp. (50,000 x 60%) Basic exemption Taxable income

D B B C D

P200,000 100,000 (80,000) (9,000) P211,000

P2,000,000 (1,200,000) 30,000 (50,000) P780,000

Final Tax Withheld on dividend income from domestic corp. = (P90,000 + 72,000)/ 90% x 10% = P18,000 (Domestic Corp = Taxable on income within and without Gross Income P10,000,000 Allowable deductions (4,000,000) Dividend income from domestic corp. exempt Dividend income foreign corp. (95% from R.P.) 1,000,000 Dividend income foreign corp. (60% from R.P.) 800,000 Dividend income foreign corp. (25% from R.P.) 400,000 Taxable income P8,200,000

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35.

(Resident Foreign Corp = Taxable on income from Philippine Gross Income Allowable deductions Dividend income from domestic corp. Dividend income foreign corp. (80% from R.P.) (P1M X 80%=considered from Phil. sources) Dividend income foreign corp. (60% from R.P.) (P800,000 x 60%) Dividend income foreign corp. (25% from R.P.) (entire amount is considered income from sources outside of the Phils.) Taxable income

sources only P10,000,000 (4,000,000) exempt 800,000 480,000 -

P7,280,000

CHAPTER 7 – INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME PROBLEM SOLVING:

P7.1 INCOME SUBJECT TO BASIC TAX: Basic salary (P900,000+P300,000) Director’s fee Business income: Retail business Apartment rental (P190,000/95%) Dividend income from a resident corporation 13th, Xmas and MidYear Bonus (net of P30,000 exclusions) Gross Income subject to basic tax (Q#1) LESS: Business expenses Basic exemption Net Taxable income (Q#4) Income tax due (Q#5)

P1,200,000 200,000 250,000 200,000 50,000 150,000 P2,050,000 (125,000) (50,000) P1,875,000 P565,000

INCOME SUBJECT TO FINAL TAX: Cash dividend from a domestic corporation Interest from savings deposit Royalties from book publications Prizes from contest won Winnings town lottery Total Income subject to final tax (Q2)

P50,000 20,000 50,000 50,000 50,000 P220,000

INCOME EXEMPT FROM TAX: Stock dividend from a domestic corporation Damages received from injuries and sickness Proceeds-life insurance coverage of his father Total income exempt from tax (Q3)

P25,000 85,000 300,000 P410,000

P7.2 1)

P10,000

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2) 3)

P15,000 P715,000 computed as follows: Gross profit from sales Taxable recovery-receivables Taxable tax refunds Rent income excluding security deposit Operating expenses Write-off during the year Taxable income

P1,000,000 10,000 15,000 250,000 (500,000) (60,000) P715,000

P7.3 1) 2) 3)

4)

P240,000 + 24,000 = P264,000 P240,000 + 24,000 = P264,000 P1,000,000 Income from improvement (Remaining BV after lease term) (P3M x 5/15) Remaining Lease Term after completion = 10 years Remaining life after lease term = 5 years

P1,000,000

P100,000 Income from improvement (Remaining BV after lease term) (P3M x 5/15) Remaining Term after completion = 10 years Remaining life after lease term = 5 years

P1,000,000 /10 years =P100,000

P7.4 Ramon Magsaysay award Athlete of the year award Prize for winning an Olympic Medal Winnings – Philippine lotto Total Winnings and Awards exempt from income tax

P50,000 100,000 500,000 100,000 P750,000

If the Question was total amount exempt from income tax, the answer would have been: Total Winnings and Awards exempt from income tax P750,000 Gift from Mayor Alfredo Lim 250,000 Car from Honda as a gift 1,000,000 Total Amount exempt from income tax P2,000,000

P7.5 P0; The P800,000 should be exempt from income tax

P7.6 P1,000,000; The interest income from expanded foreign currency deposit

P7.7 Taxable Proceeds = P1,000,000 – P600,000 = P400,000

P7.8 35 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

Income within = None. The ratio of income without over total income for the past 3 years < 50%.

