ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION

SCHOOL OF BUSINESS AND ACCOUNTANCY

INCOME AND BUSINESS TAXATION

MODULE 1 INTRODUCTION

I. Income Tax

Taxation is a power inherent in every sovereign state to impose a charge or burden upon persons,
properties or rights to raise revenues for the use and support of the government and to enable it to
discharge its appropriate functions. That which is imposed as a burden is called a tax.

The power of taxation is a very broad power of the state exercised by the law-making body. As the
amount of the tax is dictated by the needs of the government, the power of taxation can be
exercised to reach any proper subject of taxation and to exact any amount, except only when
there are limitations prescribed by the fundamental law (constitution) of the land, and except only
as the sense of responsibility of the members of the legislature to their respective constituents
prevents an abuse of power.

Among the many subjects of taxation is income.

Income tax is succinctly defined as a tax on income, whether gross or net (27 Am. Jur., 308). It is
an imposition by the government where the test of faculty in taxation is income. In the Philippines,
the income tax in the National Internal Revenue Code is:

a. A national tax. It is imposed by the National Government

b. An excise tax. It is a burden not laid directly upon persons and properties. It is neither a
capitation or poll tax, nor a property tax
c. A direct tax. It is demanded from the person whom the law intends to impose it, and cannot
be shifted by the taxpayer to some other person
d. A general tax. It is levied for the general purposes of the government
e. An ad valorem tax. It is levied on value or amount of the income of the taxpayer

The income tax has been increasingly relied upon by the Government:

a. To provide a large amount of revenue

b. Levied at reasonably progressive rates, and, together with the estate tax, to remove
inequalities in the distribution of income and wealth which are deterrents to social progress
(Report of the Commission of the Philippines on the National Internal Revenue Code,
1939)

II. Philippine Income Tax

The first income tax law in the Philippines was the United States Revenue Act of 1913, approved
on October 3, 1913, but made to apply to income earned from March 1, 1913. Paragraph M of
Section 11 of the Act provided for the administration and enforcement thereof by the internal
revenue officers of the Philippine Government. This law was amended by an Act of the United
States Congress in 1916, and by the United States War Revenue Act of 1917. The latter Act

3 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
authorized the Philippine Legislature to amend, alter, modify or repeal the Federal Tax Law then in
force in the Philippines. Under this authority, the Philippine Legislature, on March 9, 1919, enacted
Act No. 2833. This was the first income tax law passed by a Philippine legislative body, although it
was patterned after the United States Act of 1916. On June 15, 1939, Commonwealth Act No.
466, otherwise known as the National Internal Revenue Code, was approved, with Title II thereof
as the income tax law. The National Internal Revenue Code took effect on July 1, 1939, but the
provisions of the income tax law were made to apply to income earned from January 1, 1939. The
income tax law of 1939 was amended by numerous laws enacted by various Philippine legislative
bodies and by Presidential Decrees issued during the martial law regime of the Philippine
Government. On June 3, 1977, Presidential Decree No. 1158 consolidated the internal revenue
laws and Presidential Decrees into a single Tax
Code. The Code was known as the “National Internal Revenue Code of 1977”. In October, 1985,
Presidential Decree
INCOME AND BUSINESS TAXATION

No. 1994, after amending certain provisions of the National Internal Revenue Code, called the
Code the “National Internal Revenue Code of 1986”. Executive Orders during the Revolutionary
Government of the Philippines in 1986 amended certain provisions of the National Internal
Revenue Code. The Tax Reform Act of 1997, which amended and renamed the Code as the
“National Internal Revenue Code of 1997”, is, in Title II, the present income tax law.

In this light, there may be rules stated in the book which seem not on all fours with the strict
reading of the words in the law. If that is so, it is because there is a history of the rule being
discussed which gives the provision a meaning that is different from the usual import of the words
used in the law. Since there is not enough space in the book to trace the history of all these
provisions of law, the present interpretations, instead, are immediately given as the rule, to read,
to understand, and to apply.
The Philippine income tax law is not the National Internal Revenue Code only. Also included are:

a. Special laws, as they give preferential income tax treatment to certain taxpayers, under
certain conditions b. Revenue regulations
c. Revenue circulars
d. Rulings of the Bureau of Internal Revenue
e. Opinions of the Secretary of Justice
f. Decisions of the Supreme Court of the Philippines
g. Decisions of the Court of Appeals
h. Decisions of the Court of Tax Appeals
i. Decisions of inferior courts

III. General Principles on Income Taxation

a. A citizen of the Philippines, residing in the Philippines, is taxable on all income derived from
sources within and outside the Philippines;
b. A non-resident citizen is taxable only on income derived from sources within the
Philippines;

4 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
c. An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker is taxable only on income from sources within the Philippines.
A seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract worker;
d. An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;
e. A domestic corporation is taxable on all income derived from sources within and outside
the Philippines;
f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.

POSTTEST

1. Briefly, give the history of the Philippine Income tax law.

Answer: The Philippine income tax law was approved on Oct 3, 1913 which was the United
States Revenue Act of 1913. Later, the Philippine Legislature amended the law in 1919.
The National Internal Revenue Code was approved and took effect on 1939. The income
tax law of 1939 was amended by numerous laws enacted by various Philippine legislative
bodies and by Presidential Decrees issued during the martial law regime of the Philippine
Government. In October, 1985, Presidential Decree No. 1994, after amending certain
provisions of the National Internal Revenue Code, called the Code the “National Internal
Revenue Code of 1986”. Executive Orders during the Revolutionary Government of the
Philippines in 1986 amended certain provisions of the National Internal Revenue Code.
The Tax Reform Act of 1997, which amended and renamed the Code as the “National
Internal Revenue Code of 1997”, is, in Title II, the present income tax law.

2. What is the significance of knowing the history of the income tax law of the Philippines?
Answer: The history of the income tax law is important to understand why this is
implemented and where was it patterned from. Also, it is important to know the past income
tax law to improve them and amend it if needed.

3. Can the income tax law of the United States have an influence in the application of the
income tax law of the Philippines?
Answer: Yes, because the first income tax law of the Philippines is the United States
Revenue Act of 1913 which was later amended by the Philippine Legislature.

4. What constitutes the body of the income tax law of the Philippines?
Answer: the income tax law of the Philippines composed of the National Internal Revenue
Code, special laws, revenue circulars, rulings of the BIR, Decision of the SC,CTA and
other inferior courts.

5. What kind of tax is the income tax? Explain.

Answer:
a A national tax. It is imposed by the National Government
b An excise tax. It is a burden not laid directly upon persons and properties. It is
neither a capitation or poll tax, nor a property tax

5 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
c A direct tax. It is demanded from the person whom the law intends to impose it, and
cannot be shifted by the taxpayer to some other person
d A general tax. It is levied for the general purposes of the government
e An ad valorem tax. It is levied on value or amount of the income of the taxpayer

6. What are the general principles of income taxation in the Philippines?

Answer:
1. A citizen of the Philippines, residing in the Philippines, is taxable on all income derived
from sources within and outside the Philippines;
2. A non-resident citizen is taxable only on income derived from sources within the
Philippines;
3. An individual citizen of the Philippines who is working and deriving income from abroad
as an overseas contract worker is taxable only on income from sources within the
Philippines. A seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a
vessel engaged exclusively in international trade shall be treated as an overseas
contract worker;
4. An alien individual, whether a resident or not of the Philippines, is taxable only on
income derived from sources within the Philippines;
5. A domestic corporation is taxable on all income derived from sources within and
outside the Philippines;
6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.

6 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY

MODULE 2: TAX ON INDIVIDUALS

LEARNING FOCUS

Individual income tax payers may be:

(a) Resident citizens of the Philippines;

(b) Non-resident citizens of the Philippines;

(c) Resident aliens;

(d) Non-resident aliens engaged in business in the Philippines; or

(e) Non-resident aliens not engaged in business in the Philippines, but with income from the
Philippines.

Who is a non-resident citizen? He is a citizen who:

(a) Establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his
physical presence abroad with a definite intention to reside therein; or

(b) Leaves the Philippines during the taxable year to reside abroad:

(1) As an immigrant; or

(2) For employment on a permanent basis; or

(3) For work and derives income from abroad and whose employment thereat requires
him to be physically abroad most of the time during the taxable year.

(c) Was previously a non-resident citizen and who arrives in the Philippines at any time during
the taxable year to reside permanently in the Philippines. He shall be considered a non-
resident citizen for the taxable year in which he arrives in the Philippines with respect to
income derived from sources abroad until the date of his arrival in the Philippines.

Illustration. Mr. B was a non-resident citizen in 2009. He returned to the Philippines on June 5,
2010 to reside permanently in the Philippines He had income from January 1 to June 4, 2010
from Philippine sources of P300.000 and from foreign sources of P200.000. He had income
from June 6 to December 31 of the same year of P600.000 from Philippine sources and of

7 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
P400.000 from foreign sources. He would be considered a resident citizen on P 1,300,000, and
a non-resident citizen on P200.000.

A citizen of the Philippines who shall have stayed outside the Philippines for one hundred
eighty-three days or more by the end of the year shall be considered a non-resident citizen by
the mere fact of his length of stay abroad.

Illustration. Mr. C, a citizen of the Philippines left the Philippines on February 10, 2008, and
returned only on January 1, 2010. For 2009, he would be considered a non-resident citizen.

Who is a resident alien? He is one whose residence is within the Philippines but who is not a
citizen of the
Philippines. Who is a non-resident alien? He is one whose residence is not in the Philippines and
who is not a citizen of the Philippines. The nature, and length of stay by the end of the calendar
year, determines the status of the alien. So that -

(a) One who comes to the Philippines for a definite purpose which in its very nature may be
promptly accomplished is not a resident alien;

(b) One who comes to the Philippines for a definite purpose which in its very nature would
require an extended stay, and to that end, makes his home temporarily in the Philippines,
becomes a resident alien.

An alien who shall have stayed in the Philippines for more than one year by the end of the
calendar year is a resident alien.

Illustration. Mr. D, an alien, came to the Philippines on June 5, 2009 He stayed in the
Philippines until February 2, 2011. For the year 2009, Mr. D was a non-resident alien. For the
year 2010, Mr. D was a resident alien.

Who is a non-resident alien engaged in business or practice of profession in the Philippines? By

provision of law, an alien who shall come to the Philippines and stay for an aggregate period of
more than one hundred eighty days during a calendar year shall be considered a non-resident
alien in business (or in the practice of profession) in the Philippines. The only criterion is length
of stay.

Illustration. Mr. E, an alien, came to the Philippines on January 1, 2010, and stayed up to
February 1, 2010. During his stay in the Philippines he was actively in commerce with a gross
income of P1, 000,000 and expenses related to the income of P200.000. He would be
considered a non-resident alien not engaged in business in the Philippines. His stay in the
Philippines did not exceed one hundred eighty days.

Illustration. Mr. F, an alien, came to the Philippines on January 1, 2010 as a tourist. He stayed up
to
September 1, 2010. During his stay in the Philippines, his activities were spending, except on
August 31, 2010, when he sold his camera for P40, 000 for a gain of P5, 000. He would be
considered a non-resident alien engaged in business in the Philippines. His stay in the
Philippines exceeded one hundred eighty days.

Illustration. Mr. G, an alien came to the Philippines and stayed for one hundred days in 2009
and one hundred days in 2010. He was a non-resident alien not engaged in business in the
Philippines for both the years 2009 and 2010.

8 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
INCOME TAX RULES FOR INDIVIDUALS
Uniform rules for individuals Figure 2-1
Income tax rules for the resident citizen Figure 2-2
Income tax rules for the non-resident citizen Figure 2-9
Income tax rules for the resident alien Figure 2-
10
Income tax rules for the non-resident alien in business in the Figure 2-
Philippines 11
Income tax rules for the non-resident alien not in business in the Figure 2-
Philippines 13

Figure 2-1. Uniform rules for individuals: The capital gain tax

(a) On sale of shares of stock of a domestic corporation not listed and

traded thru a local stock exchange, held as capital asset
On the net capital gain: Final tax of 5%
Not over P100,000 Final tax of
10%
On any amount in excess of P100,000
(b) On sale of real property in the Philippines
held as capital asset***
On the gross selling price, or the current fair market value at the time of sale, Final tax of 6%
whichever is higher
*Sale of shares of stock of a domestic corporation thru a local stock exchange or thru initial public
offering pays the stock transaction tax (one of the several percentage taxes in the National
Internal Revenue Code) and having paid this tax, any gain shall not be subject to income tax.

What is capital asset? What is net capital gain? What is real property? What is the meaning of
final tax?

There is a statutory definition of capital asset. Succinctly, capital asset is asset not used in
business. When an asset held is described as an investment, it is a capital asset. Capital asset
is the opposite of “ordinary asset”. Ordinary asset is asset used in business (e.g., machinery).

Net capital gain is selling price (less) cost. What is “selling price”? Selling price is the
consideration on the sale, paid in cash or in property. Where the fair market value at the time of
sale was higher than the selling price agreed upon by the parties, “selling price" shall be such
fair market value. The selling price or the fair market value, whichever is higher, is reduced by
the expenses of the sale. What is cost? Cost is the purchase price increased by the expenses
on the purchase.

9 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Illustration. Mr. G sold directly to a buyer shares of stock of a domestic corporation held as
capital asset. The selling price was P300.000 and the cost was P250.000. The net capital gain
was P50.000. The capital gain tax at 5% would have been P2.500.

Illustration. Mr. H sold directly to a buyer shares of stock of a domestic corporation held as
capital asset. The selling price was P200.000 at the time when the fair market value of the
shares sold was P250.000, and the cost was P100, 000. The net capital gain was P150, 000.
The capital gain tax would have been:

On P100,000 at 5% P 5,000
50,000 at 10% 5,000
P150,000 P 10.000

Illustration. Mr. I sold directly to a buyer shares of stock of a domestic corporation held as
capital asset. The selling price was P420, 000 with a P20, 000 commission given to the broker
who negotiated the transaction. The shares were purchased for P240.000 with a commission of
P10, 000 paid to the broker who negotiated the transaction. The capital gain tax would have
been on a net capital gain of P150, 000, and it would have been computed, as follows:
Selling price P420,00
0
Less: Expense on the sale 20,000
Net selling price P400,000
Less: Cost -
Purchase price P240.000
Add: Expense on the acquisition 10,000 250,00
0
Net capital gain P150,00
0
Capital gain tax P
10,000

Illustration. Mr. J sold directly to a buyer shares of stock of a domestic corporation held as
capital asset. The selling price was P200, 000 and the cost was P250, 000. There was a capital
loss on the sale. There is no capital gain tax. The capital gain tax is imposed only when the sale
resulted in a capital gain. The capital loss will not be included in the year-end computation of the
income tax.

