ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

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

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

TAX-701U: INCOME TAX - CORPORATIONS

Suggested Answers and solutions
b. Exercises

1) The gross sales of GEAL Corporation amounted to ₱6M, with cost of sales amounting to ₱4M. It incurred. operating expenses
amounting to ₱1M, and on the filing of its First Quarter Income Tax Return, it signified its intention to avail of the OSD.
Compute the RCIT, if any: Requirements:
A. Assuming the taxable period is calendar year ended December 31, 2020.
B. Assuming the taxable period is fiscal year ended June 30, 2021.
C. Assuming the taxable period is fiscal year ended December 31, 2021.

Suggested Answers/Solutions:

A. Assuming the taxable period is calendar year ended December 31, 2020.

* 27.5% = 30% x 6/12 + 25% x 6/12

B. Assuming the taxable period is fiscal year ended June 30, 2021.

* OSD for corporation is based on gross income.

* Effective income tax rate is 15% of gross income computed as follows:
100 – 40 = 60 x 25% = 15%.
* If the Company opted to deduct the OSD, RCIT will always be higher than the 2% MCIT (15% of gross income vs. 2% of GI)

C. Assuming the taxable period is fiscal year ended December 31, 2021.

* OSD for corporation is based on gross income.

* Effective income tax rate is 15% of gross income computed as follows:
100 – 40 = 60 x 25% = 15%.
* If the Company opted to deduct the OSD, RCIT will always be higher than the 2% MCIT (15% of gross income vs. 2% of GI)

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2) LMB Corporation, a retailer, has gross sales of P1,400,000,000 with a cost of sales of P560,000,000 and allowable deductions
of 150,000,000 for the calendar year of 2021. Its total assets of P180,000,000 as of December 31, 2021 per Audited Financial
Statements includes the land costing P50,000,000 and the building of P25,000,000 in which the business entity is situated,
with an aggregate amount of P75,000,000 as Fixed Assets.

Requirements:
A. Compute the RCIT and MCIT for CY 2021.
B. Compute the RCIT and MCIT for CY 2021 assuming 2021 is its 2nd year of operations

Suggested Answers/Solutions:

A. Compute the RCIT and MCIT for CY 2021.

* Requirements for the application of the 20% lower – not met, hence, application of the 25% RCIT rate.

B. Compute the RCIT and MCIT for CY 2021 assuming 2021 is its 2 nd year of operations

Requirements for the application of the 20% lower – not met, hence, RCIT is same with item A (P172.5M)

Not subject to MCIT since it is in its 2nd year of operation.

3) Mr. JMLH is a partner of AMBS & Co., a general professional partnership, and owns 25% interest. The gross receipts of AMBS
& Co. amounted to ₱10,000,000 for taxable year 2020. The recorded cost of service and operating expenses of AMBS & Co.
were ₱2,750,000 and ₱1,500,000, respectively.
Requirements:
a) If AMBS & Co. availed of the OSD, how much is the distributable net income?
b) How much is the income tax liability of Mr. JMLH?
c) How much is the income tax due and the business tax of AMBS and Co., if any?

Suggested Answers/Solutions:
a) If AMBS & Co. availed of the OSD, how much is the distributable net income?

Gross Receipts ₱10,000,000

Less: Cost of Services 2,750,000
Gross Income 7,250,000
Less: OSD (₱7,250,000x 40%) 2,900,000
Net Income for distribution to partners ₱ 4,350,000
The GPP elected OSD in the computation of its net income and its election is irrevocable for the taxable year for which the return is made.

b) How much is the income tax liability of Mr. JMLH?

Share in Distributive Profit (₱4,350,000 x 25%) ₱ 1,087,500.00

Tax Due 800,000 130,000
287,500 x 30% 86,250 P216,250
* Individual partner is not allowed for any deduction on his distributive share.
* Taxpayer is not allowed to avail of the 8% income tax option since their distributive share from GPP is already net of cost & expenses.

c) How much is the income tax due and the business tax of AMBS and Co., if any?

a. There is no income tax liability for AMBS & Co. being a GPP under Section 26 of the Tax Code, as amended
b. The GPP is liable to business tax (VAT to be specific since gross receipts exceeded the P3M VAT threshold.

