Income Taxation PDF

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INCOME TAXATION

CHAPTER 3 P3.1. Determine if the following incomes are subject to basic tax, fringe benefit tax or exempt from tax by putting a check mark in the column provided below. If the value of the benefit is provided, indicate the correct amount. Amount

Subject to FBT

1. Officer’s. expense account not Subject to liquidation

₱120,000

120,000

2. Officer’s expense Subject to liquidation

account

80,000

3. Personal expenses of the Company officers, paid for or Reimbursed by the companyEmployer

50,000

4. Annual uniform allowances Granted to an executive

6,000

5,000 /yr.

5. Housing benefits of officials of The Philippine Army

360,000

360,000

6. Housing benefits of officials of A domestic corporation

250,000

7. Housing unit furnished to an employee, where said unit was situated inside or adjacent to the premises of the business

45,000

45,000

8. Monetized unused vacation Leave credits not exceeding 10 Days.

15,000

15,000

9. Household personnel benefit By an officer of a domestic Corporation.

60,000

10. Annual allowance to dependents

1,500

medical

cash

Subject Basic Tax

to Exempt

₱80,000

50,000

250,000

60,000

1,500

P3.2.

in 2018, Garcia Realty Corporation paid P325,00 to Wilderness Resort, representing vacation expenses of Mike, an executive of Garcia Company. Answer the following:

a. Is this a taxable fringe benefit? ❖ Answer: Yes.

b. How much is the tax base of the fringe benefit? ❖ Answer: ₱500,000 Solution: GUMV = ₱325,000 / 65% = ₱500,000

c. Should the taxable fringe benefit be included in the returnable income of Mike for the year? ❖ Answer: No, Fringe benefit tax is included in the Final tax, hence, nonreturnable. d. How much is the fringe benefit tax collected? ❖ Answer: ₱175,000 Solution: FBT = ₱500,000 x 35% = ₱175,000 e. When is the fringe benefit tax remitted? ❖ Answer: On or before the 10th day of the month following the calendar quarter in which the Fringe benefit were granted to the recipient. f.

Assuming Mike is a rank and file employee, is the fringe benefit subject to fringe benefit tax? ❖ Answer: No, it is subject to Basic tax.

P 3.3. LJ is a resident citizen employed by Chris Sports Incorporated. He received the following from his employer during 2018: Basic compensation income ₱90, 000 13th month pay 75,000 P3,000 monthly transportation allowance 6,000 Productivity Incentive pay 10,000 Christmas bonus 25,000 Uniform allowance 16,000 Actual medical allowance 10,000 Rice subsidy 36,000 Required: Determine LJ's taxable net income

❖ Answer: ₱ 963,000 Solution:

P3.4.

Basic compensation income P3,000 monthly transportation allowance

₱900,000 36,000

De Minimis Benefits Other Benefits 13th month pay 75,000 Productivity incentives pay 10,000 Christmas bonus (25,000 – 5,000 DMB) 5,000 20,000 Uniform allowance (16,000 – 6,000 DMB) 6,000 10,000 Actual medical allowance 10,000 Rice subsidy [36,000-(12 x 2,000 DMB)] 4,000 12,000 Total 117,000 Tax Exempt (90,000) Taxable net income

27,000 ₱963,000

A rank and file employee received the following compensation and benefits received during 2018:

Basic compensation income ₱540,000 13th month pay 45,000 Mid-year bonus 22,500 Christmas gift 10,000 Uniform allowance 7,500 Actual medical allowance 15,000 Medical allowance to dependents 2,000 Rice subsidy 18,000 Monetized vacation leave for 12 days (P2,000/day ) 24,000 Required: Determine the employee's taxable net income Answer: ₱540,000

Solution: Basic compensation income

₱540,000 De Minimis Benefits

Other Benefits 45,000 22,500 5,000 1,500 5,000

th

13 month pay Mid-year bonus Christmas gift (10,000-5,000 DMB) Uniform allowance (7,500-6,000DMB) Actual medical allowance (15,000-10,000DMB) Medical allowance to dependents Rice subsidy Monetized vacation leave [24,000-(2,000x10)] Total Tax Exempt Taxable net income

