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TAXATION SIA/TABAG
TAX 2806 - Income Tax on Individuals MAY 2020
LECTURE NOTES
F. GENERAL PRINCIPLES: SOURCES OF INCOME Interest from a depositary bank RC & RA 15%**
SUBJECT TO INCOME TAX under the expanded foreign
currency deposit system NRC, NRA- 0%
1. RC – World ETB
2. NRC, RA, OCW, NRA-ETB, NRA-NETB – Within
the Phils. only Interest income from long-term RC, NRC, Exempt
deposit or investment (at least 5 RA, NRA-
G. TYPES OF INCOME TAX APPLICABLE TO years maturity) ETB
INDIVIDUAL TAXPAYERS
In case of pre-termination of the
1. Final Withholding Tax long-term deposit or investment,
2. Capital Gains Tax on Sale of Shares of Stock depending on the holding period: RC, NRC,
3. Basic tax - 5 years or more RA, NRA- Exempt
- 4 years to less than 5 years ETB 5%
H. FINAL WITHHOLDING TAX - 3 years to less than 4 years 12%
- Less than 3 years 20%
GENERAL PRINCIPLES:
ü It is a tax deducted from the
** 7 ½% if received prior to 2018
income/proceeds to be paid to the income
earner (payee) or seller;
v ROYALTIES
ü It is constituted as full and final payment of
the income tax liability;
TP RATE
ü The income subjected to this tax is no longer
Royalties from:
subject to basic income tax;
a) Literary works RC, NRC, 10%
ü It cannot be credited or deducted from the
b) Books RA, NRA-
basic income tax due the BIR;
c) Musical compositions ETB
ü The liability for the payment of the tax is
primarily on the payor as the withholding
agent. Other Royalties 20%
KINDS: v DIVIDENDS
1) Tax on certain passive income TP RATE
2) Capital Gains Tax on Sale of Real Property a) Dividends actually or
3) Fringe Benefit Tax constructively received from: RC, NRC, 10%
i. Domestic Corporation RA
I. FINAL WITHHOLDING TAX (FWT) ON ii. Joint Stock Company
PASSIVE INCOME iii. Insurance or mutual fund
company; and
v GENERAL PRINCIPLES iv. Regional operating
headquarters of a
1. Applicable only to passive income from multinational company.
sources within the Philippines. b) Share in the distributable net
income after tax of a NRA-ETB 20%
2. The payee is not required to file an income partnership (except GPP)
tax return for the particular income subjected c) Share in the net income after
to final withholding tax (FWT). tax of:
