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JPIA REVIEWINDIVIDUALS LJ, married, left the Philippines in the middle of the year on July 1, 2018 to go abroad and work there for five (5) years. The following data were provided as of December 31, 2018: Gross Business Income Business Expenses PERIOD Philippines Abroad Philippines Abroad Jan. 1 to ...

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JPIA REVIEW INDIVIDUALS 1. LJ, married, left the Philippines in the middle of the year on July 1, 2018 to go abroad and work there for five (5) years. The following data were provided as of December 31, 2018: Gross Business Income Business Expenses PERIOD Philippines Abroad Philippines Abroad Jan. 1 to June 30 P300,000 P200,000 P100,000 P50,000 July 1 to Dec. 31 600,000 40,000 150,000 50,000 His taxable income is: a. P800,000 b. P950,000 c. P1,100,000 d. P600,000 Solution: TNI = P300,000 + 200,000 + 600,000 – 100,000 – 50,000 – 150,000 TNI = P800,000 Note: Personal exemptions (basic and additional) under the TRAIN Law are no longer allowed beginning Jan. 1 2018. 2. Based on the above problem, but assuming he arrived from abroad on July 1, 2018 to permanently resettle in the Philippines, after working abroad for 5 years, his taxable income as of December 31, 2018 is: a. P750,000 b. P1,000,000 c. P1,100,000 d. P600,000 Solution: TNI = 300,000 + 600,000 + 400,000 – 100,000 -150,000 – 50,000 TNI = P1,000,000 3. If he did not leave Philippines at all, LJ’s taxable income is: a. P750,000 b. P950,000 c. P1,150,000 Solution: TNI = total net income Phil. And abroad TNI = P1,150,000 4 – 7. Carlo, married with two dependent children, received the following income: Rent, Philippines P1,000,000 Rent, Hongkong 200,000 Interest, peso deposit, MBTC 100,000 Interest, US$ deposit, BDO ($10,000 * P42) 420,000 Interest, deposit in Hongkong (HK$10,000 * P5) 50,000 Prize (cash) won in a local contest 8,000 Prize (TV) won in a local lotter 50,000 PCSO/lotto winnings 2,000,000 Prize won in contest in US 300,000 Lotto winning in US 100,000 Dividend, domestic company 600,000 4. Assuming the taxable year is 2017, determine the taxable net income assuming he is: RC NRC RA NRA-ETB a. P80,000 P180,000 P830,000 P180,000 b.

180,000

c. 1,558,000

80,000 1,000,000 1,000,000 908,000

908,000

908,000

d. P600,000

d. 1,658,000 1,008,000 1,008,000 1,008,000 Solution: Rent, Philippines Rent, Hongkong Interest, peso deposit, MBTC Interest, US$ deposit, BDO Interest, deposit in Hongkong Prize (cash) won in a local Prize (TV) won in a local lottery PCS/Lotto winnings Prize won in contest in US Lotto winnings in US Dividend, domestic company Basic exemption Additional exemption Taxable net income

RC P1,000,000 200,000 20% FWT 7.5% FWT 50,000 8,000 20% FWT Exempt 300,000 100,000 10% FWT (50,000) (50,000) P1,558,000

NRC,RA,NRA-ET P1,000,000 20% FWT 7.5% FWT for RA; Exempt for NCR&NRAET 8,000 20% FWT Exempt 10% FWT for RA&NRC; 20% for NRAET (50,000) (50,000) P908,000

5. Assuming the taxable year 2018, determine the taxable net income assuming he is: RC NRC RA NRA-ETB a. P80,000 P180,000 P830,000 P180,000 b.