P7.9 Salary for the first quarter Honorarium as speaker in one of ABC’s team building activities Retirement pay Commissions Fee as a member of ABC’s board of directors 10 days monetized vacation leave Interest income from time deposit Productivity incentive pay and 13th month pay (Productivity pay=P10,000 de minimis under RR 1-2015) (Total of excess of productivity of P10,000 + 60,000 bonus is not more than P82,000, hence tax exempt) Total compensation income subject to tax

P180,000 10,000 Exempt 30,000 50,000 Exempt F. Tax Exempt

P270,000

P7.10 INCOME

A.

Rental income (gross)  From an apartment unit in USA,

Q#1 Income within

Q#2 Income without

-

P240,000

Q#3 Taxable income (Resident Citizen)

Q#4 Taxable income (Nonresident Citizen)

P240,000

36 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

 B.

C.

D.

E.

F.

G.

H.

From a parcel of land in Makati

Royalties from book  Published in the Philippines  Published in USA Interest income earned on notes receivable  From a debtor who resides in USA  From a debtor who resides in Manila Net profit from sales, merchandising business  From Philippine outlet  From USA outlet Dividend income from two domestic corporations. Gross income from the Phils. for the past 3 years  60% of its world income  85% of its world income Dividend income from two resident foreign corporations. Gross income from the Philippines for the past 3 years was equivalent to:  40% of its world income  60% of its world income Prizes received from Supermarket raffle: From the Philippines:  ABC Supermarket  DEF Superstore From USA:  UVW Supermarket  XYZ Supersavers Prizes and winnings from lotto  Philippine lotto  USA lotto BASIC EXEMPTION TOTAL

P180,000 30,000 20,000 15,000

180,000

P180,000

20,000

-

15,000 25,000

25,000

200,000

300,000 200,000

200,000

60,000 80,000

-

-

-

12,000

40,000 8,000

40,000 20,000

12,000

8,000 12,000

-

8,000 -

8,000 -

-

6,000 14,000

6,000 14,000

-

200,000

100,000

-

-

P907,00 0

P643,00 0

(50,000) P1,018,000

(50,000) P375,000

25,000 300,000

MODIFIED IDENTIFICATION: Exercise 1: 1) 2) 3) 4) 5) 6)

D B A D B C

(as dividend income)

37 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

7) 8) 9) 10)

A A C D

(year of service was not provided. Retirement benefits, in general, are taxable)

Exercise 2: DIVIDEND 1. 10% F.Tax 2. 10% F.Tax 3. Basic Tax 4. Exempt 5. Basic Tax 6. Exempt 7. N.taxable

26. 27. 28. 29. 30.

INJURIES/DAMAGES 8. Exempt 9. Exempt 10. Basic Tax 11. Exempt 12. Basic Tax 13. Exempt 14. Basic

PRIZES/AWARDS 15. Basic 16. Exempt 17. Exempt 18. Exempt 19. Exempt 20. Basic Tax 21. Basic Tax 22. Exempt 23. Basic Tax 24. 20% final tax (individual taxpayer) 25. Basic Tax

VARIOUS PROCEEDS/INCOME Final Tax Exempt Exempt Exempt Exempt

TRUE OR FALSE 1. T 2. F 3. T 4. F 5. F

MULTIPLE CHOICE 1. C 2. B 3. B 4. B 5. B 6. B 7. C 8. A 9. C 10. C 11. B 12. D 13. B 14. A 15. D

6. 7. 8. 9. 10.

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

T F T F F

C B D D B A C C A C D C D D C

11. 12. 13. 14. 15.

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45.

F T F F F

C D D C A C D D D D B D D D A

16. 17. 18. 19. 20.

