ACT183: INCOME TAXATION

PRELIM EXAM
S.Y 2020-2021

TRUE OR FALSE
1. In general, the income of a trust for the taxable year which is to be distributed to the beneficiaries
is returnable and will be taxed to the respective beneficiaries. TRUE
2. Income accumulated in the trust for the benefit of unborn person is not reportable income.
FALSE. Income accumulated in the trust for the benefit of unborn person is a reportable
income because the tax imposed upon individuals shall apply to the income of the estates
or any kind of property held in trust including of unborn or unascertained person with
contingent interest.
3. The income of the trust which is accumulated for future distribution is taxed against the
beneficiaries. FALSE. The imposition of tax is taxed against the trustees instead whether
ordinary income or gain from sale of assets corpus of the trust.
4. Each beneficiary must include in his return his distributive share of the net income of the trust.
TRUE
5. The income of irrevocable trust is taxable in the same manner as the income of the estate. TRUE
6. Tax exemption is transferable and assignable. FALSE. Tax is not transferable and assignable.
7. Tax assessment is a process of taxation which involves the passage of tax laws and ordinances
through legislature. FALSE. Tax levy is a process of taxation which involves the passage of
tax laws and ordinances through legislature. Tax assessment involves the act of
administration and implementation of the tax laws by the executive through its
administrative agencies such as the BIR and BOC.
8. The primary requisite of Equality or Theoretical Justice principle is that each taxpayer should be
required to contribute equal amounts in the form of taxes. FALSE. Tax burden should be
proportionate to the taxpayer’s ability to pay. The idea is that people, businesses, and
corporations with higher incomes can and should pay more in taxes.
9. When the power to tax is delegated to the local government, only the legislative branch of the
local government can exercise the power. TRUE
10. No person shall be imprisoned for non-payment of income tax. FALSE. No person shall be
imprisoned for debt or non-payment of poll tax.
11. A foreigner who stays in the Philippines for more than 180 days during the taxable year is
deemed as doing business within and his income within and outside the Philippines is taxable in
the Philippines. FALSE. Income within the Philippines only.
12. An individual taxpayer is exempted from filing income tax return if his sole income has been
subjected to final withholding tax. TRUE
13. Both resident and non-resident foreign corporation’s interest income from peso deposits is
subject to a final tax of 20%. FALSE. Nonresident foreign corporation is subject to 30% tax
rate.
14. The excess of MCIT over normal corporate tax that has not been credited against normal tax
within the reglementary period shall be removed from the book balance by charging it to the
income tax expense account. FALSE. It is charged by a debit entry to retained earnings and
a credit entry to deferred charges-MCIT since this tax is not allowable as deduction from
gross income.
15. The excess MCIT over normal corporate tax can be carried forward as tax credit against the
normal tax for the four immediately succeeding years. FALSE. Excess MCIT can be carried
forward as tax credit against the normal tax for the three (3) immediate succeeding years.
16. A corporation under taxation does not include general professional partnership but includes joint
venture under a service contract with the government. FALSE. Corporation under taxation
does not include both GPP and joint venture or consortium.
17. Nonresident foreign corporations are taxed based on their net taxable income within. FALSE.
Nonresident foreign corporations are taxed based on their gross taxable income within.
18. If the payor of the dividend is a domestic company and the recipient of the dividend is either a
domestic or resident foreign corporation, such dividend is exempt from income tax. TRUE
19. For purposes of determining MCIT on gross receipts, cost of services is allowed to be deducted
to arrive at the tax base. TRUE
20. A sale of real property located in the Philippines by nonresident foreign corporation is subject to a
capital gains tax of 6%. FALSE. Imposing capital gains tax on a nonresident foreign
corporation is not applicable because only the Domestic Corporation is subject to 6%
capital tax gains.
21. The share of a partner in the general professional partnership is subject to final withholding tax of
10% if the amount is below P720,000. FALSE. The share of a partner in the GPP is subject to
FWT of 15% creditable WT if the amount of income payment is more than P720,000,
otherwise, 10%.
22. The income of general commercial partnership is also subject to MCIT or normal corporate tax
whichever is applicable. TRUE
23. If the only source of income of the partner is his share in a general professional partnership, he is
no longer required to file the annual income tax return. FALSE. The partner will be required to
file income tax return for the purpose of furnishing information as to the share of each
partner in the net gain or profit, which each partner shall include in his individual ITR.
24. Partner’s contribution to a commercial partnership are subject to a final tax of 10%. FALSE. It is
not the contribution that is subject to a final tax of 10% but its net taxable income as
dividends.
25. A general professional partnership is not required to file its annual income tax return. FALSE. A
GPP is still required to file income tax return for the purpose of furnishing information.
COMPUTATIONAL
1. Mr. X, a NRA-ETB, is a partner of XYZ partnership, a general professional partnership established
and operating in the Philippines. During the taxable year, her share in the distributable net income of
the partnership amounted to P750,000. How much is the income tax due of Mr. X during the taxable
year?

