Name: ANABO, IVAN G.

Course & Year: BSA – 3 (First Sem)

Subject: INCOTAX
Teacher: CHAN, JAYSON

UNIT 1
GENERAL PRINCIPLES OF THE PHILIPPINES INCOME TAXATION

UNIT ACTIVITY 1
1. The elements of a State have four major elements, to wit;
its people
a fixed territory where they reside
a government to government to govern them
the sovereignty to govern its own operations free from external control

2. The three Inherent powers of a State are:

Police Power – known as the most pervasive of the bunch, it is the power of the State to
make laws, rules, regulations, interfere with the liberty & property and ordinances that
the purpose is to provide people for its general welfare.
Power of Eminent Domain – is the power of the State to take/confiscate private
property for public use with payment of just compensation, this many only be exercised
over the property rights of the people.
Power of Taxation – which is focus of this course, is the power of the State to enforce
contributions from its people to defray government expenses. In short, it is the power to
raise revenues for the support of the government.

3. The two tests in the exercise of the police power of the State are:
Subject matter must be lawful (lawful subject)
 This means the promotion of public welfare.
 The object is to promote the general welfare.
 The object of the law is to prohibit the cause of the harm to the general welfare.
 This means not only to promote the welfare of individuals or group of individuals
but society as a whole.
 General welfare refers to public welfare, public order, public safety, public
health, public morals and anything that pertains to the promotion or
protection of public interest.
 If there is a conflict between the rights of individuals and public welfare, the
former must yield because the welfare of the people is the supreme law. This
is a justification of police power, precisely a limitation on individual rights.
Means to achieve the purpose must be lawful (lawful means)
 The means must be in consonance with the law.
 It must be reasonably necessary for the accomplishment of the purpose.
 It must not be oppressive on the rights of individuals.
 4. The compensation in eminent domain cases considered just the full and fair equivalent of
the property taken from the owner by the expropriator. The measure is not the takers’ gain
but the owner’s loss. Inwardly, fair stipend ought to make a landowner entirety again—in
other words, put the proprietor within the same relative position as on the off chance that
the taking did not happen. This by and large implies that the landowner is entitled to the
esteem of the arrive or the sum that the property has devalued due to the government's
activity. Be that as it may, the issue of valuation is seldom a straightforward one and is
frequently exceedingly debated in eminent space cases.

5. The inherent power of State is based on the 1987 Constitution are FALSE, because 1987
Constitution shows the human rights of the people and sets limitations on the exercise of
the power to tax, while taxation is base in governmental necessities. The inherent power of
the States which has three elements is inborn in the variety fact of statehood and
sovereignty. These are fundamental attributes of a government that has enabled it to
perform the most vital functions of the governance. Also, the government as the being the
instrument by which people enact its will, is empowered to enact programs, initiate
activities, act whenever the need arises –its sovereignty is expressed by the government as a
form of “national power” which is evident in the actions of government policies agencies,
officials, members of the military and police, and other public servants.

6. For me, based on General Principle of Philippine Income Taxation, in this case, the correct
power exercised by the state is POWER OF EMINENT DOMAIN because its affects only
property RIGHTS. It may be exercised by some private entities. The property forcibly
taken under this power, upon payment of just compensation, is needed for conversion to
public use or purpose.

The taking of property in law may include:

 trespass without actual eviction of the owner;
 material impairment of the value of the property; or
 prevention of the ordinary uses for which the property was intended

The property that may be subject for appropriation shall not be limited to private property.
Public property may be expropriated provided there is a SPECIFIC grant of authority to the
delegate. Money and a chose in action are the only things exempt from expropriation. Although it
is also lodged primarily in the national legislature, the courts have the power to inquire the
legality of the right of eminent domain and to determine whether or not there is a genuine
necessity therefore.

UNIT ACTIVITY 2
1. The Doctrine that justifies the importance of taxation:
 Lifeblood Doctrine
 Taxes are the lifeblood of the nation
 Taxes are the lifeblood of the government and there prompt and certain availability
is an imperious need.
 Taxes are the lifeblood of the nation through which the agencies of the government
continue to operate and with which the state effects its functions for the benefit of its
constituents.
 Without revenue raised from taxation, the government will not survive, resulting in
detriment to society. Without taxes, the government would be paralyzed for lack of
motive power to activate and operate it. (CIR vs. ALGUE)
Benefits Received/Protection Doctrine
 Reciprocal duties of protection and support between State and inhabitants.
Inhabitants pay taxes and in return receive benefits and protection from the State.
 This symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that is an arbitrary method of exaction by those the seat of
power.
Necessity Theory
 Existence of a government is a necessity and cannot continue without any means
to pay for expenses.
 The power to tax emanates from necessity. (R vs. C)
Silent Partner Doctrine
 Silent partnerships are a kind of a hybrid tax structure which allows a silent
partner to combine the benefits of single income taxation earned by a partnership
and reduce the risks accompanying such an activity.
 Its partnership in the production of income, by providing the protection,
resources, incentives and proper climate for such production. (CIR vs. V.E.L)

2. The Doctrine that serves as the basis of taxation:

Governmental necessities - The existence of the government depends upon its capacity to
perform its two (2) basic functions:
 to serve the people
 to protect the people

Lifeblood Doctrine
 Without revenue raised from taxation, the government will not survive, resulting in
detriment to society. Without taxes, the government would be paralyzed for lack of
motive power to activate and operate it. (CIR vs. ALGUE)
Benefits Received/Protection Doctrine
 This symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that is an arbitrary method of exaction by those the seat of
power.
Necessity Theory
 The power to tax emanates from necessity. (R vs. C)

Silent Partner Doctrine

  Its partnership in the production of income, by providing the protection,
resources, incentives and proper climate for such production. (CIR vs. V.E.L)

3. The manner that the power of taxation be used for destruction says that the power to tax
includes the power to destroy if it is used as an implement of the police power (regulatory)
of the State. However, it does not include the power to destroy if it is used solely for the
purpose of raising revenue. (ROXAS vs. CTA)
But remember that if the purpose of taxation is regulatory in character, taxation is
used to implement the police power of the state. And if the power of taxation is used to
destroy things, businesses, or enterprises and the purpose is to raise revenue, the court will
come in because there will be violation of the inherent and constitutional limitations and it
will be declared invalid.
In addition, the burden of taxation is so heavy that it is impractical to continue
operating, forcing entities to totally shut down their operations. So potent indeed is the
power that it was once opined that “the power to tax involves the power to destroy.”
(PHCP, Inc. vs. CIR) this is referred to as the “Marshall Dictum.” However, an opposing
dictum referred to as the “Holmes Dictum” provides that the power to tax is not the power
to destroy while the Supreme Court sits.