Output VAT (10M x 12%) = 1.2M

Input VAT (no complete information to determine the input VAT)

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2. Special Corporations

a. Special domestic corporations

6) Exercises
1) Rosa Private School of Values or RSPV is a non-profit private educational institution with an issued permit to operate
from the Commission on Higher Education (CHED). It is maintained and administered by MCGJ Inc, a private domestic
corporation registered under the SEC.

RPSV uses a fiscal year accounting ending July 31st of each year. On July 31, 2021, it recorded total
gross receipts amounting to P18M, of which P10M came from education-related activities, while P8M
from other unrelated business activities. Also, RSPV Co. recorded cost of service and operating expenses
from related activities amounting to P2M and P1M, respectively, and from unrelated business activities
amounting to P3M and P2M, respectively. Compute the Income Tax Due of RSPV for the fiscal year
ending July 31, 2021.

Suggested Answers/Solutions:

* the proprietary educational institution is subject to 1% income tax on their taxable income beginning July 1, 2020 until June
30, 2023. Thereafter, it shall revert to 10%. MCIT is not applicable.

2) XYZ Hospital, a private non-profit hospital, has gross receipts of P15M with a cost of P6M and allowable deductions of
P3.25M from related activities, while for its unrelated activities, it incurred P 5M and P 2M, as cost of sales and allowable
deductions, respectively, with a gross income of P 18M, for CY 2021. Compute the Income Tax Due of XYZ
Hospital for the for CY 2021.

Suggested answers/solutions:

* the hospital is subject to the 25% RCIT rate since its gross income from non-related activities is more than 50% of its total
gross income.

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b. Special resident foreign corporation

Note: please see corrected amount of allowable deduction for CY 2022 (should be 42.55M)

Exercise: ABC Corporation is registered as a Regional Operating Head Quarter (ROHQ) since 2015. For taxable years 2020 to 2023,
its operation showed the financial results (in PHP):

CY 2020 CY 2021 CY 2022 CY 2023

Annual Income 75M 120M 130M 75M
Cost of services 41.25M 66M 71.50M 41.25M
Allowable deductions 33.625M 41.20M 42.55M 35.125M

Compute the income tax due.

CY 2020 CY 2021 CY 2022 CY 2023
Annual Income 75M 120M 130M 75M
Cost of services 41.25M 66M 71.50M 41.25M
Allowable deductions 33.625M 41.20M 42.55M 35.125M
Net taxable 125K 12.8M 15.95M (1,375k)
Income

* MCIT rate of 1.5% was used since the rate from January 1 to June 30, 2023 is 1%, and for July 1 to December 31, 2023, the rate
is 2%; thus, the average/effective MCIT rate is 1.5%.

1) International carrier
a) Exercise: The following current year data were provided by Air America, international carrier doing business in the Philippines:
Gross receipts, sales of tickets in the Philippines to passengers (Manila to Taipei flight) P8,000,000
Gross receipts, sales of tickets in Japan to passengers (only P5,000,000 actually flown)
(Manila to Tokyo flight) 6,000,000
Gross receipts, transport of goods, sales of tickets in Japan (Manila to Tokyo flight) 3,000,000
Gross receipts, sales of tickets in the Philippines (Manila to Hongkong flight), passengers were
endorsed by another international airline 1,000,000
Gross receipts, sales of tickets in the Philippines (Manila to Los Angeles flight), passengers were
transshipped in Tokyo to Los Angeles by different airline company (flight from Manila to
Tokyo – 5 hours; flight from Tokyo to Los Angeles – 10 hours) 4,500,000
Expenses, sales of tickets, Philippines 4,000,000
Rental income, Philippines, gross of 5% withholding tax 1,500,000
Interest income, bank deposit, Philippines 50,000
Expenses connected to rental income, Philippines 500,000
Payments, first three (3) quarters 150,000

Compute the following assuming CY 2021 taxable year:

1) Income tax due and payable;

2) Final withholding tax; and
3) Common carriers tax;

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Suggested answers/solutions:
1) Income tax payable
Gross rental income P1,500,000
Less: Expenses 500,000
Taxable net income 1,000,000
Tax rate 25%
Tax due 250,000
Add: Tax due under special rate (18,500,000 x 2 ½%) 462,500
Total tax due 712,500
Less: Tax credits/payments
Withholding tax on rent (5% x 1,500,000) 75,000
Payments, first 3 quarters 150,000 225,000
Tax payable P487,500