1. Association
v FORMULA 2. Joint Account
3. Taxable Joint Venture or
Passive Income PXXX Consortium
Rate XX%
Final Withholding Tax PXX
v PRIZES
v KINDS OF PASSIVE INCOME
(PIDRO) TP RATE
1. Interest Income Amount is more than P10,000.
2. Royalties RC, NRC,
3. Dividends NOTE: If the amount of the prize RA, NRA- 20%
4. Prizes does not exceed P10,000, the ETB
5. Other winnings same is subject to BASIC TAX.
1. Selling Price
2. Fair Market Value by the employee but reimbursed by his
3. Zonal Value employer, provided:
a. The expenditures are duly receipted for
OPTIONS OF THE SELLER IN CASE OF SALE and in the name of the employer; and
TO GOVERNMENT: b. It does not partake the nature of a
1. Pay 6% CGT; or personal expense attributable to the
2. Pay Basic Tax. employee;
5) Representation and transportation allowances
REQUISITES FOR EXEMPTION: which are fix in amounts and are regularly
1. The property sold must be the principal received by the employees as part of their
residence of the seller; monthly compensation (subject to basic tax);
2. Proceeds is fully utilized in acquiring or 6) Inland travel expenses (such as expenses for
constructing a new principal residence; food, beverages and local transportation)
3. Utilization must be made within 18 calendar during foreign travel;
months from the date of sale or disposition; 7) Lodging cost in a hotel (or similar
4. Notify the BIR Commissioner within 30 days establishments) amounting to an average of
from the date of sale or disposition of the US$300.00 or less per day during foreign
intention to avail the exemption; travel;
5. The said exemption can only be availed once 8) Cost of economy and business class airplane
every 10 years. ticket for foreign travel;
9) 70% of the cost of first class airplane ticket
K. FRINGE BENEFITS TAX for foreign travel;
10) Educational assistance to the employee,
Fringe Benefits Tax (FBT) - is a final withholding provided:
tax imposed on the grossed-up monetary value of a. The education or study is directly
the fringe benefit furnished, granted or paid by connected with the employer’s trade,
the employer to managerial or supervisory business or profession; and
employees, whether such employer is an b. There is a written contract between them
individual, professional partnership or that the employee is under obligation to
corporation, regardless of whether the remain in the employ of the employer for
corporation is taxable or not, or the government a period of time they have mutually
and its instrumentalities. (Section 33, RA 8424, agreed upon;
RR No. 3-98) 11) Educational assistance to the dependents of
the employee, provided that the assistance
The term “FRINGE BENEFIT” means any good, was provided through a competitive scheme
service, or other benefit furnished or granted by under the scholarship program of the
an employer in cash or in kind, in addition to Company;
basic salaries, to an individual employee (except 12) Contributions of the employer for the benefit
rank and file employee) such as but not limited to of the employee:
the following: a. Pursuant to the provisions of existing law,
HEV – HIM - HELF such as under SSS and GSIS; or
1) Housing; b. Similar contributions arising from
2) Expense Account; provisions of any other existing law;
3) Vehicle of any kind;
1. Final Withholding Tax on passive income 3. Fringe Benefits Tax – 10th day of the month
following the end of the calendar quarter in
MANUAL FILING which the fringe benefits were granted to the
January to November 10th day of the month recipient.
following the month
the withholding was 4. Basic Income Tax
made a) Quarterly
December January 15 of the i. 1st Quarter – May 15 of the current
succeeding year year (CY)
ii. 2nd Quarter – August 15 of the CY
2. Capital Gains Tax iii. 3rd Quarter – November 15 of the CY
a) Shares of stock
i. Ordinary Return - 30 days after each b) Annual (Final Quarter) – April 15 of the
transaction succeeding year.
ii. Final Consolidated Return - on or before
April 15 of the following year
1. Which of the following is not considered a non- and operation for which he had to stay in the
resident citizen? Philippines for an indefinite period. His coming to
a. A citizen of the Philippines who establishes to the Philippines was for a definite purpose which in
the satisfaction of the Commissioner the fact of its nature would require an extended stay and to
his physical presence abroad with a definite that end makes his home temporarily in the
intention to reside therein. Philippines. The American management expert
b. A citizen of the Philippines who leaves the intends to leave the Philippines as soon as his job
Philippines during the taxable year to reside is finished.
abroad, either as an immigrant or for
employment on permanent basis. For income tax purposes, the American
c. A citizen of the Philippines who works and management expert shall be classified as:
derives income from abroad and whose a. Resident alien.
employment thereat requires him to be b. Nonresident alien engaged in trade or
physically present abroad most of the time business.
during the taxable year. c. Nonresident alien not engaged in trade or
d. A citizen of the Philippines who went on a business.
business trip abroad and stayed therein most d. Resident citizen.
of the time during the year.
5. Rihanna, an American singer, was engaged to sing
2. Due to his expertise, Engr. Pedro D. Magiba (a for one week at the Western Philippine Plaza after
freelancer) was hired by a foreign petroleum which she returned to USA. For income tax
contractor in Thailand to provide technical purposes, she shall be classified as:
assistance for two months from February to March. a. Resident alien.
He was hired again for the months of June-July b. Nonresident alien engaged in trade or
and October-December of the same taxable year. business.