Answer:

Tax on:
First P400,000 ₱ 30,000
In excess of P400,000; (P350,000 x 25%) 87,500
Income Tax Due ₱ 117,500

2. Mr. X, a NRA-ETB, is a partner of XYZ partnership, a commercial partnership established and

operating in the Philippines. During the taxable year, her share in the distributable net income of the
partnership amounted to P750,000. How much is the income tax due of Mr. X during the taxable
year?

Answer:

Distributable Net Income of the partnership ₱ 750,000

Tax Rate 20%
Income Tax Due ₱ 150,000

X and Y formed a partnership with profit and loss sharing ratio of 50:50. The summary of the
partnership operations for the taxable year are as follows:

Net Income 1,100,000

Interest Income, net of final tax 30,000

3. How much is the income tax due of the partnership if the partnership is a general professional
partnership?

Answer: 0, because under Section 26 of the Tax Code, as amended, a general professional
partnership as such shall not be subject to income tax. However, persons engaging in
business as partners in a general professional partnership shall be liable for income tax
only in their separate and individual capacities.
4. How much is the income tax due of each partner in the GPP assuming that their respective creditable
withholding tax has been withheld and remitted to the BIR?

Answer:

Net Income ₱ 1,100,000

Income subject to Final Tax (NET) 30,000
Distributable Income ₱ 1,130,000
Profit/Loss Ration 50%
Distributive share of each partner ₱ 565,000

Tax on:
First P400,000 ₱ 30,000
In excess of P400,000; (165,000 x 25%) 41,250
Income Tax Due ₱ 71,250
Less: Creditable Withholding Tax (P565,000 x
10%) 56,500
Income Tax still due and payable ₱ 14,750

5. How much is the final tax of each partner assuming the partnership is a commercial partnership?

Answer:

Taxable Net Income ₱ 1,100,000

Less: Corporate Income Tax (P1.1M x 30%) 330,000
Net Income ₱ 770,000
Income subject to Final Tax (NET) 30,000
Distributable Income ₱ 800,000
Profit/Loss Ratio 50%
Distributive Share ₱ 400,000
Final Tax Rate 10%
Final Withholding Tax ₱ 40,000

6. X Corporation, a closely-held corporation, reported the following during the taxable year:
Accumulated Retained Earnings 3,000,000
Paid-up share capital 2,000,000
Income tax due and payable 900,000
20% Final tax on interest income 60,000
Dividend income 200,000
Tax exempt gain 1,000,000
Dividend declared and paid 300,000
Reserved for plant expansion 200,000
Investment in Bonds 2,000,000
 How much is the accumulated earning tax or IAET?
Answer:

Taxable Income (P900,000/30%) ₱ 3,000,000

Add: Gain on life insurance ₱ 1,000,000
Interest Income (P60,000/20%) 300,000
Dividend Income 200,000 1,500,000
Total   ₱ 4,500,000
Less: Income tax due and payable ₱ 900,000
Dividend declared and paid 300,000
Reserved for plant expansion 200,000
Final Tax on interest income 60,000 1,460,000
Improperly Accumulated Earnings   ₱ 3,040,000
IAET Rate 10%
Improperly Accumulated Earnings Tax ₱ 304,000

X is a special nonresident foreign corporation. It reveals its income and expenses within the
Philippines and it is as follows:
Gross Receipts 5,000,000
Operating Expenses 2,000,000

7. How much is the income tax due if X Corporation is a cinematographic file distributor?

Answer:

Gross Receipts ₱5,000,000

Tax Rate 25%
Income Tax Due ₱1,250,000

8. How much is the income tax due if X Corporation is a lessor of aircraft?

Answer:

Gross Receipts ₱5,000,000

Tax Rate 7.50%
Income Tax Due ₱375,000

9. How much is the income tax due if X Corporation is a lessor of vessels chartered by Philippine
Nationals?

Answer:
Gross Receipts ₱5,000,000
Tax Rate 4.50%
Income Tax Due ₱225,000
 X Corporation has been operating since January 1, 2012. Data pertinent to its operations
covering 2014 to 2016 are as follows:
2014 2015 2016
Gross sales 3,080,000 4,100,000 5,200,000
Sales returns 80,000 100,000 200,000
Cost of sales 1,500,000 2,000,000 2,500,000
Operating Expense 1,450,000 1,900,000 2,100,000

10. How much is the income tax due of X Corporation of the year 2014?

Answer:

Gross Sales ₱ 3,080,000

Less: Sales returns 80,000
Net Sales ₱ 3,000,000
Less: Cost of Sales 1,500,000
Gross Income ₱ 1,500,000
Less: Operating Expenses 1,450,000
Net Taxable Income ₱ 50,000
Regular Corporate Income Tax Rate 30%
Regular Corporate Income Tax ₱ 15,000

11. How much is the income tax due of X Corporation of the year 2015?

Answer:

Gross Sales ₱ 4,100,000

Less: Sales returns 100,000
Net Sales ₱ 4,000,000
Less: Cost of Sales 2,000,000
Gross Income ₱ 2,000,000

Minimum Corporate Income Tax Rate 2%

Minimum Corporate Income Tax ₱ 40,000

12. How much is the income tax due of X Corporation of the year 2016?
 Answer:
Gross Sales ₱ 5,200,000
Less: Sales returns 200,000
Net Sales ₱ 5,000,000
Less: Cost of Sales 2,500,000
Gross Income ₱ 2,500,000
Less: Operating Expenses 2,100,000
Net Taxable Income ₱ 400,000
Regular Corporate Income Tax Rate 30%
Regular Corporate Income Tax ₱ 120,000
Less: Excess of MCIT over RCIT 10,000
Income Tax Due ₱ 110,000

13. During the year 2016, how much can be charged to retained earnings due to its tax transaction?

Answer: 0, deferred charges from the year 2015 were credited to the income tax payable of
2016. Thus, reducing the taxable year’s total income tax due. Deferred charges are only
charged to retained earnings when it expires.

14. X operates a pet shop and at the same time, offers interior design services to his clients. The
following date were provided by X for 2018 taxable year:
Pet Shop:
Gross sales 1,800,000
Cost of sales 600,000
Operating Expenses 200,000

Interior design services:

Gross receipts 1,150,000
Cost of services 120,000
Operating expenses 80,000
X signified to be taxed at 8% income tax rate on her initial quarterly income tax return, how much is her
income tax liability for the year?