180,000

c. 1,558,000

80,000 1,000,000 1,000,000 908,000

908,000

908,000

d. 1,658,000 1,008,000 1,008,000 1,008,000 Solution: Rent, Philippines Rent, Hongkong Interest, peso deposit, MBTC Interest, US$ deposit, BDO Interest, deposit in Hongkong Prize (cash) won in a local Prize (TV) won in a local lottery PCS/Lotto winnings Prize won in contest in US Lotto winnings in US Dividend, domestic company Basic exemption Additional exemption Taxable net income

RC P1,000,000 200,000 20% FWT 15% FWT 50,000 8,000 20% FWT NOTE* 300,000 100,000 10% FWT NA NA P1,658,000

NRC,RA,NRA-ET P1,000,000 20% FWT 15% FWT for RA; Exempt for NCR&NRAET 8,000 20% FWT 10% FWT for RA&NRC; 20% for NRAET NA NA P1,008,000

*NOTE Winnings: PCSO/Philippine Lotto Prior to TRAIN = Exempt, except if received by NRANETB TRAIN = Not more than P10,000 = Exempt More than P10,000 = 20% FWT (RC,NRC,RA) Received by NRAETB = Exempt regardless of amount. Received by NRANETB = 25% FWT regardless of amount.

6. Assuming the taxable year is 2017, determine the total final tax assuming he is: RC NRC RA NRA-ETB a. P553,000 P490,000 P550,000 P150,00 b. 121,500

90,000

c.

131,000

90,000

d. 142,000

90,000

150,000 937,500 90,000

90,000

150,000 150,000

Solution: RC & RA NRC NRA-ET NRA-NET Rent income Philippines @25% - P250,000 Interest, peso deposit, MBTC @20%; 25% P20,000 P20,000 P20,000 25,000 Interest, US$ deposit, BDO @ 7 1/2 %; exempt 31,500 Exempt Exempt Exempt Prize (TV) won in a local lottery @ 20%; 25% 10,000 10,000 10,000 12,500 PCSO/Lotto winnings Exempt Exempt Exempt 500,000 Dividend, domestic company @10% 60,000 60,000 Dividend, domestic company @20% - 120,000 Dividend, domestic company @ 25% - 150,000 Total FWT P121,500 P90,000 P150,000 P937,500 7. Assuming the taxable year is 2018, determine the total final tax assuming he is: RC NRC RA NRA-ETB a. P553,000 P490,000 P550,000 P150,00 b. 121,500

90,000

c.

131,000

90,000

d. 142,000

90,000

150,000 937,500 90,000

90,000

150,000 150,000

Solution: Rent income Philippines @25% Interest, peso deposit, MBTC @20%; 25% Interest, US$ deposit, BDO @15% Prize (TV) won in a local lottery @ 20%; 25% PCSO/Lotto winnings @20%; 25% Dividend, domestic company @10% Dividend, domestic company @20% Dividend, domestic company @ 25% Total FWT

RC & RA NRC NRA-ET NRA-NET - P250,000 P20,000 P20,000 P20,000 25,000 63,000 Exempt Exempt Exempt 10,000 10,000 10,000 12,500 400,000 400,000 Exempt 500,000 60,000 60,000 - 120,000 - 150,000 P553,000 P490,000 P150,000 P937,500

CORPORATIONS 8. During the 2018, a domestic corporation derived the following items of revenues:  Gross receipts from a trading business, P500,000.  Interest from money placements in the banks, P30,000  Dividends from its stock investments in domestic corporations, P20,000  Gains from stock transactions through the Philippine Stock Exchange, P50,000  Proceeds under an insurance policy on the lost of goods, P100,000 How much should the corporation report as taxable income?

a. P500,000

b. P550,000

c. P600,000

d. P650,000

Solution: Generally, taxable income means income not subject to FWT on passive income nor CGT. Item B is a passive income subject to 20% FWT Item C is a dividend income received from another DC, hence, tax-exempt (inter-corporate dividend). Item D is not subject to income tax, but to Percentage Tax of 6/10 of 1% (TRAIN Law) of gross selling price under section 127(A) of the tax code, as amended. Item D is a compensation for lost of goods. It is a return of investment not subject to tax. 9. Lenovo, Inc., a resident foreign corporation, has earned the following income during 2017: DIVIDEND INCOME FROM:  Microsoft, a non-resident foreign corporation P 500,000  Intel, a resident foreign corporation (ratio of Philippine income over world income for the past 3 years is 40%) 400,000  Panday, a domestic corporation 300,000 INTEREST INCOME FROM:  Current account, BDO 600,000  Savings deposit, ABN-AMRO bank, UK 700,000  FCDU deposits 800,000 ROYALTY INCOME from various domestic corporations 100,000 The total final tax on passive income for the taxable year is: a. P200,000 b. P260,000