Engr. Pedro D. Magiba is a: c. Nonresident alien not engaged in trade or
a. Resident citizen business.
b. Nonresident citizen d. Resident citizen.
c. Special Filipino employee
d. None of the above 6. Which of the following interest income derived
within the Philippines is subject to basic income
3. Ronnie, worked in the United States as a Partner of tax?
a Big Four Accounting Firm and has been residing a. Interest income from bank deposits
therein for the past 25 years. He arrived in the b. Interest income from loans
Philippines on July 1, 2018 to reside here c. Interest income from deposit substitutes
permanently. Which of the following statements is d. Interest income from trust funds
correct with respect to Ronnie’s classification for
income tax purposes? 7. Which of the following interest income by a
a. He will be classified as nonresident citizen from resident taxpayer is subject to 15% upon
January 1, 2018 until the date of his arrival in the effectivity of the TRAIN Law?
Philippines. a. Interest income from peso bank deposits
b. He will be classified as nonresident citizen for the b. Interest income from deposit substitutes
whole year of 2018. c. Interest income trust funds
c. He will be classified as resident citizen for the d. Interest income from dollar deposits
whole year of 2018.
d. He will be classified as neither resident nor 8. A non-resident alien derived interest income from
nonresident citizen for the year 2018. his bank deposit here in the Philippines under the
FCDU system of a domestic bank. The interest
4. Dr. J, an expert American Physicist was hired by a amounted to $500. How much is the income tax
Philippine corporation to assist in its organization due of the said alien? ($1=Php50)
10. Which of the following royalties earned within the 17. Share in the net distributable income of a general
Philippines is not subject to 10% final withholding professional partnership by a resident citizen is
tax? subject to:
a. Royalties from computer software a. 10% final withholding tax
b. Royalties from books b. 20% final withholding tax
c. Royalties from literary works c. 6% capital gains tax
d. Royalties from musical compositions d. Basic income tax
11. Statement 1: A nonresident alien not engaged in 18. If a non-resident citizen received his share in the
trade or business shall be subject to a final tax income of a taxable joint venture, what type of
rate of 25% on all income derived from sources income tax that will apply on the said income?
within the Philippines, including gain on sale of a. Final withholding tax on passive income
shares of a domestic corporation. b. Capital gains tax
Statement 2: On OCW shall be subjected to the c. Basic income tax
same tax tax rules that applies to a resident d. Fringe benefit tax
citizen.
a. Only statement 1 is correct 19. Based on the preceding number, except that the
b. Only statement 2 is correct joint venture is exempt from income tax, what
c. Both statements are correct type of income tax will apply on the said income?
d. Both statements are incorrect a. Final withholding tax on passive income
b. Capital gains tax
12. In 2018, Bryan won P500,000 in a PCSO 6/42 c. Basic income tax
lotto draw. Uncertain on which investment should d. Fringe benefit tax
he devote the money, he decided to temporarily
deposit P300,000 of his lotto winnings in Gallaxy 20. If the amount of prize received in the Philippines
Bank, a local bank. His interest income from the did not exceed P10,000, what type of income tax
said deposit will be subjected to: will apply?
a. 10% final tax a. Final withholding tax on passive income
b. 20% final tax b. Capital gains tax
c. added to his gross income and subjected to c. Basic income tax
5%-32% tax. d. Fringe benefit tax
d. Exemption from income tax.
21. If the amount of Lotto winnings received did not
13. The PCSO 6/42 lotto winnings in the preceding exceed P10,000, what type of income tax will
number shall be subjected to: apply?
a. 10% final tax a. Final withholding tax on passive income
b. 20% final tax b. Capital gains tax
c. added to his gross income and subjected to c. Basic income tax
5%-32% tax. d. Exempt from tax
d. Exemption from income tax.