Gross receipts, Philippines (Manila to Taipei) P 8,000,000

Gross receipts, Japan (Manila to Tokyo) 5,000,000
Gross receipts, transport of goods (Manila to Tokyo) 3,000,000
Gross receipts, Philippines (Manila to Hongkong) 1,000,000
Gross receipts, Philippines (Manila to Los Angeles) (5/15 x 4,500,000) 1,500,000
Gross Philippine billings P18,500,000

2) Final withholding tax (withheld by the bank)

Interest income, bank deposit, Philippines P 50,000
Rate 20%
Final withholding tax P 10,000

3) and 4) Total percentage tax

Gross receipts, transport of goods (Manila to Tokyo) P3,000,000
Tax rate 3%
Common carrier’s tax P 90,000
Gross rental income, Philippines P1,500,000
Tax rate 1%
% tax under Sec. 116 (under CREATE Act, 1% effective July 1, 2020 until June 30, 2023) 15,000
Total P 105,000

A resident foreign corporation has the following data on its income, expenses and remittances for CY 2021:

Gross sales, Philippines P9,000,000

Cost of sales, Philippines 2,000,000
Gross sales, USA 7,000,000
Cost of sales, USA 2,000,000
Business expenses, Philippines 2,000,000
Business expenses, USA 1,000,000
Royalties on Philippine copyrights 500,000
Interest on time deposit, PNB-Manila, Philippines 100,000
Remittances of profit during the year, net of the applicable tax 170,000
Payments, first three (3) quarters 100,000

Question 1 – Determine the Philippine income tax due and payable using itemized deduction
2 - Determine the Philippine income tax due and payable using Optional Standard Deduction
3 – How much is the business tax, if any?
4 – Determine the tax on the branch profit remittances, if any?

Suggested answers/solutions:

Question 1

Gross sales, Philippines P 9,000,000

Less: Cost of sales, Philippines 2,000,000
Gross income, Philippines 7,000,000
Less: Business expenses, Philippines 2,000,000
Taxable net income, Philippines P 5,000,000
Tax due (25%) P1,250,000
Less: Payments, first 3 quarters 100,000
Tax payable P1,150,000*

* Corrected tax payable (per actual slides, the P100k tax credit was added instead of deducting it
from the RCIT

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Question 2

Gross sales, Philippines P 9,000,000

Less: Cost of sales, Philippines 2,000,000
Gross income, Philippines 7,000,000
Less: Optional standard deduction (40% x 7,000,000) 2,800,000
Taxable net income P 4,200,000
Tax due (25%) P1,050,000
Less: Payments, first 3 quarters 100,000
Tax payable P950,000*

* Corrected tax payable (per actual slides, the P100k tax credit was added instead of deducting it
from the RCIT

Question 3

Gross sales, Philippines P9,000,000

Tax rate 12%
VAT P1,080,000

Question 4

Profit remittance (170,000/85%) P 200,000

Tax rate 15%
Tax on branch profit remittance P 30,000

c. Special nonresident foreign corporation

4) Exercise: A corporation has the following data for the calendar year CY 2021:
Gross income/rentals, Philippines P 2,500,000
Gross income, Japan 1,500,000
Expenses, Philippines 1,000,000
Expenses, Japan 500,000
How much is the final withholding Philippine income tax and the withholding VAT, assuming the corporation is a:
a. non-resident cinematographic film owner, lessor or distributor?
b. non-resident owner or lessor of vessels chartered by Philippine nationals?
c. non-resident owner or lessor of aircraft, machineries and other equipment?
d. Non-resident owner or lessor of vessels chartered by Japanese nationals?

