PERFORMANCE ON INCOME TAXATION

Exercise Drill No. 1: Return of Capital and Return on Capital

No. Consideration For the loss of Return of Capital Return on Capital

1. P 1, 000, 000 Health 1, 000, 000 0
2. 500, 000 P 400, 000 car 400, 000 100, 000
3. 300, 000 P 350, 000 building 350, 000 0
4. 600, 000 Income 0 600, 000
5. 1, 200, 000 Life 1, 200, 000 0

Exercise Drill No. 2: Income Tax and Transfer Tax

No. Transaction Income Tax Transfer Tax

1. Barter of Properties 
2. Sale of Goods 
3. Rendering of services 
4. Donation of properties 
5. Transfer of properties from a decedent to the heirs

upon death
6. Transfer for less than full and adequate
 
consideration

Exercise Drill No. 3: The tax concept of income

No. Item Taxable Exempt

1. Winning from gambling 
 2. Income from swindling 
3. Indemnity of moral damages 
4. Harvested fruits from on orchard 
5. Compensation income 
6. Interest Income 
7. Amounts received by the insured in excess of insurance

premiums paid
8. Proceeds of life insurance received by the heirs of the

insured
9. Gain on sale of goods by the home office to its branch 
10. Gain on sale of goods and services between relatives 
11. Gain on sale of goods by a parent corporation to a

subsidiary corporation
12. Appreciation in the value of land 
13. Birth of animal offspring 
14. Income of a registered Barangay Micro-Business

Enterprise
15. Cancellation of debt out of gratuity of the creditor 
16. Cancellation of debt by the creditor in exchange of

services rendered by the debtor
17. Matured Interest from coupon bonds 
18. Receipt of bank loan 
19. Salaries of minimum wage earner 
20. PCSO or lotto winnings 
21. Benefits from GSIS, SSS, Pag-ibig or PhilHealth 
22. Discovery of hidden treasure 

Exercise Drill No. 4: Income taxpayer classification

No. Person or entity Classification

1. A fat Mexican tourist NRA-NETB
2. A hardworking overseas Filipino worker NRC
3. An expatriate employee NRC
4. A Filipino who is privately employed in the Philippines RC
5. An unemployed Filipino residing in the Philippines RC
6. A Chinese businessman who and his domicile in the Philippine for 6 NRA-NETB
 months
7. A Japanese who married a beautiful Filipina and has been residing in the
RA
Philippines for 2 years
8. A 2nd year Korean college student studying in the Philippines RA
9. A corporation incorporated under Philippine Law DC
10. A foreign corporation doing business in the Philippines RFC
11. Trust designated by the donor as irrevocable RC
12. Trust designated by the donor as revocable NT
13. A business partnership DC
14. A joint venture organized under a foreign law and is not operating in the
NRFC
Philippines
15. An estate of a Filipino citizen judicially administered in Japan NRC
16. An estate of a Filipino citizen extra-judicially administered in the
NT
Philippines
17. A taxable joint venture organized in the Philippines DC
18. A non-profit corporation organized in the Philippines DC

Exercise Drill No. 5: General Income Tax Rule

No. Taxpayer World Income Philippine Income

1. Non-resident citizen 
2. Resident alien 
3. Non-resident alien engaged in trade or

business
4. Resident foreign corporation 
5. Resident Citizen 
6. Non-resident alien not engaged in trade or

business
 7. Non-resident foreign corporation 
8. Domestic Corporation 
9. Taxable trusts established by a Filipino