4. Holmes Doctrine or “Taxation power is the power to build,” the power to tax should not be
the power to destroy. The power to destroy is merely a consequence of taxation.

5. The Limitations to the Power of Taxation are:

Inherent Limitations
 The power of taxation must be exercised for a public purpose.
 The power of taxation is essentially legislative in nature, and generally, cannot be
delegated to the other branches of the Government.
 The power of taxation may be exercised only within the territorial boundaries of
the taxing authority.
 The power of taxation is subject to the concept of international comity.
 Generally, the government cannot be taxed.
Constitutional Limitations
 Due process and equal protection issues.
 Uniformity, equitability and progressiveness of taxation.
 Non – impairment clause.
 Tax laws must originate from the House of Representatives.
 Tax exemptions may be granted only with the concurrency of a majority of all the
members of the Congress.
 Land, building and improvements actually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempted from property
taxes.
 Revenues and assets of non – stock, non – profit educational institutions used
actually, directly, and exclusively used for educational purposes shall be
exempted from taxes and duties.
 Freedom of religion
  Public money and property shall only be utilized for public purposes.
 The Supreme Court of the Philippines has the power to review, revise, reverse,
modify, or affirm on appeal or certiorari final judgements and order of lower
courts involving the legality of any tax, impost, assessment or toll or any penalty
in relation thereto.

6. TRUE: the charitable institutions and churches are exempt from taxation because according
to the exemption from property taxes (Sec 28, Art. VI, 1987 Constitution) it says that
charitable institutions, churches, personages or covenants appurtenant thereto, mosques,
and non-profit cemeteries and all land, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational purposes shall be exempted from
taxation. In short, Freedom of Religion is the activity which cannot be taxed.

7. TRUE: Under the law, all persons shall be treated equally because according to the Equal
protection, this provision requires tax laws to be applied equally among all its subjects.
However, it is well settled that “equality before the law” under the Constitution does not
import a perfect identity of rights among all men and women. It admits of classifications. In
sum, equality under the law simply means, “equally among equals.”

8. TRUE: No person shall be imprisoned for non-payment of taxes. First of all, PENALTY
does not operate as a tax. It is a sanction imposed for a violation, whether you will be made
to pay a fine or subject yourself to imprisonment for such violation. But when you are
made to pay a tax, that enforced contribution does not operate as a penalty. According to
Atty. Erik Don Ignacio, “No person shall be imprisoned for debt on non-payment of a poll
tax”. This provision is enshrined in our Constitution as one of the Rights of an individual.
This provision prohibits the enactment of a law criminalizing non-payment of debt or poll
tax.

UNIT ACTIVITY 3

1. The source of tax laws in the Philippines are:

1987 Constitution
Treaties and Conventions
Statutes
Jurisprudence
Ordinances
Administrative Issuance

2. Taxation: Power; Tax: Laws which resulted from such power.

3. The Philippines Internal Revenue Laws are generally civil in nature. According to (R vs. O
VDF Et al.), they are neither political nor penal in nature.
4. Doctrine of Strictissimi Juris are “Taxation is the rule and exemption is the exception.” Also,
tax exemption must be strictly construed against the taxpayer and liberally in favor of the
government.

5. Differentiate tax and:

Debt - a tax is not a debt but is an obligation imposed by law.
Toll - amount charged for the cost and maintenance of property used.
License Fee - regulatory imposition in the exercise of the police power of the State.

6. Jurisprudence is derived from the Latin term juris prudentia, which means "the study,
knowledge, or science of law."

7. Yes, it is morally bad to escape from the payment of taxes because first of all a debt arises
from a contract, express or implied, while a TAX is created by LAW. As to effect of non-
payment, no person can be imprisoned for non-payment of a debt. In case of non-payment
of a tax, you will be made to pay a fine or imprisonment or both, in addition to the payment
of the basic tax plus other surcharges such as interest. In addition, taxes are not subject to
set-off or compensation. Taxes are not debts. Taxes arise from compulsory obligation
imposed upon citizens or inhabitants of the state.

8. Tax exemptions must be constructed in strictissimi juris against the taxpayer and liberally
in favor of the taxing authority, and he who claims an exemption must be able to justify his
claim by the clearest grant of organic or statute law. Deductions for income taxes partake of
the nature of tax exemptions; hence, if tax exemptions are strictly construed, then
deductions must also be strictly constructed against the taxpayer. (CIR vs. GF, Inc.)

Moreover, there is also a well – settled rule that tax refunds, or credits, just like
exemptions, are strictly construed against the taxpayer. (CIR vs. SRP Corp.)

UNIT 2
GROSS INCOME
UNIT ACTIVITY 1
1. The different sources of Philippines taxes are:
1987 Constitution
Statutes
Jurisprudence
Presidential decrees
Executive orders
Constitution
Court decisions
Tax code
Revenue regulations
Administrative issuances
BIR rulings
Local tax ordinances
Tax treaties and conventions with foreign countries

2. The difference between “income” in the context of taxation and “income” under the context
of accounting are in taxation, income is on which income tax is payable, computed by
applying provisions of the Income Tax Act, 1961 & Rules, while in accounting is the net
profit before tax for a period, as reported in the profit and loss statement.