c. P328,000 d. P1,088,000

Solution: Interest income – BDO (P600,000 x 20%) P120,000 Interest income – FCDU deposits (P800,000 x 7.5%) 60,000 Royalty income from various domestic corp. (P100,000 x 20%) 20,000 Total Final Taxes on passive income P200,000 Note:  Dividend income received by a foreign corporation (assuming the situs of the dividend is Philippines) from foreign corporations (resident or non-resident), is subject to basic income tax/regular corporate income tax (RCIT).  A dividend income received by an RFC from a DC is tax-exempt (intercorporate dividend)  The interest income from a bank deposit abroad is considered an income derived abroad, subject to basic tax if received by resident citizen or domestic corp. 10. Assume the same data in the immediately preceding number, except that the taxable year was 2018, the total final tax on passive income for the year should be: a. P200,000 c. P328,000 b. P260,000 d. P1,088,000 Solution: Interest income – BDO (P600,000 x 20%) Interest income – FCDU deposits (P800,000 x 7.5%) Royalty income from various domestic corp. (P100,000 x 20%) Total Final Taxes on passive income

P120,000 60,000 20,000 P200,000

Under the TRAIN Law, interest income from FCDU deposit of RFC was not amended, hence, use the old rate of 7.5% 11. Lenovo, Inc., a resident foreign corporation, has earned the following income during 2017: DIVIDEND INCOME FROM: Microsoft, a non-resident corporation P500,000 Intel, a resident foreign corporation 400,000 IBM, a domestic corporation 300,000 INTEREST INCOME FROM: Current account, BDO 600,000 Savings deposit, ABN-AMRO bank, UK 700,000 US dollar deposit (FCDU)- BPI Makati 800,000 Royalty income from various domestic corporations 100,000 Additional information:  The ratio of Microsoft’s gross income in the Philippines over worldwide income for the past three years is 40%.  The ratio of Intel’s gross income in the Philippines over worldwide income for the past three years is 60%.  The ratio of IBM’s gross income in the Philippines over worldwide income for the past three years is 80%. How much is the total income tax expense of Lenovo? a. P200,000 b. P400,000 c. P320,000 d. P272,000 Solution: DI-Microsoft DI-Intel (P400,000 x 60% x 30%) DI-IBM Interest income – BDO @ 20% FCDS deposit @ 7.5% Royalty income @ 20% Total Income Tax Expense   

P 72,000 Exempt 120,000 60,000 20,000 P272,000

Income Tax Expense = RCIT + Final Taxes on Passive Income + CGTs Unless clear or otherwise stated, dividend income from a foreign corporation shall be considered income derived from abroad. Dividend income from Microsoft is treated as income derived purely from abroad because the ratio of GI Philippines over world is less than 50%.

SITUS of Dividend Income:  From DC = purely income derived from within the Philippines  From FC (RFC or NRFC): o If silent, = income derived from without o If provided in the problem, As provided

o

If the ratio of Gross Income Philippines over world for the past three (3) years is available, the rule is:  Ratio is < 50% = purely income from without the Philippines  Ratio is > 50% = partly income from within the Philippines

12. Assuming Lenovo is a domestic corporation, how much is its total income tax expense? a. P200,000 b. P560,000 c. P680,000 d. P272,000 Solution: DI-Microsoft (P500,000 x 30%) DI-Intel (P400,000 x 30%) DI-IBM Interest Income – BDO @ 20% Savings deposit – UK @ 30% FCDS deposit @ 7.5% Royalty income @ 20% Total Income Tax Expense