46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

F T F T F

D D D B C B C D D D C A B B C

38 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

Supporting Computations (Multiple Choice): No. 2. TIPS are not compensation income, but subject to basic tax only if not accounted for by the employees to the employer. TIPS accounted for by the employee to the employer are not taxable income of the former. No. 11. Write-off 2013 P50,000 10,000 30,000

2013 Income (Loss) before write off P350,000 (50,000) 20,000

2014 Recovery P20,000 10,000 30,000

2014 TAXABLE RECOVERY P20,000 20,000 P40,000

No. 12. 2013 Income(loss) before write-off Write-off 2014 Recovery TAXABLE RECOVERY

Case A P120,000 40,000 P40,000 P40,000

Case B P60,000 40,000 P10,000 P10,000

Case C (P40,000) 50,000 P50,000 P0

No. 15. Interest from Philippine Currency Certificate = subject to 20% final tax Refund of income tax = not an income No. 23. Rent for 2015 and 2016 (prepaid rent is taxable yr. of receipt regardless of accounting method) Annual real property tax Total annual income

P3,600,000 30,000 P3,630,000

No. 24. Rent for 2016 (already reported in 2015) Annual real property tax Income from improvement [(P36M x **3/15) / 12] Total annual income

P0 30,000 600,000 P630,000

Lease Term: 12.5 years Remaining Lease term after completion of the improvement: 12 years Useful life of the improvement: 15 years Remaining useful life of the improvement after termination of the lease: 3 years** No. 26. Royalty – as an author @ 10% Other royalties x Total final tax on royalty income

P10,000 P800,000 20%

160,000 P170,000

No. 46. Proceeds from the taxpayers life insurance

P2,000,000

39 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

Less premiums paid (P15,000 x 25) Rent income from inherited properties Taxable income

(375,000)

P1,625,000 200,000 P1,825,000

CHAPTER 8 – DEALINGS IN PROPERTIES PROBLEM SOLVING P8.1 Question #1 Gross income P360,000 Business expenses (280,000) Add: Net capital gains Short term capital loss (@100%) (60,000) Long term capital gain (@100%) 40,000 Net Capital Gain (Loss) (20,000) Net Taxable Income in 2014 P80,000  holding period and capital loss carry-over are not applicable to corporate taxpayers.  capital losses are deductible only from capital gains.

P8.2 Question #2 2015 Gross income Business expenses Net Capital Gain Short term capital gain (@ 100%) Capital loss (@ 100%) Net Taxable Income in 2015

P500,000 (350,000) 80,000 (20,000)

60,000 P210,000

P8.1 Question #3 Gross income Business expenses Short term capital loss (@100%) Long term capital gain (@50% ) Net capital loss Basic Exemption Net Taxable Income in 2014

P360,000 (280,000) P(60,000) 20,000 (P40,000)

(50,000) P30,000

P8.1 Question #4 Gross income Business expenses Add: Net capital gains Short term capital gain (@100%) Long term capital loss (@50%) Net capital loss carry over from 2014 Basic Exemption Net Taxable Income in 2015

P500,000 (350,000) 80,000 (10,000) (30,000)

40,000 (50,000) P140,000

P8.2 Taxable income exclusive of capital gains and losses Add(Deduct): Ordinary gains(loss)

P400,000

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Gain on sale of land used in business, for 3 years Loss on sale of machinery used in business, for 8 months

P50,000 (26,000)

Add: Net capital gains Loss on sale of securities held for 3 years (8,000) Loss on sale of securities held for 3 months (6,000) Taxable income for Royale, Inc. P424,000  capital losses are deductible only from capital gains  holding period and capital loss carry-over are not applicable to corporate taxpayers.

