University of Perpetual Help System Dalta

UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL,

CALAMBA CITY, LAGUNA, PHILIPPINES
TAXATION EDMUND E. HILARIO, CPA, MBA
CHAPTER 3.0 – Income Taxation (16 items) 2 ND SEMESTER 2019 – 2020
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3.1 Taxpayer and Tax base Formula for Individual Income Tax:
Classification of individual taxpayers Gross income (excluding passive income &

1. Citizens capital gains) xx
Less Allowable deduction xx
 Resident citizens (RC)
Net taxable income xx
 Non-resident citizens (NRC) means a Filipino citizen: Less Tax rate %
 Who establishes to the satisfaction of the Net income tax due xx
Commissioner the fact of their physical presence Less Tax credit if any xx
abroad with a definite intention to reside therein; Tax payable or still tax due if any xx
 Who leaves the Philippines during the taxable year
to reside abroad, either as immigrant or for Current progressive tax rates table:
employment on a permanent basis; But not The tax Excess
Over over shall be Plus over
 Who works and derive income from abroad and
- P10,000 5% - -
whose employment thereat requires him to be P10,000 30,000 P500 10% P10,000
physically present abroad most of the time during 30,000 70.000 2,500 15% 30,000
the taxable year 70,000 140,000 8,500 20% 70,000
 Who is previously considered as a non-resident 140,000 250,000 22,500 25% 140,000
and who arrives in the Philippines at anytime 250,000 500,000 50,000 30% 250,000
500,000 - 125,000 32% 500,000
during the taxable year to reside thereat
permanently shall be considered non-resident for
Allowable Deductions for Individuals
the taxable year in which he arrives in the
1) With gross compensation income derived from
Philippines with respect to his income derived from
employer-employee relationship only
sources abroad until the date of his arrival;
 Premium payments on health and/or
 Who stays outside the Philippines more than 183
hospitalization insurance
days.
 Basic and additional personal exemption
2. Aliens
 Resident aliens (RA) – means an individual whose
2) Gross income from business or practice of profession
residence is within the Philippines and who is not a
 Itemized deductions or optional standard
citizen thereof.
deduction
 Non-resident aliens (NRA) – means an individual
 Premium payments on health and/or
whose residence is not within the Philippines and who
hospitalization insurance
is not a citizen thereof
 Basic and additional personal exemption
 Engaged in trade of business within the Philippines
(NRAETB)
Who cannot avail of deduction from gross income?
 Not engaged in trade or business within the
1) Non-resident aliens not engaged in trade or business
Philippines (NRANETB)
in the Philippines
Note:
2) Resident Citizens who avail the 8% of Gross Income
a) The term trade or business includes the performance
in computing tax income (Under the TRAIN)
of the functions of a public office
b) The term trade, business or profession shall not
include performance of services by the taxpayer as Premium payment on health and/or hospitalization
an employee insurance - It is an amount of premium on health and/or
c) A non-resident alien individual who shall come in the hospitalization paid by individual taxpayer for himself and
Philippines and stay therein for an aggregated period members of his family during the taxable year.
of more than 180 days during the calendar year shall
be deemed a non-resident alien doing business in Requisites for Premium payments to be Deductible:
the Philippines. 1) Insurance must have actually been taken
2) The amount of premium deductible does not exceed
General Principles of Individual tax situs: P2,400 per family or P200 per month during the
 Only resident citizens are taxable for income derived taxable year
from sources within and without the Philippines. All 3) That said family has a gross income of not more than
other individual income taxpayers are taxable only P250,000 for the taxable year
for income derived from sources within the 4) In case of married individual, only the spouse
Philippines claiming additional exemption shall be entitled to this
 A seaman is considered as an OCW provided the deduction.
following requirements are met:
 Receives compensation for services rendered Who may avail of the Premium Payments?
abroad as a member of the complement of a 1) Individual taxpayers earning purely compensation
vessel; and income during the year
 Such vessel is engaged exclusively in 2) Individual taxpayer earning business income or in
international trade practice of his profession whether availing of itemized
Note: An overseas contract worker (OCF) is taxable or optional standard deductions during the year
only on income derived from sources within the 3) Individual taxpayer earning both compensation and
Philippines the business or practice of profession during the year
Different individual income taxes: Who may avail basic and additional personal exemption?
1. Income tax – basic tax is at 5% to 32% 1) Only to individual resident citizen, non-resident
(progressive tax rate) citizen and resident alien (whether business or
2. Final tax on passive incomes (proportional tax compensation income earners)
rate) 2) Non-resident alien engage in trade or business may
3. Capital gains tax on capital gains be entitled to personal exemptions subject to
reciprocity, i.e.
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 the country of which he is a subject or citizen has may claim the corresponding exemption if full for
an income tax laws and such year.
 the income tax law of his country allows personal 2. If the taxpayer should die during the taxable
exemption to citizen of the Philippines not year, his estate may claim his corresponding
residing therein, bud deriving income there from exemption as if he died at the close of such year
and not to exceed the amount allowed in 3. If the spouse or any dependent should marry or
Philippine Tax Code. become 21 years of age, during the year or
should become gainfully employed, the taxpayer
What are basic and additional personal exemptions? may claim the exemption as if the spouse or
1) Basic personal exemption – The basic personal dependent or dependent died or as if such
exemption is P50,000 exempt income of an individual dependent married, become 21 years of age or
whether single, head of the family or married become gainfully employed at the closed of such
individual (each married individuals) year.
4. For any other event and for which there no
Head of the family: specify rules applicable for the abovementioned,
 Unmarried or legally separated person with one the status of the taxpayer at the end of the year
or both parents, or one or more brothers or shall determine his exemptions (strictly
sisters, or one or more legitimate, recognized construed against the taxpayer.
natural or legally adopted children living with
dependent upon the taxpayer for their chief What are itemized deductions?
support (chief support means more than one-half 1. Ordinary and necessary expenses
of the requirement for the support) 2. Interests
3. Taxes
 where such brother/sister or children are not 4. Losses
more than 21 years of age, unmarried and not 5. Bad debt
gainfully employed, or where such dependents 6. Depreciation of property
regardless of age, are incapable of self-support 7. Depletion of oil, gas wells and mines
because of mental or physical defect 8. Charitable & other contributions
9. Research and development
2) Additional personal exemption – The additional 10. Pension trust contributions of employees
personal exemption is P25,000 exempt income of an 11. Premium payments on health and/ or
individual for each of the qualified dependent children hospitalizations insurance
or senior citizen not exceeding four (4) in number.
The proper claimant of the additional exemption in What is optional standard deductions? -In case of
case of married individual is the husband being the individual taxpayer’s OSD is a deduction equivalent to
head of the family, except, under the following cases: 40% of the gross receipts in lieu of Cost of Sales and
 husband is unemployed itemized deductions.
 husband is working abroad like an OFW or a
seaman 3.1.2. Corporations
 husband explicitly waived his right of the 1. Domestic Corporation (DC) – created or
exemption in favor of his wife in the withholding organized in the Philippines or under its laws
exemption certificate 2. Foreign Corporation
 husband is the guilty spouse in a legal separation  Resident foreign corporation (RFC) – created
(the innocent spouse may be categorized as Head or organized other than Philippines laws;
of the Family (HF) plus additional personal engaged in trade or business within the
exemption if court awards custody) Philippines
 husband purely in business while wife purely  Non-resident foreign corporation (NRFC) –
receiving compensation created or organized other than Philippine
laws; not engaged in trade or business
Qualified Dependent within the Philippines
 Child or children 3. Special Corporation
 legitimate, illegitimate, legally adopted TAX
 living with the taxpayer and dependent upon the SITUS RATE
1 Private educational
taxpayer of chief support
institutions & non- TNI 10%
 not exceeding 21 years old, unless incapable of stock profit
self-support due to mental or physically defect hospitals
 unmarried and not gainfully employed 2 Resident Gross Philippine
international billings 2.5%
carriers
Senior citizen
3 Non-resident Gross income
 any resident citizen of the Philippines cinematographic Philippines0 25%
 at least sixty (60) years old, including those who film owner/lessor
have retired from both government officers and 4 Non-resident Gross income
private enterprises, and owner/lessor of from rentals,
vessels leases, charter 4.5%
 has an income of not more than Sixty thousand fees, Philippines
peso (P60,000) per annum subject to the review 5 Non-resident Gross income
of the National Economic Development Authority owner/lessor of from rentals,
(NEDA) every three years. aircrafts, leases, charter 7.5%
machineries & fees, Philippines
equipment’s
What are rules for a change of status? 6 Offshore banking Interest income
1. If the taxpayer should marry or should have units from FC 10%
additional dependents during the taxable year, he transactions
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What is a corporation?  A revocable trust on the other hand, are not
It includes the following but not limited hereto: taxable entities. The income of properties held
1) Partnerships, no matter how created or organized under revocable trust is taxable to the grantor.
2) Joint-stock companies A Trust is a stipulation in favor of 3rd persons. Under
3) Joint accounts Art 1440 of the New Civil Code (NCC),
4) Associations  a person who establishes a trust is called the
5) Insurance companies trustor;
 one in whom confidence is reposed as regards to
It excludes the following: property for the benefit of another person is
1) General professional partnership known as the trustee; and
2) Joint venue or consortium formed for the purpose  the person for whom benefit the trust has been
of undertaking construction projects or engaging created is referred to as the beneficiary.
in petroleum, coal, geothermal and other energy
operations pursuant to an operating or 3.1.6 Co-ownerships – is joint ownership of a property
consortium agreement under a service contract formed for the purpose of preserving the same and/or
with the Government dividing its income.
 A co-ownership that is limited to property
3.1.3 Partnerships – is a business organization owned by preservation or income collection is not a taxable
2 or more persons who contribute their industry or entity and is exempt but the co-owners are
resources to a common fund for the purpose of taxable to their share on the income of the co-
dividing the profits among themselves. Type of owned property.
partnership  A co-ownership that reinvests the income of the
1. Ordinary partnership or a business partnership – co-owned property to other income producing
is one formed for profit, hence it is taxable as properties or ventures will be considered an
corporation. unregistered partnership, hence taxable as a
2. General professional partnership (GPP) – is corporation.
formed for the exercise of a common profession.
A GPP is not treated as a corporation and is not a 3.1.7 Tax exempt individuals and organization
taxable entity; hence, exempt on its regular a) Individual taxpayer – Both those who are
income. but the partners are taxable in their working in the private and public sector being
individual capacity with respect to their share in paid the statutory minimum wage as
the income of the partnership. determine by the Tripartite Minimum Wage Board
covering their basic, holiday, overtime, night
3.1.4. Joint Ventures differential and hazard pay shall be exempt
A joint ventures is a business undertaking for a from income tax and is not required to file
particular purpose. It may be organized as a income tax return.
partnership or a corporation. 2 Types of joint Note: Only commission and honorarium among
ventures others things are subject to income tax of a
 Exempt joint ventures minimum wage earner.
Exempt joint ventures are those formed for the
purpose of undertaking construction project, or b) Corporation
engaging in petroleum, coal, geothermal and Corporation exempt from income taxation
other energy operations, pursuant to an enumerated under Sec 30 of NIRC
operating consortium agreement under a service 1. Labor, agricultural or horticultural
contract with the Government. This type of joint organization not organized principally for
venture is not treated as a corporation and is tax profit;
exempt on its regular income, but the venture 2. Mutual savings bank not having a capital
are taxable to their share in the net income of stock represented by share, and cooperative
the joint venture, similar to GPP. bank without capital stock organized and
 Taxable joint ventures operated for mutual purposes and without
All other joint ventures are taxable as a profit;
corporation 3. Beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organizations
3.1.5. Estates and trusts operating under the lodge system, or a
Estate – refers to the mass of properties left by a mutual aid association or a nonstock
deceased person. corporation organized by employees
 Estates under judicial settlement are treated as providing for the payment of life, sickness,
individual taxpayer and are taxable on the accident, or other benefits exclusively to the
income of the properties left by the decedent members of such society, order, or
 Estate under extra judicial settlement are exempt associations, or non-stock corporation or
entities. The income of the properties of the their dependents;
estate is taxable to the heirs. 4. Cemetery Company owned and operated
exclusively for the benefits of its members;
Trust – a right to the property, whether real or 5. Non-stock corporation or association
personal, held by one person for the benefit of organized and operated exclusively for
another. religious, charitable, scientific, athletic, or
 A trust that is irrevocably designated by the cultural purposes, or for the rehabilitation of
grantor is treated as an individual taxpayer veterans, no part of its net income or asset
taxable on the income of the property held in shall belongs to or inure to the benefit of any
trust. member, organizer, officer or any specific
persons;
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6. Business league, chamber of commerce, or b) dealings in capital assets other than
board of trade not organized for profit and domestic stocks and real properties
no part of the net income of which inure to
the benefit of any private stockholder or Determination of Gains or losses in dealings in
individual; property:
7. Civic league or organizations not organized Selling price xx
for profit but operated exclusively for the Less Tax basis or adjusted
promotion of social welfare; basis of the assets
8. A non-stock and non-profit educational disposed xx
institution; Gain or loss xx
9. Government educational institution;
10. Farmers’ or other mutual typhoon or fire What is Selling price? – It includes the amount
insurance company, mutual ditch or realized from the sale and other disposition of
irrigation company, mutual or cooperative property which shall include:
telephone company, or like organizations of  the sum of money received and
a purely local character, the income of which  fair value of non-cash property received
consists solely of assessment, dues, and fees
collected from members for the sole What is tax basis? – It refers to the cost, carrying
purposes of meeting its expenses and; amount or depreciated cost of an asset. The cost
11. Farmers’, fruit growers’ or like association of an asset is the value forgone to acquire it. It
organized and operated as a sales agent for is the purchase price or the fair value of
the purpose of marketing the products of its consideration paid in acquiring the property.
members and turning back to them the
proceeds of sales, less the necessary selling Tax treatment of ordinary gains and losses –
expenses on the basis of the quantity of ordinary gains are separate items of gross
produce finished by them. income subject to regular income tax, while
ordinary losses are items of deductions from
Note: Exemptions applies only to income derived gross income in the determination of taxable
from related activities. Any income derived from business or professional net income. Ordinary
unrelated activities is subject to regular income tax. gain is taxable in full while ordinary loss is
deductible in full.
Government Owned & Controlled Corporations
(GOCC’s) Effect of Situs on Dealings is Properties
1. General rule: These corporation are taxable as  If the taxpayer is taxable on world income
any other corporation. such as in the case of resident citizens and
2. Except the following: Domestic Corporation, the rules of dealings
 GSIS in properties apply to all properties
 SSS regardless of location.
 PHIC  If the taxpayer is taxable only on Philippine
 PCSO income, the rules of dealings in properties
will be applied only to properties located in
Regional or Area headquarters the Philippines.
1. If limited to supervision or communication
activities – not subject to income tax 4. Interests
2. If it is operating headquarters – subject to a 10% Interest income refers interest income other than
of taxable income passive interest income subject to final tax. A
taxable interest income must have been actually
General principles of corporate tax situs: paid out of an agreement to pay interest, it
1. Only Domestic Corporation are taxable for cannot be imputed. Examples:
income derived from sources within and without  interest income from lending activities to
the Philippines. individuals and corporation by banks
2. All other corporate income taxpayer are taxable  Interest income from bonds and promissory
for income derived from sources within the notes
Philippines  interest income from bank deposits abroad
3.2 GROSS INCOME Exempted interest income from regular income

