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TAXATION
FUNDAMENTALS OF INCOME TAXATION
INCOME
All wealth which flows into the taxpayer other than a mere return of capital and includes gains
Basic Definitions:
Gross Income refers to what is income for taxation purposes
Taxable Income as the pertinent items of gross income that are subject to tax after allowable
deductions
Tax Base the value of a certain goods, or property for taxation purposes
Characteristics of Gross Income:
1. Return on capital and resulted increased networth at the moment of its generation
2. Realized benefit by the taxpayer (realization means actual or constructive receipt of in cash)
Example of constructive receipts of income:
1. credit to an account own by the taxpayer
2. declaration of a share of the profits of a general professional partnership
3. offsetting debt with right to received dividends
4. cancellation of debt in payment of service
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That in all things God will be glorified! Rex B. Banggawan, CPA, MBA TAX 6th Batch HQ03
Northern CPAR: Taxation Fundamentals of Income Taxation
2. Other withheld final tax these are groups of passive income that are subject to
withholding by the income payor.
Examples include final tax on:
a. Interest on deposits with banks d. Winnings
b. Prizes e. Royalties
c. Dividends received from domestic corporation
B. Regular (Active) Income Tax applies to all items of gross income that are generated by the
taxpayer in the ordinary course of business or to those items of passive income that are not
covered by final taxes.
Regular income tax is either:
1. Progressive tax (0-32% schedular rates) applicable to individual and taxable trusts
and estates
2. Final tax (35%) applicable to corporations
SITUS OF INCOME
A. Interest debtors residence
B. Dividends
1. By a domestic corporation within the Philippines
2. By a foreign corporation apply the income dominance test
Basis:
World gross income for the three-year period ending the current taxable year preceding
the declaration of such dividends
a. If Philippine gross income is more than 85%, the whole dividends are considered within.
b. If Philippine gross income is less than 50% of the basis, the whole dividend is
considered earned outside the Philippines
c. If Philippine gross income is at least 50% of this, the ratio of Philippine gross income
over the basis multiplied by the dividend received is considered earned within the
Philippines.
C. Service place of performance of the service
D. Rent location of the property
E. Royalties place where the intangible is used
F. Gain on sale
a. Real property location of the property
b. Domestic shares of stock always within the Philippines
c. Personal property place of sale
G. Mining location of mine
H. Farming - location of farm
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That in all things God will be glorified! Rex B. Banggawan, CPA, MBA TAX 6th Batch HQ03
Northern CPAR: Taxation Fundamentals of Income Taxation
I. Merchandising place of sale
Place of Puchase Place of Sale Income is earned
a. Within within within
b. within abroad abroad
c. abroad within within
d. abroad abroad abroad
J. Manufacturing place of production and place of sale (Sec. 42(E), NIRC):
Whether full or partial processing, for example:
Place of Production Place of Sale Income is earned
a. Within within within
b. within abroad within and abroad
c. abroad within within and abroad
d. abroad abroad abroad
Allocation methods:
1. With factory or production price the value as transfer price of the factory to the selling
segment is deemed the selling price of the commodity transferred.*
2. Without factory or production price the portion deemed earned within the Philippines is:
(Property value, Philippines/ Property value, world) * 50% of P xxx
income
(Gross sales, Philippines/ Gross sales, world) * 50% of income xxx
Manufacturing income earned from the Philippines P xxx
Normally, accounting period are uniformly 12 months, however, short accounting period may arise
in the following cases:
1. death of a taxpayer 3. dissolution of a business
2. newly organized business 4. changes in accounting period
TAX PAYMENTS
Tax shall be paid on the 15th day of the fourth month following the close of the taxpayers
taxable year.
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That in all things God will be glorified! Rex B. Banggawan, CPA, MBA TAX 6th Batch HQ03
Northern CPAR: Taxation Fundamentals of Income Taxation
A. Citizens
1. Resident
2. Non-resident
B. Aliens
1. Resident
2. Non-resident
a. In business
b. Not in business
C. Estate and Trusts same rule with individuals
II. Corporations
A. Domestic
B. Foreign
1. Resident
2. Non-resident
TAX COMPLIANCE
The Philippines follows the self-assessment method wherein taxpayers determine their gross
income, prepare their income tax returns and pay the tax accordingly. The return filed is
presumed correct unless proven otherwise by the government. However, in cases of failure to file
a return, the Commissioner of Internal Revenue shall file a return from best available information
and such return thus filed is presumed correct. The taxpayer has the burden of proof in this
case. The same rule applies when tax authorities has reasons to believed that the tax return of
the taxpayer is grossly misstated.
