INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

102

Chapter 12: Income Tax of Corporations

CHAPTER 12

INCOME TAX OF CORPORATIONS

Problem 12 1 TRUE OR FALSE 1. False for tax purposes, a corporation does not include both general professional partnership and joint venture with a consortium service contract with the government. 2. False domestic corporations refer only to corporations that are created or organized under Philippine laws. Foreign corporations are also operating in the Philippines but not created under Philippine laws. 3. False nonresident corporations are taxed based on gross income within. 4. False Only domestic corporations are to be taxed for income within and without. 5. True 6. True 7. True 8. False the MCIT is applicable also to resident foreign corporations for their income derived within. 9. True 10. False Not taxable because the corporation is a foreign corporation. 11. False 30%, but legally, foreign corporations are not allowed to own real property in the Philippines as provided by anti-dummy law. 12. False interest income of resident foreign corporation is subject to a final tax of 20%, but interest income of nonresident foreign corporation is subject to normal corporate tax. 13. True Problem 12 2 TRUE OR FALSE 1. True 2. True 3. False MCIT is applicable only to corporation that are subject to normal tax rate. 4. True 5. False Other fixed or determinable annual, periodic or casual gains, profits and income are not treated as branch profit. 6. True 7. True 8. True 9. True 10. False exempt from income tax and VAT. 11. False not imposed also to insurance companies 12. True Problem 12 3 TRUE OR FALSE 1. False the net additions to reserve funds are not part of income but instead deducted from gross income. 2. True 3. False In general, GOCCs are subject to corporate income tax. 4. True 5. False royalties received in the active pursuit of business is subject to a normal tax of 30%. 6. True 7. True 8. True 9. True

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

103

Chapter 12: Income Tax of Corporations

10. False If the unrelated income of the proprietory educational institution exceeds the related income, the income tax rate applicable would be the corporate income tax of 30%. 11. False Sale of real property outside the Philippines by a resident foreign corporation is not subject to tax in the Philippines. 12. False 10% based on gross income within Problem 12 4 1. C 2. A 3. A 4. D 5. C 6. A 7. A 8. B 9. A 10. C 11. A* 12. A 13. B Problem 12 5 1. B 2. A 3. D 4. A 5. B 6. B 7. A 8. D 9. B 10. C 11. D Only family-closed corporation is subject to IAET. 12. A 13. C

*This is on the assumption that a resident foreign corporation acquired a real property and subsequently sold it without the confiscation of the real property by the Philippine Government. As a rule, foreign corporations are not allowed to own and acquire real properties in the Philippines as provided by the anti-dummy law. (PD 715, May 28, 1975) Problem 12 6 1. Letter C Gross income (P8,000,000 + P4,000,000) Business expenses (P5,000,000 + P3,000,000) Gain on sale of warehouse (P3,000,000 P2,000,000) Net taxable income Corporate income tax (P5,000,000 x 30%) Note: The land and warehouse sold is an ordinary asset. Hence, subject to normal tax. 2. Letter B Gross income within Business expenses Gain on sale of warehouse (P3,000,000 P2,000,000)* Net taxable income Corporate income tax (P4,000,000 x 30%) P8,000,000 ( 5,000,000) 1,000,000 P4,000,000 P1,200,000 Taxable income P12,000,000 ( 8,000,000) 1,000,000 P5,000,000 Income tax due

P1,500,000

*This is on the assumption that a resident foreign corporation acquired a real property and subsequently sold it without the confiscation of the real property by the Philippine Government.