Suggested answers/solutions:

a. Gross income, Philippines P2,500,000

Tax rate 25%
Final withholding tax P 625,000

The withholding VAT cannot be determined because the gross receipts are not given.

b. Gross income , Philippines P2,500,000

Tax rate 4 1/2%
Final withholding tax P 112,500

c. Gross income, Philippines P2,500,000

Tax rate 7 1/2%
Final withholding tax P 187,500

d. Gross income, Philippines P2,500,000

Tax rate 25%
Final withholding tax P 625,000*

* Corrected FWT (per actual slides, the P2.5M was multiplied to 30% resulting to P750K FWT
instead of applying the 25% RCIT rate (2.5M x 25% = 625k)

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d. PEZA-registered enterprises

Note: please see corrected taxable period (from CY 2020 to CY 2021)

1) Exercise: A PEZA-registered enterprise has the following data for the CY 2021:
Gross revenue from registered activities P100,000,000
Cost of services (allowable direct cost) 50,000,000
Operating expenses 10,000,000
Other income from unregistered activities 5,000,000
Q1 - How much is the tax due assuming it is a new registered pioneer firm enjoying ITH incentive on its registered activities?
Q2 - How much is the tax due to the BIR and to the LGU assuming it is subject to 5% GIT on its registered activities?

Suggested answers/solutions:
Answer to Question 1
Gross revenue P100,000,000
Less: Cost of services 50,000,000
Gross profits 50,000,000
Less: Operating expenses 10,000,000
Total Taxable net income entitled to ITH incentive 40,000,000
Tax rate 0%
Tax due 0
RCIT on Other income (unregistered activities) – not entitled to the ITH incentive,
hence, RCIT will apply (P5M x 25%), lower rate of 20% was not applied since no P1,250.000*
information for the total asset test
* corrected the amount of tax due (per slides, no tax due was calculated on other income from unregistered activities

Answer to Question 2
Gross revenue P100,000,000
Less: Cost of services 50,000,000
Gross profits 50,000,000
Tax rate 5%
Tax due P 2,500,000
The share of the local government is 2/5 x P2,750,000 P 1,000,000
The share of the national government is 3/5 x P2,750,000 P 1,500,000
Other income (P5M x 25%) P 1,250,000
Total Due to the BIR (1.5M + 1.25M) P 2,750,000

3. Important Pointers in Non-Taxable Partnerships

Exercise: Jaimee, married, has two dependent minor brothers. She is a partner of a general professional partnership. She also has
a VAT-registered trading business of her own. The following data are made available for CY2021:
Gross sales, trading business P2,500,000
Cost of sales 2,000,000
Expenses, trading business 100,000
Interest income, BPI-Makati 20,000
Share in the net income of a general professional partnership, gross of 10% withholding tax 300,000
Royalty, books published in the USA 150,000
Salaries as part-time teacher, gross of P8,500 withholding tax 120,000
Tax payments, first 3 quarters 100,000
Compute the Income tax payable.

Suggested answers/solutions:
1. Income tax payable
Gross compensation income P120,000
Gross sales, trading business 2,500,000
Less: Cost of sales 2,000,000
Gross income 500,000
Add: Other income
Share in the net income of general professional partnership 300,000
Royalty, USA 150,000
Total gross income 950,000
Less: Expenses, trading business 100,000 850,000
Total taxable net income P970,000
Tax due Section 24 (A) 800,000 130,000
170,000 x 30% 51,000 181,000
Less: Tax payments, first 3 quarters 100,000
Withholding tax on share in net income of GPP (10% x 300,000) 30,000
Tax withheld on salaries 8,500 138,500
Tax payable P42,500

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4. Important Pointers in Taxable Partnerships

Exercise: A business partnership is organized by partners Tin, resident citizen and Cris, non-resident alien engaged in trade or
business. They are equal partners. The partnership has the following data for the calendar year ended 2021:

Gross business income (gross sales, P3,000,000) P 1,000,000

Deductible expenses 300,000
Yield from deposit substitute, net of final withholding tax 50,000
Interest income derived from a depository bank under EFCDS, net of withholding tax 100,000
Gain from sale of shares of stock not traded in the local stock exchange, net of CGT 80,000
Withdrawals on the share in the net income of the partners, net of final withholding tax 150,000
Rent income, gross of 5% withholding tax 300,000
Payments of quarterly taxes, first 3 quarters 120,000

Compute the following:

1) Income tax payable of the business partnership;
2) Distributable net income of the partnership; and
3) Final withholding tax on the share of the partners, if any

Suggested answers/solutions:

Question 1 – Gross business income P1,000,000

Add: Rent income 300,000
Total gross income 1,300,000
Less: Deductible expenses 300,000
Taxable net income P1,000,000