Illustration. Mr. K sold directly to buyers, at different dates within a taxable year, shares of
stock of a domestic corporation, Lot A and Lot B. The sale of Lot A resulted in a net capital gain
of P100,000 while the sale of Lot B resulted in a net capital loss of P40,000. The sale of Lot A
would have had a capital gain tax at 5%, or P5.000. The sale of Lot B would not have had a
capital gain tax. The two sales should not be consolidated to arrive at a net capital gain from the
two transactions. The capital gain tax is on a per transaction basis, and the payment of the tax
is a final tax.

Illustration. Mr. S sold directly to a buyer, shares of stock of a resident foreign corporation held
as capital assets. The selling price was at the fair market value of P500.000 on a cost of
P350.000. There is no capital gain tax because the shares were not those of a domestic

10 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
corporation. The capital gain of P150, 000 will be included in the year-end computation of the
income tax.

Illustration. Mr. V is a dealer in securities. In the course of his business, he sold at the Philippine
Stock
Exchange shares of stock of a domestic corporation on a selling price of P1, 500,000 on a cost
of P1,200,000. There is no capital gain tax. The shares of stock were not held as capital assets.
They were held by Mr. V as ordinary assets. The sale is not subject to the stock transaction tax
because he is a dealer in securities. The gain is subject to his year- end income tax.

What is real property? Real property is land, building or anything attached to the soil with
permanence. The capital gain tax is applied on the selling price-or fair market value at the time
of sale whichever is higher. Any gain or loss on the sale is immaterial because there is a
conclusive presumption by law that the sale resulted in a gain. The tax is on a per transaction
basis.

Illustration. Mr. M sold a land and building in the Philippines held as capital asset for P5,
000,000 when the fair market value was P5, 200,000 and which had a cost to him of P2,
000,000, for a gain on the sale of P3, 000,000. The capital gain tax is 6% of P5, 200.000, or
P312, 000. The amount of gain is immaterial.

Illustration. Mr. N sold a land and building in the Philippines held as capital asset for P2,
000,000, when the fair market value was P1, 900,000 and which had a cost to him of P2,
500,000, for a loss on the sale of P500, 000. The capital gain tax is 6% of P2, 000,000, or P120,
000. The loss from the sale is immaterial.

Illustration. On March 10, 2010, Mr. O sold Land and Building No. 1 for P5, 000,000 and a gain
of P2, 000,000 and Land and Building No. 2 for P4, 300,000 and a loss of P300.000, both held
as capital assets in the Philippines. The capital gain tax on the sale of Land and Building No. 1
is 6% of P5, 000,000 or P300, 000, a part of the capital gain tax on the sale of Land and
Building No. 2 which is 6% of P4, 300,000, or P258.000. The two capital gain taxes are
computed, and paid, separately under separate tax returns.
Illustration. Mr. YM sold a land and building in Malaysia held as capital asset on a selling price
at its fair market value of P2, 000,000 on a book value of P1, 100,000. There is no capital gain
tax because the real property was outside the Philippines. The capital gain of 900,000 will be
included in the computation of taxable income at the end of the year.

Illustration. Mr. MP sold his factory land and building in the Philippines on a selling price at its
fair market value of P2, 000,000 on a book value of P1, 200,000. There is no capital gain tax
because the real property in the Philippines was not held as capital asset. It was held as
ordinary asset. The gain of P800, 000 will be included in the computation of taxable income at
the end of the year.

The capital gain tax on shares of stock is paid within thirty days from the date of sale. On real
property, the capital gain 1.1-is withheld at source. In a deferred payment sale, the tax may,
under certain conditions, be withheld in installments, as payments on the price are made to the
seller. Thus, the capital gain tax on shares of stock would have been paid, and on real property
would have been withheld, already even before the end of the year. The capital gain need not
be included anymore in the quarterly and year-end computations.

THE INCOME TAX OF THE RESIDENT CITIZEN

11 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
The income tax rules for resident citizens are shown in Figure 2-2.

Figure 2-2. Income tax rules for the resident citizen

(a) Same as (a), uniform rules;

(b) Same as (b), uniform rules;
(c) From sources within the Philippines, on
passive income of:
Interest under the expanded foreign
currency deposit system Final tax of 7½%
(d) From sources within the Philippines, on
passive income of:
Royalty from books, literary works and
musical compositions Final tax of 10%
(e) From sources within the Philippines, on
passive income of:
Interest on any currency bank deposit, yield
or other monetary benefits from deposit
substitute, trust fund and similar
arrangement;
Royalty other than (d), above;
Prize exceeding P10,000
Other winnings, except Philippine Charity
Sweepstakes and lotto winnings
Final tax of 20%
(f) From sources within the Philippines, on
passive income of:
Dividend from a domestic corporation, or
from a joint stock company, insurance or mutual
fund company, and regional operating
headquarters of multinational company, or
share in the distributive net income after tax of a
partnership (except a general professional
partnership), joint stock or joint
venture or consortium taxable as a corporation Final tax of 10%
(g) From sources within the Philippines, on
passive income of:
Interest on long-term deposit or investment
in banks (with maturity of 5 years or more) Exempt
(h) Taxable income (others) within and outside
the Philippines 5% to 32%
Tax formula for (h):
Gross income from within and outside the Philippines

12 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Less: Allowable deductions for expenses and losses (or the Optional Standard Deduction), and for
personal exemptions
Equals: Taxable income

The income items in that figure can be divided into three categories as shown in Figure 2-3:

Figure 2-3. Categories of income subject to tax of a resident citizen.

Category A Category B Category C
Capital gain with capital gain Passive income with final tax: Other income
tax of: Graduated tax of 5% to 32%
(a) 5% and 10% (a) 7½%
(b) 6% (c) 10%
(d) 20%
The tax in (a) is due within The tax in (a), (b), or (c) is Computation of the income
30 days from the date of withheld at source. The tax is made in an annual
sale. The tax in (b) is income received is tax-paid income tax return (and in
withheld at source. already. the quarterly income tax
return)

Capital gain with capital gain tax.

See uniform rules for individuals, pages 2 to 4.

Passive income with final tax.

Certain passive income items from sources within the Philippines are subject to withholding
income tax. The income tax is withheld by the income payor so that the amount received by the
income earner is net of tax. The income tax withheld is remitted by the income payor to the
Bureau of Internal Revenue. The tax is a final tax. The income is not included anymore in the
year-end computations of the income tax.

Illustration.

Entries in a passbook on interest on bank deposit.

Date Withdraw Deposit/Interest Balance

al
250,000.00
3,750.00 253,750,000
750 253,000.00

Note: The P5,000.00 was the interest earned on the deposit, and the P1,000.00 was the final tax withheld
from the interest income.

13 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
What is the expanded foreign currency deposit system? What is an FCDU? An FCDU is a unit
of a local bank or of a local branch of a foreign bank authorized by the Banko Sentral Ng
Pilipinas to engage in foreign currency denominated transactions. These transactions include
accepting foreign currency deposits and granting of foreign loans to domestic borrowers.

What is a deposit substitute? It is a means of borrowing money from the public (twenty or more
individual or corporate lenders) other than by way of deposit with banks through the issuance of
debt instruments. For example, the Treasury Notes of the Banko Sentral are deposit substitutes.
The yield is subject to a final tax.

What is a trust fund? Example: A bank pools together the small amounts entrusted to it by its
clients for investment in safe and high-yielding securities. The small investors earn interest (also
called "yield"), and in addition, a small amount, which is called “additional yield”. The interest
income and the “additional yield” is subject to a final tax.

Royalties from books, literary works and musical compositions are subject to a final tax of 10%.
Other royalties (e.g., royalties from patents and franchises), are subject to a final tax of 20%.

What is the difference between a prize and a winning? A prize is the result of an effort (e.g., prize
in a beauty contest) A winning is the result of a transaction where the outcome depends upon
chance (e.g., betting).

Illustrations. A winning of P20.000 is subject to a final tax of P4.000. A winning of P2.000 is

subject to a final tax of P400. A prize of P30.000 is subject to a final tax of P6,000. A prize of
P3,000 is not subject to a final tax, hence it is income Category C on which the year-end tax
rates of 5% to 32% apply.

Are Philippine Charity Sweepstakes and lotto winnings subject to income tax? No, they are
exempt from income tax by provision of a special law.

Other income.

An income which is neither capital gain with capital gain tax, nor passive income with final tax, is
“other income”. On other income, the law applies a graduated tax (See Figure 2-4). Other
income is what is included in the computations, and in the income tax return, at the end of the
year, and at the end of each of the first three quarters of the year if the taxpayer is self-
employed (had income from business or profession).

Other income may be derived from:

a) Employer-employee relationship, which is called compensation income;

14 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
b) Business or profession;
c) Sale or exchange of property which is not subject to the capital gain tax;
d) Incidental sources, such as interest or dividend, which is not subject to final tax.
2-4. Graduated income tax for individuals.

ON TAXABLE INCOME OF: THE TAX IS:

Not over P10,000 5%
Over P10,000 but not over P30,000 P500 + 10% of excess over
P10,000
Over 30,000 but not over 70,000 2,500 + 15% of excess over
30,000
Over 70,000 but not over 140,000 8,500 + 20% of excess over
70,000
Over 140,000 but not over 250,000 22,500 + 25% of excess over
140,000
Over 250,000 but not over 500,00 50,000 + 30% of excess over
250,000
Over 500,000 125,000 + 32% of excess over
500,000

How much is the income tax on a taxable income of P82,153?

O P70,000 P 8,500.00
n
12,153 at 20% 2,430.60
P82,153 P10,930.60 or P10,931.00

e) Centavos. In the gross income and the deductions for expenses and losses there can
be centavos. In the taxable income, centavos shall be dropped in the income tax arrived
at with the application of the tax rates, fifty or more centavos shall be considered as one
peso, and less than fifty centavos shall be disregarded. (These rules on centavos apply
to all taxpayers, on their respective tax formulas.) After deducting from the tax computed
any withholding income tax, and/or any quarterly income tax paid, the income tax still
due or refundable can have centavos.

Tax formula 1:

For an individual with income from employer-employee relationship (gross compensation

income), who is not a minimum wage earner

Gross compensation income

Less: Personal exemptions (See Figure 2-6)

Equals: Taxable compensation income

Income tax: On the taxable compensation income, apply 5% to 32%

Tax formula 2:

15 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
For an individual who is self-employed (business or practice of profession):

Gross income

Less: Deductions for expenses and losses (or the Optional Standard Deduction) and personal
exemptions Equals: Taxable income
Income tax: On the taxable income, apply the rates of 5% to 32%

Tax formula 3:

For an individual who has mixed income:

Gross compensation income

Add: Net income from business or profession (Gross income less deductions for expenses and
losses, (or the Optional Standard Deduction)
Less: Personal exemptions
Taxable income

Income tax: On the taxable income, apply the rates of 5%. to 32%

In Tax Formula 1, Tax Formula 2, or Tax formula 3, if the taxpayer paid premiums on
hospitalization and/or health insurance, the premium payments are deductions from gross
income in the amounts allowed by law The minimum wage earner.

Statutory minimum wage shall refer to the rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLELIS) of
the Department of Labor and Employment (DOLE).

A minimum wage earner shall refer to a worker in the private sector paid the statutory minimum
wage, or to an employee in the public sector with compensation income of not more than the
statutory minimum wage in the non-agricultural sector where he/she is assigned.

A minimum wage earner is exempt from income tax on the: (a) Minimum wage; (b) Holiday pay;
(c) Overtime pay, (d) Night shift differential pay, and (e) Hazard pay; and exempt from the
withholding income tax on them.

Illustration. Compensation income only: Mr. A, a minimum wage earner in Metro Manila,
received P9,168 (P382/day x 6 days x 4 weeks) as monthly minimum wage plus hazard pay of
P1,000, overtime pay of P5,000, night shift differential of P2,000 and hazard pay of 4,000 How
much was the income tax withheld?

Minimum wage P9,1

68
Hazard pay 1,000
Overtime pay 5,000
Night shift pay 2,000
Hazard pay 4,000
Total P21,1

16 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
68
Taxable income P0
Income tax withheld P0

Related provisions of the income tax law and revenue regulations

(1) On fringe benefits. Ordinarily, facilities and privileges (such as entertainment, medical
services, or so called “courtesy” discounts on purchases) otherwise known as “de
minimis” benefits furnished or offered by employers to employees are not considered as
compensation income subject to income tax. Examples are: (a) Rice subsidy of P1,500
or one sack of 50-kg. rice per month amounting to not more than P1,500; (b) Uniform
and clothing allowance not exceeding P4,000 per annum
(2) On exclusions from gross income. Other gross benefits received by officials and
employees of public and private entities (such as productivity incentives and Christmas
bonus) not exceeding P30,000 are exclusions from gross income; GSIS, SSS,
Philhealth and Pagibig contributions and labor union dues of individuals are exclusions
from gross income

As applicable to the minimum wage earners (MWE):

(1) De minimis benefit conforming to the ceiling shall not be considered in determining the
P30,000 ceiling of “other benefits" excluded from gross income.
(2) The MWE receiving “other benefits” exceeding P30,000 limit shall be taxable on the
excess benefit, as well as on his salaries, wages and allowances, just like an employee
receiving compensation income beyond the SMW;
(3) MWE receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income, are not exempt from income tax on their entire income earned during the
taxable year - (Rev. Reg. No. 10-2008) (Query: Is the statutory minimum wage, holiday
pay, overtime pay, night differential pay and hazard pay of the MWE still exempt from
withholding income tax - i.e., which makes the items taxable but without withholding
income tax on them as they are paid to the MWE?)

Illustration. Mr. B, a minimum wage earner in Metro Manila, had salaries of P139.430* and
overtime pay of P10.600 in 2010. In addition, he received a thirteenth month pay of P11,619.
How much is his income tax? Answer: None, because:
Salaries P139,4
30
Overtime pay 10,600
Thirteenth month pay P11,619
Less: Exclusion (maximum of P30.000) 11,619 0
Total (still SMW) P149.430
P0
Income tax

*Considered paid on rest days, special days and regular holidays: P382 x 365 days. Monthly
SMW is P138,430/12, or P11,619 (See Rev. Reg.)