3.2.1. Inclusions in the gross income taxation:
The term items of gross income or inclusions in gross  Interest income earned by landowners in
income is a broad category pertaining to all items of disposing their lands to their tenants in
income subject to taxation namely: pursuant to the Comprehensive Agrarian
1) Gross income subject to final tax Reform Law
2) Gross income subject to capital gain tax  Imputed interest income
3) Gross income subject to regular tax
5. Rents
What is gross income subject to regular tax? – It Rent income arises from leasing properties of any
means all income derived from whatever source, kind. It is a passive income but is not subject to
including but not limited to the following: final tax under the NIRC, hence is subject to
1. Compensation regular income tax
2. Gross income from profession, trade of business
3. Gains from dealings in property Special considerations on rent
a) dealings in ordinary assets
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1) Obligations of the lessor that are assumed by 10. Pensions – this pertains to pensions and
the lessee are additional rental income to the retirement benefits that fail to meet the exclusion
lessor criteria and hence subject to regular tax.
2) Advance rentals are
a) Item of gross income upon receipt if 11. Partner’s share in the net income of the general
 Unrestricted professional partnership
 Restricted to be applied in future The partnership itself is not subject to regular
years of upon the termination of the income tax as they are merely viewed as pass-
lease through entities. These entities do not pay tax
b) Not an item of gross income if on their regular income. However, the partners
 It constitutes a loan are the ones subject to regular tax on their share
 It is a security deposit to guarantee in the net income of the general professional
payment or rent subject to partnership
contingency which may or may not
happen
3) Leasehold improvements made by the lessee 3.2.2. EXCLUSIONS / EXEMPTIONS FROM GROSS
on the leased property are recognized by the INCOME
lessor as income using the spread-out a) Proceeds of life insurance exempt if the
method or outright method. proceeds are retained by the insurer, the
interest thereon is taxable.
6. Royalties
Royalties earned from sources within the b) Return of insurance premium – the amount
Philippines are generally subject to final income received by insured, as a return of premiums
tax, except when they are active by nature. paid by him under life insurance, endowment, or
Active royalty income and royalties earned from annuity contracts, either during the term or at
sources outside the Philippines are subject to the maturity of the term mentioned in the
regular income tax. contract or upon surrender of the contract. The
amount received by the insured as a return of
7. Dividends premium on any insurance contract is a return of
This pertains to dividends declared by foreign capital, hence excluded from gross income.
corporation such as cash, property and script
dividends from foreign corporation are items of c) Gift, bequest or devise exempt income
gross income subject to regular income tax. therefrom is taxable.
d) Compensation for personal injuries or sickness,
Note: whether by suit or agreement
 Dividends declared by domestic corporation e) Income exempt under treaty
are subject to 10% final tax if the recipient is f) Retirement benefits, pensions, gratuities, etc.
an individual taxpayer and Requisites:
 Dividends declared by domestic corporation  In the service of the same employer for at
are exempt if the recipient is a domestic or a least 10 years
resident foreign corporation  At least 50 years old
 Stock dividends is exempt from income tax  must be availed of only once
but when the declaration confers to the  retirement plan must be approved by the
recipient a different interest or right after the BIR prior to implementation
stock dividend declaration or when stocks  separation pay because of death,
dividends are subsequently redeemed such sickness, or other physical disability or
that it amounts to payment of cash for any cause beyond the control of the
dividends, the fair market value of the stock official or employee (e.g. retrenchment,
dividends received is taxable. redundancy or cessation of business)
 SSS benefits< retirement gratuities<
8. Annuities pensions and other similar benefits
The excess of annuity payments received by the received by citizens and aliens who
recipient over premium paid is taxable income in come to reside permanently here from
the year of receipt. foreign sources private or public
9. Prizes and winnings
Prizes and winnings that are exempted from final
3.2.3. INCOME FROM COMPENSATION
tax are not items of gross income subject to
Employer – Employee relationship
regular income tax. Exempt prizes and winnings:
 Employer – refers to person to whom an
a) Prizes received without effort to join a
individual performs any service, of whatever
contest
nature, as employee of such person. It is the
b) Prizes in athletic competition sanctioned by
person who has control over the payment of the
their respective national sports association
employee.
c) Winnings from PCSO or lotto
 Employee – refers to any individual who is a
recipient of wages.
Rules of taxable prizes and winnings to individual
taxpayer:
Elements of employer – employee relationship under
Earned from Sources
Prizes Within Abroad the law
Less than P10,000 Regular tax Regular tax 1) Selection and engagement of employees
More than P10,000 Final Tax Regular tax
2) Payment of wages
Winnings other than
PCSO and Lotto Final tax Regular tax 3) Power of dismissal
4) Power of control
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4) benefits for the convenience or advantage of the
Type of employees as to function employer
1) Managerial employees
2) Supervisory employees Exempt benefits of minimum wage earners
3) Rank and file employees 1) Basic minimum wages
2) Holiday pay
The following are not considered employees 3) Overtime pay
1) Consultant 4) Night shift differential pay
2) Directors 5) Hazard pay
3) Talents and Artists Note:
A minimum wage earner must not have other items
Type of employees as to taxability of taxable income aside from these benefits to be
1) Minimum wage earners – refers to a worker in exempt.
the private sector who is paid the minimum wage
or to an employee in the public sector with De Minimis Benefits – are facilities or privileges such
compensation income of no more than the as entertainment, medical services, or courtesy
statutory minimum wage (Salary 1 to 3) discounts on purchases that are of relatively small
2) Special employees – special aliens subject to the value and are furnished by the employer merely as a
15% final income tax on compensation income, means of promoting health, goodwill, contentment or
such as those holding managerial or technical efficiency of his employees. De minimis benefits are
position in a Regional or area headquarters petty fringe benefits and are exempt from income
(RHQ) or Regional operating headquarters tax. De Minimis Benefits was restricted to mean only
(ROHQ) the following:
3) Regular employees – an employee subject to the a) Monetized unused vacation leave credits of
regular progressive income tax private employees– not exceeding 10 days during
the year
Requirements to Filipinos Employed by RHQs and b) Monetized unused vacation and sick leave credits
ROHQs: of government official and employees
1) Position and function test – the employee must c) Medical cash allowance to dependents of
be occupying and actually exercising a employees – not exceeding P750 per employee
managerial or supervisory position per semester of P125/month.
2) Compensation threshold test – the employee d) Rice subsidy – P1,500 or 1 sack of 50-kg per
must have a gross annual taxable income of at month amounting to not more than P1,500
least P975,000 e) Uniform and clothing allowance – not exceeding
3) Exclusivity test – employee is not a consultant or P5,000 per annum
contractual personnel and is solely employed by f) Actual medical assistance – not exceeding
RHQs or ROHQs. P10,000 per annum
g) Laundry allowance – not exceeding P300/ month
Gross compensation income – generally includes all h) Employee achievement award – monetary value
remuneration received under an employer – not exceeding P10,000
employee relationship. i) Gifts given during Christmas – not exceeding
P5,000 per employee
Non-taxable or exempt Compensation j) Daily meals allowance – not exceeding 25% of
1) Benefits excluded and/or exempted under the the basis minimum wage
NIRC and special laws
a) Remuneration received as incidents of Note:
employment Hence, the following petty benefits are taxable de
 Exempt retirement benefits under RA minimis benefits
7641, including exempt retirement  Excess de minimis over their limits
gratuities to government official and  Other benefits of relatively small value that are
employees not included in the de minimis list.
 Exempt termination benefits
 Benefits from the US Veterans Treatment of taxable de minimis benefits
Administration 1) For rank and file employees – treated as
 Social Security, retirement gratuities, compensation income as “other income” under
pensions and similar benefits from 13th month pay and other benefits”
foreign government agencies, and other 2) For managerial and supervisory employees –
institutions, private or public fringe benefit subject to final fringe benefits tax
 Benefits from SSS, under the SSS Act of
Classification of Gross Compensation Income
1954, as amended
1) Regular compensation –fixed amount of
 Benefits from GSIS, under the GSIS Act
remuneration
of 1937, as amended
2) Supplemental compensation – other
b) Employee mandatory contribution to GSIS,
performance-based pay to employees with or
SSS, PhilHealth, HDMF and union dues
without regard to the payroll period
c) Certain benefits of minimum wage earners
3) 13th month pay and other benefits –not
d) De minimis benefits
exceeding P82,000 is an exclusion from gross
e) 13th month pay and other benefits not
income ( under The Train Law this amount
exceeding P82,000 (TRAIN P90,000)
increases to P90,000).
2) benefits exempt under treaty or international
agreement
3) benefits necessary to the trade, business or 3.2.4. Income from Business
conduct of professional of the employer
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1) Business income – arises from habitual sales and other conditional sales, or ordinary
engagement in any commercial activity involving assets.
regular sales of goods or services by an individual 2) Capital gain – arises from the sale, exchange and
or a corporation. The income from business, other disposition, including pacto de retro sales
legal or illegal, registered or unregistered is and other conditions sales of capital assets.
taxable
2) Professional income – the gross income from Taxation of gains on dealing in properties:
exercise of a profession or business gross income Type of Gains Applicable taxation scheme
from the sales of service. Ordinary gains Regular income tax
Capital gains General rule: Regular
3.2.5. Passive income income tax
What is final tax? Exception: Capital gains tax
A tax imposes on passive income, also known as final
income tax. Capital gains subject to capital gains tax:
1. It is constituted as a full and final payment of the 1) Capital gains on the sale of domestic stock sold
income tax due from the payee on a particular directly to buyer
type of income subject to final withholding tax 2) Capital gains on the sale of real properties not
(FWT). The finality of the withholding tax is used in business
limited only to the payee’s income tax liability
and does not extend to other taxes that may be What is a capital gains tax? – A tax imposed on sale
imposed on said income. of stock of a domestic corporation not listed and
2. The income subjected to final income tax is no traded thru a local stock exchange, held as capital
longer subject to the net income tax; otherwise asset and sale of real property in the Philippine held
there would be a violation of prohibited double as a capital asset.
taxation.
3. The liability for the payment of the tax rests How to compute capital gain tax of individual
primarily on the payor as withholding agent. taxpayer?
4. The payee is not required to file an income tax 1. On sale of shares of stock
return for the particular income subjected to  Not over P100,000 = 5%
FWT.  Excess of P100,000 =10%
5. The rate of the final tax is multiplied to the gross
income. Thus deductions and/or personal and 2. On sale of real property
additional exemptions are not allowed.  Gross selling price or the current fair market
value, whichever is higher = 6%
What are passive incomes? – Income derived from
sources within the Philippine such as:
3. Gains from other capital assets = regular income
1. Interest under the expanded foreign currency
tax
deposits system;
2. Interest, yields, or other monetary benefits from
3.3 Deduction from gross income
deposits, deposit substitutes, trust funds or
3.3.1. Itemized deductions
similar agreement;
a) Ordinary and necessary expenses
3. Royalties from intellectual creation (e.g.
b) Interest
composition, authorship, literary works);
Requisites on the deductibility of interest (RR13-
4. Prizes and winnings;
2000):
5. Dividends from Domestic Corporation or share of
1) There must be a valid indebtedness
a partner in the distribution income of an
2) The indebtedness must be that of the taxpayer
ordinary partnership
3) The indebtedness must be connected with the
taxpayer’s trade, business or exercise of
3.2.6. Capital gains profession
What are the 2 kinds of assets? 4) Interest expense must have been paid or
1) Ordinary assets – assets used in business such as incurred during the taxable year
a) Stock in trade of a taxpayer or other real 5) Interest must have stipulated in writing
property of a kind which properly be included 6) Interest must legally due
in the inventory of the taxpayer if on hand at 7) Interest payments must not be between
a close of the taxable year related taxpayers
b) Real property held by the taxpayer primarily 8) Interest must not be incurred to finance
for sale to customers in the ordinary course petroleum operation
of his trade or business 9) In case of interest incurred in the acquisition of
c) Real property used in trade or business (i.e. property, use in trade, business or profession,
buildings and/or improvements) of a the same was not treated as a capital
character which is subject to the allowance expenditures
for depreciation. 10) The interest is not expressly disallowed by law
d) Real property used in trade or business of to be deducted from gross income of the
the taxpayer taxpayer.
2) Capital assets – any assets other than ordinary Deductible amount of interest expense: - The
assets deductible amount of interest expense is the gross
interest expense reduced by the following
percentage of the interest income:
Gains on dealings in properties:
1) Ordinary gains – arises from the sale, exchange
Effectivity Percentage
and other disposition, including pacto de retro
Jan 1, 1998 41%
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Jan 1, 1999 39% 8) Foreign income tax, if not claimed as tax credit
Jan 1, 2000 38%
Nov 1, 2005 42% Only basic tax is deductible: - is allowed as
Jan 1, 2009 33% deduction. Tax surcharges for late payments are
avoidable and unnecessary expenses; hence, non-
Rationale of the deduction limit: - the limit is deductible. Moreover, allowing these as deduction
intended to recover the tax savings of taxpayers will relax policy on tax collection.
who are taking advantage of high regular tax Note:
savings created from interest expense and a lower  Interest for late payment of tax is held
final tax on deposit interest income. deductible but as interest expense rather than
as tax expense
Optional treatment of interest expense: - Interest
incurred in financing the acquisition of property
d) Losses
used in trade or business may, at the option of the
Losses actually sustained during the taxable year
taxpayer, be claim as:
and not compensated by insurance or other
1) An outright deduction from gross income or
indemnity shall be allowed as deductions.
2) A capital expenditure claimable through
depreciation
Requisites for the deduction of losses:
1) It must be incurred in trade, profession or
Other deductible interest expense
business of the taxpayer
1) Interest from tax delinquency
2) It must pertain to property connected with
2) Interest from scrip dividends
trade, business or profession, if the loss arises
from fires, storms, shipwrecks, or other
Examples of non-deductible interest:
casualties, or from robbery, theft or
1) Interest on personal loans
embezzlement (the loss must be an ordinary
2) Interest incurred with a related party
loss)
3) Discounted interest applicable to future periods
3) The loss must not be compensated by
for individual taxpayers
insurance or indemnity contract
4) Interest expense incurred to finance petroleum
4) A declaration of loss must have been filed by
operations
the taxpayer within 45 days from the date of
5) Interest on preferred shares
discovery of the casualty or robbery, theft or
6) Imputed interest
embezzlement giving rise to the loss
5) The loss must not have been claimed as
c) Taxes
deduction for estate tax purposes in the estate
Taxes paid or incurred within the taxable year in
tax return
connection with the taxpayer’s trade, business or
exercise of profession shall be allowed as
Types of losses
deduction, except:
1) Ordinary loss
1) Philippine income taxes , except fringe benefit
2) Capital loss
tax
Note:
 Final income tax & stock transaction tax
 Losses from ordinary assets are deemed
 Capital gains tax
normal to the taxpayer’s trade, business or
 Regular income tax
profession, hence, deductible in full.
2) Foreign income, if claimed as tax credit
 Losses on capital assets are deemed by law as
3) Estate tax and donor’s tax
unnecessary expenses, hence deductible only
4) Special assessment
on the extent of capital gains.
Other non-deductible taxes
1) Business tax
Examples of deductible ordinary losses
 VAT
1) Loss on disposal or destruction of any ordinary
 Other percentage tax
assets
2) Surcharges or penalties on delinquent taxes
2) Loss due to voluntary removal of building
incident to renewal or replacement
Rationale of non-deductibility
3) Permanent or irreversible loss in value of
Income taxes are not costs of earning income but
assets due to changes in business conditions
are impositions on net income accruing only after
only to the extend actually realized
income is earned, hence not deductible.
4) Abandonment loss
Note:
 Foreign income tax is not a cost of earning
income, however, it is allowed under the NIRC e) Bad debt
to be claimed as deduction if not claimed as Bad debts refer to debt due to taxpayer which were
tax credit. actually ascertained to be worthless and were
 Special assessment is not a tax expense but is charged off within the taxable year.
capitalized to the cost of the land.
Requisites of claims for deduction of bad debt:
Examples of deductible taxes: 1) The debt must have been ascertain to be
1) Documentary stamp tax worthless
2) Occupational tax 2) It must be charged off within the taxable year
3) License tax 3) It must be connected with the taxpayer’s
4) Fringe benefit tax profession, trade or business
5) Local taxes, except special assessment 4) The taxpayer must be under the accrual basis
6) Community tax of accounting
7) Municipal tax 5) It must not be incurred from related party
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Note:
 The accounting bad debt expense called 4) Rules on depreciation of passenger vehicles
“estimated bad debt expense” is not deductible a) Substantiation of the purchase with
in taxation because it is a mere estimate rather sufficient evidence such as official receipts
than an actual loss. The deductible bad debt and other documents bearing the total
expense pertains to the write-off of purchase price including specific motor
uncollectible receivable after having been vehicle identification number of the
actually ascertained to be worthless. vehicles
b) Substantiation of the direct connection or
Examples of capital losses not deductible as bad relation of the vehicle to the development,
debts: operation, and/or conduct of the trade or
1) Bad debt from personal receivable business or profession of the taxpayer
2) Securities becoming worthless of taxpayers c) Only one vehicle for land transport is
other than domestic banks and trust allowed for an official and employee and
companies a substantial part of whose business the value of which shall not exceed
is the receipts of deposits P2,400,000
3) Loss on capital investments in partnership, d) No depreciation shall be allowed for
joint ventures or corporation yachts, helicopters, airplanes or aircrafts
and land vehicle which exceeded the
Subsequent recovery of bad debts – under the threshold, unless the main line of business
NIRC, the recovery of bad debts previously allowed is transport operation or lease of
as a deduction in the preceding years shall be transportation equipment and the vehicle
included as part of the gross income in the year of purchased are used in said operations
recovery to the extent of the income tax benefit of
said deduction. g) Depletion
Depletion expense is a provision for the periodic
f) Depreciation – refers to the gradual exhaustion in return of capital investments in wasting assets such
the value of tangible business properties brought by as minerals, gas & oil.
the ordinary wear and tear through usage or
obsolescence by the passing of time. It is a Stages of wasting assets activities
provision for the periodic return of the invested 1) Exploration stage – it involves ascertaining the
capital on the property throughout its useful life. existence, location, extent or quality of any
There shall be allowed as a depreciation deduction deposit or mineral.
a reasonable allowance for the exhaustion, wear 2) Development stage – commences when
and tear (including reasonable allowance for deposits of ore or minerals are shown to exist
obsolescence) of property used in the trade or in sufficient commercial quantity.
business. 3) Commercial production – is the stage of actual
extraction, processing and sale
Depreciation method:
1) Straight line method Common rules for both mining and oil operation:
2) Declining balance method Taxpayers engaged in wasting assets shall classify
3) Sum of the year digit method their expenditures into:
4) Any other methods which may be prescribed 1) Cost of acquisition or improvement of tangible
by the Secretary of Finance upon properties or
recommendation of CIR 2) Intangible exploration, drilling and
development costs
Special rules on depreciation
1) Life tenancy to a property – in case of property Treatment of tangible development costs: -
held by one person for life with remainder to Tangible develop costs include the acquisition or
another person, the deduction shall be improvement of tangible property which are of a
computed as if the life tenant were the character subject to the allowance for depreciation.
absolute owner of the property and shall be This may include construction of mine-plant, roads,
allowed to the life tenant buildings, processing plants and installation of
heavy equipment on-site.
2) Properties held in trust – in case of property
held in trust, the allowable deduction shall be Treatment of tangible development costs: - tangible
apportioned between the income beneficiaries exploration and development drilling costs are
and the trustees in accordance with the capitalized and deducted through allowance for
pertinent provisions of the instrument creating depreciation subject to the following rules:
the trust, or in the absence of such provisions, 1) Petroleum operations:
on the basis of the trust income allowable to  Properties directly used in petroleum
each. operations – the NIRC prescribes either
straight line method or declining balance
3) Revaluation on properties – the depreciation of method at the option of the taxpayer. A
an asset must be premised on its acquisition shift from straight line method to declining
cost, and not on its reappraised value. balance method is allowed. The useful life
Taxpayer using the revaluation model in shall be 10 years or such shorter life as
accounting for items of property, plant and may be permitted by the CIR.
equipment under PAS 16 are not allowed to  Properties not directly used in petroleum
deduct the depreciation of the revalued surplus operation – the NIRC prescribed the
on the value of property as this is not a actual straight line method on the basis of an
expense. estimated useful life of 5 years.
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2) Mining operations c) Loss on properties covered with insurance or
 If the expected life of property used in indemnity contracts
mining is 10 years or less, the taxpayer 2) Expenses non-deductible under the matching principle
can use the normal rate of depreciation. a) Expense on exempt income
 If the expected life is more than 10 years,  Expenses incurred to finance the acquisition
the property can be depreciated over any of a tax-exempt security
number of years between 5 years and 10  Premiums paid for the life insurance of an
years. officer where the taxpayer –business itself is
the beneficiary
Intangible exploration and development costs:  Expense on EFCDU or OBU from foreign
1) Intangible costs in petroleum operations currency operation
include any incidental and necessary costs of  Expenses of non-profit organizations,
drilling wells or preparing wells for petroleum government agencies and cooperative from
production and which have no salvage value their exempt operations cannot be deducted
2) Intangible costs in mining operations include within the gross income subject to regular
the costs of diamond drilling, tunneling, and tax
other improvements of a nature that is not
subject to allowance for depreciation. b) Expenses on income subject to a special tax
regime
Tax treatment of intangible exploration and  Expenses of new enterprises registered with
development costs: the Tourism Infrastructure and Enterprises
1) Before commercial production – capitalized as Zone Authority (TIEZA) under RA 9353
costs of the wasting asset  Expenses of enterprise registered PEZA
2) After commencement of commercial under RA 7916
production, if incurred with:
 Non-producing wells or mines, deducted c) Business expenses of taxpayers subject to final
in the period paid or incurred income tax such as
 Producing wells or mines, at the option of  Non-resident alien, not engaged in trade or
the taxpayer, either: business
 Capitalized and amortized using the  Non-resident foreign corporations
cost-depletion method or d) Expenses and taxes on income subject to final
 Deducted in the year paid or incurred tax or capital gains tax
 Selling expenses of domestic stocks directly
The expense Option on Non-producing Mines: - to buyer
After commercial production has commenced,  Selling expenses of real properties classified
exploration and development drilling expenses as capital assets
incurred on non-producing mines may be deducted  Expenses of petroleum service
outright but the deductible amount shall not exceed subcontractors in supplying goods and
25% of the net income from mining operations services to petroleum service operators
without the benefit of any tax incentives under
existing laws. The unclaimed balance of the e) Foreign business expenses of taxpayers taxable
expense shall be carried forward to the succeeding only on Philippine income such as
years until fully deducted.  Resident alien and non-resident alien
engaged in trade or business in the
Application of the matching rule: Philippines
Taxpayers subject to on world income can deduct  Resident foreign corporation
depreciation and depletion expense on properties
wherever situated. Those taxable only on f) Loss of income not yet recognized in gross
Philippine income are only allowed to claim income
depreciation and depletion on properties located  Write-off of receivable under the cash basis
within the Philippines. of accounting
h) Charitable contributions  Destruction of unharvested farm fruits or
i) Research & development vegetables
j) Pensions  Death of animal offspring
3.3.2. Items not deductions 3) Expenses non-deductible under the lists of NIRC
1) Expenses non-deductible under the meaning of closed a) Personal, living or family expenses
and completed transaction b) Amount paid out for new buildings or permanent,
a) Decrease in value of properties or investment or betterment made to increase the value of any
such as property or estate
 Decrease in value of securities such as stock c) Any amount expended in restoring property or in
or bonds making good the exhaustion thereof
 Decrease in value of FOREX or FOREX d) Premiums paid on any life insurance policy
denominated receivables covering the life of any officer or employee, or
 Decrease in value of machineries, equipment any person financially interested in any trade or
and building brought by obsolescence business carried on by the taxpayer, individual,
or corporate, when the taxpayer is directly or
b) Estimated future losses such as indirectly a beneficiary under such policy
 Estimate loss on bad debts or uncollectible
receivable 3.3.3. Optional standard deduction (OSD)
 Estimated loss on lawsuit not yet confirmed Under the OSD, the allowable deduction of the taxpayer is
by a final judgment simply presumed as a percentage of gross sales or receipt
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for individuals and gross income for corporations. There is
no need to support every item of expenses. However,
does not relieve the taxpayer of the responsibility to 3.3.4. Deductions allowed under special laws
deduct withholding tax on income payments as required Special allowable itemized deductions
by the NIRC and the regulations. Special deductions are other items of deductions
which may or may not partake the nature of an expense
Who can claim OSD? but is allowed by the NIRC or by special laws as
OSD is a proxy to itemized deductions. As a rule, all deductions. Special deductions include deduction
taxpayers who are subject to tax on taxable net income incentives to taxpayers in assisting and in complying with
can claim deductions, except the following: certain legal requirements.
a) Non-resident alien engaged in trade or business
(NRA-RTB) Special allowable Deductions:
b) Taxpayers mandated to use itemized deductions 1) Special expenses under the NIRC and special laws
a) Income distribution from a taxable estate or trust
Mandatory itemized deductions (RR2 – 2014) b) Transfer to reserve fund and payments to policies
1) Corporation mandated to use the itemized deduction and annuity contracts of insurance companies
a) Exempt GOCCs and non-stock non-profit c) Dividend distribution of a Real Estate Investment
corporation with no taxable income Trust (REIT) under RA 9856
b) Those with income subject to special / d) Transfer to reserves of funds of taxable
preferential tax rates and cooperatives
c) Those with income subject to regular corporate e) Discounts to senior citizens under RA 9257
income tax and special/preferential tax Conditions for deductibility of sales discount to
2) Individual taxpayers mandated to use the itemized senior citizens:
deduction:  Only that portion of the gross sales
a) Exempt individuals under the NIRC and special exclusively used, consumed or enjoyed by
laws with no other taxable income the senior citizen shall be eligible for the
b) Those with income subject to special/preferential deductible sales discount
tax rates and  The gross selling price and the sales discount
c) Those with income subject to regular income tax must be separately indicated in the official
special/preferential income tax receipts or sales invoice by the
establishment for the sale of goods or
Percentage of optional standard deduction: services to the senior citizen
1) Individual taxpayers – 40% of total  Only the actual amount of the discount
sales/revenues/receipts/fees granted or sales discount not exceeding 20%
a) Those selling goods under the accrual basis – of the gross selling price can be deducted
40% of sales from gross income, net of VAT, if applicable.
b) Those selling services under the cash basis –  The discount can only be allowed as
40% of gross receipts deduction from gross income for the same
c) Those selling services under the accrual basis – taxable year that the discount is granted
40% of gross receipts  The business establishment giving sales
2) Corporate taxpayers – 40% of gross income discount to qualified senior citizen is required
to keep a separate and accurate records of
Rules on determination of OSD for individual taxpayers sales, which shall include the name, TIN, ID.
1) Gross Sales – it includes only sales contributory to gross sales/receipts, discount granted, date
income subject to regular tax. Since sales returns, of transaction and invoice number for every
allowances and discounts re not contributory to sale transaction to senior citizen
income, they must be deducted from the total f) Discounts to persons with disability under RA
recorded sales. In short, the tax concept of “gross 9442
sales” is the accounting concept of “net sales”.  Similar to senior citizens, person with
2) Gross receipts – means amounts actually or disability is entitled to 20% discount from
constructively received during the taxable year. For certain establishments such as hotels, and
sellers of services employing the accrual basis of similar lodging establishments, restaurant,
accounting, the term “gross receipts” shall mean sports, and recreation centers places of
amounts earned as gross revenue during the taxable culture, leisure and amusement, drugstore
year. on the purchase of medicine, medical and
dental services in private facilities, and
Optional Standard Deduction and NOLCO domestic air, sea, and land transport.
NOLCO cannot be claimed simultaneously with OSD 2) Deduction incentives under special laws
because NOLCO is an item of deduction while OSD is a a) Additional compensation expense for senior
proxy of all itemized deductions. NOLCO is deemed citizen employee under RA 9257. Under RA
included in the claimable OSD. 9257, private establishments employing senior
citizens shall be entitled to additional
Optional Standard Deduction and Net Capital Loss Carry- Conditions for deductibility of additional
Over compensation:
OSD do not replace net capital loss carry-over of  Employment shall have to continue for at
individual taxpayers. The net capital loss carry-over is least 6 months
used in the measurement of net capital gain which is an  The annual taxable income of the senior
item of gross income. In other works, it is not an item of citizen does not exceed the poverty level as
deduction. Hence, a net capital loss carry-over from the determined by the NEDA
prior year can still be deducted against the net capital
gain of the current year even if the taxpayer opted to b) Additional compensation expense for persons
deduct optional standard deduction for the current year. with disability under RA 7277 as amended by RA
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9442. Private entities that employ persons who money laundering and other similar
meet the required skills or qualification, either as circumstances.
regular employees, apprentice or learner, shall be
entitled to an additional deduction, from their Tax Deductible Incentive
gross income, equivalent to 25% of the total Contributions to the government in priority
amount paid as salaries and wages to disabled activities are deductible in full while those made
persons. Requisites for Deductibility: in non-priority activities are deductible subject to
 The entity present proof as certified by the limit. Aside from the usual regular deductible
DOLE that disabled persons are under their contribution expense, an adopting entity shall be
employ. allowed an additional deduction from gross
 The disabled employee is accredited with the income equivalent to 50% of the contribution of
DOLE and the DOH as to his disability, skills the adopting entity for the “Adopt-A-School-
and qualification Program”.
c) Cost of facilities improvements for persons with Conditions for deductibility:

disability in accordance with RA 7277 as 1) The deduction shall be availed of in the
amended by RA 9442. Under RA 7277, private taxable year in which the expense is paid or
entities that improve or modify their physical incurred
facilities in order to provide reasonable 2) The expense is substantiated with sufficient
accommodation for disabled persons shall also be evidence, such as official receipts or delivery
entitled to an additional deduction from their receipt and other adequate records
income, equivalent to 50% of the direct costs of  The amount of expenses being claimed
the improvements or modifications. as deductions
 Direct connection or relation of the
d) Additional training expenses under the RA 8502 – expenses to the adopting private entity’s
Jewelry industry Development Act of 1998. participation in the “Adopt-a-School-
Under RA 8502, and its implementing rules and Program”.
regulations, a qualified jewelry enterprise duly  Proof or acknowledgement of receipt of
registered and accredited with the Board of the contributed or donated property by
Investment (BOI) is entitled to an additional the recipient public school.
deduction from taxable income of 50% of the 3) The application together with the approved
expenses incurred in training schemes approved MOA endorsed by the National Secretariat,
by Technical Education and Skills Development shall be filed with the RDO having
Authority (TESDA). The same shall be deductible jurisdiction over the place of business of the
during the year the expenses were incurred. adopting private entity, copy furnished the
Conditions for deductibility: RDO having jurisdiction of the property, if
 A qualified jewelry enterprise must submit to the contribution is in the form of real
the BIR a certified true copy of its Certificate property.
of Accreditation issued by BOI
 The training scheme must be approved and Procedure for availment.
certified by TESDA :
1) Memorandum of Agreement
e) Additional contribution expense under the Adopt- 2) Supporting evidence
a School Program under RA 8525. Under this 3) Applying for Certificate of Tax Incentives and
program, private entities are allowed to assist a Tax Exemption and submit the following
public school to in particular aspect of documents to the Secretariat:
educational program within an agreed period of  Duly authorized or approved MOA
time. The assistance maybe an aid, contribution  Duly notarized deed of donation
or donation in cash or in kind but not limited to  Official receipts and other documents
infrastructure, physical facilities, real estate showing the actual value of the
property, training and skills development, contribution or donation
learning support, reading materials, computer  Certificate of Title and Tax declaration, if
and science laboratories, health and nutrition the donations is in the form of property
packages, and assistive learning devices for  Other adequate records showing direct
students with special needs. connection or correlation of the expense
being claimed as deduction to the
Qualification of participating schools: adopting entity’s participation in the
Any government schools in all levels may program
participate in the program. Priorities shall be
given to schools located in the poorest province, Valuation of deductions (RR10-2003)
low income municipalities, and other local 1) Cash assistance contribution or donations
government units experiencing severe classroom shall be based on the actual amount
shortages, insufficient budget, or having appearing in the official receipt issued by the
numerous poor but high performing learners. done
2) Assistance other than money
Qualification of Adopting Private Entity  Personal property – acquisition cost of
1) It must have a credible track record assistance or contributions
2) It must have been in existence for at least  Consumable goods – acquisition cost or
one year value at date of donation whichever is
3) It must not have been prosecuted and found lower
guilty of engaging in illegal activities such as  Services – the value of service rendered
by the donor and the service provider
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and the public school as fixed in the
MOA or the actual expense incurred by g) Additional free legal assistance expense under RA
the donor, whichever is lower 9999. Lawyers or professional partnership
 Real property – fair value (higher of providing pro-bono legal services are given
zonal value or assessed value) at the deduction incentives for their free legal services.
time of contribution or the depreciated
cost of the property whichever is lower. Requirement for Availment:
Lawyers or professional partnership
f) Additional deductions for compliance to Rooming- rendering actual free legal services shall secure a
in and Breast-feeding practices under RA 7600 as certification from the Public Attorney’s Office
amended by RA 10028. The purpose of RA (PAO), the DOJ or association accredited by the
10028 is to encourage, protect and support the SC indicating that the said legal services to be
practice of breast-feeding which is believed to provided are within the services defined by the
provide distinct benefits to the mother and the SC, and that the agencies cannot provide the
infant aside from saving the country’s valuable legal services to be provided by the legal counsel.
foreign exchange that may otherwise be used for
milk importation. Tax Deduction Incentive
The practicing lawyer or professional
Tax Deduction Incentives: partnership shall be entitled to an allowable
The expenses incurred by a private health deduction from gross income equivalent to the
institution in complying with the rooming-in and amount that could have been collected for the
breast-feeding practices, shall be deductible actual performance of the actual free services
expenses for income tax purpose up to twice the rendered or up to 10% of gross income derived
actual amount incurred. Meaning, the cost of from the actual performance of the legal
compliance shall be claimed as part of the profession whichever is lower. For the purpose of
regular itemized deduction and additional this incentives, the free legal services must be
expense for the same amount shall be exclusive of the 60-hour mandatory free legal
claimed under special itemized allowable assistance rendered to indigent clients as
deduction. mandatorily required under the Rule on
Mandatory Legal Aid Services for Practicing
Illustrative Problem: Lawyers.
St Claire Medical Hospital, a private hospital,
previously set up a milk storage facility and a Computation of Special Free Legal Service
milk bank. The total annual cost of the 2 Expenses (Whichever is Lower)
facilities were as follows:
Actual free services provided xx
Storage Milk Compare Deduction Limit
Facility Bank
Gross receipts Xx
Supplies P100,000 P120,000
Less: Direct cost of service Xx
Staff salaries 210,000 90,000
Gross income from operation xx
Maintenance 50,000 70,000
x tax deductible incentive
Total P360,000 P280,000 rate 10 xx
Less: Fees collected %
from patients 0 190,000 Special “free legal service
Excess Expense P360,000 P90,000 expense (lower figure) xx
Solution: Computation of Net Income