P8.3 Ordinary income Add: Net capital gain: Long term capital gain @ 50% Long term capital loss @ 50% Basic Exemption Taxable Income

P8.4 (1)P25,000:

(2)P(P80,000);

P140,000 P20,000 (5,000)

15,0000 (50,000) P105,00 0

(3)(P55,000)

Capital gain on sale of bonds (@50%) P25,000 Capital loss on sale of car @ 100% (80,000) Net capital loss (P55,000)  net capital loss from the taxable period of a prior year is deductible only from net capital gains in the current year.  sale of shares of domestic corporations held as capital assets are subject to CGT  sale of real properties held as capital assets located in the Philippines are subject to CGT

P8.5 (1)P5,000:

(2)(P5,000); Capital gain on sale of bonds (@100%) P45,000 Capital loss on sale of car @ 50% (40,000) Net capital gain 2015 P5,000 Capital loss carry-over in 2015 P5,000 net capital loss from the taxable period of a prior year is deductible only from net capital gains in the current year.  sale of shares of domestic corporations held as capital assets are subject to CGT  sale of real properties held as capital assets located in the Philippines are subject to CGT

P8.6 Ordinary income Add: Net capital gain

2014

2015

P48,900

P85,700

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2014: P15,895-P18,960 = (P3,065) 2015: =P45,700 x 50% = P22,850 P22,850 Net capital loss carry-over from 2014 ----Basic exemption (50,000) (50,000) Additional exemption (25,000) (25,000) Taxable Income (P26,100) P33,550  net capital loss from the taxable period of a prior year is deductible only from net capital gains in the current year.  sale of shares of domestic corporations held as capital assets are subject to CGT  sale of real properties held as capital assets located in the Philippines are subject to CGT MULTIPLE CHOICE 1. C 2. D 3. D 4. A 5. D 6. D 7. D 8. D 9. B/A 10. C

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

A A D B D D D C A B

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

D D C C C D D C A A

Supporting Computations (Multiple Choice): 18. P1,200,000 x 6% = P72,000 Sale of vacant lot used as warehouse is an ordinary asset 19. CGT = 1,000 shares x P10 x 5% = P500 20. Statement 2 is False. The capital loss should be recognized as of the last day of the taxable year. 22. Total net sales from his trading business P 500,000 Cost of sales (300,000) Gain on sale of vacant lot used in business 50,000 Ordinary income/gain P250,000

23. 24. 25.

Capital Gain (On Sale of personal Car) = (P100,000-P50,000) x 50% = P25,000 Capital Loss (On Sale of personal computer) = (P10,000-P20,000) x 50% = (P5,000) Net capital gain = P25,000 – P5000 = P20,000

CHAPTER 9 – DEDUCTIONS FROM GROSS INCOME PROBLEM SOLVING:

P9.1 1. 2. 3.

P142,000 P104,000 P10,000

Solution: Interest Expense Taxes and licenses Documentary stamp taxes

Tax Expense

Taxable tax refunds

100,000 4,000

42 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

Fringe benefit taxes paid* Refund of taxes and licenses for the preceding year Income tax due for the year Income tax payments for the year (first 3 quarters) Refund of income tax payments for the preceding year Interest income From trade notes receivable From peso bank deposits From U.S.$ deposit From bank deposits abroad Interest expense on indebtedness Surcharges on tax assessments Interest expense on tax assessments Reduction of interest expense (P100,000 x 33%)**

-

-

-

-

10,000 -

150,000 25,000 (33,000) P142,000

-

-

P104,000 P10,000 * Should be part of compensation of expense **The limitation on the deductibility of interest expense was legislated specifically to address the tax arbitrage arising from the difference between the 20% final tax on interest income and the regular corporate income tax rate (RCIT) under which interest expense can be claimed as a deduction.