Income tax return is required for items of gross income that are subject to:
1. Regular Income Tax (quarterly and annual consolidated return)
2. Capital Gains Tax (per transaction and an annual consolidated return)
Who are not required to file individual returns for income tax?
1. An individual whose gross income does not exceed his total personal and additional
exemptions, except those engaged in business or profession
2. An individual with respect to pure compensation income, derived from sources in the
Philippines, the income tax on which has been correctly withheld, except those with
concurrent employment
3. An individual whose income has been subjected to final income tax
4. An individuals who is exempt from filing income tax returns in pursuant to other provisions
of the Tax Code and other laws.
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That in all things God will be glorified! Rex B. Banggawan, CPA, MBA TAX 6th Batch HQ03
Northern CPAR: Taxation Fundamentals of Income Taxation
2. Installments (for individual taxpayers)
3. ABC Company received a P1,000,000 cash remittance from its sister company, DEF Company,
to be remitted to its home office HIJ Company. Which statement is correct concerning the
taxation of this item?
a. Not taxable since the item represents a return of capital.
b. Taxable since it is realized by ABC Company by means of an actual receipt.
c. Not taxable since the item, although a received in cash, did not redound to the benefit of
ABC Company.
d. Taxable since taxation is the rule, exemption is the exception.
4. THE Corporation declared dividends to its 100,000 outstanding P10-par ordinary share at P2
per share. ABC bought its 10,000 ordinary share investment in THE Corporation for P15 per
share. ABC have already received cumulative dividends of P140,000. Which statement is
correct?
a. Only P10,000 of the dividends will be subject to income tax since it represents excess
over cost (i.e. return on capital)
b. The P20,000 dividends will be subject to tax since both return of or on capital is subject
to tax
c. The P20,000 dividends will be subject to tax because it represents a return on capital.
d. Only P10,000 of the dividends will be subject to income tax since it is the benefit actually
realized.
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That in all things God will be glorified! Rex B. Banggawan, CPA, MBA TAX 6th Batch HQ03
Northern CPAR: Taxation Fundamentals of Income Taxation
d. Revenues of non-profit educational institutions
13. Toma Sengla Tumba is an organized non-stock, non-profit fraternal organization. In order to
fund its summer activity, Bassagulero, its members purchased and sold souvenir merchandise
to local tourists. The total profit generated by the fund raising activity was P200,000. The
members further contributed P100,000 as additional funding for the activity. Which
statement is correct?
a. All receipts of Toma Sengla Tumba are subject to income tax.
b. Only the P100,000 membership contribution is subject to income tax.
c. All receipts of Toma Sengla Tumba are exempt from income tax.
d. Only the P200,000 fund raising profit is subject to income tax.
14. Under the NIRC, income is received not only when it is actually or physically transferred to a
person but even when it is merely constructively received by him. An example of income
constructively received is
a. Rental payments refused by the lessosr, when the lessee tendered payment and the latter
made a judicial deposit of the rental due.
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That in all things God will be glorified! Rex B. Banggawan, CPA, MBA TAX 6th Batch HQ03
Northern CPAR: Taxation Fundamentals of Income Taxation
b. Interest coupons not yet due and payable.
c. Interest on savings deposit not yet credited to the account of the depositor.
d. Advanced deposit made by the lessee.
19. All of the following income is considered earned within, except one. Choose the exception.
a. Interest income from notes issued by a non-resident alien
b. Dividends paid by a non-resident foreign corporation
c. Management advisory fee earned from a foreign client abroad
d. Dividends declared by a domestic corporation received a non-resident alien investor
SITUS APPLICATIONS
20. THY, a resident foreign corporation, declared P500,000 dividends on July 1, 2008, to its
100,000 outstanding ordinary shares. Becky holds 20,000 of THYs ordinary shares. The
corporation has just started operation 3 years ago and has significant Philippine operation
since its start-up. Details of the gross income of THY is shown below:
Gross Income: 2005 2007 2008
Philippines P 1,200,000 P 4,000,000 P 6,000,000
Abroad 2,800,000 2,000,000 4,000,000
How much of the dividends received by Becky is considered earned within the Philippines and
the pertinent tax scheme that would apply?
a. P56,000; final tax c. P52,000; final tax
b. PP56,000; progressive tax d. P52,000; progressive tax
21. A resident alien rendered professional advisory services to foreign businesses earning him
P2,000,000 professional fees. The professional fee is
a. exempt from the Philippines. c. taxable both in the Philippines and abroad.
b. taxable from the Philippines. d. neither taxable in the Philippines nor abroad.