5,000 6,000 10,000 2,000 18,000 20,000

4,000 83,000 (90,000) ₱540,000

P 3.5. SPECIAL RULES IN COMPUTING THE MONETARY VALUE OF FRINGE BENEFITS 1. XYZ Co. leased a residential house for the use of its branch manager. The rent per agreement was ₱165,000 per month.

a. How much is the monetary value of the benefit for the month? ❖ Answer: ₱82,500 Solution: Rental Payment Multiply by Monetary Value

₱165,000 50% ₱82,500

b. How much is the fringe benefit tax for the month? ❖ Answer: ₱44,423.08 Solution: Monetary Value Divide by GUMV Multiply by FBT rate Fringe Benefit Tax Expense

₱82,500.00 65% 126,923.08 35% ₱44,423.08

2. XYZ Company owns residential property which is assigned to its officer for use. The following data pertain to the residential property: Cost ₱5,000,000 Fair market value per BIR 4,500,000 Fair market value per Assessor's office 3,000,000 a. How much is the monetary value of the benefit for the quarter? ❖ Answer: ₱28,125 Solution: Fair Market Value per BIR Multiply by Value of the benefit Multiply by Annual Monetary Value Divide by Quarterly Monetary Value

₱4,500,000 5% 225,000 50% 112,500 4 ₱28,125

b. How much is the fringe benefit tax for the quarter? ❖ Answer: ₱15,144.23 Solution: Quarterly Monetary Value Divide by GUMV Multiply by FBT rate Quarterly FBT

₱28,125.00 65% 43,269.23 35% ₱15,144.23

3. Using the same data in no. 2, and assuming that, XYZ Company transferred the ownership of the residential property in the name of the officer, answer the following:

a. How much is monetary value of the benefit? ❖ Answer: ₱5,000,000

b. How much is the fringe benefit tax? ❖ Answer: ₱2,692,307.69 Solution: Monetary Value of the Benefit Divide by GUMV Multiply by FBT rate Fringe Benefit Tax Expense

₱5,000,000.00 65% 7,692,307.69 35% ₱2,692,307.69

4. Chen Company purchased a motor vehicle for the use of its manager. The vehicle was registered in manager's name. The cost of the vehicle was ₱1,200,000 used partly for personal purposes and partly for the benefit of the company. Compute the following:

a. Monetary value of the benefit ❖ Answer: ₱800,000

b. Fringe benefit tax ❖ Answer: ₱646,153.85 Solution: Monetary Value of the Benefit Divide by GUMV Multiply by FBT rate Fringe Benefit Tax Expense

₱1,200,000.00 65% 1,846,153.85 35% ₱646,153.85

5. Using the same data in no. 4 and assuming that, Chen shouldered only a portion of the cost of the car in the amount of P800,000 and the balance paid by the manager, determine the following: a. Monetary value of the benefit ❖ Answer: ₱800,000

b. Fringe benefit tax ❖ Answer: ₱430,769.23 Solution: Monetary Value of the Benefit Divide by GUMV Multiply by FBT rate Fringe Benefit Tax Expense

₱800,000.00 65% 1,230,769.23 35% ₱430,769.23

6. Using the same data in no. 4 and assuming that, Chen purchased the car in the name of the manager on installment basis. Determine the following: a. Monetary value of the benefit ❖ Answer: ₱240,000 Solution: Acquisition Cost Divide by Monetary Value of the Benefit

₱1,200,000 5 ₱240,000

b. Fringe benefit tax ❖ Answer: ₱ Solution: Monetary Value of the Benefit Divide by GUMV Multiply by FBT rate Fringe Benefit Tax Expense

₱240,000.00 65% 369,230.77 35% ₱129,230.77

TRUE OR FALSE

Write TRUE if the statement is correct, otherwise, write FALSE.