Tax due (1,000,000 x 25%, since total asset test cannot be performed) P 250,000
Less: Tax payments, first 3 quarters (120,000)
Creditable withholding tax on rent (5% x 300,000) ( 15,000)
Tax payable P 115,000

2 – Taxable net income P1,000,000

Less: Income tax 250,000
Income after tax 750,000
Add: Yield from deposit substitute 50,000
Interest income (EFCDS) 100,000
Gain from sale of shares of stock not traded in the local stock 80,000
exchange
Distributable net income P 980,000

3- Tin (50%) Cris (50%)

Share in the distributable net income P490,000 P490,000
Tax rate 10% 20%
Final withholding tax P 49,000 P 98,000

Important Pointers in Joint Ventures

g. Exercise: Rhea Construction Company and Issa Construction Company formed a joint venture to undertake construction project
pursuant to an operating consortium agreement under a service contract with the Government. They shared in the income
equally. For the calendar year 2021, the following data on their joint and separate operations were presented:

Joint Venture Rhea Company Issa Company

Gross income P150,000,000 P20,000,000 P30,000,000
Expenses 50,000,000 5,000,000 10,000,000
Tax payments, first three quarters 1,500,000 2,500,000

REQ: a. Compute the:

1) net income of the joint venture 3) tax payable of Rhea Company
2) income tax due from the joint venture 4) tax payable of Issa Company

b. Assuming the above joint venture was engaged in the sale of real estate, compute the:
1) taxable net income of the joint venture. 3) tax payable of Rhea Company.
2) tax due from the joint venture. 4) tax payable of Issa Company.

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Suggested answers/solutions:

Requirement a 1) Gross income P150,000,000

Less: Expenses 50,000,000
Net income P100,000,000

2) None. Joint venture undertaking construction project pursuant to an operating or consortium

agreement under a service contract with the Government.

3) and 4) Rhea Co. Issa Co.

Gross income, separate operation P20,000,000 P30,000,000
Add: Share in joint venture net income (100,000,000 x 50%) 50,000,000 50,000,000
Total gross income 70,000,000 80,000,000
Less: Expenses, separate operation 5,000,000 10,000,000
Taxable net income P65,000,000 P70,000,000
Tax rate (under CREATE Act) 25% 25%
Tax due 16,250,000 17,500,000
Less: Tax payments, first three quarters 1,500,000 2,500,000
Tax payable P14,750,000 P15,000,000

Requirement b 1) Gross income P150,000,000

Less: Expenses 50,000,000
Taxable net income P100,000,000

2) Tax due (100,000,000 x 25% under CREATE Act) P 25,000,000

3) and 4) Rhea Co. Issa Co.

Gross income, separate operation P20,000,000 P30,000,000
Less: Expenses, separate operation 5,000,000 10,000,000
Taxable net income P15,000,000 P20,000,000
Tax rate (under CREATE Act) 25% 25%
Tax due 3,750,000 5,000,000
Less: Tax payments, first three quarters 1,500,000 2,500,000
Tax payable P 2,250,000 P 2,500,000

6. Important Pointers in Co-Ownership

Exercise: John and Sam are brothers who are both resident citizens of the Philippines. They invested P1,000,000 each in buying a
coconut plantation. The land is registered in their names as co-owners.

During the fifth year of operations, the co-ownership had a gross sales of coconut amounting to P30,000,000; gross income of
P20,000,000 and expenses of P15,000,000.Assume taxable period is CY 2021.
Question 1 – How much is the business tax of the co-ownership, if any?
2 – How much is the income tax due of the co-ownership?
3 – How much is the final tax on each co-owner’s share in the co-ownership’s net income.

Suggested answers/solutions:

Question 1
None. Sale of coconut which is an agricultural food product in its original state is exempt from VAT and percentage tax.