24. Darrel Asuncion, a resident citizen, owned a commercial building in Las Vegas. The building was
currently leased to a resident Pilipino who pays P50,000,000 rental annually. The rent is
considered
a. earned abroad. c. earned within the Philippines.
b. earned in the Philippines. d. partly within and partly outside the
Philippines.
25. An Indian citizen who married a beautiful Filipina wife owns a building in the United States
and leases the same to businesses owned by Filipino residents. The Indian national has his
residence in the Philippines and all his children are studying in elite Philippine universities.
Which is true?
a. The rental income of the Indian national is taxable in the Philippines because he had his
residence in the Philippines.
b. The rental income of the Indian national is taxable in the Philippines because he married a
beautiful Filipina wife and his family is resident in the Philippines.
c. The rental income of the Indian national is taxable in the Philippines because he derives
his income from Filipino resident lessees.
d. The rental income of the Indian national is exempt in the Philippines because the property
is located abroad.
26. Benzon, a non-resident alien, invests in the capital stock of a domestic corporation. Benzon
subsequently sold this to another non-resident alien at a gain of P20,000. Which is true?
a. The income is taxable in the Philippines because domestic securities are by situs rules
situated herein.
b. The income is exempt in the Philippines because the place of sale applies with sale of
personal property.
c. The income is exempt in the Philippines because the resident of the seller applies with sale
of personal property.
d. The income is exempt in the Philippines because both non-residents are involved in the
transaction.
INCOME TAXPAYERS
27. Which is not an income taxpayer?
a. Business partnership c. Non-resident alien
b. Non-resident foreign corporation d. General professional partnership
28. Which of the following individual taxpayers is not covered by progressive tax?
a. Resident citizen c. Non-resident alien engaged in trade or
business
b. Resident alien d. Non-resident alien not engaged in trade or business
30. A business partnership that is organized in the Philippines but dominantly operates abroad is
classified under the NIRC as a
a. domestic corporation c. non-resident corporation
b. resident corporation d. absentee corporation
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That in all things God will be glorified! Rex B. Banggawan, CPA, MBA TAX 6th Batch HQ03
Northern CPAR: Taxation Fundamentals of Income Taxation
31. A corporation doing business in the Philippines but is not organized according to Philippine laws
is classified as
a. domestic corporation c. non-resident corporation engaged in business
b. resident corporation d. non-resident foreign corporation
32. All of the following taxpayers are taxable even on income earned outside the Philippines,
except
a. Domestic corporation c. Resident alien
b. Resident citizen d. None of these
33. All of the following are taxable only on income earned within the Philippines, except
a. Resident alien c. Non-resident alien
b. Resident citizen d. Non-resident citizen
34. An alien who arrived in the Philippines during the year and showed proof to the satisfaction of
the CIR regarding his employment in the Philippines for an extended period of time.
a. Resident alien c. Non-resident citizen engaged in trade or business
b. Resident citizen d. Non-resident citizen not engaged in trade or
business
35. In default of intention, an alien who is resident in the Philippines for 6 months is considered a
a. Resident alien c. Non-resident citizen engaged in trade or business
b. Resident citizen d. Non-resident citizen not engaged in trade or
business
39. A short accounting period may arise under the following scenarios, except one. Select the
exception?
a. When a taxpayer dies.
b. When a business is dissolved.
c. When the Commissioner of Internal Revenue terminates the taxpayers accounting period.
d. When an individual taxpayer changes his accounting period to a fiscal year.