Answer:

Gross Sales ₱1,800,000

Gross Receipts 1,150,000
Total ₱2,950,000
Less: 250,000
Total ₱2,700,000
Rate 8%
Income Tax Liability ₱216,000.00

X, a self-employed resident citizen provided the following date for 2018 taxable year:
Sales 2,800,000
 Cost of sales 1,125,000
Business expense 650,000
Gain on sale of shares of foreign corporation 50,000
Interest income from peso bank deposit 80,000
Interest income from FCDS 120,000
Gain on sale of shares of DC (non-listed) 150,000
Gain on sale of shares of DC (listed) 200,000
Gain on sale of land in the Philippines held as capital asset with a cost of 1,500,000 when zonal
value is 1,900,000 (Gain is P500,000)

15. How much is the total income tax expense of X for the year?

Answer:

Sales ₱ 2,800,000
Less: Cost of sales 1,125,000
Gross Income ₱ 1,675,000
Less: Business Expenses 650,000
Net Income ₱ 1,025,000
Other Income: Gain on sale of shares of FC 50,000
Total Taxable Income ₱ 1,075,000

Tax on:
First P800,000 ₱ 130,000
In excess of P800,000 (P275,000x30%) 82,500

Final Withholding Tax on:

Interest Income - Peso bank deposit (P80,000x20%) 16,000
Interest Income - FCDS (P120,000x15%) 18,000

Capital Gains Tax on:

Gain on sale of shares of DC - non-listed
(P150,000x15%) 22,500
Gain on sale of land (1,500,000+500,000) 6% 120,000
Total Income Tax Expense ₱ 389,000

16. How much is the total income tax expense of X for the year if he opted for the 8% optional tax rate?

Answer:

Sales ₱ 2,800,000
Add: Gains on sale of shares of FC 50,000
Total Taxable Income ₱ 2,850,000
Less: 250,000
Total ₱ 2,600,000
Tax Rate 8%
Income Tax Payable ₱ 208,000
Add:
Final Withholding Tax on:
 Interest Income – Peso bank Deposit (80,000x20%) 16,000
Interest Income – FCDS(120,000x15%) 18,000

Capital Gains Tax on:

Gain on sale of shares of DC – non-listed
(150,000x15%) 22,500
Gain on sale of land(1,500,000+500,000) 6% 120,000
Total Income Tax Expense ₱ 384,500

17. Assume Mr. X sold a real property (land) treated as capital asset located abroad. The selling is
P4,500,000. The property was acquired 5 years ago with a cost of P3,500,000. How much tax can b
be assessed in this transaction?

Answer: 0, because the property is located abroad and it cannot be taxed because the levy
must only apply within its jurisdiction.

Mr. X is self-employed and/or professional. He provided the following information for 2019 taxable year:
Gross Sales 1,650,000
Cost of Sales 500,000
Business Expense 425,000
Rental income (NET) 308,750
PCSO Winnings 500,000
Royalty income-books 120,000
Other royalty income – Philippines 60,000
Dividend Income – domestic corporation 40,000
Interest income – PNB, Manila 100,000
Interest income from FCDC, Philippines 50,000
Creditable withholding tax 65,000
Quarterly tax payments 82,500

18. How much is the income tax payable of Mr. X that will reflect in his ITR?

Answer:

Gross Sales ₱ 1,650,000

Rental Income (P308,750/95%) 325,000
Less: Cost of Sales ₱ 500,000
Business Expenses 425,000 925,000
TOTAL INCOME   ₱ 1,050,000

Tax on:
First P800,000 income ₱ 130,000
 In excess of P800,000 (P250,000 x
30%) 75,000
Income Tax Due ₱ 205,000
Less: Creditable Withholding Tax ₱ 65,000
Quarterly Tax Payments 82,500 147,500
Income Tax Payable   ₱ 57,500

19. Assume that Mr. X opted to be taxed 8% optional tax, how much is the income tax payable of Mr. X
that will reflect in his ITR?

