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Northern CPAR: Taxation II Final Income Tax

NORTHERN CPA REVIEW


Room 412 Pelizloy Centrum, Lower Session Road, Baguio City, Philippines
Mobile Numbers: SMART 09294891758 & GLOBE 09272128204
E-mail Address: ncpar@yahoo.com
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 Taxab Capital Gains Tax


(Certain passive income le at (Certain capital gains
only) eithe only)
r

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 Full Only portion
Certain passive Certain passive
Coverage income income and
regular income
Who remits the tax Income payor Income payor
and the

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Northern CPAR: Taxation II Final Income Tax
taxpayer
Necessity for a consolidated None Required
return

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 % 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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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 % final tax c. 4 % final tax d. regular tax
12.Royalties on musical composition is subject to
a. 20% final tax b. 10% final tax c. 0% final tax d.
regular tax
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 Armandos 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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Northern CPAR: Taxation II Final Income Tax
Share in the distributive income of a 72,000
joint venture
a. P46,000 b. P53,000 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 Banks 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 Helens 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 pre-
termination 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 latters 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
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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

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Driven for real excellence! Tax by Rex B. Banggawan, CPA, MBA Tax 5 Batch HQ04
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