17 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Illustration. Mr. C, a minimum wage earner in Metro Manila, had salaries of P139,430 and
overtime pay of
P8.320 in 2010. In addition, he received a thirteenth month pay of P11,619, rice subsidy of
P20,000 and “other benefits” of P25,000. His income tax would have been (not considering
withholding income tax):

Salaries P139,430
Overtime pay 8,320
Thirteenth month pay P11,619
Taxable fringe benefit (P20.000 less P18,000) 2,000
Others
25,000
Total 8,619
P38,619 P156,369
Less: Exclusion P26,592
30,000
Taxable income
Income tax
Under the rules on withholding tax on compensation income, the income tax is computed on the
periodic payment of compensation, the computed income tax is withheld, so that what the
compensation income earner receives is his compensation income, net of lax

Illustration. Compensation income only: Mr. Q, who is not a minimum wage earner, had the
following data for a year:

Regular salaries P180,000 Overtime pay 20,000 Payroll

deductions:
SSS contributions 3,400
Philhealth contributions 1,200
Pagibig contributions 1,500
Labor union dues 500
Payment on loan from employer 30,000
Income tax withheld by the employer 23,350

How was the income tax withheld arrived at?

The items of SSS, Philhealth, and Pagibig contributions, and the labor union dues are
exclusions from gross income. The tax withheld would have been computed, as follows:
Regular salaries P180,0
00
Overtime pay 20,000
Payroll deductions: P200,0
00
SSS contributions P3,400
Philhealth contributions 1,200
Pagibig contributions 1,500

18 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Labor union dues 500 6,600
Gross compensation income P193,4
00
Less: basic personal exemption 50,000
Taxable compensation income P143,0
00
Income tax P23,3
50

The above computation would have been made by the employer to determine the total income
tax for the year that he should withhold. This is called “annualizing” the withholding income tax
The employee receives from the employer a certificate showing his gross compensation of
P200,000 the exclusions with a total of P6,600. and a tax withheld of P23,350. The employee
does not have to make computations nor file an income tax return at the end of the year. The
rules on “Substituted Filing of Income Tax Returns" will apply because the income is purely
gross compensation income from one employer only in the Philippines, and the income tax
withheld by the employer on it was correct. A computation at end of the year will be a repetition
of the computation of the employer and will anyway result in an income tax still due of zero
(P0).

Illustration. Compensation income only: Mr. R had the following data for a year:

Salaries net of exclusions for

SSS, Philhealth and Pagibig contributions, and of labor union dues
P360,000
Thirteenth month pay 30,000
Christmas bonus 30,000
Mid-year bonus 30,000
Merit bonus 30,000
Income tax withheld by the
employer 42,500

The income tax withheld from the compensation income would have been computed, as follows:

Salaries, net of exclusions P360,0

00
Thirteenth month pay P30,000
Christmas bonus 30,000
Mid-year bonus 30,000
Merit bonus 30,000
Total benefits P120,000
Less: Exclusion at a ceiling 30,000 90,000
Taxable compensation income P270,0
00
Less: Basic personal exemption 50,000
Taxable compensation income P220,0
00

19 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Income tax withheld by the employer. P42,500

(The rules on Substituted Filing of Income Tax Returns will apply.)

Illustration. Compensation income only Mr. S, who is not a minimum wage earner, had the
following data for a year:

Salaries, net of exclusions for SSS, Philhealth and

Pagibig contributions, and of labor union dues P200,000
Allowances 30,000

He paid premiums of P2,000 on hospitalization and health insurance, receipts for which he
showed his employer. How much would have been the income tax withheld by the employer"?

The income tax withheld by the employer would have been:

Nullifies, net of exclusions P200,0
00
Allowances 30,000
Gross compensation income P230,0
00
Less: Basic personal exemption 50,000
Premiums on hospitalization or
health insurance 2,000 52,000
Taxable compensation income P178,0
00
Income tax withheld P
32,000

(The rules on Substituted Filing of Income Tax Returns will apply.)

Illustration. If in the preceding illustration, the taxpayer did not notify the employer of his
premium payments on hospitalization and health insurance, the computation by the employer
for the withholding income tax would have been:
Gross compensation income (See above) P230,0
00
Less: Basic personal exemption 50,000
Taxable compensation income P180,000
Income tax withheld P 32,500

Since the withholding income tax will not equal the income tax at the end of the year, the
taxpayer must file an income tax return. The income tax return will show:
Taxable compensation income (see above) P178,0
00
Income tax P32,0
00
Less: Income tax withheld by the employer 32,500
Income tax refundable P500

Illustration. Business income only: Mr. Z, in trading business, had the following data

20 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
for a year:
Net sales P722.0
00
Cost of sales 240,0
00
Business expenses 200,0
00
Income tax paid (3 quarters) 30,000

The income tax due at the end of the year would have been:

Net sales P722.0

00
Less: Cost of sales 240,0
00
Gross profit from sales P482,0
00
Less: Business expenses 200,0
00
Net income from business P282.0
00
Less: Basic personal exemption 50,000
Taxable income P232,0
00
Income tax P
45,500
Less: Income paid (3 quarters) 30,000
Income tax still due P15,5
00

Illustration. Mixed income: Mr. AA, had gross compensation income (minimum wage earner)
and income from business. Data for a year follow:
Regular salaries and overtime pay P139,4
30
Gross income from business 320,5
70
Expenses of the business 100,0
00
Income tax withheld on the compensation income 0
Income tax paid (3 quarters) on business income 20,000

The income tax still due would have been computed, as follows:
Regular salaries and overtime pay P139,4
30
Gross income from business P320,570
Less: Expenses from business 100,000

21 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Net income from business 220,5
70
Total P360,0
00
Less: Basic personal exemption 50,000
Taxable income P310,0
00
Income tax P
68,000
Less:
Quarterly income tax paid 20,000
Income tax still due P48,0
00

Illustration. Mixed income. Mr U, married, had the following data on income, expenses and
losses in a calendar year:
Salaries and bonuses (net of exclusions) P
300,00
0
Gross income from business 2,000,0
00
Dividend income from a domestic corporation 20,000
Business expenses 1,400,0
00
Capital gain on a direct sale to a buyer of shares
of stock of a domestic corporation 150,0
00
Capital loss on a direct sale to a buyer of shares
of stock of a domestic corporation 50,000
Capital gain on a sale of an asset (other than shares
of stock and other than real property) 70,000

The year-end income tax of Mr. U would be on salaries and bonuses of P300,000, net income
from business of P600,000, and capital gain of P70,000.

Personal Exemptions.

Personal exemptions are arbitrary amounts allowed by law to mi Individual taxpayer,

theoretically, to provide for personal, living and family expenses.

The personal exemptions of resident citizens of the Philippines (also non-resident citizens and
resident aliens) are shown in Figure 2-5. Figure 2-5. Personal exemptions

Basic personal exemption:

For the taxpayer 50,000

Additional exemption:

22 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
For each dependent child (not exceeding four). In the case of married individuals, only one of
the spouses can claim the additional exemptions. For legally separated spouses, the additional
exemption shall be
allowed to the spouse who has legal custody of the child or children (but the total amount for the
spouses
shall not exceed the maximum for four) 25,000

Who is a dependent child?

A dependent child for whom there can be a claim for an additional exemption of P25,000, “is a
legitimate, illegitimate or legally adopted child, chiefly dependent upon and living with the
taxpayer, if such dependent is not more than twenty-one years of age, unmarried and not
gainfully employed, or if such dependent, regardless of age, is incapable of self-support
because of mental or physical defect.”

A legitimate child is one who was conceived or born of spouses inside wedlock. Under the New
Civil Code of the Philippines, a natural child is one conceived of parents who, at the time of
conception, without being married, were qualified to marry. Under the Family Code of the
Philippines, an illegitimate child is one conceived and born outside the marriage. (Thus, a
natural child under the New Civil Code is an illegitimate child under the Family Code.)

Illustration. Mr. CC, a citizen of the Philippines, had living with and dependent upon him for
support the following: (a) his mother; (b) a brother, twenty-one years old, single, unemployed;
(c) a legitimate son, twenty-five years old, single, unemployed; (d) another legitimate son,
twenty-one years old, married, unemployed; and (c) an illegitimate daughter, eighteen years
old, single, unemployed. How much would be his total personal exemptions?

With the underlined word or words indicating why additional exemptions cannot be claimed, the
basic personal and additional exemptions of the taxpayer follow:
Basic personal exemption Additional exemptions: P50,0
00
(a) Mother P0.00
(b) Brother, twenty-one years old, single
unemployed 0.00
(c) Legitimate son, twenty-five years old,
single, unemployed 0.00
(d) Legitimate son, twenty-one years old,
married, unemployed 0.00
(e) Illegitimate daughter, eighteen
years old, single, unemployed 25,000 25,0
00
Total basic and additional personal exemptions P75,0
00

Married persons.

In the case of married individuals where only one of the spouses is deriving gross income, only
such spouse shall be allowed the personal exemption.

Husband and wife, both income earners, accomplish one income tax return only. They compute
the income tax separately on their respective incomes. The two taxes will be added to arrive at

23 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
a single income tax still due or refundable. See Figure 2-6. Income which is clearly joint, or
which cannot be identified as exclusively of one spouse, with the related deductions, will be
divided equally. There will be a basic personal exemption of P50,000 for each. Only one spouse
will claim the additional exemptions. Where the husband and wife are both compensation
income earners, the husband is the proper claimant of the additional exemptions, but he may
waive it in writing in favor of the wife. When only one spouse is the gross compensation income
earner, such spouse is usually the claimant of the additional exemptions. When the spouses
are both self-employed (business or profession), either may claim the additional exemptions in
the joint income tax return at the end of the year.
Figure 2-6. Computation of income tax of husband and wife.

Where the spouse of an employee is a non-resident citizen deriving income from foreign
sources, the employed spouse within the Philippines shall be automatically entitled to claim the
additional exemptions.

When the income of both the spouses are only gross compensation income, and the taxes
withheld by their employers were correct, there would be no computations, and no income tax
return to be prepared, at the end of the year.

When the income of one spouse is gross compensation income and the income of the other
spouse is from self-employment, there will be an income tax return to be prepared at the end of
the year. When the income of both spouses is from self-employment (business or practice of
profession), there will an income tax return to be prepared at the end of the year.

Illustration. Assume that Mr. and Mrs. BB, husband and wife, with three children, the eldest of
whom is twelve years old, had:
Mr. and Mrs. BB:
Rent income P300.000
Expenses 100,000
Income tax withheld by the lessee from rental
payments (5% of P300,000) 15,000

Mr. BB:
Professional fees - gross income from profession 600,000

24 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Expenses, practice of profession 200,000
Income tax withheld from professional fees
(10% of P600,000) 60,000
Income tax paid (for three quarters) 10,000
Mrs. BB:
Gross compensation income, after deduction
for SSS, Philhealth, and Pagibig
contributions, and
labor union dues 204,000
Gain on sale of bonds held for 6 months 20,000
Income tax withheld on compensation income 6,100

Mrs. BB Mr. BB
Gross income from profession P600,000
Gross compensation income P204.000
Gross income from rent (1/2 each) 150,000 150,000
Gain on sale of bonds 20,000
Total P374,000 P750,000
Less:
Expenses on practice of profession (200,000)
Expenses on rental properties (1/2 each) (50,000) (50,000)
Basic personal exemption (50,000) (50,000)
Additional exemptions (75,000)
Taxable income P199,000 P450,000
Income tax P37,250 P110,000
Less: Quarterly income taxes paid (10,000)
Withholding taxes:
On professional fees (60,000)
On compensation income (6,100)
On rent (1/2 each) (7,500) (7,500)
Income tax still due P 23,650 P 32,500
The income tax still due at the end of the year from Mr. and Mrs. BB would have been
computed as follows:

The income tax still due from the husband and wife, as shown in one income tax return
prepared by them, is P23,650 plus P32,500, or P56,150.

Change of status.

(1) If the taxpayer should have additional dependents during the taxable year, he may claim
the corresponding exemptions in full for the year.
(2) If the taxpayer should die during the taxable year, his estate may claim the personal
exemptions as if he died at the close of such year
(3) If any dependent should die; or should marry; or should
become twenty-one years old; or should become gainfully employed, during the year,

25 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
the taxpayer may claim the personal exemptions as if the dependent died or as if such
dependent married, became twenty-one years old or become gainfully employed, at the
close of such year.

Illustration. Mr. ED had a legitimate child, 19 years old at the beginning of the year. He died on
July 1 of the year, with a gross income and expenses from the beginning of the year to June 30
of P220.000 and P60.000, respectively. In a last income tax return to be filed for him, for the
taxable period ending June 30, the computations would be:
Gross income P220,0
00
Less:
Expenses P60,000
Personal exemptions:
(in full, as if died at the close of the year)
Basic personal exemption 50,000
Additional exemption 25,000 135,0
00
Taxable income P85,0
00

For any other event that results in a change in the status of the taxpayer as it affects his
personal exemptions, and for which there are no specific rules applicable from those above-
mentioned, the status of the taxpayer at the end of the year will determine his additional
exemptions for such year.

Illustration. Mr. EF had a legitimate child, 25 years old, at the beginning of the year, who was
insane. Within the year the child recovered his sanity. His status at the end of the year would
allow him only a basic personal exemption of P50,000.

Figure 2-7. Income tax rules for the non-resident citizen

(a) Same as (a), uniform rules;

(b) Same as (b), uniform rules;
(c) From sources within the Philippines,
on passive income of:
Interest under the expanded foreign
currency deposit system Exempt
(d) From sources within the Philippines,
on passive income of:
Royalty from books, literary works and
musical compositions Final tax of
10%
(e) From sources within the Philippines,
on passive income of:
Interest on any currency bank deposit, yield
or other monetary benefits from deposit
substitute, trust fund and similar
arrangement;
Royalty other than (d), above;

26 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Prize exceeding P10,000
Other winnings, except Philippine Charity
Sweepstakes and lotto winnings Final tax of
20%
(f) From sources within the Philippines,
on passive income of:
Dividend from a domestic corporation, or from a joint
stock company, insurance or mutual fund company, and
regional operating headquarters of multinational
company, or share in the distributive net income after tax
of a partnership (except a general professional
partnership), joint stock or joint venture or consortium Final tax of
taxable as a corporation 10%
(g) From sources within the Philippines,

on passive income of:

Interest on long-term deposit or investment
In banks (with maturity of 5 years or more) Exempt
(h) Taxable income (others) within the
Philippines 5% to 32%
Tax formula for (h):
Gross income from within the Philippines
Less: Allowable deductions for expenses and losses (or the Optional
Standard Deduction); and for personal exemptions
Equals: Taxable income

THE INCOME TAX ON THE NON-RESIDENT CITIZEN.

The income tax rules applicable to non-resident citizens are in Figure 2-7. The rules on
personal exemptions are in Figure 2-5.

