SOLUTIONS MANUAL

INCOME TAXATION, 2022 edition

By: TABAG & GARCIA

CHAPTER 1 Ð PRINCIPLES OF TAXATION

TRUE OR FALSE-SET A
1. FALSE 9. TRUE 17. FALSE 25. FALSE
2. TRUE 10. TRUE 18. FALSE 26. TRUE
3. TRUE 11. TRUE 19. FALSE 27. FALSE
4. TRUE 12. TRUE 20. TRUE 28. TRUE
5. TRUE 13. FALSE 21. TRUE 29. TRUE
6. FALSE 14. FALSE 22. TRUE 30. FALSE
7. TRUE 15. FALSE 23. TRUE
8. FALSE 16. FALSE 24. FALSE
MULTIPLE CHOICE
1. A 21. D 41. D 61. C
2. C 22. D 42. A 62. C
3. B** 23. D 43. A 63. C
4. D 24. D 44. B 64. C
5. C 25. B 45. C 65. A
6. B 26. A 46. C
7. C 27. A 47. B
8. C 28. D 48. A
9. D 29. C 49. C
10. D*** 30. C 50. D
11. A 31. A 51. D
12. D 32. C 52. C
13. D 33. D 53. B
14. C 34. C 54. D
15. C 35. A 55. A
16. D 36. C 56. A
17. A 37. D 57. A
18. A 38. C 58. D
19. C 39. D 59. C
20. B 40. A 60. A
**Statement 1 Ð False; similarity of tax from license fee, not a distinction.
***Statement 1 Ð False; should be ÒjurisdictionÓ instead of Òsymbiotic relationÓ.
Statement 2 Ð False; should be Òsymbiotic relationÓ instead of ÒjurisdictionÓ

CHAPTER 2 - INDIVIDUAL TAXPAYERS

PROBLEM SOLVING:
2-1
1. RC 4. NRA-NETB
2. RC 5. NRC
3. RC 6. RA

2-2
TAX TYPE Tax RATE TAX TYPE Tax RATE
1 FWTx 20% 19 Exempt -**
2 FWTx 15% 20 FWT 20%**
3 BTx Tax Table 21 FWTx 25%**
4 FWTx 20% 22 BTx Tax Table
5 Exempt - 23 Exempt -
6 BTx Tax Table 24 FWTx 25%
7 BTx Tax Table 25 FWTx 20%
8 BTx Tax Table 26 FWTx 20%
9 BTx Tax Table 27 FWTx 10%
10 BTx Tax Table 28 BTx Tax Table
11 FWTx 20% 29 BTX Tax Table
12 FWTx 10% 30 FWTx 20%
13 FWTx 20%* 31 FWTx 25%
14 BTx Tax Table* 32 CGT 15%
15 BTx Tax Table 33 Exempt Sub.to OPT***
16 FWTx 20% 34 BTx Tax Table
17 FWTx 20% 35 BTx Tax Table****
18 BTx Tax Table
*Prizes received from Philippine sources exceeding P10,000 are subject to 20% final tax rate.
Other WINNINGS (regardless of amount) are subject to 20% final tax rate.

Amount 0
**PCSO/Lotto winnings under CREATE Law:
RC, NRC, RA, NRAET 0 NRANET
f P10,000 exempt 25% FWT
> P10,000 20% FWT 25% FWT

***Stock Transaction Tax on sale of shares of DC listed in the Local Stock Exchange = 6/10 of 1% of GSP
 ****CGT on Real Properties
Must be pertaining to a real property classified as capital asset located in the Philippines. However, if it is sold
to the Government, the tax may either be CGT or Basic Tax, at the option of the individual taxpayer.