3. Differentiate “income” from:

Capital
 Capital refers to the initial sum invested while income is the source of the profit.
 Capital is wealth, while income is the service of wealth.
 Labor or capital is the tree, while income is the fruit. (M&P vs. R&C)
Return of Capital
 Is a payment, or return, received from an investment that is not considered a
taxable event and is not taxed as income.
 Return on capital is your net income (income after deducting expenses)
expressed a proportion to your capital, it is normally expressed as a percentage,
while income is what you receive in return for the activity you have carried out
to generate earnings, it is an absolute amount (Paul Putney, 2020).
Revenue
 Revenue is the total amount of income generated by the sale of goods or services
related to the company's primary operations. Income or net income is a
company's total earnings or profit (Claire Boyte-White, 2020).
 Both revenue and net income are useful in determining the financial strength of a
company, but they are not interchangeable (Claire Boyte-White, 2020).

Receipts
 Receipts are not income. Receipts may include capital as well as its earnings,
while income refers to the amount after excluding capital invested, cost og good
sold, and other deductions allowed by law.
  Income accounts are on an accrual’s basis while, receipts accounts show only the
cash and bank transactions in that accounting period (WYCAS, 2020).

4. According to Julia Kagan & Lea Uradu (2020), Taxable income is the amount of income
used to calculate how much tax an individual or a company owes to the government in a
given tax year. It is generally described as adjusted gross income (which is your total
income, known as “gross income,” minus any deductions or exemptions allowed in that tax
year). Taxable income includes wages, salaries, bonuses, and tips, as well as investment
income and unearned income.
They further added that,
 Taxable income is the amount of a person’s gross income that the government
deems subject to taxes.
 Taxable income consists of both earned and unearned income.
 Taxable income is generally less than gross income, having been reduced by
deductions and exemptions allowed by the IRS for the tax year.

UNIT ACTIVITY 2

THEORY

1. “Exclusion,” in the context of income taxation, refers to items not included in the
determination the taxable income because a law or treaty expressly or implied exempts
them from income tax.

2. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of
the insured, whether in a single sum or otherwise, shall be excluded from gross income, but
if such amounts are held by the insurer under an agreement to pay interest thereon, the
interest payments shall be included in gross income.
While, the amount by the insured, as a return of premiums paid by him under life
insurance, endowment, annuity contracts, either during the term or at the annuity of the
term mentioned in the contract or upon surrender of the contract shall be excluded from
gross income.
The receipt of premium paid is a mere return of capital, hence, not classified as
income, and thus, exempted from income tax.

3. Differentiate the following terms from each other:

Gift
 Something voluntarily transferred by one person to another without
compensation.
 A thing given willingly to someone without payment
Bequest
 Is a financial term describing the act of giving assets such as stocks, bonds,
jewelry, and cash, to individuals or organizations, through the provisions of a
will or an estate plan (Julia Kagan, 2020).
 Refers to a testamentary gift of personal property, often excluding money.
  A property given by will
Devise
 When real estate is left through a will, it is called a devise.
 It is used to denote a testamentary gift of both real and personal property.
 A clause in a will leaving something, especially real estate, to someone.
Descent
 Refers to the origin or background of a person in terms of family or nationality.
 The system of acknowledged social parentage, which varies from society to
society, whereby a person may claim kinship ties with another.

4. Prizes and awards are taxable when, the receipt was selected without any action on his part
to enter the contest or proceeding. Also, when the receipt is not required to render to
substantial future services as a condition to receiving the prize or award.

In addition, prizes won in sports tournaments not sanctioned by their national sports
associations shall be subject to income tax. Also, prizes out of PROFESSIONAL tournaments
shall be treated as a professional income are properly to income tax.

5. The exemptions apply only to the gains derived from sale of the aforementioned certificates
of indebtedness, it does not extend to the interest income derived from such investment.
The interest income earned from the bonds is not synonymous with the “gains,”
which exempts gains derived from trading, redemption, or retirement of long-term
securities from ordinary income tax.
The term “gain” does not include interest, which represents forbearance for the use
of money. Gain from sale or exchange or retirement bonds or other certificates of
indebtedness. (BO vs. RP)

PROBLEM

1. KALSANON
A.) P 700,000 included not excluded
B.) P 700,000 included not excluded
C.) P 700,000 included not excluded

2. ATREUS
A.) Excluded from Gross Income

Return of his life insurance P2,000,000

House and lot inherited from his late parents 3,000,000
Cash gift from his missionary friend 50,000
TOTAL P 5,050,000

B.) Included from Gross Income

Rentals from the property inherited 100,000 + 20,000 x 20 years = P 400,000

Proceeds of his mother’s life insurance 1,000,000 + 5,000 x 30 years = P 150,000
TOTAL P 1,650,000
 3. TREVOR
A.) Excluded from Gross Income

Donation from his closet friends P 5,000

Compensation for damages 200,000
TOTAL P 205,000

B.) Included from Gross Income

Proceeds from his wife life insurance P 1,500,000

Premium Paid 200,000
Dividend Income xx
Prizes for winning Municipal Bikini Open xx
TOTAL P 1,700,000

UNIT ACTIVITY 3

THEORY

1. Final withholding tax system is a tax compliance method utilized by the taxing authority
which requires a tax agent to withholding ta portion of a payment for a services or goods to
a supplier and remit that portion to the government. It helps to ensure that taxes are
remitted properly by a business and on a timely basis.

2. The sources of interest income are:

Bank Deposit
 consist of money placed into banking institutions for safekeeping. These deposits
are made to deposit accounts such as savings accounts, checking accounts and
money market accounts (Julia Kagan, 2020).
Deposit Substitutes
 Is debt instrument issued by the bank to borrow money from the public other
than the client’s deposit.
Trust Funds/Similar Arrangements
 Is any state, stock, security, or any property held in trust by a person called the
trustee in favor of another person called the beneficiary.