40. DEF Corporation changed its accounting period from a calendar year to a fiscal year ending
every March 31. DEF Corporation should file its annual income tax return not late than
a. April 15 c. June 15
b. August 15 d. July 15
41. Bee Jay, a resident citizen, changed its accounting period for internal reporting purposes
from a calendar year to a fiscal year ending every June 30 after a significant change in the
nature of his business. Bee Jay should file its annual income tax not later than
a. June 30 c. October 15
b. September 15 d. April 15
42. Gross income is reported partially in each taxable year in proportion to collections made in
such period as it bears to the total contract price refer to
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That in all things God will be glorified! Rex B. Banggawan, CPA, MBA TAX 6th Batch HQ03
Northern CPAR: Taxation Fundamentals of Income Taxation
a. Crop year basis method c. Percentage of completion basis method
b. Accrual method d. Installment sales method
44. Starting August, 2008, ABC Corporation changed its accounting period from a fiscal year
ending every June 30 to the calendar year. Which statement is correct?
a. ABC Corporation should file an adjustment return on April 15, 2009 covering the period of
July 1, 2008 to December 31, 2008.
b. ABC Corporation should file an adjusted return on April 15, 2009 covering the period of
August 1, 2008 to December 31, 2008.
c. ABC Corporation should file an adjustment return on October 15 covering the period of
January 1, 2008 to June 30, 2008
d. ABC Corporation need not file an income tax return until April 15, 2009
45. Effective February 2008, DEF Corporation changed its accounting period from a fiscal year
ending every January 31 to another fiscal year ending every August 31. Which is correct?
a. DEF Corporation should file an adjustment return covering the period covering August 31,
2007 to August 31, 2008.
b. DEF Corporation should file an adjustment return covering the period January 1, 2008 to
August 31, 2008
c. DEF Corporation should file an adjustment return covering the period of February 1, 2008
to August 31, 2008.
d. DEF Corporation should file an adjustment return covering the period of August 31, 2008
to December 31, 2008.
47. On July 1, 2008, Eliazar sold a real property for P600,000. 10% down-payment is due upon
signing of the contract of sale. The balance is payable as follows: 15% December 31, 2008;
50% March 31, 2009; 35% July 31, 2009
Since the property is classified as ordinary asset only the gain of P300,000 is subject to
progressive tax. How much of the gain is taxable in 2008?
a. P0 c. P300,000
b. P6,000 d. P70,500
48. The following accounts relates to book of Zeus, a dealer of household appliances:
12/31/2006 12/31/2007
Installment sales P 1,000,000 P 2,000,000
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That in all things God will be glorified! Rex B. Banggawan, CPA, MBA TAX 6th Batch HQ03
Northern CPAR: Taxation Fundamentals of Income Taxation
Cost of installment sales 500,000 1,100,000
2007 Installment receivables - 500,000
2006 Installment receivables 300,000 50,000
50. On October 1, 2008, Vicky sold one of her business establishment (ordinary asset). The land
and building cost Vicky P10,000,000 and was sold for P14,000,000. P500,000 was paid upon
the signing of the contract. The establishment is subject to P11,000,000 real mortgage and is
to be assumed by the buyer. Compute the amount taxable gain to be reported in 2008.
a. P500,000 b. P5,000,000 c. P4,000,000 d. P625,000
51. On December 31, 2008, Carlo received P100,000 notes due April 1, 2009 as payment for his
business advisory services from his client. The notes can be discounted at various bank at
P96,000. Under deferred payment method, how much is taxable in 2008 and in 2009?
a. P100,000; P0 c. P4,000; P96,000
b. P96,000; P4,000 d. P0; P100,000
52. The following computations were shown by the taxpayer as support of his GAAP income under
the accrual basis:
53. Mr. Mario was alleged to have under-declared his income during the previous year. An
examiner conducted an evaluation of Mr. Mario based on his statement of assets and
liabilities. The following information were available:
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That in all things God will be glorified! Rex B. Banggawan, CPA, MBA TAX 6th Batch HQ03
Northern CPAR: Taxation Fundamentals of Income Taxation
In the same period, Mr. Mario donated a parcel of land out of its declared asset with a
declared value of P200,000. Mr. Mario also presented a lists of his personal and family
expenditures aggregating P150,000 during that year. Using the net worth method, what is Mr.
Marios possible income?
a. P70,000 b. P270,000 c. P420,000 d. P220,000
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That in all things God will be glorified! Rex B. Banggawan, CPA, MBA TAX 6th Batch HQ03