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2-3
1.
a. Exempt
b. Exempt
c. Income Tax Due = P130,000
d. P746,000 computed as follows:
Tax Due:
1st P2,000,000 P490,000
Excess over P2M = (P800,000 x 32%) 256,000
Total P746,000

2. Income Tax Payable = P95,000 computed as follows:

Gross sales P2,800,000
Cost of sales (1,200,000)
Operating expenses (650,000)
Taxable net income P950,000
Tax Due:
1st P800,000 P130,000
Excess over P800,000M = (P150,000 x 30%) 45,000
Tax Due P175,000
Less: CWT (80,000)
Income Tax Payable P95,000

3. Income Tax Payable = P124,000 computed as follows:

Gross sales P2,800,000
Less (250,000)
Balance subject to 8% tax P2,550,000
x 8%
Tax Due P204,000
Less: CWT (80,000)
Income Tax Payable P124,000

4. Income Tax Payable = P195,000 computed as follows:

Gross sales P2,800,000
Rental income (P380,000/95%) 400,000
Cost of sales (1,200,000)
Operating expenses (650,000)
Taxable net income P1,350,000
Tax Due:
1st P800,000 P130,000
Excess over P800,000M = (P550,000 x 30%) 165,000
Tax Due P295,000
Less: CWT on rent (P400,000 Ð P380,000) (20,000)
Other CWT (80,000)
Income Tax Payable P195,000

5. The 8% optional tax is not applicable because the total of the gross sales and other non-operating income exceeded the revised vat threshold of
P3,000,000.

6. Income Tax Payable = P302,500 computed as follows:

Gross receipts P4,000,000
Cost of direct services (1,800,000)
Other operating expenses (825,000)
Taxable net income P1,375,000
Tax Due:
1st P800,000 P130,000
Excess over P800,000M = (P575,000 x 30%) 172,500
Tax Due P302,500
Less: CWT; none was provided in the problem -
Income Tax Payable P302,500

7. The 8% optional tax is not applicable because the gross receipts exceeded the revised vat threshold of P3,000,000.

8. Income Tax Payable = P212,000 computed as follows:

Compensation income P1,400,000
Gross sales 2,800,000
Cost of sales (1,200,000)
Operating expenses (650,000)
Taxable net income P2,350,000

0 0P490,000
Tax Due:
1st P2,000,000
Excess over P2M = (P350,000 x 32%) 112,000
Tax Due P602,000
Less: CWT
On compensation income (310,000)
 On business income (80 000)
Income Tax Payable P212,000

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9. The 8% optional tax is applicable because the gross sales did not exceed the revised vat threshold of P3,000,000. The income tax payable shall be
computed as follows:
Gross sales 2,800,000
x 8%
8% Tax on sales P224,000
ADD: Tax due on compensation income
1st P800,000 P130,000
Excess over P800,000 = (P600,000 x 30%) 180,000 310,000
Tax Due P534,000
Less: CWT
On compensation income (310,000)
On business income (80,000)
Income Tax Payable P144,000
& For mixed income earners, P250,000 is not deducted for purposes of computing the 8% tax
& The 8% tax is not applicable to compensation income.

2-4
10. Taxpayer is a resident citizen
a. Taxable income = P1,050,000
b. Income tax payable = P80,000
c. Final tax on passive income = P57,500
d. Total income tax expense = P262,500

Gross business income, Philippines P1,000,000

Gross business income, USA 500,000
Business expenses, Philippines (700,000)
Business expenses, USA (430,000)
Compensation income, Philippines 600,000
Dividend income-foreign corp. 40,000
Interest income-bank deposit abroad 30,000
Raffle draw winnings 10,000
Taxable income (within and without) P1,050,000

Tax Due [(P130,000)+(250,000 x 30%)] P205,000

Creditable withholding tax on bus. income (125,000)
Income Tax Payable P80,000

Dividend income Ð DC (50k x 10%) P5,000

Interest income bank deposit-Phls.@20% 4,000
Interest income FCDS deposit @ 15% 6,000
Royalty income from composition @10% 2,500
PCSO winnings (P200,000 x 20%) 40,000
Final Tax on Passive Income P57,500

Basic income tax due P205,000 The question is tax expense; ignore
Final taxes on passive income 57,500 the income tax payable of P80,000.
Total income tax expense P262,500

11. Taxpayer is a nonresident citizen

a. Taxable income = P950,000
b. Income tax payable = P50,000
c. Final tax on passive income = P51,500
d. Total income tax expense = P226,500

Gross business income, Philippines P1,000,000

Business expenses, Philippines (700,000)
Compensation income, Philippines 600,000
Dividend income-foreign corp. 40,000
Raffle draw winnings 10,000
Taxable income P950,000

Tax Due [(P130,000)+(150k x 30%)] P175,000

Creditable withholding tax on bus. Income (125,000) Assume the tax withheld pertain to
Income Tax Payable P50,000 Income derived in the Phls.