citizen in the Philippines
10. Taxable estate of a non-resident citizen

judicially administered abroad

Exercise Drill No. 6: Location and situs of income

No. Income description Within Without

1. Rey earned P100,000 interest income;
P60,000 P40,000
40% of these were from non-resident debtors.
2. A finance company earned P1, 000,000 royalties
600,000 400,000
from a franchise; 40% of these were derived abroad.
3. Raymond earned P100,000 rent from
OFWs from his apartment in the US. He
40,000 100,000
also earned P40,000 rent from his
Philippine condominium unit.
4. Chester, a resident citizen, works home online and
submits his output to clients.
120,000 0
He collected P100, 000 service fee from foreign
clients and P20, 000 from in resident clients.
 5. Mark rendered audit services to client in
Afghanistan for P500, 000. The services were paid 0 500,000
in Afghanistan.
6. Jun has a store in a tourist park in Baguio0
City, Philippines. He earned a total of
40,000 0
P40, 000 gain from selling souvenir items.
40% were from foreign tourists.
7. Don Mariano sold at a gain of P2, 000,000 to a
client abroad a commercial building located in 2,000,000 0
Quezon City, Philippines.
8. John sold his stocks in a domestic corporation to a
50,000 0
foreign investor at a gain of P50, 000.
9. Manso received P20, 000 dividends from a domestic
corporation and P30, 000 dividend income from a 20,000 30,000
non-resident foreign corporation.
10. Andrew received P40, 000 dividends from a
resident foreign corporation; 60% of its historical 24,000 16,000
income is from the Philippines.
11. CDO, Inc. manufactures in the Philippines and sells
to unaffiliated export clients. A total of P100, 000 100,000 0
gross income was earned during the period.
12. ABC manufactures abroad and sells to its
Philippines branch at market prices.
Production cost abroad were P200, 000. Billings to 150,000 100,000
branch totalled P300, 000 while branch sales
totalled P450, 000
13. James received P100, 000 dividends from a resident
foreign corporation which realized 40% of its 0 100,000
income in the Philippines.
14. Ellis received P20, 000 dividend from a non-
0 20,000
resident foreign corporation.
15. Davao plant manufactures tables and sells to
resident clients. A total of P400, 000 gross income 400,000 0
was realized during the period.

Multiple Choice- Theory: Part 1

1. C 9. C
2. D 10. B
3. A 11. B
4. A 12. B
5. A 13. C
6. D 14. D
7. B 15. D
8. B 16. A

Multiple Choice- Theory: Part 2

1. A 10. A
2. B 11. C
3. B 12. B
 5. D 14. D
6. B 15. C
7. C 16. A
8. A 17. D
9. A 18. C

Multiple Choice- Theory: Part 3

1. B 6. D
2. A 7. D
3. A
4. B
5. D

Multiple Choice- Problems

Problem 3-1
Answer: B
Consideration received P 1, 000, 000
Less: Payment of Candy 950, 000
Return on Capital (Candy) P 50, 000
Problem 3-2
Answer: C
Monthly Salary P 22, 000
Add: Consideration received (Sale of Computer) 15, 000
Less: Cost of Computer 12, 000
Return on Capital P 25, 000
Problem 3-3
Answer: C
Consideration received (assignment of insurance) P 120, 000
Less: Cost of insurance
Annual payment P 20, 000
Multiply to: Years paid 4 80, 000
Return on Capital P 40, 000
Problem 3-4
Answer: A
Explanation: All of the proceeds collected are exempted from income tax in accordance with Section 32 of the NIRC.
Problem 3-5
Answer: C
Insurance Proceeds P 120, 000
Less: Cost of insurance
Annual payment P 20, 000
Multiply to: Years paid 4 80, 000
Add: Policy Payment 120, 000
Return on Capital P 200, 000
Problem 3-6
Answer: C
Cash Surrender Value P 200, 000
Less: Insurance Premium Paid
Annual Payment P 20, 000
Multiply to: years paid 7 140, 000
Return on Capital P 60, 000

Problem 3-7
Answer: B

Proceeds Received P 2, 000, 000

Less: Premiums Paid 500, 000
Return on capital P 1, 500, 000
Problem 3-8
Answer: C
Explanation: Return on capital is equal to 500, 000 pesos only which is the difference between the insurance proceeds
received and return of capital which is the cost of the building.
Problem 3-9
Answer: C
Explanation: The 300,000 proceed forms part of a gross income which as a reimbursement for the lost value of the future
harvest. The value of the lost crop is realized not through actual harvest but through the insurance contract he entered into.
Problem 3-10
Answer: D
Indemnity received from patent infringement P 1, 200, 000
Less: Payment for loss of profit 1, 000, 000
Return on Capital P 200, 000
Problem 3-11
Answer: C
Indemnity received from bus company P 800, 000
Less: Impairment of health P 500, 000
Attorney’s fee 100, 000 600, 000
Return on Capital P 200, 000
Problem 3-12
Answer: D
Explanation: This problem falls under the value of human reputation which cannot be measured financially any
indemnity received is deemed a return of capital exempt from income tax.
Problem 3-13
Answer: D
Service fee from professional services P 100, 000
Add: Income from illegal gambling 100, 000
Gain on sale of a personal car 50, 000
Profits from bar restaurant 250, 000
Return on Capital P 500, 000

Problem 3-14
Answer: C
Gain from sale of merchandise to unrelated parties P 800, 000
Add: Gain from sale of merchandise to Asuncion 100, 000
Gain from sale of merchandise to affiliates 200, 000
Total Income subject to income tax P1, 100, 000

Problem 3-15
Denver Salary P 800, 000
Add: Productivity Incentive P 100, 000
Representation and transportation allowance (net)
Granted Allowance P 200, 000
Less: Disbursement 120, 000 80, 000 180, 000
Total income subject to income tax P 980, 000