3. According to the study of Kristian, Reinert & et al. (2013) of the Concept of Tax Sparing ( A
General Analysis, and an Analysis and Assessment of the Various Features of Tax Sparing
Provisions), the concept of tax sparing has the invariable core feature of providing a credit
for tax not actually paid, it is highly diverse with respect to its other features. In the
preceding analysis, the variable features, such as items of income covered, computation
methods and references to domestic law, have a major impact on the operation of tax
sparing.
They further added that, considering that many of the features may be combined,
the potential diversity of tax sparing provisions becomes increasingly vast. For these
reasons, it appears that the nuances are highly significant in order to establish a proper
perception of what tax sparing is as a legal concept.
 But based on the research of PWC (2020), Under the suspended RMO, the tax
sparing rule shall apply to an NRFC which is a resident or is domiciled in a country which:
(1) has no effective tax treaty with the Philippines; (2) has a worldwide system of taxation;
and (3) allows a tax credit against the tax due from the NRFC dividend taxes deemed to
have been paid in the Philippines equivalent to 15%. They added that, in its previous
rulings, the BIR ruled that “the only condition for the application of the tax sparing credit is
that the country-domicile of the recipient corporation allows a credit against the tax due
from non-resident foreign corporations.” It appears, however, that these new requirements
are more rigid which may result in the denial of the taxpayer's benefits.

4. A prize is a reward for a contest or a competition. Differently worded, a prize represents

remuneration for an effort of one’s superiority in skill and effort, like prize money of a
boxing or video game tournament. On the other hand, a winning is a reward for an event
that substantially depends on chance such as gambling, lottery, or raffle ticket. The former
requires the exertion of effort, while the latter does not require as much.

PROBLEM

1. GAMBIT

10 – year bond P 8,000

P 40,000
x 20%
P 8,000
5 – year time deposit P xx
EXEMPT
Foreign expanded deposit (Interest Income) P 9,000
P 60,000
x 15%
P 9,000
Local depositary bank (Interest income) P 20,000
P 100,000
x 20%
P 20,000
TOTAL P 37,000

2. BEYONDSAY
 Beyondsay is not subject to final tax on his royalty income because the same of
his income is in the ordinary or primary or principal course of his business.

3. LEGO

A. P 200,000 x 10% = P 20,000

B. P 200,000 x 25% = P 50,000
C. P 200,000 x 20% = P 40,000
D. P 200,000 x 25% = P 50,000
E. Exempt/ None
 F. Exempt/ None
G. Exempt/ None
H. P 200,000 x 30% = P 60,000
I. P 200,000 x 15% = P 30,000

4. MS. FILEY
 P 200,000 x 20% = P 40,000

UNIT ACTIVITY 4

THEORY

1. Compensation income is obtained from an employee relationship between payor and

receipts, while Professional income is an income from exercise of any profession or
vocation which calls for an intellectual or manual skill.

2. There are four-fold test elements to determine the employer-employee relationship:

Power of the employer in the selected and engagement of employees
Payment of wages
The employer’s power of dismissal
The power to control the employee’s conduct in terms of both the end to be achieved
and the means and method used to achieve that end. (F vs. U)

3. Convenience of Employer Rule

Allowances furnished to the employee for and as a necessary incident to the

performance of his duties are not considered as compensation and are not taxable.

According to (OHRD Corp. vs. P), ultimately, the real difference lies not on the kind
of the benefit but not the purpose why it was given by the employer. If it is primarily for
the employee’s gain, then the benefit is a facility (taxable); if its provision is mainly for the
employer’s advantage, then it is a supplement (not taxable). Again, benefit as deductible
from the wages even thought it clearly works to the employer’s greater convenience or
advantage.

4. Minimum wage earner is a worker in the private sector paid the statutory minimum wage
or is an employee of the public sector with compensation income of not more that the
statutory minimum wage in the non-agricultural sector where he/she is assigned. (Sec. 22,
HH, NIRC)
Also, minimum wage shall refer shall be exempt from the payment of income tax on
their taxable income. Holiday pay, overtime pay, night-shift differential pay, and hazard
pay received by such minimum wage earners shall likewise be exempt from income tax.
(Sec. 24, A.1.B, NIRC)

PROBLEM

1. WORKHARD
 Net Take Home Pay (200k + 32k + 1k) P 233,000
Add: 10 – day vacation leave 5,000
13th month pay 12,000
TOTAL P 250,000

2. BADUL

Salary (370,000 + 50,000) P 420,000

Professional Fee (270,000 / 90%) 300,000
Per diem 200,000
13th month pay 50,000
TOTAL P 970,000

3. DEBAYUN

Actual medical assistance P 8,000

Productivity incentives 7,500
Wooden trophy 5,000
TOTAL P 20,500

UNIY ACTIVITY 5

THEORY

1. “All income derived from whatever source is taxable”

 Refers to the inclusion of all types of income not expressly excluded or exempted
from taxation, irrespective of the voluntary or involuntary action of the taxpayer
in producing such income. This only means that the list provided at the
beginning of this material is not exclusive and is deemed to include income from
any source, whether legal or illegal, despite it not being specifically mentioned in
such provision.

2. Tax Benefit Rule

 A general principle in taxation which states that if a taxpayer deducted an item
on his income tax return and enjoyed a tax benefit thereby, and in a subsequent
year recovers all or part of that item, he will recognize gross in the year the
deducted item is recovered.
 The rule has both an inclusionary and an exclusionary component, example; the
recovery is included in the taxpayer’s gross income to the extent that the taxpayer
obtained a tax benefit from the prior year’s deduction, and the recovery is
excluded to the extent that the prior year’s deduction did not provide a tax
benefit.
 3. Gross income shall mean gross sales less returns, discounts, and allowances, and cost of
goods sold, plus other items of income not subjected to final tax, and other incidental or
outside operations or source. (Sec. 43, RR No.2)

4. Compensation income is obtained from an employee relationship between payor and

receipts, while Business income is an entity’s net profit or loss, which is calculated as its
revenue from all sources minus the cost of doing business (Alicia Tuovila, 2020).

She added that, it is earned income and encompasses any income realized from an
entity’s operations; and for tax purposes, Business income is an ordinary income.