 The total regular itemized deduction is Gross receipts xx
P450,000 (P360,000 + P90,000) Less Direct cost xx
 The special itemized allowable deduction Gross income from operation xx
allowed as additional deduction is Add Other gross income xx
P450,000, same amount as the regular Total gross income xx
itemized deduction. Less Regular itemized
deduction xx
Conditions for Deductibility Special free legal service
1) The deduction shall apply for the taxable expense xx xx
period when the expense were incurred Net income xx
2) All health or non-health facilities,
establishments and institutions shall comply
h) Additional productivity incentive bonus expense
with the IRR of RA 10028 within 6 months
under RA 6971. Under the Productivity Incentive
after its approval
Acts of 1990 (RA 6971), a business enterprise
3) The facility, establishment or institution
which adopts a productivity incentive program is
secure a “Working Mother-Baby-Friendly
entitled to a special additional deduction
Certificate” from the Department of Health to
equivalent to 50% of the total productivity
be filed with the BIR
bonuses given to employees under the program.
In addition, business enterprises providing
Note:
manpower training and special studies to rank
 Government hospital cannot claim
and file employees as accredited by the TESDA
deductions since it is non-taxable
are also entitled 50% additional deduction of the
 However, government facilities,
total grant for local training and special studies.
establishments and institutions will receive
However, the deduction incentive will not be
additional appropriation equivalent to the
allowed on bonuses accruing during the pendency
savings they may derive as a result of
complying with RA 10028.
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of a strike or lockout arising from any violation of
the productivity incentive program. Installment method is available to the following
taxpayers:
3.4 Accounting periods - it is the length of time over which a) Dealers of personal property
income is measured and reported. b) Dealers of real properties, only if their initial
payment do not exceed 25% of the selling price.
Type of Accounting period: c) Casual sale of non-dealers in property, real or
1) Regular accounting period – 12 months in length personal, when their selling price exceeds P1,000
 Calendar year – starts from January 1 and ends and their initial payment do not exceed 25% of
December 31. This accounting period is available the selling price
to both corporate taxpayers and individual
taxpayer. Under the NIRC, the calendar year Definition of terms:
shall be used when the a) Initial payment – means total payments made by
 taxpayer’s annual accounting period is other the buyer, in cash or property, in the taxable
than a fiscal period year the sale was made. The term “initial
 taxpayer has no annual accounting period payment” means not only the down payment but
 taxpayer does not keep books it also includes the installment payment made in
 taxpayer is an individual the year of sale.
b) Selling price – means the entire amount for
 Fiscal year – a fiscal accounting period is any 12 which the buyer is obligated to seller, it is
month period that ends on any day other than computed as follows:
December 31. The fiscal accounting period is Cash received and/or receivable Pxx
available only to corporate income taxpayer Add FMV of property received or
receivable xx
Mortgage or any indebtedness
2) Short accounting period – less than 12 months assumed by the buyer Xx
Selling price xx
Deadline of filing the income tax return: - Under the NIRC,
the return is due for filing on the 15 th day of the four c) Contract price – is the amount receivable in cash
month following the close of the taxable year of the or other property from the buyer. It is usually
taxpayer. The regular tax due is payable upon filing of the selling price in the absence of an agreement
the income tax return. whereby the debtor assumes indebtedness on the
property
Instances of short accounting period:
1) Newly commence business – the accounting period Deferred payment method: - is a variant of the
covers the date of the start of the business until the accrual basis and is used in reporting income when a
designated year-end of the business. non-interest bearing is received as consideration in
2) Dissolution of business – the accounting period covers sale. Under this method, the gross income is
the start of the current year to the date of dissolution computed based on the present value (discounted
of the business. value) of a note receivable from the contract. The
3) Changes of accounting period by corporate taxpayers discount interest on the note is amortized (i.e.
– the accounting period covers the start of the spread) as interest income over installment term.
previous accounting period up to the designated year- Note:
end of the new accounting period.  The difference between the face value and the
4) Death of the taxpayer – the accounting periods present value of the note, (is known as discount)
covers the start of the calendar year until the death will not be recognized in gross income at the date
of the taxpayer. of sale but will be deferred and recognized as
5) Termination of the accounting period of the taxpayer interest income
by the CIR – the accounting period covers the start of  The discount is amortized as interest income
the current year until the date of the termination of upon every collection on the balance of the note
the accounting period. a.
Note:
The BIR approval is required in changing an accounting 3) Percentage of completion method – under this
period, it is not automatic. method, the estimated gross income from
construction is reported based on the percentage of
3.5 Accounting methods completion of the construction project. There are
Types of accounting method: several methods of estimating project completion in
1) The general methods practice but the output method based on engineering
a) Cash method – recognition of income and survey is prescribed by the NIRC.
expense dependent on inflow or outflow of cash,
e.g. rental income are realized from receipt not 4) Outright and spread-out method – under RR No. 2,
on when earned. the net income from leasehold improvements can be
b) Accrual method – under this method: reported using either of the following method at the
 Income, gains and profits are include in option of the taxpayer:
gross income when earned regardless a) Outright method – the lessor may report as
whether received or not. income at the time when such buildings or
 Expense are allowed as deduction when it improvements are completed the FMV of such
incurred, regardless whether paid or not buildings or improvements subject to the lease
b) Spread-out method – the lessor may spread over
2) Installment and deferred payment method – under the life of the lease the estimated depreciated
this method, gross income is recognized and reported value of such buildings or improvement at the
in proportion to the collection from the installment termination of the lease and report as income for
sales. each year of the lease an aliquot part thereof.
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The depreciated value of the leasehold  Installment – when the tax due is in excess
improvement is computed as follows: of P2,000, the taxpayer may elect to pay in
2 equal installment:
Excess useful life over lease term xx  1st installment – April 15
÷ Useful life of the improvement xx  2nd installment – on or before July 15
Percentage %
x Cost of improvement xx H. Use of tax tables
Depreciated value xx
OLD Table
5) Crop year basis Over But not Excess
Farming income is commonly recognized using the over over
cash basis or accrual basis, however, long-term crops P10,000 P30,000 P500 10% P10,000
or those that takes more than one year to harvest 30,000 70,000 2,500 15% 30,000
70,000 140,000 8,500 20% 70,000
may be accounted for under the crop year basis.
140,00 250,000 22,500 25% 140,000
Under this method, farming income is recognized as
0
the difference between the proceeds of harvest and
250,00 500,000 50,000 30% 250,000
expenses of the particular crop harvested. The
0
expense of each crop is accumulated and deducted
500,00 125,000 32% 500,000
upon the harvest of the crop. 0
Reconciliation of income under PFRS and income under TRAIN TABLE

