ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 6

TAXATION A. Tamayo  G. Caiga  C. Lim  K. Manuel  E. Buen

TAX-801: SOURCES OF INCOME

1. Classification of Income as to Sources
a. Income purely within
b. Income purely without
c. Income partly within and partly without

2. Determination of Income as to Sources (Section 42 of the Tax Code, as amended)

ITEMS OF INCOME TEST OF SOURCE OF INCOME
a. Interest Residence of the debtor
b. Dividends
1) From domestic corporation Income within
2) From foreign corporation (based on the ratio of the General rule: Income within
gross income of the foreign corporation for the
preceding 3 years prior to declaration of dividends Income partly within and partly without if the ratio is less
derived from Philippine sources) than 50% (computed % = income from within PH)
PHILIPPINE GROSS INCOME
Total (World) Gross Income

c. Income from services Place of performance

d. Rent Location of property
e. Royalties Place of use of intangibles
f. Gain on sale of real property Location of property
g. Gain on sale of personal property purchased in one Place of sale
country and sold in another
h. Gain on sale of domestic shares Income within
3. Deductions of Taxpayers Whose Taxable Income Is From Philippine Sources Only

Gross income within xxx

Less: Expenses, interest, losses and other deductions properly allocated to income within xxx
Ratable portion of unallocated expenses, interest, etc.
(Philippine Gross Income/Total gross income x Unallocated expenses) xxx xxx
Net income xxx
4. Exercise
A corporation has the following income and expenses for the CY 2021:
Gross income, Philippines P1,600,000
Gross income, USA 400,000
Business expenses, Philippines 500,000
Business expenses, USA 200,000
Unallocated business expenses 150,000
Interest expense, USA 50,000
Interest expense, Philippines 100,000
Unallocated interest expense 80,000
Compute the tax payable assuming the above corporation:

a. Resident foreign corporation.

b. Nonresident foreign corporation.
c. Domestic corporation.

5. Income partly from sources within and partly from sources without

a. Examples a. Income from transportation and other services rendered partly within and partly without the
Philippines.
b. Income from the sale of personal property produced in whole or in part by the taxpayer
within and sold without the Philippines.
c. Income from sale of personal property produced, in whole or in part by the taxpayer
without and sold within the Philippines.

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY TAX-801
Week 6: SOURCES of INCOME

b. Computation of Taxable income x Value of property, within_________

income within when 2 Value of property, within and without xxx
independent factory Add:
or production price Taxable income x Gross sales, within_____
has not been 2 Gross sales, within and without xxx
established Income within xxx

6. Exercises

a. A corporation manufactures goods in the Philippines, which are sold exclusively in foreign countries.
The following data are taken from the records of the corporation:
Gross sales, without P5,000,000
Gross income from sales, without 3,000,000
Operating expenses 2,100,000
Value of properties, Philippines 300,000
Value of properties, without 600,000

Determine the taxable income within and without.

b. An individual taxpayer has the following data on income and expenses in 2021:
1) Gross income, Philippines P220,000
2) Rent on building, Philippines, net of 5% withholding tax 95,000
3) Rent on commercial building, USA 70,000
4) Interest income, debtor resides in Hongkong 10,000
5) Dividends from Ford Motors, foreign company, declared in 2021 60,000

Note: Gross income of Ford Motors follows:

Within Without
2018 P300,000 P500,000
2019 400,000 100,000
2020 500,000 200,000
2021 350,000 150,000

6) Royalties received from Ford Motors for use of patents in USA 30,000
7) Dividend from Walmart Corp., USA, declared in 2021 80,000
Note: Gross income of Walmart for the preceding 2 years prior to declaration of
dividend follow: Within Without
2019 P400,000 P600,000
2020 400,000 400,000

8) Gain on sale, Philippines, land located in Japan 300,000

9) Gain on sale, Philippines, car purchased in Japan 40,000
10) Expenses:
a) Business expenses, Philippines 100,000
b) Depreciation building in Philippines 20,000
c) Depreciation building in USA 10,000
d) Expenses, sale of car in the Philippines 10,000
e) Expenses, sale of land in the Philippines 50,000
f) Unallocated expenses 60,000

REQ: a. Classify income into income within and income without.

b. Determine the taxable income assuming the individual taxpayer is:
1) NRA- ETB
2) NRA-NETB
3) RC

END

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