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Problem 12 7 D Gross income within Multiplied by normal corporate tax rate Income tax due Problem 12 8 Not in the Choices = P2,700,000. Gross income within Less: Allocated operating expenses (P30,000,000 x 15/75) Net taxable income Multiplied by normal corporate tax rate Income tax due Problem 12 9 1. Letter D Domestic corporation: Total net income (P160,000 + P240,000) Multiplied by normal tax rate Income tax due Less: Tax credits: Local Foreign, Actual, P60,000 lower limit (P120,000 x 240/400) = P72,000 Income tax still due and payable Supporting computation: Gross income within without (P180,000 + P75,000 + P190,000) Deductions within - without (P80,000 + P25,000 + P100,000) Net income 2. Letter C Resident foreign corporation Gross income within Deductions within Net income Multiplied by normal corporate income tax Income tax due Less: Local Income tax still due and payable

104

Chapter 12: Income Tax of Corporations

P2,800,000 30% P 840,000 P15,000,000 6,000,000 P 9,000,000 30% P2,700,000

P400,000 30% P120,000 P42,000 60,000 102,000 P18,000 Philippines P450,000 (290,000) . P160,000 Foreign P445,000 (205,000) P240,000

P445,000 (205,000) P240,000 30% P 72,000 42,000 P 30,000 P2,000,000 6,000,000 P8,000,000 30% P2,400,000 P 8,000,000 5,000,000 P13,000,000 30% P 3,900,000

Problem 12 10 D Net income from PAGCOR (P30,000,000 - P28,000,000) Net income from NAPOCOR (P10,000,000 P4,000,000) Total net income Multiplied by normal corporate tax rate Income tax due Problem 12 11 C Net income from National Power Corporation Net income from National Books Store Total net income Multiplied by corporate normal tax Income tax due

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

105

Chapter 12: Income Tax of Corporations

Problem 12 12 A Gross profit (P3,000,000 P1,400,000) Capital gains on sale of paintings Operating expenses before charitable contribution P100,000) Net income before charitable contribution Charitable contributions - limit (P1,840,000 x 5%), lower Actual P100,000 Net taxable income Multiplied by corporate normal tax rate Income tax due Problem 12 13 C Operating expenses Less: Net operating loss 4th year Gross income Multiplied by MCIT rate Minimum corporate income tax

(P800,000

P1,600,000 940,000 (700,000) P1,840,000 ( 92,000) . P1,748,000 30% P 524,400 P4,000,000 100,000 P3,900,000 2% P 78,000

Domestic and resident foreign corporation taxed during the taxable year with MCIT cannot enjoy the benefit of NOLCO. Nevertheless, the running of the three (3) year period for the expiry of NOLCO is not interrupted by the fact that such corporation is subject to MCIT. (Rev. Reg. 14-2001)
Problem 12 14 B Operating loss Operating expenses Gross income Multiplied by minimum corporate income tax rate Income tax payable 4th year 5th year net income Multiplied by normal tax rate Income tax due Less: Excess of minimum income tax over normal tax Net income tax payable Problem 12 15 1. Letter A Net income per GAAP Add: Allowance for bad debts Income before incentive to CHED contribution Less: Incentive to CHED contribution (P300,000 x 50%) Net taxable income Multiply by normal corporate income tax rate Income tax due 2. Letter C Net income per GAAP Add: Operating expenses Gross income Multiply by minimum corporate income tax rate Minimum corporate income tax higher (P 200,000) 1,000,000 P 800,000 2% P 16,000 P320,000 30% P 96,000 16,000 P 80,000

P5,000,000 150,000 P5,150,000 150,000 P5,000,000 30% P1,500,000 P 5,000,000 80,000,000 P85,000,000 2% P 1,700,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

106

Chapter 12: Income Tax of Corporations

Normal tax (P5,000,000 x 30%) Problem 12 16 1 Letter A . Income tax payable current year MCIT (P8,000,000 x 2%) 2 . Letter C Net operating income (P8,000,000 P7,000,000) Multiplied by normal tax rate Normal tax Less: Excess of MCIT Income tax payable

P1,500,000

P 160,000

P1,000,000 30% P 300,000 100,000 P 200,000

Problem 12 17 A None. There is no excess corporate MCIT over NCIT in year 3 to be applied on year 4 because the MCIT is not yet applicable for the company as it only has 3 years of operation in year 3. Problem 12 18 1. Letter A Income tax payable Divided by MCIT tax rate Gross income 2. Letter C Income tax expense Divided by corporate normal income tax rate Net taxable income