22. If the lotto winnings in the preceding number was
14. The following taxpayers who received a dividend received by NRANETB, what type of income tax will
income from a domestic corporation will received apply?
net of 10% final withholding tax, except: a. Final withholding tax on passive income
a. Resident citizen b. Capital gains tax
b. Non-resident citizen c. Basic income tax
c. Resident alien d. Exempt from tax
d. Non-resident alien engaged in trade or
business 23. Which of the following transactions is subject to
6% capital gains tax:
15. Which of the following cash and/or property a. Sale of condominium units by a real estate
dividends actually or constructively received by an dealer
individual shall not be subject to final tax but to b. Sale of real property utilized for office use
regular income tax for individuals? c. Sale of apartment houses
d. Sale of vacant lot by an employee
24. Statement 1: Proceeds of sale of real property c. The grossed-up monetary value of the fringe
classified as capital asset may be exempt from the benefit shall be determined by dividing the
6% capital gains tax. monetary value of the fringe benefit by the
gross monetary value factor
Statement 2: Gain from sale of real property d. The person liable for fringe benefit tax is the
classified as capital asset to the Government may employer, whether he is an individual,
be taxed under Section 24 (A) at the option of the professional partnership or a corporation
individual taxpayer. regardless of whether the corporation is
a. True, True c. False, False taxable or not or the government and its
b. True, False d. False, True instrumentalities.
25. Which of the following is not a requisite for the sale 30. An employer subject to fringe benefit tax may be
or disposal of principal residence to be exempt a/an
from CGT? a. An individual
a. The proceeds are fully utilized in acquiring or b. General professional partnership
constructing a new principal residence within c. Corporation
18 calendar months from date of filing the CGT d. All of the above
Return.
b. The historical cost or adjusted basis of the real 31. Which of the following is subject to fringe benefit
property sold or disposed shall be carried over tax?
to the new principal residence built or a. Basic salary of the rank and file employees.
acquired. b. Basic salary of the supervisory or managerial
c. The BIR is notified within 30 days from the employees.
date of sale or disposition. c. Fringe benefit of the rank and file employee.
d. The tax exemption can only be availed of once d. Fringe benefit of the supervisory or managerial
every 10 years. employee.
26. Vincent sold his principal residence for 32. How much is the allowable deduction from
P10,000,000 to his friend. Its FMV when he business income of a domestic corporation which
inherited it from his father was P12,000,000 granted and paid P97,500 fringe benefits to its key
although its present FMV is P15,000,000. He used officers in 2018?
½ of the proceeds to buy a new principal residence a. P150,000 c. P97,500
within eighteen (18) months after the sale. b. P100,000 d. P65,000
Assume further that Vincent properly informed the
BIR about the sale within the required period. It 33. In 2018, ABC Corporation gave the following fringe
shall be: benefits to its employees:
a. Exempt from capital gains tax
b. Subject to P300,000 capital gains tax To managerial employees P1,300,000
c. Subject to P450,000 capital gains tax To rank and file employees 5,000,000
d. Subject to P600,000 capital gains tax
The allowable deduction from the gross income of
27. Because of dire necessity, Juan sold a parcel of the corporation for the fringe benefits given to
land from for P8,000,000 with a cost of employees is
P10,000,000. At the time of sale, the fair market a. P2,000,000 c. P6,320,000
value of the land was P11,000,000. The proceeds b. P2,148,000 d. P7,000,000
of the sale were used to purchase principal
residence at Manila. As such, within 30 days from 34. Data from a managerial employee for taxable year
the sale, he informed the Commissioner of Internal 2018 revealed the following:
Revenue of his intention to avail of the exemption Salaries and wages (net of SSS and 785,000
and set-up an escrow deposit equivalent to the philhealth contributions amounting to
capital gain’s tax. The sale of land resulted a tax 25,000 and withholding tax of
consequence of: 150,000)
a. P480,000 capital gains tax on sale of real Allowance, not subject to liquidation 60,000
property. Gasoline allowance, subject to 19,500
b. P600,000 capital gains tax on sale of real liquidation
property. 13th month pay 80,000
c. P660,000 capital gains tax on sale of real
property. Taxable compensation income subject to graduated
d. None. rates is -
a. P785,000 c. P935,000
28. Fringe benefit tax is computed based on: b. P810,000 d. P960,000
a. Grossed-up monetary value
b. Monetary value 35. Based on the above problem, the fringe benefit tax
c. Gross compensation due is -
d. Net compensation a. P19,500 c. P31,500
b. P30,000 d. P32,307
29. The following statements are true, except
a. Fringe benefit tax shall be treated as a final 36. In the year 2018, Bank of Philippine Archipelago
income tax on the employee withheld and paid Inc. paid for the quarterly rental of a residential
by the employer on a quarterly basis house of its branch manager, Mr. Tolentino,
b. The grossed-up monetary value of the fringe amounting to P90,000.