tax accounting: But not Excess
3.6 Tax return preparation and filing tax payments Over over over
A. Manual filing – the traditional manual system of filing P250,000
P400,000 800,000 P30,000 25% P400,000
income tax return is by paper document where 800,000 2,000,000 130,000 30% 800,000
taxpayer fill-up BIR forms to report income, expenses 2,000,000 8,000,000 490,000 32% 2,000,000
or any declaration required to be filed with the 8,000,000 2,410,000 35% 8,000,000
Bureau. The income tax return shall be filed to the
following, in descending order of priority, within the I. Accomplishing of various income tax returns and
revenue district office where the taxpayer is forms
registered or required to register:
 An authorized agent bank 3.7 Withholding taxes
 Revenue Collection Officer A. Time of withholding – the final withholding tax,
 Duly authorized city or municipal treasurer withholding tax on compensation and expanded
withholding tax return shall be filed in triplicate by
B. Electric filing & E-submission – the e-filling of tax every withholding agent or payor who is either an
returns including attachments in electronic format individual or corporation on or before the 10 th day of
shall be made through the internet to the BIRs Large the month following the month in which withholding
Taxpayer Service Division through the BIR website. was made. The return shall be filed and the tax shall
Taxpayer under EFPS system shall e-pay their tax be paid with the authorized agent bank of the RDO
online through internet banking service. The account having jurisdiction over the withholding agent’s place.
of the taxpayer will be auto-debited for the amount of B. Income payments subject to withholding
taxes to be paid. C. Year-end withholding tax and requirements
D. Venue and time of filing of withholding tax returns
C. Large taxpayers and non-large taxpayers E. Venue and time of payment
D. Income tax credits F. Modes of payment
G. Time of payment
E. Venue and time of filing of tax returns H. Use of tax tables and rates
Where to file return? I. Use of various withholding tax returns and forms
 Legal residence – authorized agent bank;
revenue district officer; collection agent of 3.8 Compliance requirement
duly authorized treasurer A. Administrative requirements
 Principal place of business B. Attachments to the income tax returns, including CPA
 With the office of the Commissioner certificate per NIRC requirements
C. Keeping of books of accounts and records, including
When to file return? report of inventories
 Under the NIRC, the return is due for D. Prescriptive period of maintain books of accounts and
filing on the 15th day of the 4th month other accounting periods
following the close of the taxable year of
the taxpayer. The regular tax due is MULTIPLE CHOICE PROBLEMS. Select the correct answer
payable upon filing of the ITR. for each item by writing the letter of your choice on the
 First quarter – April of current year answer sheet. Submit necessary solution to support your
 Second quarter – August 15 of current answer if needed. NO SOLUTION WILL BE MARK
year INCORRECT!
 Third quarter – November 15 of current A. INDIVIDUAL TAXATION
year
1. One of them is not considered non-resident citizen
 Final quarter – April 15 of the following
a. A citizen of the Philippines who establishes to the
year
satisfaction of the Commissioner the fact of this
physical presence abroad with a definite intention
G. Modes of payment
reside therein
 Cash
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b. A citizen of the Philippines who leaves the Philippines 7. An exemption allowed to a taxpayer who has qualified
during the taxable year to reside abroad either as an legitimate illegitimate, or legally adopted children
immigrant or for employment on permanent basis a. Additional exemption
c. A citizen of the Philippines who works and derives b. Special additional personal exemption
income from abroad and whose employment thereat c. Optional standard deduction
requires him to be physically present abroad most of d. Basic personal exemption
the time during the taxable year
d. A citizen of the Philippines who went on a 8. The following except one may claim personal exemption
business trip abroad and stayed there in most a. Non-resident alien not engaged in trade or
of the time during the taxable year business
b. Non-resident alien engaged in trade or business
2. A non-resident citizen arrived in the Philippines on July 1, c. Resident alien
2000 to reside here permanently after working as nurse in d. Citizens
the United States of America for many years
Which of the following statements is correct with respect 9. Which of the following taxpayers whose personal
to Ms. A’s classification for income tax purposes? exemption is subject to the law on reciprocity under the
a. She shall be classified as non-resident citizen Tax Code?
for the year 2000 with respect to her income a. Non-resident citizen with respect to his income
derived from sources abroad from January 1, derived from outside the Philippines
2000 until the date of her arrival in the b. Non-resident alien who shall come to the
Philippines Philippine and stay herein for an aggregate
b. She shall be classified as non-resident citizen for the period of more than 180 days during any
whole year of 2000 calendar year
c. She shall be classified as resident citizen for the c. Resident alien deriving income from a foreign country
whole year of 2000 d. Non-resident alien not engaged in trade or business in
d. She shall be classified as neither resident non- the Philippines whose country allows personal
resident citizen for the year 2000 exemption to Filipinos who are not residing but are
deriving income from said country
3. B an Expert Physicist was hired by a Philippines
corporation to assist in its organization and operation for 10. Under the Tax Code who of the spouses is the proper
which he had to stay in the Philippines for an indefinite claimant of the additional exemption in respect to any of
period. His coming to the Philippines was for a definite the dependent children?
purpose which in its nature would require an extended a. The husband if his income is higher than the income
stay and to that end makes his home temporarily in the of the wife
Philippines. The American management expert intends to b. The spouse who has the bigger income
leave the Philippines as soon as his job is finished c. The husband
For income tax purposes, the American management d. The wife who has the bigger income
expert shall be classified as
a. Resident alien 11. Mr. H and Mrs. W married couple had the following data in
b. Non-resident alien engaged in trade or business year? Only Mr. H has gainful employment earning gross
c. Non-resident alien not engaged in trade or business income. Two dependents a legitimate son 21 years old
d. Resident citizen and daughter 19 years old but newly-wed. The personal
and additional exemption of the couple
4. C an American singer was engaged to sing for one week at a. H – P100, 000; W – P50, 000
the Western Philippine Plaza after which she returned to b. H – P100, 000; W – P0
USA. for income tax purposes she shall be classified as c. H – P50, 000; W – P50,000
a. Resident alien d. H – P50, 000; W – P0
b. Non-resident alien engaged in trade or business
c. Non-resident alien not engaged in trade or 12. One of the following is not a head of the family for
business income tax purposes
d. Resident citizen a. Widower supporting his mother in law 50 years
old
5. Situs of taxation is world/global taxation? b. Unmarried taxpayer supporting his mother 50 years
a. Resident citizen old
b. Resident alien c. Married but legally separated taxpayer supporting a
c. Non-resident citizen legitimate child 6 years old
d. Non-resident alien d. Legally separated taxpayer supporting a brother 22
years old physically incapacitated
6. It is important to know the source of income for tax
purposes (i.e from within and without the Philippines) 13. A taxpayer single has the following dependents who live
because with him
a. Some individuals and corporate taxpayers are a. Jimy brother 23 years old taking up Engineering
taxed on their worldwide income while others course
are taxable only upon income from sources b. Dea sister married
within the Philippines c. Jomen adopted child gainfully employed
b. The Philippines imposes income tax only on income d. .
from sources within
c. Some individual taxpayers are citizens while others
are aliens For income tax purposes the taxpayer can claim:
d. Export sales are not subject to income tax Basic personal exemption Additional exemption
a. P50, 000 Zero
b. P50, 000 P8, 000
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c. P100, 000 Zero c. Share in the net income of a general professional
d. P50, 000 P25, 000 partnership received by a resident alien
d. Dividend received by a non-resident alien from a
domestic corporation
14. The taxpayer is a married non-resident alien engaged in
business in the Philippines with two (2) qualified
21. Interest received by non-resident individuals from a
dependent children. His country gives a non-resident
depository bank under the expanded foreign currency
Filipino with income there from a basic personal
deposit system is exempt from tax
exemption of P4, 000. He is entitled to total personal
Passive income received by a resident citizen from
exemptions of
resources outside the Philippines shall be generally subject
a. P54, 000
to Section 24 (A) and not to final tax
b. P32, 000
a. True, true
c. P28, 000
b. True, false
d. P48, 000
c. False, false
d. False, true
15. One of the following is not qualified as dependent for
income tax purposes
22. A non-resident alien driving income from Philippines
a. Illegitimate child 16 years old living in the United
sources claims that he is entitled to personal exemptions.
States due to his studies
Which of the following is not a condition for the allowance
b. Senior citizen not related to the taxpayer with a
of personal exemptions to said non-resident citizen?
yearly income of P60, 000 living with and taken care
a. That he has stayed in the Philippines for an aggregate
of by the taxpayer
period of more than 180 days
c. Legitimate child 21 years old with a monthly income
b. That his country has an income tax law that allows
of P2, 000 living with the taxpayer in Manila
personal exemptions to Filipinos not residing therein
d. Brother 24 years old incapable of self-support
c. That he has filed a true and accurate return of his
because of physical disability
total income from all sources within the Philippines
d. That he is married to a Filipina
16. Life insurance premiums paid by an individual taxpayer is
deductible from gross income for an maximum amount of
23. Which of the following statements is incorrect?
P2, 400 provided the family’s gross income for the year
a. To be subject to final tax passive income must be
does not exceed P250, 000
from Philippines sources
The premium on health and/ or hospitalization insurance
is deductible by the spouse who claimed the additional b. Passive income earned outside of the Philippines is
not subject to final tax but subject to Section 24(A)
exemption in case of married taxpayer
Net Income Tax\
a. True, true
c. An income which is subject to final tax is excluded
b. True, false
from the computation of income subject to Section 24
c. False, false
(A) Net Income Tax
d. False, true
d. An income which is subject to creditable
17. Which of the following will change the status of the withholding tax is excluded in the computation
of income subject to Section 24(A)
taxpayer?
a. Marriage of a dependent within the taxable year
24. Proceeds of sale of real property classified as principal
b. Dependent becoming 21 years old during the year
residence and capital asset are exempt from the 6%
c. Dependent gaining employment during the year
capital gains tax if used to build or buy a new principal
d. Marriage of taxpayer himself during the year
residence within 18 months from the date of sale or
disposition
18. Filipinos as well as alien employees of regional or area
Gain from sale of real property classified as capital asset
headquarters established in the Philippines by
to the Government may be taxed under Section 24 (A) or
multinational companies shall be subject to final tax of
capital gains tax at the option of the individual taxpayer
15% of gross compensation income in the Philippines
a. True, true
Generally non-resident aliens not engaged in trade or
b. True, false
business are subject to 25% final tax on their gross
c. False, false
income in the Philippines
d. False, true
a. True, true
b. True, false
25. One of the following is not a deposit substitute
c. False, false
a. Bankers acceptance
d. False, true
b. Promissory notes
c. Repurchase agreements
19. “Global system of income taxation” means
d. Debt instruments issued for interbank call loans
a. All types of income except those subject to final
with maturity of not more than 5 days to cover
tax are aggregated to arrive at gross income
deficiency in reserves against deposit liabilities
b. Separate graduated rates are imposed on different
types of income
26. Which of the following statements is incorrect?
c. Capital gains are excluded in determining gross
a. A prize of P10, 000 is subject to 20% final
income
b. Wining from Philippine Charity Sweepstakes are
d. Compensation income and business/professional
exempt from income tax
income are taxed at different place in the world
c. Royalties on books literary works and musical
composition are subject to 10% final withholding tax
20. Which of the following income of an individual taxpayer is
d. Interest income from long term deposit is exempt
subject to final tax?
from income tax
a. P10, 000 prize in Manila won by a resident citizen
b. Dividend received by a resident citizen from a
resident corporation
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27. 1st statement - Cash and or property dividends received d. P0
from domestic corporation by a non-resident alien not
engaged in trade of business are subject to 25% final tax 35. G bought a plot of land with a cash payment of P2, 000,
2nd statement - Share of an individual in the distributable 000 and a purchase money mortgage of P2, 500, 000. In
net income after tax of a general professional partnership addition G paid P10, 000 for title insurance policy. G’s
is subject to final tax basis in this land is
a. True, true a. P2,000,000
b. True, false b. P2,010,000
c. False, false c. P4,500,000
d. False, true d. P4,510,000
28. 1st statement – Non-resident individual taxpayer are also 36. H an accrual – basis taxpayer owns a building which was
subject to 7.5% final tax on their income from expanded rented to M under a 10 – year lease expiring August 31,
foreign currency deposit 2016. On January 2, 2013 M paid P30, 000 as
2nd statement – there can be a 6% capital gains tax on consideration for cancelling the lease. On November 7,
sale of a real property in USA 2013, H leased the building to P under a 5 – year lease. P
a. True, true paid HP 10,000 rent for 2 months November and
b. True, false December and an additional P5, 000 for the last month’s
c. False, false rent. What amount of rent income should H report in its
d. False, true 2013 income tax return?
a. P10,000
29. Which is covered by gross income taxation? b. P15,000
a. Resident alien c. P40,000
b. NRA – ETB without Reciprocity Law d. P45,000
c. NRA – not ETB
d. Not resident citizen 37. The following are subject to Net Income Taxation except
a. Resident Citizen
30. Which is governed by Hybrid gross income taxation? b. Domestic Corporation
a. A resident Filipino with compensation income only c. Non Resident Citizen engaged in business
b. NRA – ETB with the benefit of reciprocity law d. Non Resident Corporation
c. A non resident citizen with the business income only
d. A resident citizen who is considered a mixed 38. Mr L a cemetery lot dealer sold real properties to different
income earner buyers as follows;
Selling Price Cost
31. E Resident Filipino taxpayer single supporting three minor House & Lot P2,000,000 P1,250,000
(illegitimate) children one of them living abroad showed Farm Lot P 800,000 P 300,000
the following data for taxable year 2000 Cemetery Lot P 45,000 P 20,000
Salary from ABC Co. (net of P40, 000 The house and lot were sold to acquire a condominium
Withholding tax) P350,000 unit for Mr. L new principal place of residence. What is Mr.
Professional fee from various schools L capital gains tax?
(net of 10% withholding tax) 135,000 a. P170,700
Expenses incurred practice of profession b. P168,000
(Living expenses including tuitions c. P 48,000
fees of children 25% thereof) 80,000 d. P 50,700
Health and or hospitalization insurance
Premium paid 5,000 39. In June 2005 J received a piece of land fairly valued at
How much personal exemption may Mr. E claim? P1, 000, 000 from his wealthy best friend as a birthday
a. P25,000 gift. Since J had no use of the said donated land he
b. P50,000 immediately sold it to G for only P500, 000. What is the
c. P75,000 total tax liability of J?
d. P100,000 a. P 30,000
b. P 60,000
32. How much is Mr. E taxable income? c. P210,000
a. P380,000 d. P360,000
b. P355,000
c. P350,000 40. Mr. S an individual calendar year taxpayer purchased 100
d. P330,000 shares of Core Co. Common stock for P15, 000 on
December 15, 2015 and an additional 100 shares for P13,
33. F sold his residential house to Ms. P for P5M. Its FMV 000 on December 30, 2015. On January 3, 2016 S sold
when he inherited it was P6M although its presents FMV is the shares purchased on December 15, 2015 for P13, 000.
P8M What amount of loss from the sale of core’s stock is
The tax on the above transaction is deductible on Mr. S 2015 and 2016 income tax returns?
a. P360,000 CGT 2015 2016
b. P480,000 CGT a. P0 P0
c. P30% donors tax b. P0 P2,000
d. VAT c. P1,000 P1,000
d. P2,000 P0
34. Continuing #33 but assuming the residential house is
located abroad the capital gains tax is; 41. Mr. O received the following in December
a. P360,000 Thirteenth month pay 15,000
b. P480,000 Christmas bonus 15,000
c. P120,000 Monetized vacation leave for 5 days 10,000
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The taxable compensation income to Jose is gainfully employed. How much personal exemption can
a. P40,000 Mr. C claim?
b. P0 a. P 50,000
c. P25,000 b. P 75,000
d. P20,000 c. P100,000
d. P125,000
42. Lessor had the following information for the given taxable
year 48. A privilege granted to a taxpayer to deduct or set off
Cost of Leasehold improvement P1,000,000 against Phil. Income tax the income war profits and
Annual rent 100,000 excess profits taxes that he has paid or has accrued to a
The estimate life of leasehold improvement is 50 years. foreign country
The term of the lease is 40 years. At the end of the a. Tax exemption
twentieth (20th) year the lease was terminated for valid b. Tax deduction
causes done by the lessee c. Tax consolidation
What is the taxable income to be reported by the lessor at d. Tax credit
the end of the 20th year?
a. P100,000 49. A married to M had the following during the taxable year
b. P125,000
c. P605,000 Gross Income
d. P700,000
From the practice of profession P700,000
43. What is the allowable deduction of lessee on the 20 year?
th
Rental income of their conjugal 300,000
a. P600,000 property
b. P625,000
c. P100,000 Allowable deductions
d. P500,000
For the practice of profession 520,000
44. The following individuals are required to file an income tax
For the property rented to tenants 140,000
return except
a. non-resident alien engaged in trade or business The taxable income before exemptions of Mr. A is
b. non-resident alien not engaged in trade or a. P340,000
business b. P180,000
c. resident citizen c. P260,000
d. non-resident citizen d. P170,000
45. 1st statement – In case of an individual taxpayer and the 50. K sold for P10 M her Baguio rest house with a FMV of P12
income tax on the annual return exceeds two thousand M to buy a new principal residence. If K utilized P8 M of
pesos such tax may be paid in two equal instalments the proceeds of the sale in acquiring a new principal
2nd statement – if an individual’s annual income tax is paid residence the capital gains tax payable is
in instalment. First payment shall be made when the a. P720,000
return is files and the rest shall be paid on or before July b. P600,000
15 following the close of the year c. P144,000
a. True, false d. P120,000
b. True, true
c. False, true 51. Which of the following is not correct?
d. False, false a. An individual citizen of the Phils. Who is working and
deriving income from abroad as an overseas contract
46. Mr. A a non resident alien stockholder received a dividend worker is taxable only on income from sources within
income of P300, 000 in 2016 from a foreign corporation the Phils
doing business in the Philippines. The gross income of the b. A seaman who is a citizen of the Phils. and who
foreign corporation from within and without the Philippines receives compensation for services rendered abroad
for three years preceding 2016 are as follows as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as
Source of 2013 2014 2015 an overseas contract worker
income
c. An alien individual is taxable only on income derived
From P16,000,000 P12,000,000 P14,000,000
from sources within the Phils
within the
d. A citizen of the Phils. is taxable on income
Philippines
derived from sources within and without the
From 18,000,000 14,000,000 16,000,000
without Phils
the
Philippines 52. Optional standard deduction is allowed to except
How much of the dividend income received by Mr. A is a. Non-resident alien engaged in business
considered income from sources within the Philippines? b. Non-resident alien not engaged in business
c. Resident alien
a. Zero d. General professional partnership
b. P150,000
c. P300,000 53. 1st statement – the fact that an individual’s name is signed
d. P270,000 to a filed return shall be prima facie evidence for all
purposes that the return was actually signed by him
47. Mr. C a widower has two sons by his previous marriage. C 2nd statement – if a taxpayer is unable to make his return
lives with Mrs. J who is legally married to Mr. J. They have the return may be made by his guardian or representative
a child name Jill. The children are all minors and not
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the latter assuming the responsibilities of making the Helena with Dondon directed to provide full financial
return and incurring penalties if the same was erroneous support for them as well. The court awarded the 6 th child
a. True, false to Dondon’s father with Dondon also providing full
b. True, true financial support. Assuming that only Dondon’s gainfully
c. False, true employed while Helena is not for how many children could
d. False, false Dondon claim additional exemptions when he files his
income tax return?
54. 1st statement – an individual may employee either a. Six children
calendar year or fiscal year as basis for filing its annual b. Five children
income tax return c. Three children
2nd statement – the return of any individual shall be filed d. Two children
on or before the 15th day of April of each year covering
income for the preceding year 60. Keynard Inc. A Philippines corporation sold through the
a. True, false local stock exchange 10,000 PLDT share that it bought 2
b. True, true years ago. Keynard sold the shares for P2 million and
c. False, true realized a net gain of P2, 000,000. How shall it pay tax on
d. False, false the transaction?
a. It shall declare a P2 million gross income in its
55. Z is a Filipino immigrant living in the United States for income tax return deducting its cost of acquisitions