P9.2 ERRATUM : DETERMINE THE FOLLOWING 1. Deductible expenses of Mike Leomar in 2014 2. Deductible expenses of Mike Leomar in 2016 Answers:: Annual Rent Annual real property tax Depreciation expe. – Leasehold Improvement** (P9.5M/9.5 years x 6/12) Deductible Expense   

2014 P2,400,000 30,000

2016 P2,400,000 30,000

P2,430,000

4,750,000 P7,210,000

**Remaining lease term upon completion of the improvement = 9.5 years Useful life of the improvement = 15 years Depreciation expense for 2016 = 6 months from July to December 2016

P9.3 Gross income, Philippines Business expenses, Philippines Unallocated business expenses (P150,000 x 1.6/2) Interest expense, Philippines Unallocated interest expense (P80,000 x 1.6/2) Taxable Net Income

P1,600,000 (500,000) (120,000) (100,000) (64,000) P816,000

P9.4 Interest expense (P1M x 10%) Less: 33% x (P1M x 12%) Deductible Interest Expense

P100,000 (39,600) P60,400

43 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

P9.5

Deductible Interest = P25,000. *Interest paid or accrued on taxes related to business of practice of profession, such as those paid for deficiency or delinquency (since taxes are considered indebtedness) are deductible as interest expense, provided that, the tax is a deductible tax. It is deductible in “full”. It shall not be reduced by 33% of interest income subject to final tax. Stock Transaction Tax is a nondeductible tax, hence, the related interest expense on such assessment shall not be deductible from the gross income.

P9.6 1. 2. 3. 4.

P0; P0; P1,600,000 P533,333; P533,333; P533,333 P533,333; P533,333; P533,333 P533,333; P533,333; P533,333 Total interest = P6M loan – proceeds of P4.4M = P1.6M

P9.7 1. 2.

P533,333; P533,333; P533,333 P533,333 ; P533,333; P533,333

P9.8 Question#1 Interest expense (bank loan) Less: 33% x P4,000 Allowable interest expense on bank loan

P20,000 (1,320) P18,680

P9.8 Question#2 Acquisition cost of computers ADD: Interest expense Capitalizable cost of the computers

P200,000 20,000 P220,000

Depreciation expense (P220,000/8 x 9/12)

P20,625

P9.9 Interest paid for late payment of 2014 income tax Surcharge and compromise penalty for late payment of 2014 income tax Interest on bonds issued by CTDI Deductible interest

P50,000 250,000 P300,000

9.10 Professional tax P750 Gravel and sand tax 20,000 Road user’s tax on his delivery vans 50,000 Local annual fixed tax for his delivery vans 10,000 Other local business taxes 12,000 Total deductible taxes P92,750 Real property tax on his house is not deductible, it is considered as personal expense not related to trade, business, or practice of profession. However, Real property taxes on real properties used in business are deductible taxes. 44 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

9.11 Plane tickets P100,000 Transportation expenses-officers (136,000 + 64,000) **200,000 Transportation expenses-messengers 80,000 Deductible expenses P380,000 **Not subject to FBT. Regularly received allowances as part of compensation package.

P9.12. 9.13 9.14

Deductible Premium = P75,000 None. There shares purchased and sold within the prohibited period are not identical.

(1) SP (50 shares of Elsa) Cost (50 shares of Elsa = P200,000 x 50/100) Loss on Wash Sale

(2) (3) (4 )

P75,000 (100,000) (P25,000 )

P0. Cost of shares acquired on June 30 = P50,000 + loss on wash sale of P25,000 = P75,000 SP (75 shares of Elsa) Adjusted cost (Q#3) Capital Gain

P250,000 (75,000) P175,00 0

9.15 (1) Gross business income Business expenses Net income before capital gains and contributions Contributions deductible in full (accredited NGO) Contributions with limit (CBCP): Actual=P20,000; Limit (P600,000x10%= P60,000) Add (Deduct): Net capital gain Compensation income Basic exemption Taxable Net Income

P1,000,000 (400,000) P600,000 (30,000) (20,00) 30,000 600,000 (50,000) P1,130,00 0

(2 ) Gross business income Business expenses Net income before capital gains and contributions Contributions deductible in full (accredited NGO) Contributions with limit (CBCP): Actual=P20,000; Limit (P600,000 x 5% = P30,000)

P1,000,000 (400,000) P600,000 (30,000) (20,00)

45 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

Add: Net capital gain Taxable Net Income

P9.16. P9.17.