200,000 2% P10,000,000 P P 150,000 30% 500,000

The excess of MCIT over NCIT shall be recorded in the corporations books as an asset under the account title Deferred Charges, MCIT. This asset account shall be carried forward and may be credited against the normal tax due for a period not exceeding three taxable years immediately succeeding the taxable year(s) in which the same has been paid. (Rev. Regs. No. 9-98) Problem 12 19 C Rental income (P1,900,000/95%) Capital gains Total gross income Operating expenses Net taxable income Multiplied by corporate normal tax Income tax due Excess of MCIT over NCIT Add: Expanded withholding tax (P2,000,000 P1,900,000) Total creditable income tax Less: Income tax due Tax refund P2,000,000 500,000 P2,500,000 (2,350,000) P 150,000 30% P 45,000 P 40,000 100,000 P140,000 45,000 P 95,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Problem 12 20 A Gross income (P1,600,000 P1,200,000) Less: OSD (P400,000 x 40%) Net income Multiplied by normal tax rate Income tax due Capital gains tax (P1,600,000 x 6%) Tax advantage using normal tax (P96,000 P72,000) Problem 12 21 1. Letter D Domestic Corporation: a. Not traded in local exchange: Selling price Cost (P110 x 12,000 shares) Capital gain Tax on P100,000 x 5% Tax on excess (P280,000 P100,000) x 10% b. Traded in local exchange (P1,800,000 x .005) c. d. Sale of land abroad (P3,000,000 P2,500,000) x 30% Sale of land Philippines (P1,200,000 x 6%)

107

Chapter 12: Income Tax of Corporations

P400,000 160,000 P240,000 30% P 72,000 P96,000 P24,000

P1,600,000 1,320,000 P 280,000 P 5,000 18,000 P 23,000 9,000

150,000 72,000 P254,000 Note: OSD is not applicable to land sold in Japan because the land is a capital asset. 2. Letter A Resident Foreign Corporation a. b. c. d. (P1,200,000 x 6%) Total 3. Answer not in the choices = P122,000. Nonresident Foreign Corporation a. b. c. d. (P1,200,000 P900,000) x 30% Total Problem 12 22 C Interest from savings deposits (P3,000,000 x 20%) Royalty income (P1,000,000 x 20%) Interest from a depository bank EFCD (P1,500,000 x 7.5%) Total passive final tax

P 23,000 9,000 72,000 P104,000

P 23,000 9,000 90,000 P122,000 P 600,000 200,000 112,500 P 912,500

Dividend from a domestic corporation received by a domestic corporation is tax exempt. Dividend from a nonresident foreign corporation is subject to normal tax.

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

108

Chapter 12: Income Tax of Corporations

Problem 12 23 1. Letter B Domestic Corporation a. ($20,000 @ 7.5% x P50) b. P300,000 @ 20% c. P100,000 @ 20%* d. P 80,000 @ 20% Total 2. 3. Letter B = Resident foreign corporation (same as letter 1) Letter C Nonresident foreign corporation a. Exempted b. (P300,000 @ 30%) c. (P100,000 @ 30%) d. (P 80,000 @ 30%) Total

P75,000 60,000 20,000 16,000 P171,000

P90,000 30,000 24,000 P144,000

*It is assumed that the royalty income from franchising is a passive income. Problem 12 24 1. Letter B Dividend income - (PCB and Magnolia are both domestic corporations) Interest income on US dollar loans ($3,000 x 10% x P50) 2. Letter C Interest on Philippine peso loans Operating expenses Taxable income Multiplied by normal corporate tax Income tax due A P1,000,000 1,500,000 P2,500,000 (3,000,000) (P 500,000) P50,000

Exempt P15,000 P2,000,000 ( 900,000) P1,100,000 30% P 330,000

Problem 12 25 Related income Unrelated income Total revenue Operating expenses Net loss

Minimum corporate income tax (P2,500,000 x 2%) Problem 12 26

1 . 2 .