more than 10 years. He is retired and he came back to the an expense
Philippines as a balikbayan. Every time he comes to the b. It shall report the P200,000 in its corporate income
Philippines he stays here for about a month. He regularly tax return adjusted by the holding period
receives a pension from his former employer in the United c. It shall pay 5% tax on the first P100,000 of the
States amounting to US$1,000 a month. While in the P200,000 and 10% tax on the remaining P100,000
Philippines with his pension pay from his former employer d. It shall pay a tax of one half of 1% of the P2 million
he purchased three condominium units in Makati which he gross sales
is renting out for P15, 000 a month each. Does the
US$1,000 pension become taxable because he is now in 61. Which theory in taxation states that without taxes a
the Philippines? government would be paralyzed for lack of power to
a. Yes income received in the Philippines by non- activate and operate it resulting in its deduction?
resident citizens is taxable a. Power to destroy theory
b. Yes income received in the Philippines or abroad by b. Lifeblood theory
non-resident citizens is taxable c. Sumptuary theory
c. No income earned abroad by non-resident d. Symbiotic doctrine
citizens are no longer taxable in the Philippines
d. No the pension is exempt from taxation being one of 62. The payor of passive income subject to final tax is
the exclusions from gross income required to withhold the tax from the payment due the
recipient. The withholding of the tax has the effect of
56. K sold for P10 M her Baguio rest house with a FMV of P12 a. A final settlement of the tax liability on the
M to buy a new principal residence. If K utilized P8 M of income
the proceeds of the sale in acquiring a new principal b. A credit from the recipient’s income tax liability
residence the capital gains tax payable is c. Consummating the transaction resulting in an income
a. P720,000 d. A deduction in the recipients income tax return
b. P600,000
c. P144,000 63. Guidant Resources Corporation a corporation registered in
d. P120,000 Norway has a 50MW electric power plant in San Jose
Batangas. Aside from Guidant’s income from its power
57. Skylar sold his bachelor’s pad for P1,200,000 to acquire a plant which among the following is considered as part of
two bedroom loft at Princeville condominium for its income from sources within the Philippines?
P3,200,000 with a fair market value of P3,500,000. How a. Gains from the sale to an Ilocos Norte power
much is the capital gains tax? plant of generator bought from the United
a. P 72,000 States
b. P192,000 b. Interest earned on its dollar deposits in a Philippine
c. P210,000 bank under the Expanded Foreign Currency Deposit
d. Zero System
c. Dividends from a two year old Norwegian subsidiary
58. In the preceding number a sale of principal residence to with operations in Zambia but derives 60% of its
purchase a new principal residence shall be exempt from gross income from the Philippines
tax if done d. Royalties from the use in Brazil of generator sets
a. Once every 10 years and reported to BIR within 18 designed in the Philippines by its engineers
months from sale
b. Once every 18 years and reported to BIR within 10 64. Anktryd Inc. Bought a parcel of land in 2015 for P7 million
months from sale as part of its inventory of real properties. In 2016 it sold
c. One every 10 years and reported to BIR within 2 the lad for P12 million which was its zonal valuation. In
months from sale the same year it incurred a loss of P6 million for selling
d. Once every 10 years and reported to BIR within another parcel of land in its inventory. These were the
1 month from sale only transactions it had in its real estate business. Which
of the following is the applicable tax treatment?
59. Dondon and Helena were legally separated. They had six a. Anktryd shall be subject to a tax of 6% of 12 million
minor children all qualified to be claimed as additional b. Anktryd could deduct its P6 million loss from its
exemptions for income tax purposes. The court awarded P5 million gain
custody of two of the children to Dondon and three to
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c. Anktryd’s gain of P5 million on shall be subject to the 71. Which among the following taxpayers is required to use
holding period only the calendar year for tax purpose
d. Anktryd’s P6 million loss could not be deducted from a. Partnership exclusively for the design of
its P5 million gain government infrastructure projects considered
as practice of civil engineering
65. Aplets Corporation is registered under the laws of the b. Joint stock company formed for the purpose of
Virgin Islands. It has extensive operations in Southeast undertaking construction projects
Asia. In the Philippines its products are imported and sold c. Business partnership engaged in energy operations
at a mark-up by its exclusive distributor Kim’s Trading under a service contract with the government
Inc. The BIR complied a record of all the imports of Kim d. Joint account (cuentas en participation) engaged in
from Aplets and imposed a tax on Aplets net income the trading of mineral ores
derived from its exports to Kim. Is the BIR correct?
a. Yes Aplets is a non-resident foreign corporation 72. In March 2016, Tonette who is found of jewelries bought a
engaged in trade or business in the Philippines diamond ring for P750,000, a bracelet for P250,000, a
b. No the tax should have been computed on the basis necklace for P500,000 and a brooch for P500,000. Tonette
of gross revenues and not net income ‘ derives income from the exercise of her profession as a
c. No Aplets is a non-resident foreign corporation licensed CPA. In October 2016, tonette sild her diamond
not engaged in trade or business in the ring, bracelet and necklace for only P1.25 million incurring
Philippines a loss of P250, 000. She used the P1.25 million to buy a
d. Yes Aplets is doing business in the Philippines through solo diamond ring in November 2016 which she sold for
its exclusive distributor Kim’s Trading Inc. P1.5 million in September 2017. Which among the
following describes the tax implications arising from the
66. Passive income includes income derived from an activity above transactions?
in which the earner does not have any substantial a. Tonette may deduct his 2016 loss from her 2016
participation. This type of income is professional income
a. Usually subject to a final tax b. Tonette may carry over and deduct her 2016
b. Exempt from income taxation loss only from her 2017 gain
c. Taxable only if earned by a citizen c. Tonette may carry over and deduct her 2016 loss
d. Included in the income tax return from her 2017 professional income as well as from
her gain
67. In 2016, Juliet UIbod earned P500,000 as income from d. Tonette may not deduct her 2016 loss from both her
her beauty parlor and received P250,000 as Christmas gift 2016 loss from both her 2017 professional income
from her spinter aunt. She had no other receipts from the and her gain
year. She spent purposes her gross income for 2016 is
a. P750,000 73. Anion Inc. received a notice of assessment and a letter
b. P500,000 from BIR demanding the payment of P3 million pesos in
c. P350,000 deficiency income taxes for the taxable year 2015. The
d. P600,000 financial statements of the company show that it has been
suffering financial reverses from the year 2016 up to
68. Federico a Filipino citizen migrated to the United States present. Its asset position shows that it could pay only
some six years ago and got a permanent resident status P500, 000 which it offered as a compromise to the BIR.
or green card. He should pay his Philippine income taxes Which among the following may the BIR require to enable
on it to enter into a compromise with Anion Inc.?
a. The gains derived from the sale in California U.S.A of a. Anion must show it has faithfully paid taxes before
jewelry he purchased in the Philippines 2016
b. The proceeds he received from a Philippine insurance b. Anion must promise to pay its deficiency when
company as the sole beneficiary of life insurance financially able
taken by his father who died recently c. Anion must waive its right to the secrecy of its
c. The gains derived from the sale in the New York bank deposits
Stock Exchange of shares of stock in PLDT a d. Anion must immediately deposit the P500,000 with
Philippine corporation the BIR
d. Dividends received from a two year old foreign
corporation whose gross income was derived solely 74. Levox Corporation wanted to donate P5 million as prize
from Philippine sources money for the world professional billiard championship to
be held in the Philippines. Since the Billiard sports
69. An example of a tax where the concept of progressivity Confederation of the Philippines does not recognize the
finds application is the event if was held under the auspices of the International
a. Income tax on individuals Professional Billiards Association Inc. Is Levox subject to
b. Excise tax on petroleum products the donor’s tax on its donation?
c. Value added tax on certain articles a. No so long as the donated money goes directly to the
d. Amusement tax on boxing exhibitions winners and not through the association
b. Yes since the national sports association for
70. Income is considered realized for tax purpose when billiards does not sanction the event
a. It is recognized as revenue under accounting c. No because it is donated as prize for an international
standards even if the law does not do so competition under the billiards association
b. The taxpayer retires from the business without d. Yes but only that part that exceeds the first P100,000
approval from the BIR of total Levox donations for the calendar year
c. The tax payer has been paid and has received in cash
or near cash the taxable income 75. The excess of allowable deductions over gross income of
d. The earning process is complete or virtually the business in a taxable year is known as
complete and an exchange has taken place a. Net operating loss
b. Ordinary loss
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c. Net deductible loss 85. Which is not a characteristics of corporate income tax
d. NOLCO a. Progressive tax
b. Direct tax
c. General x
B. CORPORATION TAXATION d. Natural tax
76. For purposes of computing the MCIT which will not form
part of cost of goods sold for traders 86. 1st statement: Non stock non – profit corporation are tax
a. Invoice cost exempt from their income from all operations
b. Import duties 2nd statement: Interoperate dividends are tax exempt if
c. Freight the recipient is a foreign corporation
d. Wharfage a. True, true
b. False, false,
77. Based on the preceding number nut the taxpayer is a c. False, true
manufacturer which will not form part of cost of goods d. True, false
sold?
a. Raw materials used 87. Which of the following corporation may not file a income
b. Direct labor & overhead tax return?
c. Freight & insurance a. Domestic Corporation
d. Import duties b. Resident Corporation
c. Non-Resident Corporation
78. based on No. 76 but the taxpayer is a seller of services d. Special Corporation
which will not form part of cost of services?
a. Salaries & supplies 88. Which is governed by gross income taxation
b. Employee benefits a. Domestic corporation
c. Depreciation & rental expenses b. Resident corporation
d. Interest expense c. Non-resident corporation
d. Educational institutions
79. Statement 1: The MCIT is only effective in the 5 th year
following the year in which the corporation commenced its 89. One of the following corporations cannot claim tax credit
business for foreign taxes paid abroad
Statement 2: non-resident corporations are also covered a. Private educational Institutions
by MICT b. Resident International Carriers
a. True, true c. Investment companies
b. False, false, d. Domestic Hospitals
c. False, true
d. True, false 90. 1st statement: Foreign income tax may be treated by a
corporate taxpayer as tax credit but not as deduction from
80. Non-Resident Corporations need not file any income tax gross income
returns. 2nd statement: Being a holding company is conclusive
Tax EXEMPT Corporations are also required to file an ITR evidence of improper accumulation of profit’
for administrative purposes only a. True, true
a. True, true b. False, false
b. False, false, c. True, false
c. False, true d. False, true
d. True, false
91. The improperly accumulated earning tax shall not apply to
81. To record MCIT the account deferred charges MCIT is the following except
a. Debited a. Insurance companies
b. Credited b. Corporations formerly registered with PEZA
c. Memo entry only c. Publicly held corporations
d. No entry required d. Bank & Non-Bank Financial Intermediaries
82. To record application of excess MCIT vs. NORMAL income 92. 1st statement: Domestic corporation not falling number
tax what account is credited under the definition of closely held corporations are
a. Income tax payable considered publicly held corporations
b. Cash in bank 2nd statement: A closely Corporation under the
c. Retained earnings Corporation Code are the same
d. Deferred charges MCIT a. True, true
b. False, false
83. To record expired portion of MCIT what account is debited c. False, true
a. Retained earnings d. True, false
b. Income tax payable
c. Deferred charges MCIT 93. It is the reasonable a test used in determining the
d. Provision for income tax reasonable needs of a business to justify the accumulation
of earnings which will exempt the corporation from paying
84. One of the following is not accepted basis of relief from IAE
the MCIT a. Urgency test
a. Prolonged labor dispute b. Reasonable need test
b. Force majeure problems c. Immediacy test
c. Legitimate business reverse d. Excise tax
d. Law suits filed by the company
94. The IAE tax is essentially a
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a. General tax Directly engaged in business
b. Property tax Dividends received 25,000
c. Regulatory or penalty tax
d. Excise tax The dividends were received from a domestic corporation.
The general and administrative expenses include cost of
95. 1st Statement: MCIT shall apply to all corporations utilized facilities cost of supplies of P25, 0000 and P15,
2nd statement: IAET shall apply only to Domestic 000, respectively. What amount should be reporter as
Corporation gross income for minimum corporate income tax purpose?
a. True, true a. P210,000
b. True, false b. P235,000
c. False, false c. P250,000
d. False true d. P275,000
96. A domestic corporation provided the following data 102. In 2016 Cable Corp. A calendar year corporation
contributed P80, 000 to a qualified charitable organization.
13 14 15 16 Cable’s 2016 net income was P820, 000. In 2016 what
Gross P2,040,00 2,800,00 3,000,00 4,000,00 amount can Cable deduct as charitable contributions?
sales 0 0 0 0 a. P80,000
Sales 40,000 100,000 b. P45,000
returns c. P41,000
Cost of 1,000,000 700,000 1,500,00 1,500,00
d. P51,000
goods 0 0
sold
103. For the year ended December 31, 2016 Kelly Corp. Had
Busines 950,000 210,000 1,200,00 1,200,00
s 0 0 net income per books of P300, 000 before taxes. Included
expense in the net income were the following items
s
Dividend income from an unaffiliated P50,000
domestic taxable corporation
The income tax due after tax credit if any for taxable year
2015 is Bad debt expense (represents the increase 80,000
a. P15,000 in the allowance for doubtful account)
b. P40,000
c. P60,000
d. P90,000 What was Kelly’s taxable income for the year ended
December 31, 2016?
97. Income derived by a depository bank under the expanded a. P170,000
foreign currency deposit system from foreign currency b. P330,000
transactions with local commercial banks shall be subject c. P345,000
to a final tax rate of d. P380,000
a. Seven and one half percent (7 ½%)
b. Twenty percent (20%) 104. A DOMESTIC CO. Provide the following data
c. Ten percent (10%)
d. Five percent (5%) 2015 2016
Gross 2,00,000 1,500,000
98. The following corporations are except from the Minimum income
Corporate Income Tax except Net income 100,000 250,000
a. Non-profit hospitals
What income tax due for the taxable year 2015 is
b. Proprietary educational institutions
a. P80,000
c. Non-stock non-profit educational institutions
b. P72,000
d. Resident corporations
c. P32,000
d. P40,000
99. Which of the following is not exempted from improperly
accumulated earnings tax?
105. Assuming the same problem in No.29. the income tax due
a. Publicly – held corporations
for the taxable year 2016 is
b. Bank and other non-bank financial intermediaries
a. P75,000
c. Insurance companies
b. P65,000
d. Resident corporation
c. P30,000
d. P40,000
100. Amos Corp. Had P600,000 in compensation expense for
book purposes in 2016. Included in this amount was a
106. Assuming the same problem No. 29. However the
P50, 000 accrual for 2016 non shareholder bonuses Amos
domestic corporation is a proprietary educational
paid the actual 2016 bonus for P60,000 on march 1, 2017.
institution. The income tax due for 2016 is
In its 2016 tax return what amount should Amos deduct
a. P75,000
as compensation expense?
b. P25,000
a. P600,000
c. P32,000
b. P610,000
d. P40,000
c. P550,000
d. P540,000
107. Williams a domestic corporation had the following data
101. Aragorn Inc had the following items of income and
Taxable Gross income Deductions
expenses year
Gross Receipts P500,000 2015 1,000,000 1,100,000
Cos of salary of personnel 250,000 2016 980,000 500,000
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area is already a commercial area. Accordingly, the RDO
The income tax payable in 2015 is wanted to make a recompilation of the taxes due by using
a. P20,000 the fair market value appearing in nearby bank’s valuation
b. P0 list which is practically double the existing zonal value.
c. P380,000 What values must the RDO use as the basis for
d. P100,000 determining the capital gains tax?
a. Fair Market Values or Zonal Values whichever is
108. Assuming the same problem No. 32 the taxable income in higher
2016 is b. Fair Market Values or Gross Selling Price
a. P380,000 whichever is higher
b. P0 c. Fair Market Values or Assessed Values whichever is
c. 100,000 higher
d. P50,000 d. Fair Market Values or Bank’s Valuation whichever is
higher
109. Assuming the same problem in No. 32 the income tax
payable in 2016 is 116. In connection with the preceding number the RDO also
a. P153,600 wanted to assess a donor’s tax on the difference between
b. P144,000 the selling price based on the zonal value and the fair
c. P114,600 market value appearing in a nearby bank’s valuation list,
d. P 94,600 should the difference in the supposed taxable value be
legally subject to donor’s tax?
110. The following person’s signature must appear in the a. Yes taxable value is difference between the selling
corporation income tax return except price and fair market value at the time of transfer
a. President b. Yes taxable value is the difference between the zonal
b. Vice president values and selling price
c. Treasurer c. No there was no transfer for insufficient
d. External auditor consideration of immovable are not subject to
donor’s tax
111. Resident international carriers are taxed on gross d. No there was a valid perfect and consummated
Philippine billing at contract of sale and not donation
a. 2 ½%
b. 5% 117. Weber Realty Company which owns a three hectare land
c. 7 ½% in Antipolo entered into a Joint Venture Agreement (JVA)
d. 10% with Prime Development Company for the development of
said parcel of land. Weber Realty as owner of the land
112. Non-resident lessors of aircraft machineries and other contributed the land to the Joint Venture and Prime
equipment are taxed on gross rentals, charter and other Development agreed to develop the same into a
fees at residential subdivision and construct residential house
a. 2 ½% thereon. They agreed they would dive the lots between
b. 4 ½% them. Does the JVA entered into by and between Weber
c. 7 ½% and Prime create a separate taxable entry?
d. 10% a. Yes JVA is a taxable corporation
b. Yes JVA is a taxable partnership
113. Non-resident owner or lessor of vessels chartered by c. No JVA is exempt from taxation
Philippine nationals are taxed on gross rentals lease or d. No JVA is a mere conduit
fees at
a. 2 ½% 118. Based on the preceding questions are the allocation and
b. 4 ½% distribution of the saleable lots to Weber and Prime
c. 7 ½% subject to income tax and to expanded withholding tax?
d. 10% a. Yes allocation and distribution saleable lots are
taxable income subject to withholding tax
114. 1st statement – A resident corporation is allowed to b. Yes allocation and distribution saleable lots are part of
deduct depreciation expense regardless of the property’s the gross income and not subject to expanded
location withholding tax
2nd statement – A private educational institution may at its c. No allocation and distribution saleable lots are
option elect either to deduct capital expenditures during exempt income in the likings of interoperate
the taxable year or to deduct allowance for depreciation dividends
thereof d. No allocation and distribution of saleable lots of a
a. True, false joint venture engaged in construction projects are
b. True, true exempt from income tax
c. False, true
d. False, false 119. Is the sale by Weber or Prime of their respective shares in
the saleable lots to third parties subject to income tax and
115. ABC Corporation sold a real property in Malolos Bulacan to to expanded withholding tax?
XYZ Corporation. The property has been classified as a. Yes the sale by Weber or Prime of their respective
residential and with a zonal valuation of P1, 000 per shares in the saleable lots to third parties are part of
square meter. The capital gains tax was paid based on the the gross income of a taxable corporation and not
zonal value. The Revenue District Officer (RDO) however, subject to withholding tax
refused to issue the Central Authorizing Registration for b. Yes the sale by Weber or Prime of their respective
the reason that based on his ocular inspection the shares in the saleable lots to third parties are not part
property should have a higher zonal valuation determined of the gross income but subject to expanded
by the Commissioner of Internal Revenue because the withholding tax
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c. Yes the sales by Weber or Prime of their c. P80,000
respective shares in the saleable lots to third d. P0
parties are both subject to income tax to
expanded withholding tax 128. Suppose Sam & John did not divide but instead invested
d. No the sales by Weber or Prime of their respective the P320,000 profit in another business venture where are
shares in the saleable lots to third parties are exempt they earned a net income after deductions of P450,000
from income tax the tax due of the co- ownership is
a. P102,400
120. Taxable on income within and without the Philippines? b. P76,800
a. Residential International Carrier c. P135,000
b. Non-residential cinematographic film makers d. P0
c. Non-stock non-profit hospitals
d. Non-resident owners or lessors of vessels 129. 1st statement – a CPA and a Dentist mat form GPP or an
ordinary partnership
C. TAXATION ON PARTNERSHIP, ESTATE & TRUST 2nd statement – Partnership and Corporation have
121. Mr. D and Ms. W are partners in a Partnership which separate juridical personalities distinct from the owners
realized a gross income of P800, 000 with a corresponding a. true, false
P350, 000 expenses in the year 2014. Mr. D is married b. false, false
with 2 qualified dependent children he earned P400, 000 c. false, true
in his own business incurring P230, 000 a allowable d. true, true
expenses while Ms. W had P450, 000 and P250, 000 gross