P150,000 120,000 Exempt 120,000 210,000 60,000 20,000 P680,000

The entire dividend income from Microsoft and Intel (regardless of the ratio of GI Philippines over world) is subject to RCIT because the taxpayer is a domestic corporation (taxable on income derived from whatever source). 13. In 2018, a domestic corporation declared and paid dividends to its shareholders as follows: To Apol, a resident citizen P100,000 To Alex, a nonresident citizen 100,000 To George, a resident alien 100,000 To LJ, a nonresident alien engaged in trade in the Philippines 100,000 To Francis, a nonresident alien not engaged in trade in the PH 100,000 To Chen, a domestic corporation 100,000 To a resident foreign corporation 100,000 To a nonresident foreign corporation (w/tax sparing) 100,000 How much final tax shall be withheld by the corporation? a. P80,000 b. P90,000 c. P85,000 d. P95,000 Solution: To Apol (P100,000 x 10%) To Alex (P100,000 x 10%) To George (P100,000 x 10%) To LJ (P100,000 x 20%) To Francis (P100,000 x 25%) To Chen (exempt) To a resident foreign corporation (exempt)

P10,000 10,000 10,000 20,000 25,000 -

To a nonresident foreign corporation (P100,000 x 15%) 15,000 TOTAL P90,000 Use the following data for the next three (3) questions: JC Corporation, a domestic corporation had the following data for 2017 taxable year: Sales P5,000,000 Cost of Goods Sold 2,000,000 General selling and administrative expenses 500,000 Interest income from Philippine Bank Deposit 100,000 Rental income (net of 5% withholding tax) 190,000 Dividend Income From domestic corporation 60,000 From foreign corporation 50,000 Capital gains from sale of domestic shares of stocks sold directly to buyer 75,000 Dividend declared and paid during the year 500,000 Retained earnings, 12/31/2016 1,000,000 Par Value of Outstanding shares, 12/31/2017 500,000 Appropriation for future plant expansion 800,000 14. The income tax payable was: a. P815,000 b. P819,200 c. P825,000 d. P899,200 Solution: Sales Rental Income (P190,000/95%) Dividend Income foreign corporation Cost of goods sold General selling and administrative expenses Taxable Net Income x Income Tax Due Less: CWT on Rental Income Income Tax Payable

P5,000,000 200,000 50,000 (2,000,000) (500,000) P2,750,000 30% P 825,000 (10,000) P 815,000

15. Based on the foregoing problem, the Improperly accumulated earnings tax on 2017 was: a. P105,125 b. P108,125 c. P208,125 d. P213,625 Solution: Income subject to basic tax Taxable Net Income Passive Income subject to FWT Interest income from BPI

P2,750,000 100,000

Tax exempt income Dividend income domestic corporation Income subject to CGT On shares of stock Total Less: Normal tax (total, not the payable only) FWT on passive income CGT (P75,000 x 5%) Dividends paid Retention (Par value of outstanding shares) Add: Retained earnings, beginning (Balance) Improperly accumulated earnings X IAET % IAET

60,000 75,000 P2,985,000 (825,000) ( 20,000) ( 3,750) (500,000) (500,000) 1,000,000 P2,136,250 10% P 213,625

16. The Improperly Accumulated Earnings Tax assuming the taxable year was 2018: a. P105,125 b. P108.125 c. P212,875 d. P213,625 Solution: Income subject to basic tax: Taxable net income Passive income subject to FWT Interest income from BPI Tax exempt income Dividend income domestic corporation Income subject to CGT On shares of stock Total Less: Normal Tax (total, not the payable only) FWT on passive income CGT (P75,000 x 15%) Dividends paid Retention (Par Value of Outstanding Shares) Add: Retained earnings, beginning (Balance) Improperly accumulated earnings x IAET % IAET

P2,750,000 100,000 60,000 75,000 P2,985,000 (825,000) ( 20,000) ( 11,250) (500,000) (500,000) 1,000,000 P2,128,750 10% P 212,875

PARTNERSHIP 17. Partnership is formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. a. Joint venture

b. General professional partnership c. Trading partnership d. Joint accounts 18. A general professional partnership is exempt from income tax, but is required to file an income tax return a. For statistical purposes b. Because the net income of the partnership will be traced into the income tax return of the partners c. Because all income earners are required to file income tax returns d. None of the above 19. For purposes of taxation, partnership is I. Classified into two major categories, partnership in trade and general professional partnership II. Partnership in trade is treated as corporate taxpayer III. General professional partnership is exempt from income tax a. I, II, and III b. I and II only