Letter D Letter A
Educational income: Tuition and miscellaneous fees Sales of canteen Sales of bookstore Total related income Non-educational income: 200A P4,000,000 700,000 300,000 P5,000,000 200B P6,000,000 1,600,000 400,000 P7,000,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Rent income (net/95%) Sale of scrap materials Total unrelated Costs and expenses: Cost of sales canteen Cost of books sold Operating expenses Purchase of library books Cost of classroom construction Purchase of school furniture Total costs and expenses Net taxable income 200A Income tax (P6,120,000 x 30%) 200B Income tax (P6,700,000 x 10%) Less: CWT from rent 200A (P5,200,000 - P4,940,000) 200B (P5,500,000 P5,225,000) Income tax still due and payable P5,200,000 60,000 P5,260,000 (P400,000) ( 240,000) (2,000,000) (1,000,000) ( 500,000) . (P4,140,000) P6,120,000 P1,836,000

109

Chapter 12: Income Tax of Corporations

P5,500,000 20,000 P5,520,000 (P 800,000) ( 320,000) (3,000,000) (1,500,000) ( 200,000) (P5,820,000 ) P6,700,000 P670,000

260,000 . P1,576,000

275,000 P395,000

A proprietory educational institution has an option to either deduct its capital expenditures on depreciable assets during the year for the expansion of school facilities (outright expense) or deduct allowances for depreciation on such assets, [Sec. 34 (A) (2), NIRC]. In this case, it is more advantageous for BCU to treat capital expenditures on depreciable assets as outright expense. The non-educational income in 200A is greater than the educational income; therefore, the tax rate to be used in 200A should be the normal corporate income tax of 30%. On the other hand, a special tax rate of 10% should be used in 200B because the educational income is greater than the non-educational income. [Sec. 27 (B), NIRC] Problem 12 27 D P-0-, Government educational institutions are tax-exempt. Problem 12 28 B Income tax payable (P700,000 x 0.025) Problem 12 29 A Manila to Beijing (P5,000 x 2,000) Manila Hong Kong Beijing (P6,000 x 4,000) x P3,000/P6,000 Manila to Hong Kong (P3,000 x 2,000) Total reportable gross income within Multiplied by applicable rate Income tax Problem 12 30 A Within Gross receipts Multiplied by special tax rate Philippine income taxes Dragon Films P10,000,000 25% P 2,500,000 P17,500 P10,000,000 12,000,000 6,000,000 P28,000,000 2.5% P 700,000 American Aircraft P20,000,000 7 % P 1,500,000

Note: Gross income means gross receipts. The aforementioned resident foreign corporations are subject special tax rates (final taxes). They are not allowed to deduct costs or expenses

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

110

Chapter 12: Income Tax of Corporations

from their gross receipts. The cost of service is only applicable for MCIT purposes. (Sec. 27(E) (4), NIRC) Problem 12 31 A Operating net income after tax Tax rate on branch remittance Branch profit remittance tax Branch profit remittance, net of tax (P24,000,000 x 85%) Dividend income from Pharma Co. Total branch profit remittance P24,000,000 15% P 3,600,000 P20,400,000 7,000,000 P27,400,000

Note: Sec. 28 (A) (4) of NIRC provides that the following income within of a foreign corporation shall not be treated as branch profit for tax purposes unless the same are effectively connected with the conduct of the trade or business in the Philippines: 1. 2. 3. 4. Interest, dividends, rents, royalties; Remuneration for technical services; Salaries, wages, premiums, annuities, emoluments; Other fixed or determinable annual, periodic or casual gain, profits, income and capital gains.
P20,000

Problem 12 32 B Income tax (P80,000/80%) x 20%

Note: Although cooperatives are tax-exempt, they are still subject to final income taxes on interest income. Problem 12 33 A All of the transactions of Unlad Cooperative are exempt from income taxes. Problem 12 34 B 1 Letter A . Income tax due 1st quarter [(P495,000/99%) P480,000) x 30% Less: 1% creditable withholding tax (P495,000/99%) P495,000 200A excess tax credit used in first quarter 200B Income tax still due and payable 200B first quarter 2 . Letter C Income tax due 2nd quarter [(P792,000/99%) P700,000) x 30% Income tax due 1st quarter [(P495,000/99%) P480,000) x 30% Withholding tax 2nd quarter [(P792,000/99%) (P495,000/99%) x 1% Remaining excess tax credit 200A (P10,000 P1,000) Income tax still due and payable 2 nd quarter 200B P 30,000 ( 6,000) ( 3,000) ( 9,000) P 12,000