Dividend income Ð DC (50k x 10%) P5,000

Interest income bank deposit-Phls.@20% 4,000
Interest income FCDS deposit @ 15% exempt
Royalty income from composition @10% 2,500
PCSO winnings (P200,000 x 20%) 40,000
Final Tax on Passive Income P51,500

Basic income tax due P175,000

Final taxes on passive income
Total income tax expense
0 0 51,500
P226,500

12. Taxpayer is a resident alien

a. Taxable income = P950,000 (same answer with #11.a; nonresident citizen)
b. Income tax payable = P50,000 (same answer with #11.b; nonresident citizen)
 c. Final tax on passive income = P57,500 (same answer with #10.c; resident citizen)

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 d. Total income tax expense = P232,500 computed as follows:
Basic income tax due P175,000
Final taxes on passive income 57,500
Total income tax expense P232,500

13. Taxpayer is a nonresident alien engaged in trade or business

a. Taxable income = P950,000 (same answer with #11.a; nonresident citizen)
b. Income tax payable = P50,000 (same answer with #11.b; nonresident citizen)
c. Final tax on passive income = P56,500
d. Total income tax expense = P231,500

Dividend income Ð DC (50k x 20%) P10,000 Use 20% rate for DI from DC instead of 10%
Interest income bank deposit-Phls.@20% 4,000
Interest income FCDS deposit @ 15% exempt
Royalty income from composition @10% 2,500
PCSO winnings (@ 20% under CREATE Act) 40,000
Final Tax on Passive Income P56,500

& **Under the CREATE Act, PCSO winnings amounting to more than P10,000 is subject to 20% FWT if received by RCs, NRCs,
RAs and NRAs-ETB. The FWT rate is 25% if received by NRA-NET, regardless of amount.

Basic income tax due P175,000

Final taxes on passive income 56,500
Total income tax expense P231,500

14. Taxpayer is a nonresident alien not-engaged in trade or business

Compensation income, Philippines P600,000
Dividend income - DC 50,000
Dividend income from resident foreign corp. 40,000
Interest income bank deposit, Phls. 20,000
Interest income on FCDS deposit Exempt
Royalty income from composition 25,000
Raffle draw winnings 10,000
PCSO winnings 200,000
Total GROSS Income P945,000
x 25%
Income Tax Due/expense P236,250

NOTE: The creditable withholding tax on business income shall be ignored because it is not applicable to a nonresident alien Ònot
engaged in businessÓ.

2-5
1. Taxpayer is a resident citizen
a. Taxable net income = P1,076,100
b. Income tax payable = P212,830
c. Final tax on passive income = P68,030
d. Capital gains tax = P120,600
Solution:
From Phils. From Abroad
Total
Income from employment P180,000 P280,000 P460,000
Business income 850,000 960,000 1,810,000
Deductible business expenses (610,000) (730,000) (1,340,000)
Interest income on personal loans** 6,000 3,000 9,000
Dividend income from foreign corp. 6,800 2,000 8,800
Prizes from singing contest 5,600 - 5,600
Interest income on bank deposits 4,200 4,200
Interest income on money market placements 1,600 1,600
Royalty income 50,000 50,000
Winnings/ prizes from lotteries, raffles 16,900 16,900
Lotto winnings --- 50,000 50,000
Taxable income P1,076,100
TAX DUE:
First P800,000 P130,000
Excess = P276,100 @ 30% 82,830
**All incomes, regardless of source, are generally taxable. However, personal expenses are not allowed as P212,830
deduction from the gross income.

Final Tax on Passive income:

Interest income on bank deposits 10,800
Interest income on money market placements 7,500
Royalty income 90,000
Lotto winnings 150,000

0 0
Winnings/ prizes from lotteries, raffle draws 45,000
Total P303,300
@ 20% P60,660

Dividend income from domestic corp. 5,700 -

Royalty income from sale of books 68,000 -
 Total P73 700
@ 10% 7,370
TOTAL FINAL TAX ON PASSIVE INCOME P68,030

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