30,000 P580,000

Charitable and other contributions with limit = P250,000 + 300,000 = P550,000 Actual (w/ limit) Limit [(6,200,000 – 2,500,000) x 5%]

P190,000 185,000

Allowed Add: deductible in full (priority project) Total

P185,000 100,000 P285,000

P9.18. Gross Income Cost of Sales Sales

P5,000,000 3,000,000 P8,000,000

Sales P8,000,000 COS (3,000,000) Gross Income 5,000,000 Salaries (gross of withholding tax, SSS, Medicare/Medicare/Pag-ibig) of (950,000) employees, net of P100,000 withholding tax and P50,000 SSS, Medicare and Pag-Ibig premiums contributions Fringe benefits given to rank and file employees (300,000) Fringe benefits given to managerial employees (200,000) (@Grossed-up monetary value) Rent expense (120,000) Representation and entertainment expenses ( ½ % of N.Sales) (40,000) Net income before contributions P3,390,000 Donation to religious and charitable institutions (Limit) (339,000) Limit: P3,390,000 x 10% Net income before personal exemption P3,051,000 Basic personal exemption (50,000) Taxable income P3,001,000  Representation expenses = limit is ½% of net sales (if merchandising) or actual whichever is lower. If service concern, limit is 1% of net revenues or actual whichever is lower.

9.19 BV = P1M x 2/5 Vs. Cost to restore Allowed (lower amount) Less: insurance coverage Deductible Loss

P400,000 200,000 P200,000 (100,000) P100,000

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P9.20. CASE A: (a) Sales Cost of sales OPEX: Bad debts written-off Salaries and wages excluding fringe benefits/de minimis Fringe benefits provided to rank and file employees Fringe benefits provided to managerial employees (GUMV = P150,000/68%) Taxes and licenses Interest expense (exclude P25,000 surcharge) Utilities expense Casualty losses Depreciation expense Net capital Gain(Loss) Capital gain on sale of a 10-year bonds Capital loss on sale of bonds of a domestic corporation Dividend income: From domestic corporation From resident corporation From nonresident corporation Interest income: From trade notes receivable From bank deposits abroad Other Income: Recovery of bad debts written off preceding year Refund of taxes and licenses for the preceding year TAXABLE INCOME

P6,200,000 (2,500,000) 20,000 350,000 50,000 220,588 50,000 125,000 100,000 60,000 40,000

(1,015,588)

30,000 (20,000)

10,000

30,000 20,000

50,000

75,000 30,000

105,000

NCIT@ 30% Less: Payments for the first 3 quarters INCOME TAX PAYABLE

(b)

10,000 10,000

20,000 P2,869,412 P860,824 (75,000) P785,824

cannot be determined using the new/revised formula

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(c) Interest income from peso bank deposit @ 20% Interest income from U.S.$ deposit (Philippines) @ 7.5% Royalty income @ 20% Income from trust indenture with Security Bank @ 20% Total final tax on passive income

10,000 3,000 8,000 5,000 P26,000

(d ) Capital gain on sale at P6M of land in the Philippines held for 10 years = P6M x 6% = P360,000 Capital gain on sale of shares of stock of a domestic corporation held for six (6) months, sold directly to a buyer P15,000 x 5% = P750 Total Capital Gains Tax

P360,000 750

P360,750

CASE B: (a) Sales Cost of sales OPEX: Bad debts written-off Salaries and wages excluding fringe benefits/de minimis Fringe benefits provided to rank and file employees Fringe benefits provided to managerial employees (GUMV = P150,000/68%) Taxes and licenses Interest expense (exclude P25,000 surcharge) Utilities expense Casualty losses Depreciation expense Net capital Gain(Loss) Capital gain on sale of a 10-year bonds Capital loss on sale of bonds of a domestic corporation Dividend income: From domestic corporation From resident corporation From nonresident corporation Interest income: From trade notes receivable From bank deposits abroad Other Income: Recovery of bad debts written off preceding year Refund of taxes and licenses for the preceding year Basic Personal Exemption Additional Personal Exemption (25,000 x 2) TAXABLE INCOME