P 6,000 P5,000 1,000 6,000 P - 0 -

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

111

Chapter 12: Income Tax of Corporations

Problem 12 35 C Gross receipts (P2,940,000/98%) Less: OSD (P3,000,000 x 40%) Net taxable income Multiplied by corporate normal tax rate Income tax due Less: Creditable income taxes paid 1st Qtr. (P1,960,000/98%) x 60% x 30% 2% creditable tax 2nd quarters gross receipts (P2,940,000/98%) (P1,960,000/98%) x 2% Income tax still due and payable 2 nd Qtr.

P3,000,000 1,200,000 P1,800,000 30% P 540,000 P360,000 20,000 380,000 P 160,000

With the issuance by the BIR of RMC No. 16-2010 in relation to RR No. 2-2010, the taxpayers are no longer allowed to change methods (OSD to Itemized Deductions or vice versa) from quarter to quarter within the same taxable year. The said RMC provides that the method adopted for the 1st quarter shall be the same method to be applied to the succeeding quarters of the same taxable year as well as in the preparation of the annual ITR of the said taxable year. Problem 12 36 C Income tax from ordinary net income (P1,000,000 P900,000) x 30% Final income taxes: Interest income on peso savings (P100,000 x 20%) Expanded foreign currency deposit (P100,000 x 7.5%) Total income taxes Problem 12 35 A Income tax on interest income from peso savings bank (P100,000 x 30%) Tax on cash dividend domestic corporation (P100,000 x 30%) Tax on cash dividend from a resident foreign corporation (P100,000 x 30%) Total income tax Interest income earned by nonresident foreign corporation from EFCD is tax-exempt. Problem 12 36 C 3rd Quarter P880,000 (704,000) P176,000 30% P 52,800 4th Quarter P1,120,000 (896,000) P 224,000 30% P 67,200 ( 52,800) P 14,400 P 30,000 20,000 7,500 P 57,500 P30,000 20,000 7,500 P57,500 P 30,000 30,000 30,000 P90,000

Gross income - cumulative Itemized deductions - cumulative Net taxable income Multiplied by normal corporate income tax Income tax due Total income tax paid in previous quarters - tax credit Income tax still due and payable Problem 12 37 C Regular tax (P1,000,000 P900,000) x 30% Final tax on interest income peso deposit (P100,000 x 20%) Final tax on interest income EFCD (P100,000 x 7.5%) Total income tax

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Problem 12 38 A Interest income from peso savings bank (P100,000 x 30%) Cash dividend from domestic corporation (P100,000 x 30%) Cash dividend from a resident foreign corporation with 100% earnings in the Philippines (P100,000 x 30%) Total income tax Problem 12 39 C Cash dividend from a domestic corporation (P100,000 x 30%)

112

Chapter 12: Income Tax of Corporations

P 30,000 30,000 30,000 P 90,000 P 30,000

The cash dividend received from a resident foreign corporation is considered income outside the Philippines because its earnings within does not reached 50%. Problem 12 40 D Zero because the earnings of the said resident foreign corporation have no tax situs in the Philippines. Problem 12 41 C Income subject to normal tax rate (P300,000/30%) Passive income (P60,000/20%) Capital gains (P35,000: 5,000 at 5%, 30,000 at 10%) Total income Less: Income taxes paid: Income tax per annual tax return Final tax on passive income Capital gains tax Amount subject to 10% surtax Problem 12 42 A Net taxable income (P300,000/30%) Add: Passive income (P60,000/20%) Capital gains (P100,000) + (P35,000/10%) Total Less: Income tax per ITR Passive income final tax Capital gain tax IAET base Multiplied by IAET tax rate IAET Problem 12 43 1. Letter A Reserve funds, beginning Add: Net additions to reserve funds during the year Total Less: Reserve funds, ending Amount of reserve funds released 2. Letter B Gross premium collected Add: Reserve funds release Gross income Less: Operating expenses Net additions to reserve funds Net income P1,000,000 300,000 400,000 P1,700,000 P300,000 60,000 35,000