5. According to the source of Alejandro Macquinto (2020), the taxation for bloggers, content
creators and other professionals earning through digital ads is similar for online for online
merchants as well, and those earning below PHP 250,000 a year should not pay taxes, but
they are still required to file annual Income Tax Returns.
All persons doing business and earning income in any manner or form, specifically
those who are into digital transactions through use of any electronic platforms and media,
and other digital means, to ensure that their businesses are registered pursuant to the
provision of Section 236 of the Tax Code, as amended, and that they are tax compliant.
For me, it is better to follow the proper requirements about the taxation in order to
avoid violations of our law. First of all, if you are making money, you moreover have the
commitment or obligation to pay taxes to the government. Anything that you gain cash,
except for those expressly excluded by the law, is assessable and taxable.

PROBLEM

1. CLOUD

Advance deposit P 50,000

Monthly rental (30,000 x 5) 150,000
Annual insurance 15,000
PREMIUM P 215,000

Monthly rental P 150,000

Annual insurance 15,000
PREMIUM P 165,000

2. NEY
 Royalty income from franchising – part of normal operations P 1,500,000

3. BOSS FIGHT
A.) Income Subject to Normal Tax:

Cash salary (402,000 + 25,000) P 427,000

Cancelled debt 500,000
Income tax paid by the employee 150,000
Gross income from the business 5,000,000
Prepaid rent income 500,000
Interest from insurance proceeds 100,000
 (95,000/95%)
TOTAL P 6,677,000

B.) Income Subject to Final Tax:

Dividend from San Magnolia Corporation P 130,000

Gambling winnings 4,000
Bad debt recovery 300,000
TOTAL P 434,000

C.) Income Excluded from Gross Income:

Stock dividend P 45,000

Donation 30,000
SSS Contribution 3,000
Living quarters and meal allowances 50,000
TOTAL P 128,000

IDENTIFICATION

1.) Taxable 11.) Taxable

2.) Taxable 12.) Taxable
3.) Non-taxable 13.) Non-taxable
4.) Taxable 14.) Taxable
5.) Non-taxable 15.) Non-taxable
6.) Non-taxable 16.) Non-taxable
7.) Non-taxable 17.) Taxable
8.) Non-taxable 18.) Non-taxable
9.) Taxable 19.) Taxable
10.) Non-taxable 20.) Taxable

UNIT 3
FRINGE BENEFIT TAX

UNIT ACTIVITY 1
1. Fringe benefit mean any good, service, or other benefit furnished or granted by an
employer, in cash or in kind, in addition to basic salaries to an individual employee, while
Fringe benefit tax is a monetary burden imposed by the State on fringe benefits furnished
or granted by an employer, in cash or in kind, to an employee other than a rank and file.

2. The employer is liable to remit the fringe benefit tax to the Bureau of Internal Revenue once
the fringe benefit is given to a managerial or supervisory employee. A fringe benefit tax is a
final tax on the employee’s income to be withheld by the employer. The withholding and
remittance of FBT shall be made on quarterly basis.

3. The following Fringe benefits are not subject to fringe benefit tax:
Fringe benefits which are authorized and exempted from tax under special laws.
 Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans.
Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not.
De minimis benefit as defined in the rules and regulations to be promulgated by the
secretary of finance, upon recommendation of the Commissioner.

4. The purpose of the fringe benefit tax is to imposed only to fringe benefits granted to
supervisory or managerial employees. Those granted to rank-and-file employees are
taxable as compensation income subject to the ordinary graduated rates and not to fringed
benefit tax. These fringe benefits being, services or other benefits furnished or granted by
an employer, in cash or in kind, in addition to basic salaries of an employee.

5. Managerial Employees
 Are those employees vested with the power or government to lay down and
executive management policies and/or to hire, transfer, suspend, lay-off, recall,
discharge, assign, or discipline employees.

Supervisory Employees
 Are those, who in the interest of the employer, effectively recommend managerial
actions laid down by a managerial employee if the exercise of such authority is not
merely routinely or clerical in nature but requires the use of independent judgement

Rank – and – File Employees

 Are those holding neither a managerial nor a supervisory position. (Art. 212, M,
LCP)

PROBLEM

1. PIE
A.) Fringe Benefit Tax of Each Benefit Received

Fringe Benefits Condominium Car

Vale of benefit 6,000,000
Divided by assumed economic life (years) 20 yrs.
Monetary value of benefit 300,000 (A/D) 2,000,000
Multiplied by % of ownership (100%/50%) 50% 100%
Fringe Benefit Tax Base 150,000 2,000,000
Divided by gross monetary value rate (65%) 65% 65%
Gross-up Monetary Value (GUMV) 230,769.23 3,076,923.08
Multiply by FBT tax rate (35%) 35% 35%
FRINGE BENEFIT TAX (FBT) P 80,769.23 P 1,076,923.08

B.) Appropriate Journal Entry for Each Fringe Benefit

CONDOMINIUM CAR
 FBT Expense P 80,769.23 FBT Expense P 1,076,923.08
FBT Payable P 80,769.23 FBT Payable P 1,076,923.08

2.) DAVE2D

Monthly rent P 50,000

Months x 12
P 600,000 A.) Monetary value of the FB on the
apartment
x 50%
FBT base 300,000
Gross monetary value /65%
P 461,538.46 B.) Gross-up monetary value of the FB
FBT rate x 35%
P 161,538.46 C.) FBT on the annual use of the apartment

Cash price equivalent P 500,000

Life /5
Value of benefit P 100,000
x 100%
FBT base 100,000
Gross monetary value /65%
P 153,846.15 D.) Gross-up monetary value of the car
FBT rate x 35%
P 53,846.15 E.) Fringe Benefit tax of the car

None, exempted from BFT F.) Fringe benefit tax of the cash benefit

3.) MIKEY
 None, Mikey is exempted from Fringe benefit tax payable, since he’s rank-and-file
employee.