Answer:

Gross Sale ₱ 1,650,000

Add: Other Income: Rental income (net) 308,750
Total taxable income ₱ 1,958,750
Less: 250,000
Total ₱ 1,708,750
Tax rate 8%
Income tax payable ₱ 136,700
Less: Creditable withholding tax 65,000
Quarterly tax payments 82,500
Income Tax Still Payable -₱ 10,800

20. What is the total amount of final taxes?

Answer:
PCSO winnings (P500,000x20% ₱ 100,000
Royalty - books (P120,000x10%) 12,000
Other royalty (P60,000x20%) 12,000
Dividend from domestic corporation
(P40,000x10%) 4,000
Interest - PNB (P100,000x20%) 20,000
Interest - FCDC (P50,000x15%) 7,500
Final Taxes ₱ 155,500

CASE ANALYSIS
1. The President of the Philippines and the Prime Minister of Korea entered into an executive
agreement in respect of a loan facility to the Philippines from Korea whereby it was stipulated that
interest on loans granted by private Korean financial institutions in the Philippines shall not be
subject to Philippine income taxes. Is the exemption valid?

No. Just because it was the president who they’re dealing with doesn’t mean it
would give them such convenience. The president has no power to grant such tax
exemption and taxation is exercised only by the law-making body and no law granting tax
exemption shall be passed without the concurrence of the majority of all members of
congress. In the narrow sense, the power to make tax laws cannot be delegated to other
branches of the government.

2. Deado Corporation, a non-stock corporation which owns and operates a memorial park, contests
the real estate assessment made by the City of General Santos. Sued by the City, Deado
Corporation contends that the burial grounds are exempt form real estate tax. It appears that two
years prior to the assessment, Deado corporation had declared dividends to its stockholders. Is
the corporation justified in disputing assessment?

No, Deado Company does not qualify under Section 30 of the Tax Code to be tax-
exempt for the reason that the said corporation had declared dividends to its
stockholders, which only implies that the corporation is classified as a “profit
corporation” rather than a non-profit corporation. And it is said that any activity conducted
for profit, regardless of the disposition made of such income, shall be subject to tax
imposed under the Tax code.

3. To provide means for the rehabilitation and stabilization of the sugar industry so as to prepare it
for the eventuality of the loss of the quota allocated to the Philippines resulting from the lifting of
U.S sanctions against African countries. Congress passes a law increasing the existing tax on the
manufacture of sugar on a graduated basis. All collections made under the law are to accrue to a
special fund to be spent only for the purposes enumerated herein, among which are to place
sugar industry a living wage to improve their working conditions.

Matamis, a sugar planter, files a suit questioning the constitutionality of the law alleging that the
tax is not for a public purpose as the same is being levied exclusively for the aid and support of
the sugar industry. Is the contention is Matamis tenable?

Yes. In law, there is locus standi, which means having the right to bring a legal
action to test the validity of a statute that involved the expenditure of public money.
Taxpayers have sufficient interest of preventing the illegal expenditures of money derived
from taxation because they are the ones who are generally affected if public funds were
subjected from corruption or used from personal interest or gain.

4. Ms. Mayamanin contends that that her tax delinquency of P2,400 has been extinguished by legal
compensation. She claims that the government owes her P4,116 when a portion of her land was
expropriated on October 19. Hence, her obligation had been set-off by operation of law. Is the
reasoning of Ms. Mayamanin justified? Why or why not?

No, because there is no legal basis for the contention. There can be no off-setting
of taxes original the claims against the claims that the taxpayer may have against the
government. Taxes cannot be the subject of compensation. The government and the
taxpayer are not mutually creditor and debtors of each other and a claim for each other
 and a claim for taxes is not such a debt demand, contract or judgement as is allowed to be
set-off.

Furthermore, the tax was due to the city government. While the expropriation
effected by the national government. In fact, the expropriation payment was already
deposited with the PNB long before the sale at public auction of his property was
conducted.

5. After having informed that some massage parlors are being used as fronts for prostitution, the
Sangguniang Panglungsod passed an ordinance subjecting the massage parlors to such onerous
taxes that leave them no other alternative but to stop operating. Is the ordinance valid?

Yes. The power to tax may include the power to destroy if it is used validly as an
implement of the police power in order to discourage or prohibit certain things or
enterprises inimical to the public welfare.