395,000 P1,305,000 P1,000,000 300,000 450,000 P1,750,000

P300,000 60,000 40,000

400,000 P1,350,000 10% P 135,000

P1,000,000 500,000 P1,500,000 900,000 P 600,000 P10,000,000 600,000 P10,600,000 P4,600,000 500,000 5,100,000 P 5,500,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

113

Chapter 12: Income Tax of Corporations

In the case of insurance companies, whether domestic or foreign doing business in the Philippines, the net additions, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts may be deducted from their gross income: Provided, however, that the released reserve be treated as income for the year of release. [Sec. 37 (A), NIRC; Sec. 129, Rev. Regs. No. 2] Problem 12 44 1. Letter D Franchise fee Less: Creditable withholding tax (P10,000,000 x 2%) Net amount of franchise fee 2. Letter B Franchise fee Less: Pre-operating and training costs Gross income Less: OSD (P4,000,000 x 40%) Net taxable income Multiplied by normal tax rate Income tax due Less: Creditable withholding tax (P10,000,000 x 2%) Income tax still due and payable

P10,000,000 200,000 P 9,800,000 P10,000,000 6,000,000 P 4,000,000 1,600,000 P 2,400,000 30% P 720,000 200,000 P 520,000

When royalties are received in active pursuit of business, it is subject to 30% regular corporate income tax. If royalties are derived from passive income, these are generally subject to 20% final tax. (BIR Ruling No. DA (C-101) dated October 17, 2008) Problem 12 45 Year 201A Within Gross income: Philippines USA Japan Deductions: Philippines USA Japan Net income Multiply by tax rate Income tax payable Tax credit allowed see supporting computation Income tax still due P1,000,000 P 400,000 300,000 (800,000) . P 200,000 (200,000) (200,000) P300,000 Without Total P1,000,000 400,000 300,000 (800,000) (200,000) (200,000) P 500,000 30% P 150,000 ( 90,000) P 60,000

Supporting computation:
US Japan Total Tax credits: (P200,000/P500,000) x P150,000 = P60,000 vs. P80,000 Allowed, lower (P100,000/P500,000) x P150,000 = P30,000 vs. P30,000 Allowed, lower (P300,000/P500,000) x P150,000 = P90,000 vs. P100,000 Allowed, lower P 60,000 30,000 P90,000 90,000 P90,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Problem 12 46 Interest from savings deposit Metrobank (P3,000,000 x 20%) Royalty income Philippine Mining Company (P1,000,000 x 20%) Interest from a depository bank under expanded foreign currency deposit - PCI Bank ($30,000 x P50 x 7.5%) Dividends from Zerxes, a resident foreign corporation (P500,000 x 30%) Total final passive income taxes Problem 12 47
Reported income before tax Add: Loss from sale of shares of stock outside stock market Total Less: Gains subject to final income tax: (1) Gain from sale of stock in the stock market (2) Gain from sale of short-term debt securities (3) Gain from sale of real property (P9,400,000 P4,400,000) Adjusted income subject to corporate income tax Multiply by normal corporate income tax Correct amount of income tax Total reported income before tax Less: Normal corporate income tax Total accounting income after tax

114

Chapter 12: Income Tax of Corporations

P 600,000 200,000 112,500 150,000 P1,062,500

P10,000,000 5,000 P10,005,000

25,000 10,000 5,035,000 P 5,630,000 30% P 1,689,000 P10,000,000 1,689,000 P 8,311,000

5,000,000

Problem 12 48 Total revenue Operating expenses Service charge credit card (P1,000,000/5%) x 3% Net income Multiplied by normal corporate tax Income tax due Less: Creditable expanded withholding tax (P1,000,000/5%) x % Income tax still due and payable Problem 12 49 Taxable income (normal tax) Add: Income subject to final tax Income exempt from tax Income excluded from gross income Amount of NOLCO deducted Total Less: Dividends Income tax paid for the year Improperly accumulated income Multiply by tax rate Tax on improperly accumulated income