UNIT 4
DEALING IN PROPERTY

UNIT ACTIVITY 1
1. Ordinary income includes items such as wages and interest income. Capital gains arise
when you sell a capital asset, such as a stock, for more than its purchases price, or basis.
Ordinary income is any type of income earned by an organization or individual that
is taxable at ordinary rates. Long-term capital gains and qualified dividends are not
considered ordinary income, as they ae both taxed differently. In a corporate setting,
ordinary income comes from regular day-to-day business operations, excluding income
gained from selling capital assets. For private individuals, ordinary income usually consists
of the pretax salaries and wages they have earned (Daniel Liberto, 2020).
Capital gains is an increase in a capital asset’s value. It considered to be realized
when you sell the assets. A capital gain may be short-term (one year or less) or long-term
(more than one year) and must be claimed on income taxes (James Chen, 2019).
 2. The rule of the exemption from capital gains tax of a transaction involving a family home:
There is a state of a principal residence.
The proceeds from disposition of the principal residence are fully utilized in
purchasing or constructing a new principal residence.
Within 18 months from the date of disposition.
Notification to the commissioner within 30 days from the date of disposition.
Deposit of an amount equivalent to the supposed capital gains tax due.
The tax exemption can only be availed of once every 10 years.

PROBLEM

1. GON

Residual House P xx
Personal Car 500,000
Interest in Commercial Partnership 4,500,000
TOTAL CAPITAL ASSETS P 5,000,000

2. MARIA CAREY

2020
Ordinary Income P 3,000,000
Capital Gain 100% P 7,000,000
Capital Less 100% (25,000,000)
Net Capital Less (P 18,000,000)
Taxable Income P 3,000,000

2021
Ordinary Income P 2,500,000
Capital Gain 100% P 5,000,000
Capital Less 50% (1,000,000)
NCLCO (3,000,000)
Net Capital Gain P 1,000,000
Taxable Income P 3,500,000

Net Capital Gain

P 1,000,000
x 6%
P 60,000

3. SKALAWAG

Land Zonal Value

P 2,700,000
x 6%
 P 162,000

4. PACMUM

Tax Liability
20,000 units x P2/shares = P 40,000
x 15%
P 6,000

5. ENGR. CABIDOG

P 10,000,000
x 6%
P 600,000 CGT

P 600,000 P 2,000,000 / P 10,000 = 0.20 or 20%

x 20%
P 120,000 Capital gains tax liability of Engr. Cabidog

= (P 8,000,000 / P 10,000,000) x P 500,000

= 0.80 or 80% x P 500,000
= P 400,000 Tax base of the new house

UNIT 5
ALLOWABLE DEDUCTIONS FROM GROSS INCOME

UNIT ACTIVITY 1
1. Exclusions refers to items not included in the determination of the taxable income because a
law or treaty expressly exempts them from income tax, while on the other hand, deductions
are business expenses and losses that is incurred which the law allows to reduce gross
business income to arrive at the income subject to tax.

2. Individual tax payers 40%of gross sales or receipts is deductible from gross income. While,
if the taxpayer is a corporation it should be 40% of gross income for that year.

PROBLEM

1. A.)

Cost of repainting P20,000

Expense outright P 20,000
 B.)

Cost of Trucks New Differential P50,000

Cost of Overhauling Materials 30,000
Cost of Labor 15,000
Amount to be Capitalized P 95,000

2.

Sales P100,000
Rent income 500,000
Interest income 40,000
Dividend income 10,000
Total gross income 650,000
OSO (650,000x40%) 260,000
Taxable income P 390,000

3.

Net sales P100,000,000

Cost of sales (25,000,000)’
Other income 345,000,000
Gross income x 40% P 410,000,000
OSD P 164,000,000

UNIT ACTIVITY 2

THEORY

1. Business expenses as a rule are allowable as deductions only if they are incurred in relation
to business income that is taxable in the Philippines. Whether income is earned within the
Philippines or nit shall be allocated based on the gross income within and without.

2. Ordinary means it must be paid off or incurred in carrying on a trade or business. On the
other hand, necessarily means the existence of expense must substantially prove by
evidence or record the deductions claims under law.

3. Tax arbitrage rule states that tax exemptions must be construed in strictissimi juris against
the taxpayer and liberally in favor of the taxing authority, and he who claims by the
clearest grant of organize statute law.

4. The best time to opt for itemized deductions is when the expenses incurred for the year is
high, and the operation or conduct of trade, business or profession of the taxpayer
 5. It is when income for the year is high, because the amount deducted in gross income is also
higher. Also, it is best when no adequate record is available because it does not need to
submit income tax return and supporting documents.

PROBLEM

1. A.)

Interest paid on a delinquency tax P15,000

Deductible interest expense P 15,000

B.)

Interest paid to a brother P15,000

Interest paid to finance 135,000
Petroleum exploration 20,000
Interest paid to finance his family 35,000
home
Non-deductible interest expense P 205,000

2. None, because it is not yet written off

3. Cost of building P100,000,000, if Araullo Institute opts to deduct the expenditures as an

outright expense and 1,900,000 if the cash outlays as depreciation allowance.

4.
Salary expense 100,000
Retirement fund expenses (Current service) 50,000
Retirement fund expenses (Past service) 15,000
Interest expense for delinquent taxes 134,000
Interest paid to DBO Banking corp. 10,000
Depreciation expense 100,000
Rent expense 8,000
Bad debts expense 4,000
Income tax expense 80,000
Contribution to TESDA 180,000
Contribution to town fiesta 10,000
Total deductible expense P 691,000

IDENTIFICATION
1. Non-deductible
2. Deductible
3. Deductible
4. Non-deductible
5. Non-deductible
6. Non-deductible
7. Non-deductible
8. Deductible
9. Deductible
10. Non-deductible
 11. Non-deductible
12. Non-deductible
13. Non-deductible
14. Deductible
15. Non-deductible

UNIT ACTIVITY 3

THEORY

1. Ordinary loss is mostly fully deductible in the year of the loss, whereas, capital loss is not.
An ordinary loss will offset ordinary income and capital gains on a one to one basis

2. Net operating loss is the excess of allowable deduction over gross income of the business in
a taxable year.

3. Net operating loss carry over losses which had not been previously offset as deductions
from gross income and shall be carried over as deductions from gross income for the next 3
consecutives taxable immediately following the year of such loss.

4. Gambling losses are losses from wagering transaction shall be allowed only to the extent of
the gains from such transaction.