Illustration. Miss A, a citizen of the Philippines, resides, and is employed, in Canada. In a year,
her income from Canada, in its equivalent in Philippine pesos, was P500,000. She was not
subject to the Philippine income tax.

Illustration. A non-resident citizen of the Philippines had:

Gross income from business, Philippines PhP540,000

Gross income from business, foreign sources US$81,000
Expenses, Philippine business PhP240,000 Expenses, foreign business US$8,000
How much was the income tax for the year?

On the foreign income No income tax

On the Philippine income:

Gross income, Philippines P540,000

Less:

27 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Expenses, Philippine business P240,000

Basic personal exemption 50,000 290,000

Taxable income P250,000
Income tax P50,000

Illustration. Mixed income. Mr. C, a citizen of the Philippines, resides, and is employed, in a
Middle East country. In a year, his income from the foreign country, in its equivalent pesos, was
P200,000. His wife, Mrs. C, a citizen of the Philippines, resides in the Philippines, with one
qualified dependent child. She had:

Capital gain on sale directly to buyer of shares

of stock of a domestic corporation P30,000 Interest on Philippine currency bank deposit
20,000
Net income from business in the Philippines 200,000 Net income from business in Hong
Kong,
in equivalent pesos 100,000
What were the taxes of Mr. and Mrs. C?

The capital gain tax on sale of shares of stock

(P30.000 x 5%) P1,500
The final tax on passive income of interest:
(P20,000 x 20%) P4,000

The income tax on the other income for the year:

On the income of Mr. C, non-resident citizen,

from outside the Philippines No income tax
On the other income of Mrs. C:

Net income from the Philippines P200,000

Net income from Hong Kong 100,000 Net income from within and outside the Philippines
P300,000
Less:
Basic personal exemption P50,000
Additional exemption 25,000 75,000
Taxable income P225,000
Income tax P43,750

THE INCOME TAX ON THE RESIDENT ALIEN.

The income tax rules applicable to resident aliens are in Figure 2-8. Personal exemptions are in
Figure 2-5.

Figure 2-8. Income tax rules for the resident alien

(a) Same as (a), uniform rules;
(b) Same as (b), uniform rules;

28 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
(c) From sources within the Philippines, Final tax of 7½%
on passive income of:
Interest under the expanded foreign
currency deposit system
(d) From sources within the Philippines,
on passive income of:
Royalty from books, literary works and
musical compositions Final tax of 10%
(e) From sources within the Philippines,
on passive income of:
Interest on any currency bank deposit, yield or other monetary
benefits from deposit substitute, trust fund and similar arrangement:
Royalty other than (d), above;
Prize exceeding P10,000
Other winnings, except Philippine Charity
Sweepstakes and lotto winnings Final tax
(f) From sources within the Philippines, of20%
on passive income of:
Dividend from a domestic corporation, or
from a joint stock company, insurance or
mutual fund company, and regional operating
headquarters of multinational company, or
share in the distributive net income after tax
of a partnership (except a general
professional partnership), joint stock or joint
venture or consortium taxable as a Final tax of
corporation 10%
(g) From sources within the Philippines,
on passive income of:
Interest on long-term deposit or investment
In banks (with maturity of 5 years or more) Exempt
(h) Taxable income (others) within the
Philippines 5% to 32%

Tax formula for (h):

Gross income from within the Philippines

Less: Allowable deductions and personal exemptions
Equals: Taxable income

Illustration. Mr. A, a citizen of a foreign country residing in the Philippines, had the following
data on net income:

Net income, Philippines P0

How much was the Philippine income tax?

Income tax P0

29 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY

Illustration. Mr. B, with two qualified dependent children, is a citizen of a foreign country
residing in the Philippines. He had the following data for a taxable year:

Capital gain on sale of inherited real property in P300.000 the Philippines

on a selling price of P4,000,000 Dividend from a domestic corporation
20,000
Net income from business in the Philippines 200,000
Net income from business outside the Philippines 500,000
What were the income taxes of Mr. B for the year?

The capital gain tax on sale of real property P240,000

(P4,000,000 x 6%)

The final tax on passive income

(P20,000x 10%) P2,00
0

The income tax on the other income of the year:

Net income from business in the Philippines P200,0

00
Less:
Basic personal exemption P50,000
Additional exemptions 50,000 100,0
00
Taxable income P100,0
00
Income tax P
14,500

THE INCOME TAX RULES ON THE NON-RESIDENT ALIEN ENGAGED IN BUSINESS IN

THE PHILIPPINES

The income tax rules applicable to non-resident aliens engaged in business or in the practice of
profession in the Philippines are in Figure 2-9. His personal exemption is based on reciprocity.
Under the rule on reciprocity, the following are required:

(a) The country of which he is a subject or citizen has an income tax law; and

Figure 2-9. Income tax rules for the non-resident alien engaged in business in the
Philippines
a) Same as (a), uniform rules;
(b) Same as (b), uniform rules;

30 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
(c) From sources within the Philippines,
on passive income of:
Interest under the expanded foreign
currency deposit system Exempt
(d) From sources within the Philippines,
on passive income of:
Royalty from books, literary works and
musical compositions Final tax of
10%
(e) From sources within the Philippines,
on passive income of:
Interest
Royalty other than (c), above;
Prize exceeding P10,000
Other winnings, except Philippine Charity Sweepstakes and
lotto winnings
Dividend from a domestic corporation, or from a joint stock
company, insurance or mutual fund company, and regional
operating headquarters of multinational company,
or share in the distributive net income after tax of a
partnership (except a general professional
partnership), joint stock or joint venture or Final tax of
consortium taxable as a corporation 20%
(f) Gross income from within the Philippines from
cinematographic films and similar works Final tax of 25%
(g) From sources within the Philippines, on passive income of:
Interest on long-term deposit or investment
In banks (with maturity of 5 years or more) Exempt
(h) Taxable income (others) within the
Philippines
5% to 32%
Tax formula for (h):
Gross income from within the Philippines
Less: Allowable deductions for related expenses and losses
(Optional Standard Deduction is not allowed) and for personal
exemptions
Equals: Taxable income

31 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
(b) The income tax law of his country allows personal exemption to citizens of the
Philippines not residing therein, but deriving income therefrom;
(c) The personal exemption shall be equal to that allowed by the income tax law of his
country to a citizen of the Philippines not residing therein but deriving income therefrom,
or the amount provided in the National Internal Revenue Code to citizens of the
Philippines, whichever is lower. See Figure 2-10 for examples, without taking any
foreign country in particular.

Figure 2-10. Personal exemption for non-resident alien engaged in business in the
Philippines.

Foreign country allows Personal exemption in Personal exemption to the non-resident

the NIRC of the allowed Filipino Philippines
For taxpayer P70,000 P50,000 P50,000
For taxpayer P40,000 P50,000 P40,000
For dependent P30,000 P25,000 P 0*
*No additional exemption is allowed

Illustration. Mr. A is a citizen of Country Z, who engaged in business in the Philippines for ten
months in a calendar year. He was at the same time engaged in business in Country Z. Data on
his income and expenses for the year follow:

Gross income from business, Philippines P600,000 Capital gain on sale direct to
buyer of shares of a domestic corporation 60,000
Gross income from business, Country Z 200,000
Business expenses, Philippines 330,000
Business expenses, Country Z 120,000
Country Z would allow a citizen of the Philippines not residing there but deriving income from
there a basic personal exemption of P60,000. What were the income taxes for the year?

Capital gain tax on shares of stock:

(P60.000 x 5%) P3,0
00

Income tax on the other income of the year:

Gross income from business, Philippines P600,000

Less: Business expenses, Philippines 330,000
Net income from business, Philippines 270,0
00
Less: Basic personal exemption (lower than 50,000
P60,000)
Taxable income P220,0
00
Income tax P42,5
00

32 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
THE INCOME TAX RULES ON THE NON-RESIDENT ALIEN NOT ENGAGED IN BUSINESS
IN THE PHILIPPINES.

The income tax rules on non-resident aliens not engaged in business in the Philippines are in
Figure 2-11.

Figure 2-11. Income tax rules for the non-resident alien not engaged in business in the
Philippines

(a) Same as (a), uniform rules;

(b) Same as (b), uniform rules;
(c) Gross income from within the Philippines Final tax of 25%

Formula for (c):

Gross income from within the Philippines

Non-resident aliens not engaged in business or practice of profession in the Philippines, are not
allowed personal exemptions. The income tax is withheld by the income payor.

Illustration. Mr. B is a citizen of Country Y. He stayed in the Philippines in 2010 for one month
only. During his stay in the Philippines, he had an isolated transaction which gave him an
income and on which there was a related expense. Data on the income and expense follow:
Gross income P500,0
00
Expense related to the income 300,0
00

How much income tax was withheld on his income?

Gross income P500,0

00

Income tax withheld (P500,000 x 25%) P125,0

00

QUARTERLY INCOME TAX OF INDIVIDUALS

Resident citizens in business or practice of profession, nonresident citizens, resident aliens and
nonresident aliens with business or practice of profession in the Philippines, must file three
quarterly income tax returns and a final income tax return on their taxable income, and pay the
income tax, not later than:

First quarterly return : April 15 of the current year

Second quarterly return : August 15 of the current year
Third quarterly return : November 15 of the current
year Final or annual return : April 15 of the
succeeding year

33 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY

covering the income from business or profession.

Per revenue regulation, in the quarterly and final returns, gross income and deductions will be
computed on a cumulative basis, and will cover only income subject to the graduated rates of
5% to 32%. Personal and additional exemptions will be claimed in the final return only. The
income tax computed on the cumulative balances will be reduced by the income tax payments
of the preceding quarter/s and any income tax withheld on income included in the return. The
quarterly computations cannot have an income tax refundable. If the aggregate income taxes
paid in the preceding quarters of the year exceeds the income tax of a particular succeeding
quarter, the income tax payable for that succeeding quarter will be zero (PO). The final income
tax return may have an income tax refundable, or creditable against the income tax of the
succeeding quarter/s of the succeeding year.

Should the taxpayer have mixed income (gross compensation income and income from
business or profession), the quarterly returns will include only the income from business or
profession. The computations on the gross compensation income for the year will be at the end
of the year, to be aggregated with the data on income from business and profession for the
year.

Illustration. Mr. A, a resident citizen, with five qualified dependent children, had, as of
September 30,
2010, a taxable income from business of P680,000 and income tax payment thereon of
P182,600. For 2010, he had a gross compensation income of P320.000 from which there was a
withholding income tax of P30,000. The following were the cumulative data on business as of
the end each of the first three quarters, and of the year (in pesos):
1st Q 2nd Q 3rd Q Year

Gross income, business 400,000 780,000 1,300,000 1,800,0

00
Capital gain on direct
sale to buyer of
shares of
domestic 50,000 50,000
corporation
Interest on Philippine
currency bank
deposit 10,000 20,000 30,000 40,000
Expenses and losses 200,000 410,000 620,000 730,00
0

the income tax (in pesos):

1st Q 2nd Q 3rd Q Year

34 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Gross income, business 400,000 780,000 1,300,000 1,800,0
00
Expenses and losses 200,000 410,000 620,000 730,00
0
Balance 1,070,0
00
Compensation income 320,00
0
Total 1,390,000
Taxable income 200,000 370,000 680,000 1,240,0
00
Income tax (graduated) 37,500 86,000 182,600 361,8
00
Less:
Income tax paid:
First quarter (37,500) (37,500) (37,5
00)
Second quarter (48,500) (48,5
00)
Third quarter (96,6
00)
Income tax withheld on
Personal exemptions 150,000
compensation income (30,000)
Income tax still due 149,200
*See Estimated Income Tax of
Individuals
37,5 48,5 96,6
Posttests 00 00 00

I. Questions

1. What are the different kinds of individual taxpayers? Explain or describe each kind.
(a) Resident citizens of the Philippines- An individual is a citizen of the Philippines by
definition of the Constitution of the Philippines. Under the Constitution, an individual maybe
a citizen at birth (i.e., one whose father or mother is a citizen of the Philippines), or may
become a citizen of the Philippines sometime after birth (i.e., one who is naturalized in
accordance with the law).
(b) Non-resident citizens of the Philippines- a citizen who
a. Establishes to the satisfaction of the Commissioner of Internal Revenue the fact
of his physical presence abroad with a definite intention to reside therein; or
b. Leaves the Philippines during the taxable year to reside abroad as an immigrant;
or for employment on a permanent basis; for work and derives income from abroad and
whose employment thereat requires him to be physically abroad most of the time during
the taxable year.
c. Was previously a nonresident citizen and who arrives in the Philippines during the
taxable year in which he arrives in the Philippines with respect to his income derived
from sources abroad until the date of his arrival in the Philippines.

35 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
(c) Resident aliens- an individual whose residence is within the Philippines and who is not a
citizen thereof. An individual whose residence is within the Philippines and who is not a
citizen thereof is a non-resident alien. What makes an alien a resident or non-resident alien
is his intention with regard to the length and nature of his stay.
(d) Non-resident aliens engaged in business in the Philippines- By provision of law, an alien
who shall come to the Philippines and stay for an aggregate period of more than one
hundred eighty days during a calendar year shall be considered a non-resident alien in
business, or in the practice of profession, in the Philippines.
(e) Non-resident aliens not engaged in business in the Philippines, but with income from the
Philippines- an alien who shall come to the Philippines and stay for an aggregate period of
more than one hundred eighty days during a calendar year shall be considered a non-
resident alien in business, or in the practice of profession, in the Philippines.

2. What are the three categories of income subject to tax of a resident citizen? How is
each category taxed?
1. Passive Income –subject to final tax
2. Capital Gains – subject to capital gains tax
3. Other Income - subject to graduated income tax rate

3. What is the meaning of withholding final tax on income?

Final Withholding Tax is a kind of withholding tax which is prescribed on certain income
payments and is not creditable against the income tax due of the payee on other income
subject to regular rates of tax for the taxable year. Income Tax withheld constitutes the full
and final payment of the Income Tax due from the payee on the particular income subjected
to final withholding tax.

4. Discuss change of status as affecting personal and additional exemptions.

If the taxpayer marries or should have additional dependent(s) as defined above during
the taxable year, the taxpayer may claim the corresponding personal or additional
exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of such
year.
If the spouse or any of the dependents dies or if any of such dependents marries,
becomes twenty-one (21) years old or becomes gainfully employed during the taxable
year, the taxpayer may still claim the same exemptions as if the spouse or any of the
dependents died, or as if such dependents married, became twenty-one (21) years old
or became employed at the close of such year.
5. What are the rules on centavos in the formula for taxable income and income tax?