P1,000,000 ( 10,000) ( 600,000) P 380,000 30% P 114,000 100,000 P 14,000

P 900,000 P 60,000 50,000 10,000 50,000 P150,000 200,000

170,000 P1,070,000 350,000 P 720,000 10% P 72,000

Problem 12 50

Tuition fees Miscellaneous fees Income from rents Net income, school canteen Net income, book store

P2,843,100 362,600 60,000 36,200 24,800

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Gross income Less: Allowable deductions: Payroll and administrative salary Other operating expenses Interest expense Outright expense of capital expenditures for new six rooms Taxable income Multiply by the applicable tax rate Income tax

115

Chapter 12: Income Tax of Corporations

P3,326,700 P1,425,420 762,330 82,100 750,000

3,019,850 P306,850 10% P 30,685

Note: The tax differential on interest income shall now be used because under R.A. 9337 specifically requires that the interest expense is to be reduced by 33% of the interest income subjected to final tax during the taxable year. It is assumed that the educational institution opted to treat the capital expenditures as outright expense to avail of a lower tax. Problem 12 51 (1) Taxable income from operation (P1050,000/70%) Add: NOLCO deducted Interest income (P120,000/80%) Capital gain (P230,000 P5,000)/90% Total income for GAAP reporting, before tax (2) Tax on income from operation (P1,500,000 x 30%) Tax on interest income (P150,000 x 20%) Tax on capital gain (P250,000 P230,000) Total income tax paid (3) GAAP income Less: Total income tax (see 2) Net income after tax GAAP (4) Taxable income from operation Add: NOLCO Income subjected to final tax (P150,000 + P250,000) Total Less: Income tax paid Net income after income tax Multiplied by surtax rate IAET = Surtax

P1,500,000 100,000 150,000 250,000 P2,000,000 P450,000 30,000 20,000 P500,000 P2,000,000 500,000 P1,500,000 P1,500,000 P100,000 400,000 500,000 P2,000,000 500,000 P1,500,000 10% P 150,000

Problem 12 52 1. Sales Cost of sales Rent income Gross income

3rd year P1,000,000 ( 600,000) 200,000 P 600,000

4th year P2,500,000 (1,200,000 ) 300,000 P1,600,000

5th year P4,000,000 (2,400,000 ) 100,000 P1,700,000

6th year P5,000,000 (2,700,000 ) 50,000 P2,350,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
Operating expenses allowed Net taxable income Multiplied by NCIT rate Income tax due Quarterly tax paid Income tax still due and payable 2. Royalty income, net of tax Interest income, net of tax Total passive income, net of tax Divide by Total gross passive income Multiplied by final tax rate Final taxes Problem 12 53 1. Sales Less: Cost of sales Reportable gross income per ITR 2. Gross profit Less: Operating expenses: Salaries Depreciation Supplies Interest expense [P50,000 (P32,000/80% x 33%) Net taxable income per ITR ( 300,000 ) P 300,000 30% P 90,000 ( 10,000 ) P 80,000 3rd year P 80,000 20,000 P100,000 80% P125,000 20% P 25,000 (1,300,000 ) P 300,000 30% P 90,000 ( 20,000 ) P 70,000 4th year P160,000 32,000 P192,000 80% P240,000 20% P 48,000 (1,400,000 ) P 300,000 30% P 90,000 ( 30,000 ) P 60,000 5th year P120,000 16,000 P136,000 80% P170,000 20% P 34,000

116

Chapter 12: Income Tax of Corporations

(1,500,000 ) P 850,000 30% P 255,000 ( 40,000 ) P 215,000 6th year P 40,000 24,000 P 64,000 80% P 80,000 20% P 16,000 P10,000,000 6,000,000 P 4,000,000 P4,000,000

P1,000,000 300,000 200,000 36,800

1,536,800 P2,463,200

Note: Interest income is subject to final tax of 20% Inter-corporate dividend is tax-exempt. Losses on investment in securities is not deductible capital loss 3. 4. Final withholding tax paid (P32,000/80%) x 20% Net income before tax per GAAP Less: Income tax (P2,463,200 x 30%) Net income P 8,000 P2,200,000 738,960 P1,461,040