INCOME TAX DUE (TAX TABLE) Income tax paid first 3 quarters

P6,200,000 (2,500,000) 20,000 350,000 50,000 220,588 50,000 125,000 100,000 60,000 40,000

(1,015,588)

30,000 (20,000)

10,000

30,000 20,000

50,000

75,000 30,000

105,000

10,000 10,000

20,000 (50,000) (50,000) P2,769,412

P851,212 (75,000)

48 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

INCOME TAX PAYABLE

P776,212

(b) Dividend income from domestic corporations @ 10% Interest income from peso bank deposit @ 20% Interest income from U.S.$ deposit (Philippines) @ 7.5% Royalty income @ 20% Income from trust indenture with Security Bank @ 20% Total final tax on passive income

P6,000 10,000 3,000 8,000 5,000 P32,000

(c ) Capital gain on sale at P6M of land in the Philippines held for 10 years = P6M x 6% = P360,000 Capital gain on sale of shares of stock of a domestic corporation held for six (6) months, sold directly to a buyer P15,000 x 5% = P750 Total Capital Gains Tax TRUE OR FALSE 1. FALSE 11. TRUE 21. 2. FALSE 12. FALSE 22. 3. FALSE 13. FALSE 23. 4. TRUE 14. TRUE 24. 5. FALSE 15. TRUE 25. 6. TRUE 16. TRUE 7. TRUE 17. TRUE 8. TRUE 18. TRUE 9. TRUE 19. TRUE 10. TRUE 20. TRUE MULTIPLE CHOICE 1. B 16. B 31. 2. C 17. A 32. 3. B 18. A 33. 4. D 19. C 34. 5. C 20. A 35. 6. A 21. C 36. 7. D 22. B 37. 8. D 23. C 38. 9. D 24. B 39. 10. A 25. D 40. 11. D 26. D 41. 12. D 27. D 42. 13. D 28. D 43. 14. C 29. A 44. 15. B** 30. C 45. **Change the Question to “not entitled to claim NOLCO”

P360,000 750

P360,750

TRUE TRUE TRUE FALSE TRUE

C C D D D C D C D C C B B D B

49 | P a g e Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 5 E d i t i o n ) by Tabag & Garcia

Supporting Computations:

No. 6.   

Sales less cost of sales of Merchandise inventory is part of the gross income, not deduction. Loss on sale of investment is a capital loss which is deductible only from capital gains. The sale of land classified as capital asset is subject to 6% capital gains tax

No. 16-18: Gross sales Cost of sales Deductions GP(Loss) Dividend – resident foreign corporation Interest income on notes receivable Capital gain Capital loss Income (Loss) before NOLCO NOLCO Taxable income *** To the extent only of capital gain

2012 P3,300,000 (2,400,000) (1,475,000) (P575,000) 140,000 28,000

(P407,000)

2013 2,340,000 (1,070,000) (1,025,000) P245,000 16,400 13,000 274,400 (274,400) P0

2014 P825,000 (380,000) (459,000) (P14,000) 32,000 18,500 ***(18,500) 18,000 (18,000) P0

No. 36. Actual (w/ limit) Limit [(6,200,000 – 2,500,000) x 5%]

P190,000 185,000

Allowed Add: deductible in full (priority project) Total

P185,000 100,000 P285,000

No. 37 . Gross Income Cost of Sales Sales Sales COS Gross Income Salaries (gross of withholding tax, SSS, Medicare/Medicare/Pag-ibig) of employees, net of P100,000 withholding tax and P50,000 SSS, Medicare and Pag-Ibig premiums contributions Fringe benefits given to rank and file employees Fringe benefits given to managerial employees (@Grossed-up monetary value) = 136,000/68% Rent expense Representation and entertainment expenses ( ½ % of Net Sales) Net income before contributions Donation to religious and charitable institutions (Limit) Limit: P3,390,000 x 10%; Actual= P500,000 NET INCOME BEFORE PERSONAL EXEMPTION Basic personal exemption Taxable income 