In the taxable income, centavos shall be dropped in the income tax arrived at with the
application of the tax rates, fifty or more centavos shall be considered as one peso, and
less than fifty centavos shall be disregarded. (These rules on centavos apply to all
taxpayers, on their respective tax formulas.)

II. Problems

36 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
1. How much is the basic personal exemption, and the additional exemptions, if any, in
each of the following cases?

(a) The taxpayer, a citizen of the Philippines, has an illegitimate child, two years old.
Basic Exemption: 50,000
Additional Exemption: 25,000
(b) The taxpayer, a citizen of the Philippines, has a brother, twenty-five years old, who is
crippled.
Basic Exemption: 50,000
Additional Exemption: 0
(c) The taxpayers, citizens of the Philippines, are husband and wife, both earning.
Basic Exemption: 50,000
Additional Exemption: 0
(d) The taxpayers are husband and wife, citizens of the Philippines. The wife earns
compensation income. The husband is in business.
Basic Exemption: 50,000
Additional Exemption: 0
(e) The taxpayers are husband and wife, citizens of the Philippines, both with compensation
income, with six qualified dependent children.
Basic Exemption: 50,000 each
Additional Exemption: 100,000 in total generally the husband

(f) The taxpayers are husband and wife, citizens of the Philippines, with six qualified
dependent children. The husband is in business. The wife is in the practice of a
profession.
Basic Exemption: 50,000 each
Additional Exemption: 100,000 in total generally the husband
(g) The taxpayers are husband and wife, citizens of the Philippines, legally separated, with
five qualified dependent children. The court gave custody of the children to the wife.
Basic Exemption: 50,000 each
Additional Exemption: 100,000 in total for the wife, zero for the husband
(h) The taxpayer is a citizen of the Philippines. Within the year he got married and had a
legitimate child.
Basic Exemption: 50,000
Additional Exemption: 25,000
(i) The taxpayer was a citizen of the Philippines. Within the year he died.
Basic Exemption: 50,000
Additional Exemption: 0
(j) The taxpayer, citizen of the Philippines, had a qualified dependent child at the beginning
of the year. Within the year the child died.
Basic Exemption: 50,000

37 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Additional Exemption: 25,000
(k) The taxpayer, citizen of the Philippines, had a qualified dependent child at the beginning
of the year. On July 1 of the year the child celebrated his twenty-first birthday.
Basic Exemption: 50,000
Additional Exemption: 25,000
(l) The taxpayer, citizen of the Philippines, had a qualified dependent child at the beginning
of the year. Within the year the child got married.
Basic Exemption: 50,000
Additional Exemption: 25,000
(m) The taxpayer, citizen of the Philippines, had a qualified dependent child at the
beginning of the year. Within the year the child became gainfully employed.
Basic Exemption: 50,000
Additional Exemption: 25,000
(n) The taxpayer, citizen of the Philippines, had a child twenty-four years old. Within the
year the child became insane.
Basic Exemption: 50,000
Additional Exemption: 0
(o) The taxpayer is a resident alien with a qualified dependent child.
Basic Exemption: 50,000
Additional Exemption: 0
(p) The taxpayer is a non-resident alien engaged in business in the Philippines, with a
legitimate child one-year-old. His country would give a Filipino engaged in business in
his country, not residing in the country, a basic personal exemption of P60,000 and an
additional exemption fora dependent child of P9.000.
Basic Exemption: 50,000
Additional Exemption: 0
(q) The taxpayer is a non-resident alien, not engaged in business in the Philippines, but
with income from the Philippines. His country would give a non-resident Filipino, not
engaged in business in his country, but with income in the country, a basic personal
exemption of P60.000.
Basic Exemption: 0
Additional Exemption: 0

2. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Selling price, at fair market value, on a direct sale to a buyer,
of shares of stock of a domestic
corporation held as capital asset P600,000 Cost of the shares of stock 540,000
Holding period of the asset 2 years

The capital gain tax? 3,000

3. The taxpayer is a citizen of the Philippines, residing in the Philippines.

38 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Selling price, at fair market value, on a direct sale to a buyer,
of shares of stock of a domestic
corporation held as capital asset P600,000 Cost of the shares of stock
450,000 Holding period of the asset 6 months

The capital gain tax? 10,000

4. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Selling price, at fair market value, on a direct sale to a buyer,
of shares of stock of a domestic
corporation held as capital asset P600,000 Cost of the shares of stock
650,000 Holding period of the asset 22 years

capital gain tax? 0

5. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Selling price on a direct sale to a buyer, of shares of stock of
a domestic corporation held as
capital asset for two years P500,000
Fair market value of the shares at the time of sale 550,000 Cost of the shares
200,000

The capital gain tax? 20,000

6. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Selling price on a direct sale to a buyer, of shares of stock of a
domestic corporation held as capital asset for six months P700,000
Expenses on the acquisition of the shares 25,000
Purchase price of the shares 500,000
Expenses on the acquisition of the shares 200,000
The capital gain tax? 0

7. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Direct sales to buyers, on one day, of shares of stock of A Co. and of B Co. held as capital
assets:
A Co.:
Selling price P500,000 Cost 410,000
B Co.:
Selling price P600,000 Cost 450,000
Capital gain tax of sale of A Co. shares? 4,500
Capital gain tax on sale of B Co. shares? 10,000

13. The taxpayer is a citizen of the Philippines, residing in the Philippines.

39 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Shares of a resident foreign corporation held as capital assets were sold in the Philippines
directly to a buyer:
Selling price of the shares P500.000 Cost of the share 200,000 Capital gain
tax? 35,000

14. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Shares of stock of a domestic corporation held as capital assets were sold thru the Philippine
Stock Exchange.
Selling price, net of stock broker’s commission P400,000

Cost (purchase price plus stock broker’s 100,000

commission)
Capital gain tax? 0

15. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Selling price, at fair market value, of land and building in the Philippines, held as
capital asset P5,000,000
Cost of the land and building 3,000,000 Holding period of the land and building 2
years
Capital gain tax? 300,000

16. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Selling price, at fair market value, of land and building in the Philippines, held as
capital asset P5,200,000
Cost of the land and building 5,500,000 Holding period of the land and building 6
months
Capital gain tax? 312,000

17. The taxpayer is a citizen of the Philippines residing in the Philippines.

Selling price of land and building in the Philippines
held as capital asset 4,500,000
Fair market value at the time of sale 5,000,000 Cost of the land and building
4,000,000
Capital gain tax? 300,000

18. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Selling price of land and building in the Philippines
held as capital asset P3,000,000
Commission of the broker who facilitated the sale 150,000
Purchase price of the land 1,200,000 Commission of the broker who facilitated the purchase
50,000

40 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Capital gain tax? 180,000

19. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Real property in the Philippines sold was held as capital asset
Selling price P5,000,000
Fair market value at the time of sale 5,500,000
Expenses of the sale 200,000 Cost of the real property 4,000,000
Capital gain tax? 330,000

20. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Real properties sold were held as capital assets. Selling prices of real
properties in the Philippines:
Land in Quezon City, Philippines P6,000,000
Land and building in Makati City, Philippines 7,000,000 Cost:
Land in Quezon City 5,000,000
Land and building in Makati City 7,500,000
Capital gain tax on the sale of real property in Quezon City? 360,000
Capital gain tax on the sale of real property in Makati City? 420,000

21. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Land in Malaysia, held as capital asset, was sold to a buyer in the
Philippines:
Selling price P3,000,000 Cost 1,000,000
Capital gain tax? 0

22. The taxpayer is a resident citizen of the Philippines with the following data in a calendar
year:
Net income from business P2,500,0
00
Interest on Philippine peso bank savings deposit
with the Bank of the Philippine Islands 40,000
Interest on Philippine peso bank time deposit
with
the Banco de Oro, with maturity
of five years 50,000
Interest on bonds of the Banko Sentral Ng 30,000
Pilipinas
Interest on foreign currency deposit under the

expanded foreign currency deposit system 100,000

Dividend from a domestic corporation 40,000

41 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Dividend from a resident foreign corporation 20,000

Royalties from on books authored 100,000

Final tax on each of the passive income with
final tax?
Interest: 8,000+7500= 15,500
Dividend from domestic corp: 4,000
Royalties: 20,000
How much was the passive income of the year, net of final withholding income tax?
240,500

23. Mr. Luis Zobel, a resident citizen, had income from within and outside the Philippines.
Data for a year follow:
Gross income, within the Philippines P120,872.94
Gross income, outside the Philippines 190,425.30
Deductible expenses, within the Philippines 58,924.65
Deductible expenses, outside the Philippines 156,539.41
How much was the income tax at the end of the year? 13,666.84

24. Mr. Ruben Ramirez, a citizen and resident of the Philippines, was a minimum wage
earner in Manila. Data in a calendar year:
Basic salary P139,430
Hazard pay 12,000
Overtime pay 30,000
Night shift differential pay 4,000
Holiday pay 1,000
How much was the income tax at the end of the year? Zero, minimum wage earner is exempt
from income tax.

25. Mr. Benjamin de Dios is a resident citizen. He is employed and had the following data in
a taxable year:
Salaries, before payroll deductions 335,615
Allowances 20,598
Payroll deductions:
SSS contributions 5,325
Philhealth contributions 2,950
Pag-ibig contributions 1,950
Labor union dues 2,000
Payment of loan to employer 25,000
How much was the withholding income tax? 59,837.60
Was an income tax return required to be filed at the end of the year?
yes

42 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
26. Mr. Filemon Borja, a resident citizen of the Philippines, an employee, had no child at the
beginning of the year. A child was born within the year. He had the following data for the
year:
Salary, net of exclusions for SSS, etc. 295,0
00
Thirteenth month pay 30,0
00
Christmas bonus 30,0
00
Productivity incentives pay 20,0
00
Withholding income tax on the compensation income 51,5
00
Was an income tax return required to be filed at the end of the year? Yes
What would the income tax return have shown? Net income tax due of 4,500

27. Mr. Arnulfo Gonzales is a minimum wage earner in Manila, with income from other
sources. Data for a calendar year follow:
Salaries P139,4
30
Overtime pay 25,000
Rice subsidy 25,000
Thirteenth month pay and other benefits 15,000
Gross income from business 679,0
00
Expenses of the business 326,7
82
Dividend from a domestic corporation 10,000
Capital gain on direct sale to buyer of shares of stock
of domestic corporation 50,000
Final tax on passive income? 1,000
Capital gain tax? 2,500
Income tax at the end of the year (disregard consideration of quarterly income tax)? None.
Minimum wage earner is exempt from income tax

28. Mr. and Mrs. Conrad Cruz are citizens of the Philippines with three dependent children.
They had the following data on net income for a year (disregard consideration of
quarterly income tax):

Net income of Mr. Cruz P652,432,26 Net income of Mrs. Cruz 321,589,23 Net
income (joint) of Mr. and Mrs. Cruz 156,789,32
Mrs. Cruz is to claim the additional exemptions.
Income tax due from Mr. and Mrs. Cruz at the end of the year?

29. Mr. Rosendo Robles is a resident citizen of the Philippines with income from business.
Mrs. Robles is a resident citizen of the Philippines who is employed. They have two
qualified dependent children. From the data:
Mr. Mr

43 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
s.
Gross income P600,000
Expenses 200,000
Salaries and benefits, net of exclusions P242,0
00
(Disregard consideration of any quarterly income tax)
How much was the income tax withheld on the compensation income?
How much was the income tax still due from the husband and the wife?

30. Mr. Ruben Cancio, is a citizen and resident of the Philippines. The following data were
on his business net income in each of the quarters of a year:
First quarter P220,0
00
Second quarter 309,5
00
Third quarter 294,6
50
Fourth quarter 324,3
00
How much was the income tax due at the end of each of the first, second and third quarters of
the year? How much was the income tax due at the end of the year?

31. Mr. J, a citizen and resident of the Philippines, with six qualified dependent children, was
an employee during the first quarter of 2010, and a businessman from the second
quarter to the end of 2010. His gross compensation income during the first quarter of
2010, net of exclusions, and before withholding income tax, was P72,000. For 2010, he
had the following cumulative data on his business:
Second Third Year
Gross income, business P420,000 P695.000 P847.000
Expenses, business 198,000 310,000 354,000

Show the income tax withheld (correctly done) from the compensation income of the first
quarter;
Show the income tax due at the end of the second, and third quarters of the year and the
income tax due at the end of the year
32. Mr. I is a citizen of the Philippines, with two qualified dependent children. He is in
merchandising business. He had the following data as at the end of each of the first
three quarters, and end, of a year:

1st Q 2nd Q 3rd Q Year

Net sales P280,000 P595,900 P795,000 P967,000
Dividend income from:
Domestic corporation 2,000 2,000 4,000 4,00
0

44 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Resident corporation 2,000 2,000 4,00
0
Interest on trade notes
receivable 1,200 2,100 3,000 3,90
0
Capital gains on direct
sales to buyers, of:
Shares of stock of
domestic corporation 30,000 30,000 120,000 120,0
00
30,000
120,000
Bonds of domestic corporation
held for 6 months 30,0
00
Cost of sales 90,000 180,000 240,000 297,0
00
Operating expenses 110,000 184,100 245,000 320,9
00

Show the computation for the income tax due at the end of each of the first three
quarters; Show the computation for the income tax still due or refundable at the
end of the year.

33. Ms. Kristine Cruz, is a citizen of the Philippines residing in Iraq. She had the following
data in a year:
Gross rent income from rental properties the Philippines P535,000
Gross income from employment in Iraq 457,911
Expenses on the rental property in the Philippines 358,000
Expenses related to the income from Iraq 259,672
Quarterly income tax paid in the Philippines 14,412
How much was the income tax still due or refundable for the year?

34. Mr. Lourdes Ligot is a subject and resident of a foreign country. She has a qualified
dependent child. Her income is from Philippine and foreign sources:

Income, Philippines 95,742

Income, foreign country of which he is subject 46,978 Dividend from a non-resident corporation
20,000 How much was the income tax expense of the year: (a) If he is a non-resident
alien in business in the Philippines and the given income is net income (Assume full reciprocity
on personal exemptions)?
(b) If he is a non-resident alien not in business in the Philippines and the given income is
gross income?

45 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY

MODULE 3 TAX ON CORPORATIONS

LEARNING FOCUS

For income tax purposes, the term “corporation” shall include partnerships, no matter how
created or organized, joint stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies.

The term “corporation” includes also mutual fund companies, regional operating headquarters of
multinational corporations, and joint accounts.