Question 2
Gross income P20,000,000
Less: Expenses 15,000,000
Taxable net income P 5,000,000
Regular corporate income tax (25% x 5,000,000) P 1,250,000

Question 3
John Sam
Share in co-ownership income P1,875,000 P1,875,000
Tax rate 10% 10%
Final t ax P 187,500 P 187,500

Computation of net distributable income

Net income before tax P5,000,000
Less: Income tax 1,250,000
Distributable net income P3,750,000

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Exercise: The 2020 and 2021 calendar year data of Alice Corporation are shown below:

Income tax due 2020 P250,000

Less: Tax credits
Quarterly payments for the first three quarters 300,000
Excess tax payments (to be carried over as chosen by the corporation) (P 50,000)

2021 data
First Q Second Q Third Q Year
Sales, gross of 1 % withholding tax P500,000 P1,100,000 P1,500,000 P2,200,000
Cost of sales 250,000 650,000 800,000 1,200,000
Operating expenses 50, 000 150,000 300,000 500,000

REQ: Compute the income tax payable and the due dates under:
a. itemized deductions.
b. Optional Standard Deduction

Suggested answers/solutions:

a. Itemized deductions: Quarterly Declarations (Returns)

First Q Second Q Third Q

Sales P500,000 P600,000 P400,000
Less: Cost of sales 250,000 400,000 150,000
Gross income 250,000 200,000 250,000
Less: Deductions (itemized) 50,000 100,000 150,000
Taxable income, this quarter 200,000 100,000 100,000
Add: Taxable income, previous quarters - 200,000 300,000
Total taxable income to date 200,000 300,000 400,000
Tax rate 25% 25% 25%
Tax due 50,000 75,000 100,000
Less: Tax payments/credits
Prior year’s excess credit (50,000) ( 50,000) (50,000)
Tax payments, previous quarters - - (14,000)
Creditable tax withheld, previous quarters - ( 5,000) (11,000)
Creditable tax withheld, this quarter ( 5,000) ( 6,000) ( 4,000)
Tax payable (overpayment) (P 5,000) P 14,000 P 21,000
Due date May 31, 2021 Aug. 30. Nov. 29. 2021
(May 30 is 2021
Sunday) (August 29 is
Sunday)

Itemized deduction: Annual Return

Sales P2,200,000
Less: Cost of sales 1,200,000
Gross income 1,000,000
Less: Deductions (itemized) 500,000
Taxable income 500,000
Tax rate 25%
RCIT (MCIT is 1M x 1% = 10,000 only, hence, RCIT is higher) 125,000
Less: Tax credits/payments
Prior year’s excess credits ( 50,000)
Tax payments, first three (3) quarters (14k +21k) ( 35,000)
Creditable tax withheld, first three (3) quarters ( 15,000)
Creditable tax withheld, fourth quarter ( 7,000)
Tax payable (overpayment) P 18,000
Due date April 15, 2022

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b. Optional standard deduction: Quarterly returns

First Q Second Q Third Q

Sales P500,000 P600,000 P400,000
Less: Cost of sales 250,000 400,000 150,000
Gross income 250,000 200,000 250,000
Less: Deductions (40% OSD) 100,000 80,000 100,000
Taxable income, this quarter 150,000 120,000 150,000
Add: Taxable income, previous quarters - 150,000 270,000
Total taxable income to date 150,000 270,000 420,000
Tax rate 25% 25% 25%
Tax due 37,500 67,500 105,000
Less: Tax payments/credits
Prior year’s excess credit (50,000) ( 50,000) (50,000)
Tax payments, previous quarters - - (6,500)
Creditable tax withheld, previous quarters - ( 5,000) (11,000)
Creditable tax withheld, this quarter ( 5,000) ( 6,000) ( 4,000)
Tax payable (overpayment) (P 17,500) P 6,500 P 33,500
Due date May 31, 2021 Aug. 30. Nov. 29. 2021
(May 30 is 2021
Sunday) (August 29 is
Sunday)

OSD: Annual Return

Sales P2,200,000
Less: Cost of sales 1,200,000
Gross income 1,000,000
Less: Deductions (40% OSD) 400,000
Taxable income 600,000
Tax rate 25%
RCIT (MCIT is 1M x 1% = 10,000 only, hence, RCIT is higher) 150,000
Less: Tax credits/payments
Prior year’s excess credits ( 50,000)
Tax payments, first three (3) quarters (6,500 + 33,500) ( 40,000)
Creditable tax withheld, first three (3) quarters ( 15,000)
Creditable tax withheld, fourth quarter ( 7,000)
Tax payable (overpayment) P 38,000
Due date April 15, 2022

END

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