benefit is the actual amount received by the
employee
How much is the fringe benefit tax? 48. If he is a non-resident citizen, his income tax due
a. P103,529 c. P150,588 after tax credit, if any is:
b. P118,462 d. nil a. P360,580 c. P384,380
b. P358,020 d. P295,000
42. Based on the preceding number, assuming the
selling price is P2,400,000, how much is the fringe 49. If he is a non-resident alien engaged in trade or
benefit tax? business in the Philippines but without the benefit
a. P103,529 c. P150,588 of Reciprocity Law, the income tax due after tax
b. P118,462 d. nil credit, if any is:
a. P295,000 c. P405,500
43. Mikaela Flower Shop Inc. purchased a motor b. P378,500 d. P338,500
vehicle in 2018 for the use of its manager, Mike. It
was registered under Mike’s name. The cost of the 50. If he is a non-resident alien not engaged in trade
vehicle was P400,000. The vehicle will be partly or business, disregarding professional & business
used for the benefit of the Company. data, the total income tax that should be withheld
from his income is:
How much is the fringe benefit tax? a. P50,000 c. P31,500
a. P188,235 c. P37,647 b. P18,500 d. P338,500
b. P215,385 d. nil
51. Mr. and Mrs. Tijam, both CPA’s and residents of
44. In general, educational assistance to the employee the Philippines, with 6 minor children, had the
by the employer may be taxable or tax exempt. following data for taxable year 2018:
Which of the following is required in order that
such educational assistance be exempt from fringe Salaries, wife P600,000
benefit tax? Bonus (13th month pay), wife 60,000
I. The education or study involved is directly Professional Fees, (net of 10%
connected with the employer’s business or withholding tax) 7,200,000
profession. Expenses – Practice of profession 3,200,000
II. There is a written contract between them Rental income (net of 5% withholding
that the employee is under obligation to tax 712,500
remain in the employ of the employer for a Rental expenses 280,000
certain period of time they have mutually Other income, husband 840,000
agreed upon.
a. I only c. Both I and II
b. II only d. Neither I nor II
The taxable income of Mr. Tijam is: 58. Which of the following statements regarding
a. P3,475,000 c. P3,335,000 minimum wage earner (MWE) is correct?
b. P3,235,000 d. P4,800,000 a. The MWE is exempt from income tax on his
basic statutory minimum wage (SMW).
52. The taxable income of Mrs. Tijam is: b. The MWE is exempt from income tax on his
a. P3,475,000 c. P3,335,000 overtime pay, holiday pay, night shift
b. P3,235,000 d. P4,800,000 differential, and hazard pay.
c. The MWE is subject to income tax on income
53. Mr. Panganib had the following data for taxable other than those mentioned in “a” and “b”.
year 2018: (Exchange rate $1-P40) d. All of the above
54. Mr. Panganib’s total final taxes on his passive 62. Statement 1: Generally, qualified Senior Citizens
income is: deriving returnable income during the taxable
a. P16,160 c. P15,460 year, whether from compensation or otherwise,
b. P16,020 d. P39,660 are required to file their income tax returns and
pay the tax as they file the return.