income and expenses respectively. they share profits and 130. 1st statement – the share of the partnership in the gross
losses as follows 4:6 income of the GPP is added to his own gross income
If the partnership is a GPP the taxable income of Mr. D 2nd statement – the share of the partner in the net income
subject to 5 – 32% is of a GPP is also considered passive income
a. P122,000 a. true, true
b. P180,000 b. false, false
c. P250,000 c. false, true
d. P320,000 d. true, false
122. And taxable income of Ms. W subject to 5 – 32% is 131. 1st statement – GPP’s may claim the 10% OSD
a. P180,000 2nd statement – a GGPP may be organized for p[profit also
b. P270,000 a. true, true
c. P420,000 b. false, false
d. P470,000 c. false, true
d. true, false
123. If the partnership is an Ordinary Partnership its tax due is
a. P135,000 132. 1st statement – Co – ownership and partnership are the
b. P148,000 same as to taxability
c. P153,000 2nd statement - corporation and ordinary partnerships are
d. P108,000 the same as to taxability
a. true, true
124. And the total tax liability of Mr. D is b. false, false
a. P12,240 c. false, true
b. P18,900 d. true, false
c. P50,000
d. P32,500 133. 1st statement – a GPP has no separate juridical personality
since it is tax exempt
125. The total tax liability of MS. w is 2nd statement – corporations may form a taxable
a. P 32,500 partnership but not GPP
b. P 18,360 a. true, true
c. P101,000 b. false, false
d. P 31,140 c. false, true
d. true, false
126. Samuel and John are co-owner by virtue of a property
given to them by their father. The co – ownership had a 134. 1st statement – the term taxpayer means any person
gross rental income of P500, 000 (gross of 5% tax) and subject to income tax including estates & trusts
expenses related to rental activity of P200, 000 but 10% 2nd statement - the income tax imposed upon individuals
is now deductible for the year. Samuel and John share in shall also apply to the income of estate or of any property
the profits at 75% and 25% respectively. Samuel held in trust
withdrew P50, 000 from the co – ownership net income a. true, true
for the year John did not withdraw any amount. Samuel b. false, false
and John are both single c. false, true
The income tax the co- ownership d. true, false
a. P102,400
b. P76,800 135. 1st statement – only estates earning income under judicial
c. P80,000 administration are subject to income tax
d. P0 2nd statement – in income taxation of estate the judiciary
or the trust or has the personal liability to pay the tax in
127. The taxable income of Samuel is all cases
a. P320,000 a. true, true
b. P190,000 b. false, false
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c. false, true c. P35,000
d. true, false d. P0
136. 1st statement – the estate is still the taxpayer after 4. One of the following is not excluded from gross income
administration or its settlement a. amounts received by insured as return of premium
2nd statement – the trust is the taxpayer if the income is b. life insurance proceeds
to be accumulated for the trustor or grantor c. compensation for injuries as sickness
a. true, true d. share in the net income of a general
b. false, false professional partnership
c. false, true
d. true, false 5. To be allowed as a valid deduction charitable and other
contribution must not exceed
137. All of the following are non-taxable trusts except one a. 5% of taxable income after charitable contribution
a. revocable whose trusts income of individuals
b. trusts whose income are reserved for the grantee b. 10% of taxable income after charitable contribution in
c. pension trusts created under conditions laid down by case of individuals
law c. 5% of taxable income before charitable of
d. trusts whose income are to be accumulated for contribution in case of individuals
the trustor or grantor d. 10% of taxable income before charitable
contribution in case of individuals
138. The share in the profits of a partnership in a general
professional partnership is regarded as received by him 6. Premium paid for health and hospitalization insurance
and thus taxable although not yet distributed. The shall be allowed as a deduction
principle is known as a. the amount claimed does not exceed two thousand
a. actual receipt of income five hundred pesos (P2,500) per year
b. advance reporting of income b. must be claimed by each spouse separately
c. accrual method of accounting c. gross income of the family does not exceed two
d. constructive receipt of income hundred fifty thousand pesos (P250,00)
d. the amounts of premium payment claimed is not
139. Fusion of two corporation for a specific undertaking exceeding two hundred fifty pesos (P250) a month
a. merger
b. consolidation 7. 1st statement – the term quasi – banking activities means
c. joint- account borrowing funds from twenty or more persons at any one
d. joint – venture time through the issuance endorsement or acceptance of
debt instruments of any kind other than deposits.
140. An indivisible thing own by at least two individuals 2nd statement – interest in government debt securities are
a. joint – account exempt income
b. co – ownership a. true, false
c. partnership b. true, true
d. sociedad anominas c. false, true
d. false, false
D. GROSS INCOME DEDUCTIONS
1. One of the following does not form part of gross income 8. In the case of sale of land under the agrarian reform law
a. interest 1st statement – interest earned by the owner/seller is
b. royalties exempt income
c. annuities 2nd statement – capital gain in the sale of the lad is
d. gift bequest and devises taxable income
a. true, false
2. In computing allowable deduction for purposes of income b. true, true
taxation: c. false, true
1st statement – interest expense in connection with the d. false, false\
taxpayer’s business shall be reduced by an amount equal
to thirty eight percent (33%) of interest income subject to 9. In computing net income no deduction shall any case be
final tax. allowed in respect to except
2nd statement – interest incurred to acquire property used a. personal living or family expenses
in trade shall only be allowed to be treated as a capital b. any amount paid out for new buildings or for
expenditure permanent improvements or betterment made to
a. true, false increase the value of any property or estate
b. true, true c. any amount expended in restoring property or in
c. false, true making good the exhausted thereof which an
d. false, false allowance is or has been made
d. premiums paid on any life insurance policy
3. Patricia was injured in a vehicular accident in 2012. he covering the life of any officer or employee
incurred and paid medical expenses of P10, 000 and legal when the immediate family members of such
fees of P5, 000 during that year. in 2016, he recovered employees are directly the beneficiary
P35, 000 as settlement form the insurance company
which insured the car owned by the other party involved 10. Losses from wash sales of stock or securities shall not be
in the accident. from the above payments and deductible except
transactions the amount of income taxable to Patricia in a. the taxpayer is a dealer of securities or stock
2016 is and made in the course of business of such
a. P20,000 dealer
b. P25,000
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b. the share of stock sold and then required or c. both advices are wrong
repurchased are identical stock or securities d. 1st advice wrong and 2nd advice correct
c. the shares of stock sold and then reacquired within a
period beginning thirty (30) days before the date of 16. ABC Corporation took two key men insurance on the life of
such sale or disposition its President Mr. X. In one policy the beneficiary is the
d. the shares of stock sold and then reacquired within a corporation to compensate it for its expected loss in case
period ending thirty (30) days after such sale or of death of its president. the other policy designates Mr.
disposition X’s wife as its irrevocable beneficiary
Question 1: are the insurance premiums paid by X
11. 1st statement – the allowable deduction for pension corporation in both policies deductible?
payments to employees will only apply to those pension Question 2: will the insurance proceeds be treated as
plan that is funded income subject to tax by the corporation and by the wife?
2nd statement – the pension trust deduction I composed of a. yes to 1st and 2nd questions
the past service cost and the year present service cost b. yes to both questions
a. true, false c. no to 1st questions and yes to 2nd question
b. true, true d. no to both questions
c. false, true
d. false, false 17. A worked for a manufacturing firm but due to business
reverses, the firm offered a voluntary redundancy
12. SFI Inc. (SFI) has been in business for the past 10 years. program in order to reduce overhead expenses. Under the
For the year 2004, it decided to establish a pension fund program an employee who offered to resign would be
for its employees. the pertinent data of the fund are us given separation pay equivalent to his 3 months basic
follows; salary for every year of service. a accepted the offer and
received P800,000 as separation pay under the program.
After all the employees who accepted the offer were paid
Past service cost (lump sum payment) P1,000,000 the firm found its overhead still excessive. Hence it
Present service cost 100,000 adopted another program where various unprofitable
departments were closed. As a result B was separated
from the service B also received P800, 000 as separation
How much allowable deduction for pension cost SFI could
pay. at the time of separation both A and B have rendered
claim?
at least 10 years of service but A was 55 years old while B
a. P1,000,000
was only 45 years old as a result
b. P1,100,000
a. both amounts are exempt from income tax
c. P 200,000
b. both amounts are subject to income tax
d. P 100,000
c. only Mr. A is subject to income tax
d. only Mr. B is subject to income tax
13. Assuming the same facts in number 12 the allowable
deduction of SFI for pension after 10 years
18. Which of the following expenses is deductible from gross
a. P1,000,000
income?
b. P1,100,000
a. contribution to a newspaper fund for needy
c. P200,000
families when such newspaper organizes a drive
d. P100,000
solely for charitable purposes
b. premiums paid by the self-employed employer for the
14. Mr. R was retired by his employer corporation and paid
life insurance of his employees
P1, 000,000 as a retirement gratuity without any
c. contribution to the construction of a chapel of a
deduction for withholding tax. The corporation became
university that declares dividends to its stockholders
bankrupt the following year. Can the BIR subject the P1,
d. donation of prizes and awards to athletes in local and
000,000 retirement gratuity to income tax?
international competitions and sanctioned by their
1st answer – yes if the retirement gratuity was paid based
respective sport associations
on a reasonable pension where Mr. R was 50 years old
and has served the corporation for more than 10 years
2nd answer – no if Mr. R was forced by the corporation to 19. Cash dividends received by a NON RESIDENT corporation
retire beyond Mr. R’s control from a domestic corporation is
a. both answer are wrong a. exempt from income tax
b. both answer are correct b. subject to final tax
c. 1st answer is correct 2nd answer is wrong c. part of taxable income
d. 1st answer is wrong 2nd answer is correct d. party exempt partly taxable
15. The widow of your best friend has just been paid P1, 20. Cash dividends received by a domestic corporation from a
000,000 on account of the life insurance of the decreased domestic corporation is
husband. she asks you whether she declare the amount a. exempt from income tax
the amount for income tax purpose or the estate tax b. subject to final tax
purposes c. part of taxable income
1st advice – the proceeds of life insurance paid to the d. partly exempt partly taxable
beneficiary upon the death of the insured are exempt
income tax and need not be declared for income tax 21. Shares obligations or bonds issued by a foreign
purposes corporation shall be considered as intangible personal
2nd advice – the proceeds of life insurance would have to property situated in the Phil’s if, how many percent of its
be declared for estate tax purposes if the designation of business is located in the Phil’s?
the beneficiary was irrevocable otherwise it need not be a. 33%
declared b. 50%
a. both advices are correct c. 75%
b. 1st advice correct; 2nd advice wrong
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d. 85% c. severance theory
d. equitable doctrine of tax benefit
22. If a friend inquires whether or not the cost of educational
assistance to the employee and / or his dependents which 29. Which of the following statements on tax exemptions is
are borne by the employer be taxable. What will your not correct
answer be? a. when an electric light and power franchise holder is
1st answer – a scholarship grant to the employee by the exempt under its franchise from property tax on its
employer shall not be treated as taxable fringe benefits if poles wires and transformers its exemption does not
the education or study involved is directly connected with extend to the VAT of its importation of said articles
the employer’s trade business or profession and there is a b. where a taxpayer receives as payment for the land
written contract between them that the employee is under expropriated by the government tax exempt bonds
obligation to remain in the employ of the employer for s such tax exempt bonds should be included in the total
period of time that they have mutually agreed upon price to determine correct taxable profit therefrom
2nd answer – the cost of educational assistance extended c. the salaries of the justices of the Supreme Court
by an employer to the dependents of an employee shall be are exempt from income tax
treated as taxable fringe benefits of the employee unless d. exemption granted to cooperatives does not extend to
the assistance was provided through a competitive be members thereof in the sale of their products
scheme under the scholarship program of the company
a. both answer are correct 30. A was selected as the most outstanding teacher in her
b. both answer are wrong region. Her name was submitted by the school principal
c. only the first answer is correct without her knowledge. she received a trophy and a cash
d. only the second answer is correct award of P15, 000
a. taxable income
23. As regards taxable year one of the following statements is b. subject to final tax
not correct? c. exempt from income tax
a. the taxable year is the accounting period d. partly taxable partly exempt
b. the taxable year maybe less than 12 months
c. the taxable year of a sole proprietorship 31. This will not result to a taxable gain or loss
business maybe fiscal or calendar year a. the sale by a corporation of its shares of stock
d. the taxable year of a domestic corporation maybe from the unissued stock over its par or stated
fiscal or calendar year value
b. the sale by a corporation of its treasury stock over its
24. Which of the following taxes may be deducted from gross cost or other basis of acquisition
income c. the purchase and retirement by a corporation of its
a. special Assessment bonds at a price less than the issue price or face
b. transfer tax value
c. documentary stamp tax d. the issuance by a corporation of its bonds at a
d. income tax premium
25. All of the following taxpayers are not entitled to tax credit 32. Which of the following does not represent compensation
except income?
a. resident citizen with income only from the Phils a. honorarium as a guest speaker
b. resident citizen with income only from abroad b. emergency leave pay
c. resident alien with income from within and without c. vacation and sick leave pay
the Phils d. gratuitous condonation of obligation
d. non-resident citizens with income from within and
without the Phils 33. One of the following is not subject to final tax
a. interest on savings deposit
26. A operates a retail store and owns the following b. royalties
properties. which of the following is capital assets in the c. prizes amounting to more than P10,000
hand of A d. professional fees paid to individuals
a. building which houses the retail store
b. fixture used in the retail store
c. inventory on hand at the end of the year 34. Gain on sale of domestic shares of stock in New York is
d. trade accounts receivable a. Income within the Phils
b. Income without the Phils
27. A bought from XYZ Corp. 1,000 shares of stock Ninety c. Income party within and without
days thereafter the corporation was adjudged bankrupt d. Exempt from income tax
and its stock was worthless. the lose of A for income tax
purposes is 35. Noel Santos is a very bright computer science graduate.
a. wagering loss He was hired by Hewlett Packard. To entice him to accept
b. short term capital loss the offer the arrangement that part of his compensation
c. long term capital loss would be an insurance policy with a face value of P20
d. non – deductible loss for income tax purposes Million. The parents of Noels are made the benefices of
the insurance policy. will the proceeds of the insurance
28. Any amounts subsequently received on account of a bad form part of the income of the parents of Noel and be
debt previously charged off and allowed as a deduction subject to income tax?
from gross income for prior years must be included in a. yes the proceeds of the insurance form part of the
gross income for the taxable year in which received. this gross income of the parents of Noel and be subject to
is income tax
a. end result doctrine
b. destination of income test
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b. yes the proceeds of the insurance form part of the beneficiary is the corporation. At the end of the year ABC
income of the parent of Noel and be subject to final received dividend of P100 because of the policy. the
withholding tax corporation should indicate a claim for a deduction for life
c. no, the proceeds of the life insurance do not insurance premium of
form part of the gross income being exclusion a. P1,000
therefrom b. P 900
d. no the proceeds of the insurance do not form part of c. P1,100
the gross income of the parents of Noel being d. Zero
irrevocable beneficiaries
43. A dependent senior citizen will allow an individual resident
36. Pursuant to the preceding question can the company citizen taxpayer
deduct from its gross income the amount of the premium? a. to be classified as single
a. yes the premium may be deducted from the b. to be promoted to a head of a family
company’s gross income for it is an ordinary and c. to be promoted to a head of a family and claim
necessary expense one additional exemption
b. yes the premium may be deducted from the d. answer not given
company’s gross income if the intended
beneficiaries are the immediate family members 44. Mr. A resident alien adopted a child in USA Mr. A personal
of Noel Insured exemptions is
c. no the premium may not be deducted from the a. P 50,000
company’s gross income because the company was b. P 75,000
not made the beneficiary of the insurance proceeds c. P100,000
d. no the premium may not be deducted from the d. none of the above
company’s gross income because it is not ordinary
and necessary expenses of the business 45. Mr. resident citizen send his child to USA for the latter’s
high school studies Mr. B personal exemption is
a. P 50,000
37. What are requisites of the business expense to be
b. P 75,000
deductible except?
c. P100,000
a. ordinary and necessary
d. none of the above
b. paid or incurred within the taxable year
c. substantiated with official receipts
d. must be reasonable E. CAPITAL GAINS / FRINGE BENEFITS /OTHERS
46. Calendar year is
38. The following are examples of non – taxable compensation
for injuries except
Tax payer is a citizen of the Philippines who is
a. actual damages for injuries suffered single
b. compensatory damages for unrealized profits Capital gain on sale of bonds held for P45,000
c. moral damages for grief anxiety and physical 2 months
sufferings Capital gain on sale directly to buyer 120,000
d. exemplary damages of shares of domestic corporation held
for 16 months
39. What would be the allowable deduction for P8, 000 Capital loss on sale of family car held 80,000
contribution made by a resident citizen to a religious for 5 years
organization from his P70,000 net income after Capital loss on sale of land in the 60,000
contribution? Philippines held for 3 years on a
a. P8,000 selling price of P800,000
b. P7,000 Net capital loss in 2005 (net taxable 20,000
c. P7,800 income of the year was P30,000)
d. P3,500
The net capital gain in 2016 was
40. A bought a condominium unit under installment basis to a. P50,000
be used as his office in the practice of his profession and b. P5,000
paying P10, 000 monthly. for income tax purposes the c. zero
P10,000 monthly payment shall be d. some other amount
a. treated as business rental, hence deductible
b. treated as capital expenditure, hence not 47. Nutrition Chippy Corporation gives all its employees (rank
deductible and file supervisors and managers) one sack of rice every
c. treated as depreciation expense hence deductible month valued at P800 per sack. During an audit
d. treated as ordinary business expense investigation made by the Bureau of Internal Revenue
(BIR) the BIR assessed the company for failure to
41. A domestic corporation made a borrowing from ABC bank withhold the corresponding withholding tax on the amount
thereby incurring a business connected interest expense equivalent to the one sack of rice received by all the
of P60, 000 for taxable year 2016. During the same year employees contending that the sack of rice is considered
the corporation earned an interest income subject to final as additional fringe benefit for the supervisors and
tax in the amount of P100,000. the deductible interest is managers. Therefore the value of the one sack of rice
a. P27,000 every month should be considered as part of the
b. P33,000 compensation of the rank and file subject to tax. For the
c. P60,000 supervisors and managers, the employers should be the
d. P0 one assessed pursuant to Section 33 (a) of the NIRC. Is
there a legal basis for the assessment made by the BIR?
42. In a year ABC Corp paid total premiums of P1, 000 for the a. yes benefits received by rank and file are subject to
life insurance policy of the vice president where the compensation tax
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b. yes benefits received by supervisory employees and a. true, false
managerial employees are subject to fringe benefit b. true, true
tax c. false, true
c. no the benefit is a De minimis benefit exempt d. false, false
from income tax
d. no the benefit is for the convenience of the employer 54. In case of foreign travel of employees for the purpose of
thus exempt attending business meeting or conventions:
1st statement – such travel expenses shall not be treated
as taxable fringe benefits regardless of its amount
48. Which among the following fringe benefits is taxable?
2nd statement – the cost of economy and business class
a. those benefits which are given to rank and file
airplane ticket shall not be subject to the fringe benefit
employees
tax. However 30 percent of the cost of first class airplane
b. contributions of the employer for the benefit of the
ticket shall be subject to the fringe benefit tax
employee to retirement, insurance and hospitalization
a. true, false
benefit plans
b. true, true
c. benefits given to supervisory employees under a
c. false, true
collective bargaining agreement
d. false, false
d. de minimis benefits
55. On August 12, 2016 A sold a land held as capital assets