PROBLEM

1. A.)

Replacement cost of the ravaged area P127,600

Book value of the ravaged area 147,000
Lower between the two 127,600
Deductible loss P 127,600*

Interest paid to a brother P15,000

Interest paid to finance 135,000
Petroleum exploration 20,000
Interest paid to finance his family 35,000
home
Non-deductible interest expense P 205,000

Original cost 600,000

Salvage value (60,000)
Depreciable amount P540,000/10
= P54,000
 Original Cost 600,000
54,000x2 (108,000)
492,000 x 30%
= P 127,600*

B.)
Old tax base of the property P600,00
Non-deductible loss 20,000
New tax base of the building P620,000

C.)
New tax base of the building P620,000
Salvage value 62,000
Depreciable amount P558,000
Estimated life / 12
New annual depreciation P 46,500

2.
Net operating loss P 50,000,000
allowable deduction (10,000,000)
Net operating loss carry over (P 60,000,000)

3.

Casualty losses P 125,000

Embezzled fuds by the company Accountant 350,000
Replacement cost 25,000
Insurance (15,000)
Deductible losses P 485,000

UNIT ACTIVITY 4

THEORY

1. No, if a taxpayer opts for the optional standard deduction, the itemized deductions are no
longer allowed to be deduction from gross income.

2. It promotes physical education and encourage sports programs, leave competitions and
amateur sports. Its main goal is to prove that no person shall be deprived of life, liberty or
property without due process of law, nor shall any person be denied the equal protection of
the laws.

PROBLEM
 1.

Breastfeeding assistance P450,000

Salaries expense
Senior citizen 1,000,000
Special deductions (1,000,000x15%) 150,000
PWD’s 1,500,000
Special deductions (1,500,000x25%) 375,000
Salaries paid to other employees 2,500,000
Discounts granted to senior citizen 300,000
Value donation 3,000,000
Special deduction 1,500,000
Total allowable deduction P 10,775,000

2.

Estimated professional fee P5,000,000

Actual professional fee 40,000,000
Limitation rate x 10%
Limitation by law 4,000,000

Gross income P 40,000,000

Allowable deduction (4,000,000)
Taxable income P36,000,000
UNIT 6
INCOME TAX ON INDIVIDUALS

UNIT ACTIVITY 1
1.
A.) Resident citizen
 is a citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines.
B.) Nonresident citizen
 is taxable only on income derived from sources within the Philippines. The term
nom-resident means that a citizen of the Philippines who establishes to the
satisfaction of the commissioner of the fact of his physical presence abroad with an
intention to reside therein
B.) Resident alien
 it is an individual whose residence is within the Philippines and who is not a citizen
thereof.
D.) Nonresident Alien engaged in trade in the Philippines
 Non-resident is an individual whose residence is not within the Philippines and who
is not a citizen thereof. A non-resident alien engage in trade in the Philippines shall
be subject to an income tax in the same manner as an individual citizen and a
resident alien individual, on taxable income received from all sources within the
Philippines
E.) Nonresident Alien engaged not engaged in trade in the Philippines
 A non-resident alien means an individual whose residence is not within the
Philippines and who Is also not a citizen thereof. There shall be levied, collected and
 paid for each taxable year upon the entire income received from all sources within
the Philippines by every non-resident alien individual not engaged in trade or
business within the Philippines.

2. Self- employed individuals or professionals shall have the option to avail of an 8% tax on
gross sales or gross receipts and other nom-operating income in excess of 250,000. that is
provided that an income from business and profession, sale/revenue does not exceed the
VAT threshold of 3,00,000, they shall have the option to avail an 8% tax on graduated tax
scheme. Also, such tax liability is in lieu if the income tax payable under the tax table.

3. A final withholding tax is earnings that have been subjected to complete withholding tax
payment at source. It constitutes full and final settlement of the income tax due from the
payee on the said income. The liability of payment of the tax rest primarily on the payor as
a withholding agent. While on the other hand, creditable withholding tax provides an
advance collection of taxes. The income from which it is withheld is still required to be
included in taxpayer’s gross income. In creditable withholding tax, the income tax withheld
is an aliquot portion only. The one who remits the tax is the income payor for withholding
and payee (time of filling and payment)

4. The amount of the credit in respect to the tax paid or incurred to any country shall not
exceed the same proportion of the tax against which such credit is taken, which the
taxpayers taxable income from sources within the Philippines.

PROBLEM

A.)

Gross compensation P1,200,000

13 months’ pay and other benefit (120,000)
Taxable Compensation income P1,080,000
Tax Due under the graduated rates P214,000*
130,000+(1,080,000 - 800,000) x 30%=
214,000
Business Income
Gross sales P3,500,000
Non-operating income 100,000
Taxable Income P 3,600,000
Tax due under 8% 288,000
Total Tax Liability P 502,000

B.)

Total Compensation Income P1,200,000

Non-Taxable (120,000)
Taxable Compensation Income P 1,080,000

Gross Sales P3,500,000

Cost of Sales 1,000,000
 Gross Income (600,000)
Net Income from Operation P 1,900,000
Non-Operating Income 100,000 2,000,000
Total Taxable Income P3,080,000
Total Tax Liability P 835,600
*490,000+(3,080,000-2,000,000) x 32%

UNIT 7
CORPORATE TAXATION

UNIT ACTIVITY 1
1.
A.) Resident citizen
 is a citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines.
B.) Nonresident citizen
 is taxable only on income derived from sources within the Philippines. The term
nom-resident means that a citizen of the Philippines who establishes to the
satisfaction of the commissioner of the fact of his physical presence abroad with an
intention to reside therein
C.) Resident alien
 it is an individual whose residence is within the Philippines and who is not a citizen
thereof.
D.) Nonresident Alien engaged in trade in the Philippines
 Non-resident is an individual whose residence is not within the Philippines and who
is not a citizen thereof. A non-resident alien engage in trade in the Philippines shall
be subject to an income tax in the same manner as an individual citizen and a
resident alien individual, on taxable income received from all sources within the
Philippines
E.) Nonresident Alien engaged not engaged in trade in the Philippines
 A non-resident alien means an individual whose residence is not within the
Philippines and who Is also not a citizen thereof. There shall be levied, collected and
paid for each taxable year upon the entire income received from all sources within
the Philippines by every non-resident alien individual not engaged in trade or
business within the Philippines.
 2. Self- employed individuals or professionals shall have the option to avail of an 8% tax on
gross sales or gross receipts and other nom-operating income in excess of 250,000. that is
provided that an income from business and profession, sale/revenue does not exceed the VAT
threshold of 3,00,000, they shall have the option to avail an 8% tax on graduated tax scheme.
Also, such tax liability is in lieu if the income tax payable under the tax table.