The term “corporation” does not include:

(a) A general professional partnership;

(b) A joint venture or consortium formed for the purpose of undertaking construction
projects;
(c) A joint venture or consortium for engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating or consortium agreement under a service
contract with the Government.

What is a general professional partnership? A general professional partnership is a partnership

formed by persons for the sole purpose of exercising their common profession, no part of the
net income of which is derived from engaging in any trade or business.

What is a domestic corporation? a resident corporation? a non-resident corporation? A domestic

corporation is one created or organized in the Philippines or under its laws. A foreign
corporation is a corporation which is not domestic, and may be a resident or a non-resident
corporation. A resident corporation is a foreign corporation engaged in business in the
Philippines. A non-resident corporation is a foreign corporation not engaged in business in the
Philippines but deriving income from the Philippines.

IV. TAX ON DOMESTIC CORPORATION

The income tax rules of domestic corporations are found in Figure 3-1 and Figure 3-2.

Figure 3-1. Capital gain tax on domestic corporations.

46 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
(a) On sale of shares of stock of a domestic corporation not listed and traded
thru a local stock exchange*, held as capital assets**

On the net capital gain:

Not over P100,000 Final tax of 5%
On any amount in excess of P100,000 Final tax of 10%

(b) On sale of land and/or building held as capital asset**

On the gross selling price or current fair market value prevailing at Final tax of 6%
the time of sale, whichever is higher

*Sale of shares of stock of a domestic corporation thru a local stock exchange or thru initial
public offering pays the stock transaction tax (one of the several percentage taxes in the
National Internal Revenue Code), and having paid this percentage tax, any gain shall not be
subject to income tax.

Domestic corporations are subject to any or some of the following:

(a) Capital gain tax;

(b) Final tax on passive income;
(c) Normal tax (acronym of NT or RCIT);
(d) Minimum corporate income tax (acronym of MCIT);
(e) Gross income tax (acronym of GIT);
(f) Improperly accumulated earnings tax (acronym of IAET).

Tax formula for the normal tax.

Gross income (not including passive income subject

to final tax and capital gain with capital gain tax) Pxxx
Less: Allowable deductions for expenses and losses; or
Optional Standard Deduction xxx
Taxable income subject to the normal tax Pxxx

Table 3-2. Income tax rules on domestic corporations

(a) Same as (a) and (b) of Table 3-1;

(b) From sources within the Philippines,
on passive income of:
Interest under the expanded foreign currency
deposit system Final tax of
7½%
(c) From sources within the Philippines,
on passive income of:

47 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Interest on any currency bank
deposit, yield or other monetary
benefit from deposit substitute, trust
fund and similar arrangement, Final tax of
royalty 20%
(d) Dividend from domestic corporation
(intercompany dividend) Exempt
(e) Taxable income (NET) from all sources within
and outside the
Philippines – NORMAL TAX 30%

But, beginning with the fourth year from start

of operations, whichever is higher of:
NORMAL TAX 30%
MINIMUM CORPORATE INCOME TAX
(MCIT), on MCIT gross income 2%

(f) In lieu of (e), beginning with the year 2000:

GROSS INCOME TAX (GIT), on GIT gross
Income 15%

The income subject to tax of a domestic corporation may thus be divided into three categories,
each with its own set of rules (See Figure 3-3).

Illustration. A Co., a domestic corporation in its second year of operations, had the following
data for the year:
Gross income from business P2,000,000
Business expenses and losses 1,000,000
Capital gain on land sold for P5,000,000 900,000
Interest on Philippine currency bank deposit 20,000

The normal tax would have been computed, as follows:

Gross income from business P2,000,000

Less: Business expenses and losses 1,000,000
Taxable income subject to normal tax P1,000,000
Income tax at 30% P300,000

V. Figure 3-3. Categories of income subject to tax of a domestic corporation

Category A Category B Category C

Capital gain with capital gain tax of Passive income with final Other income
tax:
(a) 5% and 10% (a) 7½% Normal tax of 30%
(b) 6% (c) 20%
But beginning with the

48 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
fourth year of operations,
whichever is higher of:

The tax in (a) is due within 30 The tax is withheld at The normal tax of 30% and
days from the date of sale. The tax source. The income the minimum corporate
in (b) is withheld at source. received is tax-paid income tax of 2%
(Installment payment/ withholding already.
under certain conditions).

The normal income tax

(NT) and the minimum
corporate income tax
(MCIT) are computed and
shown in the quarterly and
annual income tax returns.

Author’s note: The author would prefer to give the acronym NT, instead of RCIT, to the normal
tax of corporations. RCIT when spoken, or written, or read hurriedly, may be mistaken for
MCIT.

Minimum corporate income tax.

The minimum corporate income tax is 2% of the “minimum corporate income tax gross income”.
What is minimum corporate income tax gross income? There is a definition by law, and a
definition by revenue regulation. (See Figure 3-4.)

Figure 3-4. Minimum corporate income tax gross income.

In the case of merchandising concerns (from the statutory definition):

Net sales
Less: Cost of sales

Equals: Gross profit from sales subject to the MCIT

In the case of manufacturing concerns (from the statutory definition):

Net sales
Less: Cost of goods sold
Equals: Gross profit from sales subject to the MCIT

In the case of service concerns (from the statutory definition):

Gross receipts or revenues

49 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY

Less: Direct costs of the services**

Equals: Gross income subject to the MCIT
** Direct cost of services”. Examples are: Salaries of personnel directly rendering the services;
expenses on the facilities directly utilized; and cost of supplies.

“Gross income shall include all income earned or realized during the taxable year that is
subject to the normal tax, including gross income derived outside of the main activities of the
taxpayer (from Revenue Regulation No. 122007. October 19, 2007)

Illustration. B Co., a domestic trading corporation in its fourth year of operations, had the
following data on operations in a taxable year:

Gross sales P800,000

Sales returns and allowances 20,000
Sales discounts 5,000
Purchases 250,000
Purchase returns and allowances
10,000
Purchase discounts 2,000
Freight-in 5,000
Inventory, January 1 30,000
Inventory, December 31 15,000
The minimum corporate income tax, which would have been compared with the normal
tax, would have been:

Gross sales P800,0

00
Less: Sales returns and allowances P20,000
Sales discounts 5,000 25,000
Net sales P775,0
00
Less: Cost of sales –
Inventory, January 1 P30,000
Add: Purchases P250,000
Less: Purchase returns
and allowances P10,000
Purchase discounts 2,000 12,000
Net purchases P238,000
Add: Freight-in 5,000 243,000
Goods available for sale P273,000
Less: Inventory, end 15,000 258,0
00
Gross profit from sales P517,0
00
Minimum corporate income tax

50 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
(P517,000x2%) P10,340

(The statutory formula for MCIT gross income is the accounting formula for gross profit from
sales).

Illustration. C Co., a domestic corporation, is in manufacturing business. In its fourth year of

operations, it had:

Net sales P850,0

00
Raw materials:
Inventory, January 1 30,000
Net purchases 100,0
00
Inventory, December 31 15,000
Labor 50,000
Manufacturing overhead 30,000
Work in process inventory, 50,000
January 1
Work in process inventory, 40,000
December 31
Finished goods inventory, 60,000
January 1
Finished goods inventory, 45,000
December 31

The minimum corporate income tax, which would have been compared with the normal tax,
would have been:

Net sales P850,0

00
Less: Cost of goods sold –
Raw materials:
Inventory, January 1 P 30,000
Add: Net purchases 100,000
Materials available for use P130,000
Less: Inventory, December 31 15,000
Raw materials used P115,000
Add: Labor 50,000
Manufacturing overhead 30,000

51 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Total manufacturing costs P195,000
Add: Work in process inventory, 50,000
January 1
Cost of goods put in process P245,000
Less: Work in process inventory,
December 31 40,000
Cost of goods manufactured P205,000
Add: Finished goods inventory, 60,000
January 1
Total goods available for sale P265,000

Less: Finished goods inventory,

December 31 45,000
Cost of goods sold 220,0
00
Gross profit from sales P630,0
00
Minimum corporate income tax (P630.000 x 2%) P12,6
00

(The statutory formula for MCIT gross income is the accounting formula for gross profit from
sales).

Illustration. D Co, a domestic corporation, is a service enter-rise. In its fourth year of

operations, it had:

Gross revenues P900,0

00
Discounts and allowances 50,000
Salaries of service personnel 160,0
00
Depreciation of equipment used in rendering services 10,000
Rental of office 140,0
00
Supplies used 12,000
Light, water and telephone 55,000
Repairs 5,000
Other operating expenses 110,0
00

The minimum corporate income tax, which would have been compared with the normal tax,
would have been:

Gross revenues P900,0

52 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
00
Less: Discounts and allowances 50,000
Net revenues P850,0
00
Less: Direct cost of services – P160,000
Salaries of service personnel 10,000
Depreciation of equipment 140,000
Rental of equipment 12,000
Supplies used 55,000
Light, water and telephone 5,000 382,0
00
Repairs P468,0
00
Gross income P9,36
0
Minimum corporate income (P468,000 x 2%)

Illustration. E Co., a domestic trading corporation, in its fourth year of operations, had a gross
profit from sales of P300.000 and net taxable income of P100,000. How much was the income
tax of the corporation for the year?

Minimum corporate income tax (P300,000 x 2%)

P 6,000
Normal income tax (P100,000 x 30%)
P30,000
Income tax for the year (whichever is higher) P30,000

Illustration. F Co., a domestic manufacturing corporation, in its fourth year of operations, had a
gross profit from sales of P400,000 and a net taxable income of P20,000. How much was the
income tax of the corporation for the year?

Minimum corporate income tax (P400,000 x 2%) P8,000

Normal income tax (P20,000 x 30%) P6,000
Income tax for the year (whichever is higher) P8,000

VI. QUARTERLY TAX ON CORPORATIONS

Within sixty (60) days after the end of each of the first three quarters of the year, a corporation
files an income tax return. On or before the fifteenth day of the fourth month following the close
of the taxable year, a final or annual income tax return is filed. The quarterly and final tax
returns are summary declarations of gross income and deductions on a cumulative basis. The
normal income tax and the minimum corporate income tax are computed on the quarterly and
final tax returns, and whichever is higher is paid. The tax computed on the quarterly or year-end
taxable income is decreased by the amount of tax paid for the preceding quarter or quarters.
There may be an income tax payable (but not refundable) in a quarterly return.

Passive income with final tax and capital gains with capital gain tax are not included in the
quarterly and year-end computations.

53 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
If the sum of the quarterly tax payments made during the year is not equal to the total tax due
on the final return, the corporation may: (a) Pay the balance of the tax still due; or (b) Carry-over
the excess tax credit; or (c) Be credited or refunded with the excess payment.

Illustration. L Co., a domestic corporation, in its fourth year of operations in 2010, had the
following cumulative balances at the end of each quarter, and at the end, of the year (in pesos):

1st Q 2nd Q 3rd Q Year

Gross profit from sales 350,000 530,000 790,000 995,00

0
Interest on Philippine
currency bank deposit 4,000 8,000 12,000 16,000
Capital gains on sale
directly to buyers of:
Land 900,00
0
Shares of domestic
corporation 150,000 150,000 150,00
0
Dividend from domestic
corporation 10,000 10,000 20,000 20,000
Business expenses 200,000 310,000 380,000 490,00
0

Income tax at the end of: 1st Q 2nd Q 3rd Q Year

Gross profit from sales 350,000 530,000 790,000 995,00

0
Business expenses 200,000 310,000 380,000 490,00
0
Taxable income 150,000 220,000 410,000 505,00
0

MCIT at 2% 7,000 10,600 15,800 19,900

NT at 30% 45,000 66,000 123,000 151,50
0
Whichever is higher 45,000 66,000 123,000 151,50
0
Less: Income tax of-
First quarter (45,000) (45,000) (45,000
)
Second quarter (21,000) (21,000
)
Third quarter (57,000
)
Income tax due 45,000 21,000 57,000 28,500

54 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
In this problem, the income tax expense in the books of accounts and in the Income Statement
will be P151.500, from the journal entries (pro forma) at the end of each quarter, and of the year
of:

(Debit) Income tax expense Pxx

(Credit) Income tax payable Pxx

Illustration. U Co., a domestic corporation in its seventh year of operations, had the following
data for 2010:

1st Q 2nd Q 3rd Q Year

Gross profit from sales 400,000 780,000 990,000 1,200,000 Business

expenses 380,000 600,000 710,000 1,500,000
The computation for the income tax at the end of each quarter, and of the year, and the
journal entries for them, would have been:

1st Q 2nd Q 3rd Q Year

Gross profit from sales 400,000 780,000 990,000 1,200,0

00
Business expenses 380,000 600,000 710,000 1,500,0
00
Taxable income 20,000 180,000 280,000 (300,0
00)

MCIT at 2% 8,000 15,600 19,800 24,000

Normal tax at 30% 6,000 54,000 84,000 0
Whichever is higher 8,000 54,000 84,000 24,000
Less: Income tax paid-

First quarter (8,000) (8,000) (8,000)

Second quarter (46,000) (46,000
)
Third quarter (30,000
)
Due (refundable) 8,000 46,000 30,000 (P60,0
00)

and suggested journal

entries are,

First quarter

55 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
(Debit) Income tax expense P8,000
(Credit) Income tax payable P8,000

Second quarter:
(Debit) Income tax expense P46,000
(Credit) Income tax payable P46,00
0

Third quarter:
(Debit) Income tax expense P30,000
(Credit) Income tax payable P30,00
0

Year:
(Debit) Income tax P60,000
refundable
(Debit) Deferred charge - 24,000
MCIT
(Credit) Income tax P84,00
expense 0

Excess MCIT carry-forward. Any excess of the minimum corporate income tax over the normal
tax of a year will be carried forward and credited against the normal tax for the three
immediately succeeding taxable years. In the year to which carried forward, the normal tax
should be higher than the minimum corporate income tax.

Illustration. A domestic corporation had the following data on computations of the normal tax
(NT) and minimum corporate income tax (MCIT) for five years:

Year 4 Year 5 Year 6 Year 7 Year

8
MCIT P80,000 P50,000 P30,000 P40,000 P35,0
00
NT 20,000 30,000 40,000 20,000 70,0
00

The excess MClTs over NTs carry-forward are shown in Figure 3-5.

The gross income tax.

The President of the Philippines, upon recommendation of the Secretary of Finance, may,
effective 2000, allow domestic and resident corporations the option to be taxed on gross
income, as follows: (a) The tax is fifteen percent (15%); (b) Available only to firms whose ratio of

56 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%);
(c) Shall be irrevocable for three (3) consecutive years during which the corporation is qualified
under the scheme.