TRUE 1. A fringe benefit is any goods, service or other benefits furnished or granted by an employer in cash or in kind, including basic salaries to individual employees. FALSE 2. A fringe benefit which is subject to the fringe benefit tax is taxable income of the employee. TRUE 3. A fringe benefit which is not subject to the fringe benefit tax is taxable income of the employee. TRUE 4. Fringe benefits subject to fringe benefit tax cover only those fringe benefits given or furnished to a managerial or supervisory employee. TRUE 5. Fringe benefit tax shall be treated as a final income tax on the employee withheld and paid by the employer on a quarterly basis. FALSE 6. The grossed-up monetary value oi the fringe benefit is the actual amount received by the employee. TRUE 7. The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary value of fringe benefit by the grossed up monetary value factor. TRUE 8. The person liable for fringe benefit tax is the employer, whether he is an individual, professional partnership or a corporation regardless of whether the corporation is taxable or not or the government and its instrumentalities TRUE 9. A managerial employee is one who is vested with powers of prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall discharge, assign or discipline employees, or to effectively recommend such managerial actions. TRUE 10. The grant of fringe benefits to the employee is exempt from tax if such grant is required by the nature of, or necessary to the trade, business or profession of the employer. FALSE 11. The amount on which the fringe benefit tax rate is applied is the monetary value of the fringe benefit. TRUE 12. The amount on which the fringe benefit tax rate is applied is the amount deductible by the employer from its gross income. TRUE 13. Grossed-up monetary value is reflected in the books of accounts as fringe benefit expense and fringe benefit tax expense. TRUE 14. Failure to withhold the required tax on salary is collectible from the employer. TRUE 15. Failure to withhold the correct amount due to false information supplied by the employee shall be the liability of the employee.

(MODIFIED) IDENTIFICATION Determine whether or not the following is subject to fringe benefit tax. Write A if the benefit is subject to fringe benefit tax, otherwise, write B. Assume further that the employee is holding supervisory or managerial position unless stated otherwise. B 1. Fringe benefit required by the nature of or necessary to trade or business of the employer. B 2. Fringe benefit for the convenience or advantage of the employer. A 3. Car plan for managerial employees. B 4. Daily meal allowance for managerial employees. B 5. Monetized unused vacation leave credits of private employees not exceeding 10 days. B 6. Monetized unused vacation leave credits of government employees in excess of 10 days. B 7. Monetized value of sick leave credits not exceeding 10 days. B 8. Monetized value of sick leave credits of private employees in excess of 10 days. B 9. Compensation income of supervisory and managerial employees. B 10. Housing units situated inside or adjacent to business or factory (located within 50 meters from the perimeter of business). A 11. House benefits to the Chief Finance Officer of the company A 12. Allowances received by supervisory and managerial employees not subject to liquidation. B 13. Used by employee of aircraft (including helicopters) owned/maintained by the employer. A 14. Cost of 1 class/business class airplane ticket for business travel or convention abroad in excess' of 70%. B 15. De minimis benefits received by an executive of a company. A 16. Educational assistance (Master of Science in Accountancy) granted to Fe, the Finance Manager of ABC Company. No written contract was executed by Fe and ABC. B 17. Premiums borne by the employer for the group insurance of its employees B 18. Contributions of the employer for the benefit of, the employee to retirement, insurance and hospitalization benefit plans. B 19. Reimbursement of transportation expenses paid to a messenger of the company B 20. Contributions made by an employer to SSS, GSIS and similar contributions under existing laws in excess of what the law requires as contributions.

MULTIPLE CHOICE Choose the letter of the correct answer.

1. Which of the following statements is correct? I. The fringe benefit tax is a final withholding tax on the grossed-up monetary value of the fringe benefit granted by the employer to an employee who holds a managerial or supervisory position. II. Fringe benefit tax is effective regardless of whether the employer is an individual, professional partnership or a corporation (regardless of whether the corporation is taxable or not) III. The fringe benefit tax regulations cover only those fringe benefits given or furnished to managerial or supervisory employees. The regulations do not cover those benefits which are part of compensation income, because these are subject to creditable withholding tax on compensation in accordance with RR No:2-98, as amended. a. I only

b. I and II only

c. I, II and III

d. None of the above

2. Statement 1: Fringe benefits are forms of incentives to employees. Statement 2: Fringe benefits include salaries, services, or other benefit given by employer to an individual employee. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are not correct

3. Which. of the following statements regarding fringe benefit tax is wrong? a. Fringe benefit tax is imposed on the employee b. The employer is the one liable for the payment of fringe benefit tax c. Both "a" and "b" d. Neither "a" nor "b"

4. This income of a resident alien holding managerial position is subject to basic tax a. Fringe benefit tax

b. Interest income from Philippine currency deposit with Security Bank c. P50,000 winnings from PCSO and Philippine lotto d. Prizes from S&R (P10,000), Gateway (P10,000), and Glorieta (P10,000) or a total of P30,000

5. Which of the following is a fringe benefit not covered by the fringe benefit tax a. De minimis benefit. b. Housing privileges granted to rank and file employees. c. Fringe benefits granted as a result of the nature of the business, trade, or profession of the employer. d. All of these.