49. 1st statement – monetized unused vacation leave credits
for P2 M with a FMV of P1.8 M. A acquired the land for P1
not exceeding 10 days is an exempt de minimis benefit
M and at the time of sale the property was subject to a
2nd statement – daily meal allowance for overtime work
mortgage of P1.3 M. payments shall be; P100, 000 on the
not exceeding twenty five (25%) percent of the basic
date of sale and the balance shall be paid in equal
minimum wage is exempt fringe benefit
monthly instalments. the capital gain tax for 2016 is
a. true, false
a. P120,000
b. true, true
b. P 24,000
c. false, true
c. P 36,000
d. false, false
d. P 48,000
50. 1st statement – laundry allowance not exceeding P300 per
56. How much is the allowable deduction from business
month is exempt de minimis benefit
income of a domestic corporation which granted and paid
2nd statement – medical cash allowance to dependents of
employees not exceeding P750 per employee per P340, 000 fringe benefits to its key officer in 2016?
a. P500,000
semester or one hundred twenty five pesos (P125) per
b. P160,000
month is exempt de minimis benefit
c. P340,000
a. true, false
d. none of the above
b. true, true
c. false, true
57. In the year, Cadena de Amor Corporation gave the
d. false, false
following fringe benefits to its employees
51. 1st statement – flowers fruits and books or other similar
token items given to employees under certain To managerial employees P1,020,000
circumstances are exempt de minimis benefits To rank and file employees 5,000,000
2nd statement – gifts given during Christmas and major
The allowable deduction from the gross income of the
anniversary celebrations not exceeding P5, 000 per
corporation for the fringe benefits given to employees is
employee per annum is exempt de minimis benefit
a. P2,000,000
a. true, false
b. P1,500,000
b. true, true
c. P6,320,000
c. false, true
d. P7,000,000
d. false, false
58. The tax payer other than a corporation may elect to pay
52. 1st statement – rice subsidiary of one thousand peso or
the income tax due in two equal installments if the tax
one sack of 50 kg. Rice per month amounting to not more
due is
than one thousand five hundred pesos is an exempt de
a. more than P100
minimis benefit
b. more than P1,000
2nd statement – employee achievement awards e.g for
c. more than P2,000
length of service or safety achievement which must be in
d. more than P5,000
the form of a tangible personal property other than cash
or gift certificate with an annual monetary value not
59. The tax reform Act of 1997 took effect on
exceeding ten thousand pesos received by an employee
a. January 1, 1997
under an established written plan which does not
b. January 1, 1998
discriminate in favor of highly paid employees is an
c. December 11, 1997
exempt de minimis benefit
d. July 28, 1997
a. true, false
b. true, true
60. A feature of ordinary gains as distinguished from the
c. false, true
capital gains
d. false, false
a. gains from sale of assets not stock in trade
b. may or may not be taxable in full
53. 1st statement – uniforms and clothing allowance not
c. sources are capital assets
exceeding four thousand pesos per annum is an exempt
d. no holding period
de minimis benefit
2nd statement – actual medical benefits not exceeding
P10, 000 per annum is an exempt de minimis benefit
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61. On capital gains tax on real property which of the
following statement is not correct?
a. the tax should be paid if in one lump sum within 30
days from the date of the sale
b. the installment payment of the tax should be made
within 30 days from receipt of each installment
payment on the selling price
c. the tax may be paid in installment if the initial
payment does not exceed 25% of the contract
price
d. the initial payment maybe more than down payment
62. Becky Corp. a calendar year corporation realized taxable

income of P36, 000 from its regular business operations
for calendar year. in addition Becky Corp. had the
following capital gains and losses during 2018
Short term capital gain P8,500
Short term capital loss (4,000)
Long term capital gain 1,500
Long term capital loss (3,500)
Becky Corp. did not realize any other capital gains or

losses since it began operations. What is Becky’s total
taxable income?
a. P36,250
b. P38,500
c. P39,500
d. P40,500
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UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL,

Classification of individual taxpayers Gross income (excluding passive income &

3.2 GROSS INCOME Exempted interest income from regular income

c) Cost of facilities improvements for persons with Conditions for deductibility:

Solution: Computation of Net Income

Reconciliation of income under PFRS and income under TRAIN TABLE

55. On August 12, 2016 A sold a land held as capital assets

62. Becky Corp. a calendar year corporation realized taxable

Short term capital gain P8,500

Short term capital loss (4,000)

Long term capital gain 1,500

Long term capital loss (3,500)

Becky Corp. did not realize any other capital gains or

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