“Gross income”, for purposes of the gross income tax (GIT) is: (a) For trading or manufacturing
concerns, gross profit from sales; and (b) For service concerns, gross receipts less sales
allowances and discounts.

(Note: At the date of publication of this edition of the book, the President of the Philippines had
not made available the optional Gross Income Tax.)

VII. Figure 3-5. Excess MCIT carry-forward

The income tax expense.

The income tax expense for a year of a corporation would be the total of the three taxes of:

(a) Capital gain tax;

(b) Final tax on passive income; and (c) Normal income tax.

Illustration. G Co., a domestic corporation, a trading concern, in its fourth year of operations in
2010, had the following:

Gross sales P40,000,000

Interest on Philippine currency bank deposit 100,000
Dividend from domestic corporation 50,000
Dividend from resident foreign corporation 40,000

Capital gain on sale directly to buyer of shares

57 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
of stock of a domestic corporation on a
selling price of P600,000 80,000
Capital gain on sale of land and building on a
selling price at the prevailing market
value of P5,000,000 1,000,000
Interest on trade notes receivable 20,000
Sales returns and allowances 700,000
Sales discounts 800,000
Cost of sales 18,500,0
00
Business expenses 19,000,0
00

The income taxes of the corporation would have been:

Final tax on passive income

On interest on Philippine currency
bank deposit
(P100,000 x 20%) 20,000

Capital gain tax:

On shares of stock of domestic corporation
(P80,000 x 5%) P4,000
On land and building
(P5,000,000 x 6%) P300,000

Income tax on other income:

Normal tax:
Gross sales P40,000,0
00
Less: Sales returns and P700,000
allowances
Sales discounts 800,000 1,500,000
Net sales P38,500,0
00
Less: Cost of sales 18,500,0
00
Gross profit from sales P20,000,0
00

58 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Add:
Dividend from foreign corporation 40,000

Interest on trade notes receivable 20,000

Gross income P20,060,0

00
Less: Deductions for business 19.000.0
expenses 00

Taxable income P1,060,0

00

Normal income tax (P1,060,000 x P318,000

30%)
Minimum corporate income tax

(P20,060,000 x 2%) P401,200

Income tax (whichever is higher) P401,200

Income tax payments of

P724,000 is:
Final tax on passive income P20,000
Capital gain tax on shares P 4,000
Capital gain tax on land and 300,000 304,00
building 0
Normal income tax 318,00
0
Income tax expense P642,00
0
and a Deferred Charge - MCIT of 83,200

Total P725.20
0

VIII. TAX ON FOREIGN CORPORATIONS

Foreign corporations may be resident corporations (engaged in business in the Philippines), or

non-resident corporations (not engaged in business in the Philippines).

A foreign corporation can engage in business in the Philippines only after it had registered with,
and had been allowed by, the regulatory agencies of the Philippine government to engage in
business in the Philippines.

59 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
The income tax rules for resident corporations are in Figure 3-6, while the income tax rules for
non-resident corporations are in Figure 3-7.

Illustration. H Co. is a resident corporation. In 2010, its first year of operations. H Co. had the
following data on income and expenses:

Gross income from within the Philippines P580.0

00
Gross income from outside the Philippines 650,00
0
Expenses on the income from within the Philippines 340,00
0
Expenses on the income from outside the Philippines 420,00
0

IX. Figure 3-6. Income tax rules on resident corporations

(a) On sale of shares of stock of a domestic corporation not

listed and traded thru a local stock exchange, held as capital
assets:

On the net capital gain:

Not over P100,000 Final tax
of 5%
On any amount in excess of P100,000 Final tax of
10%

(b) From sources within the Philippines,

on passive income of:
Interest under the expanded foreign currency
deposit system Final tax of
7½%
(c) From sources within the Philippines,
on passive income of:
Interest on any currency bank deposit, yield or other
monetary benefit from deposit substitute, trust fund and Final tax of
similar arrangement, royalty 20%
(d) Dividend from domestic corporation (intercompany dividend) Exempt
(e) Taxable income (NET) from all sources within the Philippines –
NORMAL TAX 30%

But, beginning with the fourth year from start of operations,

whichever is higher of:
NORMAL TAX
MINIMUM CORPORATE INCOME TAX (MCIT) on MCIT gross income from within the
Philippines
(f) In lieu of (e), beginning with the year 2000:

60 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY

GROSS INCOME TAX (GIT), on GIT gross income from all sources within the Philippines
15%

Is gross income tax be available to a resident corporation? Yes.

The Philippine normal income tax for the year would have been computed, as follows:

Gross income from within the Philippines P580,0

00
Less: Deductions for expenses 340,0
00
Taxable income from within the Philippines P240,0
00
Income tax at 30% P72,0
00

Illustration. I Co., a resident corporation in its fifth year of operations in the Philippines in 2010,
had:

Philippines Foreign
P4,000.000 P9,000,000
1,200,000 2,700,000
2,000,000 4,500,000

The Philippine income tax would have been computed, as follows:

Net sales, Philippines P4,000,000

Cost of sales, Philippines 1,200,000
Gross profit from sales
P2,800,000
Less: Business expenses, Philippines
2,000,000
Taxable income, Philippines P 800,000
Minimum corporate income tax
(P2,800,000 x 2%) P 56,000
Normal income tax (P800.000 x 30%)
P 240,000
Income tax (whichever is higher)
P 240,000

X. Figure 3-7. Income tax rules on non-resident corporations

(a) On sale of shares of stock of a domestic corporation not listed and traded thru a
local stock exchange, held as capital assets:

61 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
On the net capital gain:
Not over P100,000 Final tax of 5%
On any amount in excess of P100,000 Final tax of 10%

(b) Interest on foreign loans Final tax of 20%

(c) Dividend from domestic corporation (under certain conditions) Final tax of
15%
(d) Gross income from sources within the Philippines Final tax of 30%

Illustration. J Co. is a non-resident corporation, with the following income from within the
Philippines:

Capital gain on sale direct to buyer of shares of stock of a domestic corporation

P100,000
Gross income from one transaction in the Philippines 800,000
Expense related to the income 150,000
The income tax of the corporation would have been:

Capital gain tax on shares of stock

(P100,000 x 5%) P 5,000
Final tax on the one isolated
transaction P240,00
(P800,000 x 30%) 0

SPECIAL CORPORATIONS

Figure 3-8 Special corporations.

Taxpayer Tax Base Rate

Taxable income from all sources 10%

Proprietary educational institution
and nonprofit hospital

Resident international carrier Gross Philippine billings 2½%

Non-resident owner or lessor of 4½%

Gross rentals, lease and charter
vessel
fees from the Philippines

Non-resident cinematographic film Gross income from the Philippines 25%

owner,
lessor or distributor

Non-resident lessor of aircraft, Gross rentals, charges and other fees 7½%
machinery and other equipment from
Philippine sources

62 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY

Regional operating headquarters of Philippine taxable income 10%

multinational corporation

There is no minimum corporate income tax for special corporations.

Under the Philippine Constitution, on private educational institutions: All revenues of non-stock,
non-profit educational institutions used actually, directly and exclusively for educational
purposes shall be exempt from taxes.

Illustration. The K University is an educational institution. In 2010, it had the following

condensed data:

Net income from tuition fees P10,000,0

00
Net income from the canteen 400,000
Net income from the book store 500,000
Miscellaneous income 100,000

The net income from all sources was P11,000,000. If K University was a stock corporation, the
income tax at 10% would have been P1,100,000. If K University was a non-stock corporation
operated by a religious order, it would have been exempt from income tax.

If the gross income of a proprietary educational institution or hospital from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived from all
sources, such educational institution or hospital will be taxed as an ordinary corporation
(predominance test).

Illustration. The KL University, a stock corporation, is an educational institution. In 2010, it had

the following condensed data:

Gross income from tuition and other school fees P1,000,0

00
Gross rent income 2,500,0
00
Total expenses of operations (as university) 1,200,0
00
Total expenses on rental properties 900,000

The income tax of KL University would have been:

Gross income from tuition and other school fees P1,000,000

Less: Expenses 1,200,000
Net loss (P200,0
00)
Gross rent income P2,500,00
Less: Expenses 900,000 1,600,00
Taxable income P1,400,0

63 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
00
Income tax at 30% P420,0
00

The KL University will be treated as an ordinary corporation because the gross income from
sources not related to education is P2,500,000, which, in relation to the total gross income of
P3,500,000, is 71.43%.

Non-resident owners of vessels are treated as special corporations only from charters or leases
of the vessels to Filipino citizens or corporations approved by the Maritime Industry Authority.

What are the income tax rules on regional headquarters and operating headquarters of
multinational companies?

(a) A regional headquarters of a multinational company will not be subject to income tax.
A regional headquarters is a branch established in the Philippines by a multinational
company and which headquarters do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating center for its
affiliates, subsidiaries or branches in the Asia-Pacific region and other foreign
markets.

(b) A regional operating headquarters of a multinational company will pay a tax of ten
percent (10%) of its net income. What is a regional operating headquarters of a
multinational company? A regional operating headquarters is a branch established in
the Philippines by a multinational company which is engaged in any of the following
qualifying services: general administration and planning, business planning and
coordination, sourcing/procurement of raw materials and components, corporate
finance advisory services, marketing control and sales promotion, training and
personnel management, logistic services, research and development services and
project development, technical support and maintenance, data processing and
communication, and business development.

XI. IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

A corporate form of organization provides a way of pooling capital from a great number of
investors to finance a business venture which would otherwise be too big, for an individual,
alone, or for individuals in a small group, to undertake. But a corporation should be formed, and
its affairs conducted, for the attainment of legitimate business objectives. If a corporation is
formed or availed of for the purpose of retaining earnings which otherwise should be distributed
to shareholders, to enable the latter to escape the income tax, as:

Example 1.M Co., a corporation formed some years ago, does not pay
any dividend, accumulating profits beyond the reasonable needs of the
business;

Example 2. All capital stock of N Co., a domestic corporation, with the

exception of four shares owned by nominal stockholders, are held by 0
Co., a domestic corporation. N Co. had accumulated profits beyond the

64 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
needs of the business, but does not distribute any dividend so that O
Co. would not have enough retained earnings from which to pay
dividends to its own (O’s) stockholders,

then measures may be taken by the state to force the corporation to pay dividends. One such
measure is the imposition of the additional tax on the corporation for improper accumulation of
profits. The loss in revenue to the state for lack of dividend that may be taxed on the individual
stockholders is recouped by the imposition of the additional tax on the corporation.

Presumptions of improper accumulation.

There are three cases when, in the absence of proof to the contrary, a corporation would be
considered as improperly accumulating profits, that is, formed for the purpose of preventing the
imposition of the income tax on its shareholders (Example 1) or on the shareholders of another
corporation (Example 2), namely:

(a) When the corporation is a mere holding company;

(b) When the corporation is an investment company;
(c) When the corporation permits its profits to accumulate beyond the reasonable needs of
the business.

A corporation having practically no activities except holding property, and collecting the income
therefrom or investing therein, shall be considered a holding company. If the activities further
include, or consist substantially of, buying and selling stocks, securities, real estate, or other
investment properties (whether upon an outright or a marginal basis) so that the income is
derived not only from the investment yield but also from profits upon market fluctuations, the
corporation shall be considered an investment company.

Under the Income Tax Regulations, an accumulation of profits (including undistributed profits of
prior years) is unreasonable if it is not required for legitimate business purposes, considering all
the circumstances of the case. The law would not prohibit an accumulation for:

(a) Additional working capital;

(b) Expansion, improvement and repairs;
(c) Debt retirement;
(d) Acquisition of a related business, or the purchase of stock of a related business
where a subsidiary relationship is established;
(e) Anticipated losses or reverses in business.

Where retention of profit is for legitimate business needs, the immediacy test applies, i.e., that
the profit must be applied not too long from the time of retention of profits.

Under the Corporation Code of the Philippines, a corporation can retain profits not exceeding
one hundred percent (100%) of its paid-in capital. So that, increase in the accumulation of
earnings up to one hundred percent (100%) of the paid-up capital of the corporation, is not
improper accumulation.
The improperly accumulated profits tax is not computed and applied by the corporation on itself
in its income tax return for a taxable year. The Bureau of Internal Revenue makes the

65 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
computation on its allegation of improper accumulation of profits by the corporation. The Bureau
makes a computation a year or years after the so-called improper accumulation shall have
taken place.

What corporations are exempt from the IAET?

(a) Publicly-owned corporations;

(b) Banks and other nonbank financial intermediaries; (c)
insurance companies.

The IAET, or improperly accumulated earnings tax.

The improperly accumulated earnings tax is ten percent (10%) of the improperly
accumulated earnings.

What is improperly accumulated profits or earnings? The formula is:

Taxable income
Increased by:
Income exempt from tax;
Income excluded from gross income;
Income subject to final tax;
Net operating loss carry-over deducted
(NOLCO) Reduced by:
Income tax paid /payable during the year
Dividend actually or constructively paid (issued from the applicable year’s taxable income)
Amount reserved for the reasonable needs of the business emanating from the covered year's
taxable income.

(Words in regular letters are in the statutory formula [provision of law]. Words in Italic letters are
additions by revenue regulation)

Illustration. Co. BB, a domestic corporation in its tenth year of operations in 2010, had a net
taxable income (no capital gain with capital gain tax, and no passive income with final tax) of
P1,000,000. It never distributed profits to its stockholders, and the Bureau of Internal Revenue
considered the accumulation of profits of the year as improper. How much must have been the
IAET, as computed by the Bureau of Internal Revenue?