P5,000,000 3,000,000 P8,000,000 P8,000,000 (3,000,000) 5,000,000 (950,000) (300,000) (200,000) (120,000) (40,000) P3,390,000 (339,000) P3,051,000 (50,000) P3,001,000

Representation expenses = Limit of ½% of net sales (if merchandising) or actual whichever is lower = Limit of 1% of net revenues (if service concern) or actual whichever is lower

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No. 39. Current service costs Past service costs 2012 (P1,600,000/10) 2013 (P1,200,000/10) Deductible Contributions

2012 P2,000,000

2013 P2,000,000

2014 P2,000,000

160,000 P2,160,000

160,000 120,000 P2,280,000

160,000 120,000 P2,280,000

CHAPTER 10 – INSTALLMENT REPORTING OF INCOME 1. 2. 3. 4. 5.

A D B A A

6. 7. 8. 9. 10.

C D C A B

CHAPTER 11 – FOREIGN INCOME TAX CREDIT AND OPTIONAL STANDARD DEDUCTION 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

D D B D C D D D A C

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

A A C D A D C B D B

21. 22. 23. 24. 25. 26. 27. 28. 29.

D C B A B D B A D

Supporting Computations:

No. 11. Net income, Philippines Net income, Canada Basic personal exemption Taxable Income Tax Due: First P500,000 Excess: (P2.7M-.5M)32% Less Tax Credit: Limit: (1,250/2750 x P829,000) Actual Income Tax Payable

P1,500,000 1,250,000 (50,000) 2,700,000 P125,000 704,000 P373,050 150,000

P829,000

(150,000) P679,000

No. 12. Net income, Philippines Net income, Canada Taxable Income Tax Due: Less Tax Credit: Limit: (1,250/2,750 x P825,000) Actual

P1,500,000 1,250,000 2,750,000 P825,000 P375,000 150,000

(150,000)

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Income Tax Payable

P675,000

No. 13. Taxable income, world

P2,000,00

Tax Due @ 30% Less Tax Credit: L1: Country X (600/200 x P600,000) Paid Allowed

P600,000

Country Y(400/200 x P600,000) Paid Allowed Total L1 L2 (1/2 x 600,000) Paid (Total)

P180,000 250,000 P180,000 P120,000 120,000 120,000 P300,000 300,000 370,000

300,000

TAX CREDIT ALLOWED Tax paid, three quarters Income tax payable

(300,000) (110,000) P190,000

No. 14. Taxable income before tax credit, world Taxes paid foreign countries Taxable income X Tax Due Less: Payments, 3 quarters Tax payable

P2,000,000 (370,000) P1,630,000 30% 489,000 (110,000) P379,000

No. 29. Gross sales Less: Sales returns Sales discounts Net sales Less: Cost of sales Inventory, beginning Purchases Purchase returns Purchase discounts Freight in Goods available for sale Inventory, end Gross profit from sales

P12,000,000 1,000,000 500,000 300,000 5,000,000 (200,000) (100,000) 150,000 515,000 (100,000)

(1,500,000) P10,500,000

5,050,000 5,450,000

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Add: other income Interest on notes receivable Dividend income from resident corporation GROSS INCOME Less: OSD (P10,500,000 x 40%) Basic personal exemption TAXABLE INCOME

100,000 100,000

200,000 5,650,000 (4,200,000) (50,000) P1,400,000

CHAPTER 12 – ACCOUNTING PERIODS AND METHODS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

A B B A C A D B C D

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

B A D D D A C A B D

21. 22. 23. 24. 25.

D C D D C

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