Problem 3-16
ANSWER D
Gain on sale of personal car P 50, 000
Add: Gross Income 200, 000
Gross Income P 250, 000

Note: Gain on sale is derived from FV of 500,000 divided by 2 less Cost of 200,000.
Gross income= Sales on merchandise (800,000) less Cost of Goods Sold (600,000).
Problem 3-17
ANSWER C
Utility bills P 5,000,000
Multiply to: service charge 2%
Gain/Income (subject to income tax) P 100,000
Problem 3-18
ANSWER D
Prior to 2018, resident citizen, resident alien, non-resident citizen, and non-resident alien engaged to trade are exempt
from tax on PCSO/Lotto Winnings.
Problem 3-19
ANSWER D
Explanation: In the first year of his stay in the Philippines, he did not exceed the 180 days threshold to be considered as a
resident alien so he is still a non-resident alien. At the end of the second year, he will then be considered as a resident
alien since he exceeded the 180 days threshold.

Problem 3-20
ANSWER: A
Explanation: A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an
immigrant or for an employment on a permanent basis is considered as a non-resident citizen.
Problem 3-21
ANSWER B
200,000 Taxable similarly as a resident citizen on income received from sources within the Philippines.
500,000 Rental income earned outside the Philippines by a resident alien is not subject to Philippine income tax.
Problem 3-22
ANSWER C
400,000 A non-resident citizen who earned interest income within the Philippines is subject to Philippine income tax.
300,000 is earned outside the Philippines therefore, it is non-taxable.
Problem 3-23
1. ANSWER D
Business income P 300,000
Add: Professional fees 150,000
Compensation income 400,000
Rent income 500,000
Interest Income 70,000
Total income subject to Phil. Income Tax P 1, 420, 000
Note: Assuming Sarah is a resident citizen, all income earned within the Philippines and abroad are subject to Philippine
income tax.

2. ANSWER C
Business Income P 200,000
Add: Professional fees 100,000
Compensation income 400,000
Rent income 300,000
 Interest income 30, 000
Total income subject to Phil. Income Tax P 1, 030, 000
Note: Assuming Sarah is a resident alien, all income earned within the Philippines are only subject to Philippine income
tax. Income earned abroad are non-taxable.
3. ANSWER B
Business Income P 200,000
Add: Professional fees 100,000
Compensation income 400,000
Rent income 300,000
Interest income 30, 000
Total income subject to Phil. Income Tax P 1, 030, 000
Note: Assuming Sarah is a resident foreign resident, all income earned within the Philippines are only subject to
Philippine income tax. Income earned abroad are non-taxable.
4. ANSWER D

Business income P 300,000

Add: Professional fees 150,000
Compensation income 400,000
Rent income 500,000
Interest Income 70,000
Total income subject to Phil. Income Tax P 1, 420, 000

Note: Assuming Sarah is a domestic corporation, all income earned within the Philippines and abroad are subject to
Philippine income tax.
Case Problem 1

Transactions Within the Philippines Outside the Philippines

Interest income from a non-resident Japanese friend P 10, 000
interest income from the Philippine residents P 40, 000 -
Rent Income from a commercial complex located in
- 500, 000
the USA which is leased to resident Filipinos
Rent income from the boarding house in Baguio city,
200, 000 -
Philippines
Professional fees rendered to Chinese clients in Hong
- 200, 000
Kong
Salary from a resident employer 300, 000 -
Gain from sale of merchandise imported and sold to
100, 000 -
Filipino residents
Gain on sale of merchandise purchased locally and
- 50, 000
sold during his business travel in Hong Kong
Gain on sale of boarding house located in Baguio city
400, 000 -
to as non-resident buyer
TOTAL INCOME P 1, 040, 000 P 760, 000
Case Problem 2

Transactions Within the Philippines Outside the Philippines

Royalty fees from Local hot burger outlet P 500, 000 -
Royalty fees from foreign Hot Burger Outlets - P 200, 000
Gain from sale of equipment to foreign franchisees - 100, 000
Gain from sale of equipment to local franchisees 200, 000 -
Gain from sale of investment in domestic stocks to
50, 000 -
foreign investors
Gain from sale of investments in foreign stock to
Filipino - 40, 000
investors
TOTAL INCOME P 750, 000 P 340, 000
Case Problem 3
Answers:
Income within the Philippines P 1, 400, 000
Income without the Philippines P 1, 360, 000

Total Sales P 3, 400, 000

Less: Manufacturing Cost
Total Sales P 3, 400, 000
Divided by: 1.7 2, 000, 000
Income within the Philippines P 1, 400, 000

Foreign Outlet Sales P 2, 720, 000

Divided by: 2
Income without the Philippines P 1, 360, 000