The IAET would have been computed as follows:

Net taxable income P1,000,000

Less: Normal tax (P1,000,000 x 30%) 300.000
Improperly accumulated profits P 700,000

66 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
IAET (P700.000 x 10%) P 70,000

Illustration. By 2010, P Co., a domestic corporation, was in its fifteenth year of operations. It
had a retained earnings at the end of that year of P2,000,000 even as there was a net loss in
2009 of P200.000. The Bureau of Internal Revenue was imposing the improperly accumulated
profits tax on the accumulation of profits of 2010. In that year, the corporation had:
Net sales P4,200,0
00
Cost of sales 1,200,0
00
Business expenses 800,000
Dividend from domestic 200,000
corporation
Quarterly income tax paid,
first,
second and third quarters 510,000
Income tax due, end of the 90,000
year
Dividend declared, 2010 500,000
*
*Paid in 2011

For the year, the taxable income and income tax of the corporation would have been computed,
as follows:

Net sales P4,200,000

Less: Cost of sales 1,200,000
Gross profit from sales P3,000,000
Less: Business expenses P800,000
Net operating loss carry-over from 2009 200,000 1,000,000
Taxable income P2,000,000
Minimum corporate income tax (P3,000,000 x 2%) P 60,000
Normal income tax (P2,000,000 x 30%) P 600,000
Whichever is higher P 600,000
Less: Quarterly income tax paid 510,000
Income tax still due P 90,000

An assessment for an improperly accumulated earnings tax would have been from a
computation, as follows:

Taxable income at the end of the P2,000,0

year 00
Add:
Dividend from a domestic P200,000
corporation
Net operating loss carry-over 200,000 400,000

Total P2,400,0
00

67 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Less:
Normal income tax P600,000
Dividend declared 500,000 1,100,0
00
Improperly accumulated earnings P1,300,0
00
Improperly accumulated earnings
tax
(P1,300,000 x 10%) P
130,000

Illustration. At the end of 2009, after ten years of operations, Q Co., a domestic corporation,
had a retained earnings of P1,200,000. The Bureau of Internal Revenue is willing to concede
that the reasonable needs of the business would justify the retention of that amount by the
corporation. For 2010, the corporation had:

Gross profit from sales P700,0

00
Dividend from domestic corporation 10,000
Interest on Philippine currency bank deposit 20,000
Capital gain on sale of land at a selling price of P3,000,000 300,0
00
Business expenses 200,0
00
Capital gain tax on land 180,0
00
Final tax on interest from bank deposit 4,000
Income tax on its taxable income of P500,000 150,0
00
Quarterly income tax paid 110,0
00
Dividend declared and paid 250,0
00

The Bureau of Internal Revenue assessed the IAET for 2010. The computation by the Bureau of
Internal Revenue would have been as follows:

Taxable income, end of the year P500,0

00
Add:
Income exempt from tax –
Dividend from domestic corporation P10,000
Passive income with final tax –
Interest on Philippine currency bank deposit 20,000
Capital gain with capital gain tax –
Capital gain on sale of land 300,000 330,0
00
Total 830,0
00

68 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Less:
Income tax paid during the year:
Final tax on passive income P4,000
Capital gain tax 180,000
Normal tax of the year 150,000
Dividend declared and paid 250,000 584,0
00
Improperly accumulated earnings P246,0
00
Improperly accumulated earnings
tax (P246,000 x 10%) P24,6
00

Each taxable year has its own improperly accumulated earnings (separate computation), with its
own improperly accumulated earnings tax.

Illustration. The Bureau of Internal Revenue conceded that the balance' in the retained
earnings account of DD Co., a domestic corporation, as at the end of 2008 was necessary for
legitimate business purposes, but not the retention of profits for 2009 and 2010. The taxable
income for 2009 was P700.000, and for 2010 was P1,000,000, with no distribution of dividend in
2009 and a distribution of dividends in 2010 of P400.000. How much were the lAETs for the
years?

Such lAETs would have been:

2009 2010

Net taxable income P 700,000 P1,000,0

00
Less: Income tax 210,000) (300,00
0)
Dividends paid (400,00
0)
Improperly accumulated earnings P 490,000 P300,00
0
IAET P 49,000 P30,00
0

XII. PROFIT REMITTANCE TAX

Any profit remitted by a branch to its head office shall be subject to a final tax at fifteen percent
(15%) which shall be based on the total profit applied or earmarked for remittance, without any
deduction for the tax component thereof, except those activities which are registered with the
Philippine Economic Zone Authority (PEZA).

XIII. GOVERNMENT OWNED OR CONTROLLED CORPORATION

69 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
All corporations, agencies or instrumentalities owned or controlled by the Government, shall pay
such rate of tax upon their taxable income as are imposed upon corporations or associations
engaged in a similar business, industry or activity, except the following:

(a) Government Service Insurance System (GSIS);

(b) Social Security System (SSS);
(c) Philippine Health Insurance Corporation (PHIC); and
(d) Philippine Charity Sweepstakes Office (PCSO);

XIV. EXEMPT ASSOCIATIONS

Enumerated hereunder are corporations and associations that are:

Not subject to income tax on income received by them from undertakings which are essential to
or necessarily connected with the purposes for which they were organized and operated, but

Subject to income tax on income of whatever kind and character from any of their properties,
real or personal, or from any of their activities conducted for profit, regardless of the disposition
made of such income:

(a) Labor, agricultural or horticultural organization not organized principally for profit;
(b) Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without
profit;
(c) Beneficiary society, order or association operating for the exclusive benefit of the
members, such as fraternal organization operating under the lodge system, or mutual aid
association or a non-stock corporation organized by employees providing for the
payment of life, sickness, accident or other benefits exclusively to the members of such
society, order, association or non-stock corporation, or their dependents;
(d) Cemetery company owned and operated exclusively for the benefit of its members;
(e) Non-stock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no
part of the net income or assets of which shall belong to or inure to the benefit of any
member, organizer, officer or a specified person;
(f) Business league, chamber of commerce, or board of trade, not organized for profit and
no part of the net income of which inures to the benefit of any private stockholder or
individual;
(g) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(h) A non-stock and non-profit educational institution;
(i) Government educational institution;
(j) Farmers and other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely
local character, the income of which consists solely of assessments, dues and fees
collected from members for the sole purpose of meeting its expenses; and
(k) Farmers, fruit growers, or like association organized and operated as a sales agent, for
the purpose of marketing the products of its members and turning back to them the

70 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
proceeds of sales, less the necessary selling expenses, on the basis of the quantity of
produce furnished by them.

Illustration. R Inc., a non-stock domestic charitable corporation, had the following data in a
year:

Donations received P600,0

00
Administrative expenses 400,0
00
Rent income 70,000
Expenses on the rental property 30,000
Income tax withheld on rent 3,500
Income tax paid, first, second and third quarters 8,000

The taxable income and income tax for the year would have been:

Rent income P70,000

Less: Expenses on the rental property 30,000
Taxable income P40,000
Income tax at 30% P12,000
Less.
Income tax withheld on rent P3,500
Income tax paid, first, second and third quarters 8,000 11,500
Income tax still due P500

Posttest

I. QUESTIONS

1. For income tax purposes, define “corporation”.

Answer: The term “corporation” shall include partnerships, no matter how created or
organized, joint stock companies, joint accounts (cuentas en participacion), associations,
or insurance companies. Includes also mutual fund companies, regional operating
headquarters of multinational corporations, and joint accounts

2. Give three associations that are not within the meaning of the term “corporation”.
Answer: general professional partnership, a joint venture or consortium formed for the
purpose of undertaking construction projects and a joint venture or consortium for
engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the Government.

3. What are the three categories of income subject to tax of a domestic corporation?
Answer: Capital gain tax, final tax on passive income and normal income tax.

4. Is the “improperly accumulated profits tax” a penalty tax? Why?

71 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Answer: Improperly accumulated earning tax is a penalty tax upon a corporate taxpayer
for accumulating so much net income after tax beyond the reasonable needs of the
business.

5. How are educational institutions taxed?

Answer: Educational institutions are special corporations which are taxed 10% on
taxable income from all sources

II. PROBLEMS

6. A domestic corporation had the following data in its second year of operations:

Capital gain on sale of land in Malaysia, on a selling price at fair market value of P5,000,000
P1,000,000
Capital loss on sale of land and building in the
Philippines on a selling price of P4,000,000 500,000
Capital gain on direct sale to buyer of shares of stock of a domestic corporation 150,000
Gross profit from sales 5,000,000
Interest on bank deposits 50,000
Expenses of operations 3,000,000

The capital gain taxes? 34,000

The final tax on passive income? 10,000
The year-end tax? 644,000
The income tax expense of the year? 600,000

7. A domestic corporation had, in its fourth taxable year:

Gross profit from sales

P4,000,000
Expenses of operations
3,000,000
(Disregard considerations of quarterly income tax payments)

Minimum corporate income tax? 80,000

Normal income tax? 300,000
Income tax of the year? 300,000

8. A domestic corporation had the following data in its sixth year of operations:

Gross profit from sales P2,000,0

00
Interest income from trade notes receivable 50,000
Expenses of operations 2,020,0
00
(Disregard considerations of quarterly income tax payments)

72 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Minimum corporate income tax? 40,000
Normal income tax? 9,000
Income tax of the year? 40,000

9. In its seventh year of operations, a domestic corporation, a service

provider, had:

Gross revenue P5,000,0

00
Costs and expenses:
Direct costs of the services 2,000,0
00
Other operating expenses 500,000
(Disregard considerations of quarterly income taxes paid)
How much is the minimum corporate income tax? 60,000
How much is the normal tax? 750,000
What is the income tax for the year? 750,000

10. A foreign corporation in its fourth year of operations, with business operations within and
outside the Philippines, had the following data for the year:

Philippin Foreign
es
Net sales P2,000 P4,000,0
00
Interest on Philippine peso deposits 60,000
Interest on foreign currency deposits 60,000
Dividend from domestic corporation 40,000
Dividend from foreign corporation 50,000
Capital gain on sale of land in the
foreign country, on a selling
price in equivalent pesos of P5,000,000 1,000,0
00
Capital gain on direct sale to buyer of
shares of stock of a domestic corporation 200,00
Cost of sales 600,000 2,400,0
00
Philippine quarterly income tax paid 205,000
Operating expenses 300,00 600,000
Minimum corporate income tax (MCIT)?
28,000
Normal income tax? 330,000

73 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Income tax due, end of the year? 125,000

11. The domestic corporation is a private educational institution in its fifth year of operations,
with the following data on income and expenses for the year:

Gross income from tuition fees P5,000,0

00
Gross income from miscellaneous fees 600,000
Gross income from rentals, net of a 5% creditable withholding tax on the gross 190,000
Interest on bank deposits, net of withholding final tax 48,000
Operating expenses 4,000,0
00
Minimum corporate income tax? None
Income tax, end of the year? 180,000

12. A domestic corporation had the following cumulative data as at the end of each of the
first three quarters, and end, of a taxable year:

First Second Third Year

Gross profit from sales P500,000 P700,000 P850,000

P990,000
Operating expenses 200,000 280,000 340,000 396,000

Income tax due at the end of each of the first three quarters, and due or refundable at the end
of the year? Q1=237,000 Q2=66,000 Q3=108,000 year end=136,200 payable

13. A domestic corporation had the following cumulative data as at the end of each of the
first three quarters, and end, of its fifth year of operations:

First Second Third Year

Gross profit from sales P400,000 P600,000 P700,000

P900,000
Operating expenses 160,000 400,000 520,000 580,000

Income tax due at the end of each of the first three quarters, and due or refundable at the end
of the year? Q1=222,000 Q2=0 Q3=24,000 year end=36,000 payable

14. A domestic corporation had the following data on transactions in each of the four
quarters of a taxable year:

First Second Third Fourth

Gross profit from sales P500,000 P350,000 P800,000 P900,0

00

74 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Dividend from a domestic
corporation 20,000 20,000
Interest on bank deposit 4,000 8,000 12,000
Operating expenses 450,000 340,000 810,000 450,00
0

Income tax due at the end of each of the first three quarters, and due or refundable at the end
of the year? Q1=15,000 Q2=3,000 Q3=0 year end=132,000 payable

15. A domestic corporation, had the following data for each of the four quarters of the
calendar year 2010 (fourth year of operations):

First Second Third Fourth

Gross profit from sales 300,000 280,000 350,000 290,000

Dividend from:
Domestic corporation 8,000 8,000
Resident corporation 5,000 5,000 Capital gain on sales:
Land in the Philippines
Sale at P1,000,000
Cost of 500,000 500,0
00
Direct sale to buyer,
of shares of domestic
corporation:
Sale at P80,000
Cost of 50,000 30,00
0
Capital loss on sale
direct sale to buyer, of
shares of domestic
corporation:
Sale at P100,000
Cost of 140,000 40,00
0
Business expenses 185,0 170,0 370,0 95,00
00 00 00 0

Quarterly income tax paid ? ? ? ?

Details for income tax due, first
quarter?
Details for income tax due, second
quarter?
Details for income tax due, third quarter?

75 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY
Details for income tax due (refundable or creditable), end
of the year?

16. A domestic corporation had the following data in its tenth and eleventh year of
operations:

Tenth year Eleventh

year
Gross income P2,000,000 P4,000,0
00
Expenses of operations 1,900,000 2,900,0
00

(Disregard considerations of quarterly income

tax payments)
Income tax at the end of the tenth year? 40,000

Income tax at the end of the eleventh year?

320,000

17. A domestic corporation, had the following data in its fourth, fifth, sixth and seventh year
of operations:

Fourth Fifth Sixth Seventh

Gross income P800,000 P600,000 P700,000 P900,000
Expenses of operations 780,000 580,000 750,000 600,000

(Disregard considerations of quarterly income taxes paid)

Income tax for each of the fourth to the seventh year of operations?

18. The following were computed income taxes (MCIT for minimum corporate income tax
and NT for normal tax) of a domestic corporation:

MCIT NT
Seventh year P70,000 P20,000
Eighth year 10,000 30,000
Ninth year 40,000 15,000
Tenth year 2,000 5,000
Eleventh year 45,000 80,000

(Disregard considerations of quarterly income tax payments)

Income tax for each of the years?

19. A domestic corporation had the following data in a taxable year:

Net taxable income at the end of the year P1,000,000

Dividend paid within the year 200,000

76 | Tax 11
ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY

If the Bureau of Internal Revenue makes a finding that the accumulation of profits is improper,
how much is the improperly accumulated earnings tax (IAET)?

20. A domestic corporation had the following data in a taxable year, income taxes not
included:

Net taxable income at the end of the year P2,000,0

00
Capital gain on real property sold at 1,000,0
P5,000,000 00
Interest on Philippine currency bank 30,000
deposit
Dividend received from domestic 50,000
corporation
Appropriation for plant expansion 200,000
Dividend paid within the year 500,000
What are the income taxes of the year?
Assuming that the Bureau of Internal Revenue is correct in its finding that the accumulation of
the year is improper, how much is the IAET?

21. A foreign corporation is doing business in the Philippine through its branch in the
Philippines. Philippine operations in its fifth year in the Philippines had the following data:

Gross income from operations of the year P5,000,0

00
Interest on Philippine currency bank deposit 100,000
Operating expenses of the year 3,000,0
00
Remittance of profits to Y Co., its mother company
abroad (net of profit remittance tax) 425,000
The minimum corporate income tax?
The aggregate of income taxes of the year?

22. A foreign corporation not licensed to do business in the Philippines derived an income of
P2,000,000 from an isolated transaction in the Philippines, on which the total of related
expenses was P200.000. The Philippine income tax? Answer: None

77 | Tax 11