6. The following earnings are subject to fringe benefit tax, except a. Salary of a rank and file employee b. Housing necessary for trade and for the convenience of the employer c. Food allowance for the convenience of the employer and necessary in the conduct of the business d. All of the above

7. The following are exempt fringe benefits, except for one a. Fringe benefits given to rank and file employee. b. Fringe benefit given for the convenience of the employee. c. When' the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer. d. Rice benefit amounting to P1,500 a month.

8. Which of the following benefits is not subject to the fringe benefits tax? a. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans b. Housing

c. Expense account d. Vehicle of any kind

9 Statement 1: Household of. the employee borne by the employer such as salaries of. household help, personal driver and other similar personal expenses are taxable fringe benefits. Statement 2: A fringe benefit which is not subject to the fringe benefit tax is returnable income of the employee. a. Statements 1 & 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

10. Fringe benefit tax is computed based on the a. Monetary value of the fringe benefit b. Book value of the fringe benefit c. Grossed-up monetary value of the fringe benefit d. Fair value of the fringe benefit

11. Which of the following statements regarding grossed-up monetary value is correct? I. The grossed-up monetary value of the fringe benefit is simply a figure meant to represent the entire income earned by the employee. II. The grossed-up monetary value includes the net amount of money received, the net monetary value of any property received, and the amount of fringe benefit tax. III. The grossed-up monetary value of the fringe benefit is determined by dividing the monetary value of the fringe benefit by 65% starting January 1, 2018. a. I only

b. I and II only

c. I, II and III

d. None of the above

12. Which statement is wrong? The amount on which the fringe benefit tax rate is applied is: a. The monetary value of the fringe benefit

b. The grossed-up monetary value of fringe benefit c. The amount deductible by the employer from his/its gross income d. Reflected in the books of accounts in the two accounts of "fringe benefit expense" and "fringe benefit tax expense"

13. If both the fringe benefit expense and the fringe benefit tax expense are allowed as deductions from gross income of a corporation, the entry in the books of accounts is a. Fringe benefit expense Fringe benefit tax expense

xxx xxx

Cash b. Fringe benefit tax expense

xxx xxx

Cash c. Fringe benefit expense Fringe benefit tax expense

xxx xxx xxx

Income constructively received

xxx

Cash

xxx

d. Any of the above

14. The monetary value of fringe benefit if given in money is a. Fair market value (BIR) or zonal value whichever is higher. b. Amount granted c. Depreciated value d. Acquisition cost plus other incidental costs

15. Statement 1: if the employer did not withhold the fringe benefit tax and subsequently discovered and assessed by the BIR, the related fringe benefit tax is not allowed as a deduction from the employer's gross income. Statement 2: Fringe benefit tax includes additional benefit granted by the employer to the employees in addition to the basic salary. a. Statements 1 & 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

16. Statement 1: The exemption of any fringe benefit from the fringe benefit tax shall not be interpreted to mean exemption from any other income tax imposed under the Tax Code except if the same is likewise expressly exempt from any other income tax imposed under the Tax Code or under any other existing law. Statement 2: If the fringe benefit is exempted from the fringe benefit tax, the same may, however still form part of the employee's gross compensation income which is subject to income tax, hence, likewise subject to withholding tax on compensation income payment: a. Statements 1 & 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 17. Cost of life or health insurance and other non-life insurance premiums borne by the employer for his employee shall be treated as taxable fringe benefit, except a. Contributions of the employer for the benefit of the employee pursuant to provision of existing SSS and GSIS laws. b. Cost of premiums borne by the employer for the group insurance of his employees. c. Both "a" and "b". d. None of the above 18. Which of the following statements regarding fringe benefit is true? I. Expenses incurred by the employee but which are paid for or reimbursed by the employer are taxable fringe benefits EXCEPT when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the employee. II. Benefits given to the rank and file, whether granted under a collective bargaining agreement or not are subject to fringe benefit tax. III. The exemption of any fringe benefit from the fringe benefit tax shall NOT be int...