55. The total capital gains tax for the year is: Statement 2: A Senior Citizen who is a
a. P243,000 c. P240,000 compensation income earner deriving from only
b. P251,720 d. P257,000 one employer but whose income had been
subjected to the withholding tax on compensation,
56. If he is a non-resident citizen his total final tax on shall, although not exempt from income tax, be
passive income is: entitled to the substituted filing of income tax
a. P16,020 c. P24,660 return.
b. P16,160 d. P8,520 a. Only statement 1 is correct
b. Only statement 2 is correct
57. If he is a non-resident alien not engaged in trade c. Both statements are correct
or business, his total combined taxes on all income d. Both statements are incorrect
from Philippines is: (excluding business income)
a. P81,750 c. P324,750 63. Statement 1: CGT on sale of real properties shall
b. P241,000 d. P319,000 be paid within 30 days from sale or disposition.
Statement 2: The CGT on the unutilized portion of
the proceeds in case of sale of a real property
classified as a principal residence shall be paid
within 30 days after the expiration of the eighteen 69. Mr. MAG, a financial Comptroller of JAB Company,
(18) month period. earned annual compensation income in 2018 of
A. B. C. D. 1,500,000, inclusive of 13th month and other
Statement 1 True False True False benefits in the amount of P120,000 but net of
mandatory contributions to SSS and Philhealth.
Statement 2 True False False True
Aside from employment income, he owns a
convenience store, with gross sales of P2,400,000.
64. Who of the following may avail of substituted filing His Cost of Sales and operating expenses are
of Income Tax Return (ITR)? P1,000,000 and P600,000, respectively, and with
ANA: non-operating income of P100,000. Assume he
§ Deriving compensation income from ABC signified his intention to be taxed at 8% income
Company, her only employer for the taxable tax rate in his 1st quarter return, the total income
year. tax due is:
§ The correct amount of tax was withheld by a. P513,000 c. P313,000
ABC Company b. P589,200 d. P493,000
§ She also sold her personal car and some of her
jewelries resulting to a capital gain of 70. Based on the preceding number, if he did not opt
P100,000. for the 8% income tax, his income tax due is:
a. P513,000 c. P313,000
PEDRO:
b. P589,200 d. P493,000
§ Deriving purely compensation income from
XYZ Corporation, his only employer for the
taxable year. 71. On February 2019, Mr. MAG tendered his
§ The correct amount of tax was withheld by XYZ resignation to concentrate on his business. His
§ Pedro’s spouse is engaged in business total compensation income amounted to P150,000,
a. Ana only c. Ana and Pedro inclusive of benefits of P20,000. His business
b. Pedro only d. Neither Ana nor Pedro operations for 2019 remains the same. He opted
for the 8% income tax rate. His income tax liability
65. Which of the following statements on the 8% is:
income tax rate is incorrect? a. P200,000 c. P190,400
a. The Financial Statements (FS) is not required to be b. P589,200 d. P493,000
attached in filing the final income tax return.
b. Existing rules and regulations on bookkeeping and 72. Ms. Cyril is employed in MAFD Corporation and is
also a part-time real estate agent for a real estate
invoicing/receipts shall still apply.
broker. In addition to SMW of P180,000 she
c. The income tax is in lieu of the graduated rates of received from her employer, she likewise received
income tax and percentage tax under Section 116 P75,000 as commissions from her real estate
of the Tax Code. dealings for the year 2018. How much is the
d. None of the above income tax liability for the year under the
graduated income tax (IT) regime?
66. Pedro is an individual taxpayer under a “contract of a. P1,000 c. P20,400
service” or “job order arrangement” with DPWH, a b. P6,000 d. nil
government agency.
Statement 1: Pedro is considered self-employed. 73. Based on the preceding number, how much is the
Statement 2: Pedro is liable both to income tax income tax liability under the 8% IT regime?
and business tax. a. P1,000 c. P20,400
a. Only statement 1 is correct. b. P6,000 d. nil
b. Only statement 2 is correct.
c. Both statements are correct.
d. Both statements are incorrect.