3. A final withholding tax is earnings that have been subjected to complete withholding tax
payment at source. It constitutes full and final settlement of the income tax due from the
payee on the said income. The liability of payment of the tax rest primarily on the payor as
a withholding agent. While on the other hand, creditable withholding tax provides an
advance collection of taxes. The income from which it is withheld is still required to be
included in taxpayer’s gross income. In creditable withholding tax, the income tax withheld
is an aliquot portion only. The one who remits the tax is the income payor for withholding
and payee (time of filling and payment)

4. The amount of the credit in respect to the tax paid or incurred to any country shall not
exceed the same proportion of the tax against which such credit is taken, which the
taxpayers taxable income from sources within the Philippines.

PROBLEM

A.)

Gross compensation P1,200,000

13 months’ pay and other benefit (120,000)
Taxable Compensation income P1,080,000
Tax Due under the graduated rates P214,000*
130,000+(1,080,000 - 800,000) x 30%=
214,000
Business Income
Gross sales P3,500,000
Non-operating income 100,000
Taxable Income P 3,600,000
Tax due under 8% 288,000
Total Tax Liability P 502,000

B.)

Total Compensation Income P1,200,000

Non-Taxable (120,000)
Taxable Compensation Income P 1,080,000

Gross Sales P3,500,000

Cost of Sales 1,000,000
Gross Income (600,000)
Net Income from Operation P 1,900,000
Non-Operating Income 100,000 2,000,000
Total Taxable Income P3,080,000
 Total Tax Liability P 835,600
*490,000+(3,080,000-2,000,000) x 32%

UNIT ACTIVITY 2

THEORY

1. Under the corporation code, corporation is treated as an artificial being created by

operation of law, having the right of succession and the powers, attributes as properties
expressly authorized by law incident to its existence. Under the tax code, corporation shall
include partnerships, no matter how created or organized, joint stock companies, joint
accounts, associations, or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of under along
constructing projects or engaging in petroleum coal, geothermal and others energy
operations pursuant to an operating or consortium agreement under a service contract with
the government.

2. An individual in the context of taxation generally refers to a natural persona while a

corporation is an artificial being created by operation of law. It is granted life by the state.

3. An income tax of 30% is hereby imposed upon the taxable income derived during each
taxable year from all sources within and without the Philippines by a domestic corporation

4. A tax of 20% on gross income referred to as minimum corporate income tax is imposed at
the end of taxable year. It is imposed on a corporation, beginning on the 4th taxable year
immediately following the year in which income tax is greater than the normal corporate
income tax.

5. A resident corporation applies to a corporation organized not under Philippine laws that is
engaged in trade or business not under Philippines. On the other hand, a nonresident
foreign corporation applies to a corporation not under Philippine laws that is not engaged
in trade or business with the Philippines.

6. Yes, tax code expressly classifies a partnership to be a corporation for taxation purposes.

7. The improperly accumulated earnings tax shall apply to every corporation formed or
availed for the purpose of avoiding the income tax with respect to its shareholders or the
shareholders of any other corporation by permitting earning and profits to accumulate
instead of being divided or distributed.
 8. In a non-stock, non-profit educational institution, all revenues and assets used actually,
directly and exclusively for educational purposes shall be exempted from taxes and duties.
while proprietary educational institution shall pay a tax of 10% on their taxable income.
that is provided that id the gross income from unrelated trade business or other activity
exceeds 50% of the total gross income derived by such education institutions from all
sources, a tax of 30% shall be imposed on the entire taxable income.

9. No, because it doesn't matter if the source of income is not actually coming for educational
matters as long as that income must be used to defray expense or for educational purpose.
it is stated that in order to qualify for tax exemption. it must be actually directly and
exclusively used for educational purposes.

10. MCIT will be suspended if the corporation suffers losses on account of prolonged labor
dispute, or because of force major or legitimate business reverse.

PROBLEM

1.

Gross Sales P3,000,000

Capital Gains 1,500,000
Total Income P4,500,000
Allowable Deductions (800,000)
Taxable Income 3,700,000
Tax Rate 30%
Income Tax Due P 1,110,000

2. A.) exempted from income tax

B.) exempted from income tax

C.) 0, because it is an operating loss

D.) 0, because it is an operating loss

3.

Taxable Income (300,000/30%) P1,000,000

Add:
Income Exempt from Tax (Dividends) 100,000
Income Subject to final Tax (Interest 400,000
Income)
Less:
Dividends Paid (100,000)
Income Tax Paid for the current year:
Income Tax due for the year (300,000)
Final Tax on Interest (80,000)
Improperly Accumulated Income P1,020,000
Income Tax Rate 10%
Improperly Accumulated Income Tax P102,000
4.

Normal Income Tax P 18,000

(60,000 x 30%)
Minimum Corporate Income Tax P 30,000
(1,510,000 x 2%)

5. A.) 5,000,000 x25% = P1,250,000

B.) 5,000,000 x 7.5% = P375,000

C.) 5,000,000x 4.5% = P225,000

6.

Share in the Partnership Income P 1,200,000

Vlog Income 2,000,000
Total Income P 3,200,000

Tax due and Payable P874,000

490,000 + (3,200,000-2,000,000) x
30%
Withholding Tax (180,000)
(15% x1,200,000)
Tax still due and Payable P 694,000

A.) P 694,000
B.) P 0