c. I and III only d. I only

20. Statement 1: All partnerships are taxed in the same manner as corporation. Statement 2: The income of a general commercial partnership is also subject to MCIT or Regular Corporate Income Tax whichever is applicable. a. Statements 1 and 2 are false b. Statement 1 is true but Statement 2 is false c. Statement 1 is false but Statement 2 is true d. Statements 1 and 2 are true 21. Which of the following statements is false? a. Registered general professional partnerships are subject to income tax b. A partners’ share in the net profits of a general professional partnership is not compensation income. c. A limited partnership is considered, for tax purposes, a corporation and the partnerships thereof likened to stockholders. d. Tax income taxation rules application to corporations likewise apply to informal partnerships 22. Statement 1: A CPA and a Dentist may form a GPP or an ordinary partnership. Statement 2: Partnership and Corporation have separate juridical personalities distinct from the owners. a. Statements 1 and 2 are false b. Statement 1 is true but Statement 2 is false c. Statement 1 is false but Statement 2 is true d. Statement 1 and 2 are true Answer: Statement 1 is false. They can form an ordinary partnership but not a GPP because they have different professions. 23. Statement 1: A partner of a GPP is not required to include in his personal gross income his share in the distributable income of the GPP Statement 2: Corporations may form a taxable partnership but not a GPP a. Statements 1 and 2 are false b. Statement 1 is true but statement 2 are false c. Statement 1 is false but statement 2 is true

d. Statements 1 and 2 are true Answer:  Statement 1 is false. Share in the income of a GPP is a returnable income or ordinary income which shall be included in the partner’s ITR.  Partnership is a contract. It Is perfected through meeting of the minds. Hence, corporations and other juridical persons cannot form a partnership because they are incapable of giving consent. However, juridical persons may form a joint venture. 24. Statement 1: If the amount to be distributed to a partner of a GPP is more than P720,000, it is subject to 15% creditable withholding tax. Statement 2: The share of a partner in a GPP is subject to final withholding tax of 10% of the amount is below P720,000. Statement 3: The distributive share of a partner in a commercial partnership is subject to final tax. a. Statements 1, 2, and 3 are false b. Only statement 3 is false c. Only statement 2 is false d. Statements 1, 2, and 3 are true Use the following data for the next five (5) questions: Garcia, Ramos, Toribio, and Co., CPAs (GRT & Co.), are partners of an accounting firm. The 2018 financial records of the firm disclosed the following: Service Revenue P4,490,000 Cost of Services 1,610,000 Operating Expenses 800,000 Rental Income 500,000 Interest Income from bank deposit 200,000 Interest Income from FCDS deposit 280,000 Ramos is also engaged in business with the following data for the year: Sales P2,500,000 Cost of Sales 1,250,000 Operating Expenses 550,000 25. How much is the distributable income of the GPP? a. P992,667 b. P1,019,333 c. P2,578,000 d. P2,978,000 Solution: Net income of the firm (P4,490k-1,610k-800k+500) Interest income from bank deposit, net (P200,000 x 80%) Interest income from FCDS transaction, net (P280,000 x 85%) Total Distributable Income of the GPP Divide Distributive share/partner

P2,580,000 160,000 238,000 P2,978,000 3 P 992,667

26. How much is the distributive share of each partner in the total income of the GPP?

a. P992,667 b. P1,019,333 27. How much is the taxable income of Ramos in 2018? a. P860,000 b. P1,510,000 Solution: Net income from the GPP’s operations Divide by Share in GPP’s ordinary income per partner Add: Ramos’ own net income (2.5M-1.25M-550k) Taxable net income of Ramos

c. P2,578,000 d. P2,976,000

c. P1,560,000 d. P2,580,000

P2,580,000 3 P 860,000 700,000 P1,560,000

The partners’ share in the other income of the GPP (i.e., subj to FWT and CGTs) are non-returnable income of the partners. 28. How much is the taxable income of Ramos in 2018 assuming GRT & Co. opted to use Optional Standard Deduction? a. P1,376,000 c. P1,692,000 b. P1,426,000 d. P1,860,600 Solution: GPP’s Gross Income (4,490k-1,610k+500k) X GPP’s net income under OSD Divide Share of Ramos in the ordinary income of the GPP Add: Ramos’ own net income (2.5M-1.25M-550K) Taxable net income of Ram...