SOLUTIONS MANUAL

INCOME TAXATION, 2016 Edition

By: TABAG & GARCIA

CHAPTER 1 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 False; similarity of tax from license fee, not a distinction.

***Statement 1 False; should be jurisdiction instead of symbiotic relation.
Statement 2 False; should be symbiotic relation instead of jurisdiction

CHAPTER 2 - INDIVIDUAL TAXPAYERS

PROBLEMS
2-1
1. RC 4. NRA-NETB
2. RC 5. NRC
3. RC 6. RA

2-2
1. P125,000 = BPE + APE for Ana and PWD. The brother shall likewise qualify as PWD within 4th degree

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Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 6 E d i t i o n ) by Tabag & Garcia
 2. P150,000 = BPE + APE for four dependents. Note: Not entitled for APE for his 20 years old recognized natural child for being
gainfully employed. Assume further that all the requirements to qualify for additional exemption under the Foster Child Act
were complied with.
3. P0 or none; Reciprocity clause applies to a nonresident alien engaged in trade or business. The taxpayer in the problem is a
nonresident alien not engage in trade or business. Dividend income from a domestic corporation is not considered as income
derived from trade or business.
4. P90,000 = BPE of P40,000 (lower than P50,000 allowed in the Philippines) + APE of P25,000 per dependent (lower than the
P30,000 allowed in U.S.A. as provided in the problem).
Total personal exemption = P50,000 BPE + P25,000 x 2 additional personal exemption = P90,000
5. P100,000 = BPE + APE for his 2 minor children.

2-3
TAX TYPE Tax RATE TAX TYPE Tax RATE
1 FWTx 20% 19 Exempt -
2 FWTx 7.5% 20 Exempt - * Prizes received from
3 BTx Tax Table 21 FWTx 25% Philippine sources
4 FWTx 20% 22 BTx Tax Table exceeding P10,000
5 Exempt - 23 Exempt - are subject to 20%
6 BTx Tax Table 24 FWTx 20% final tax rate. On the
7 BTx Tax Table 25 FWTx 20% other hand,
8 BTx Tax Table 26 FWTx 10% Other WINNINGS
9 BTx Tax Table 27 BTx Tax Table (regardless of
10 BTx Tax Table 28 BTx Tax Table amount) are subject
11 FWTx 20% 29 FWTx 20% to 20% final tax rate.
12 FWTx 10% 30 FWTx 25%
13 FWTx 20% 31 FWTx 10%
14 BTx Tax Table 32 BTx Tax Table
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

2-4
1. Taxpayer is a resident citizen
1.1 Taxable income = P1,000,000
1.2 Income tax payable = P160,000
1.3 Final tax on passive income = P14,500
1.4 Total income tax expense = P299,500

2. Taxpayer is a nonresident citizen

2.1 Taxable income = P860,000
2.2 Income tax payable = P115,200
2.3 Final tax on passive income = P11,500
2.4 Total income tax expense = P251,700

3. Taxpayer is a resident alien

3.1 Taxable income = P860,000 (same answer with #2.1; nonresident citizen)
3.2 Income tax payable = P115,200 (same answer with #2.2; nonresident citizen)
3.3 Final tax on passive income = P14,500 (same answer with #1.3; resident citizen)
3.4 Total income tax expense = P254,700 computed as follows:

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

4.1 Taxable income = P910,000
4.2 Income tax payable = P131,200
4.3 Final tax on passive income = P16,500
4.3 Total income tax expense = P267,700

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Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 6 E d i t i o n ) by Tabag & Garcia
 Dividend income from foreign corporationAssume situs is without the Phls.; refer to page 300 for the determination of
situs of dividend income

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

Compensation income, Philippines P600,000
Dividend income - DC 50,000
Dividend income from foreign corp. - Assume situs is without
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 Not exempt under the tax code if the
Total GROSS Income P905,000 taxpayer is NRA-NETB.
x 25%
Income Tax Expense P226,250

2-5
1. Taxpayer is a resident citizen
a. Taxable net income = P1,026,100
b. Income tax payable = P293,352
c. Final tax on passive income = P38,030
d. Capital gains tax = P120,600

2. Taxpayer is a non-resident citizen

a. Taxable income = P388,400
b. Income tax payable = P91,520
c. Final tax on passive income = P38,030
d. Capital gains tax = P120,600
As long as there is no interest income from foreign currency bank deposit under FCDS/FCDU, the final tax on passive
income of a nonresident citizen is the same with that of a resident citizen.

3. Taxpayer is a nonresident alien engaged in trade

a. Taxable income = P388,400 (same with a non-resident citizen taxpayer)
b. Income tax payable = P91,520 (same with a non-resident citizen taxpayer)
c. Final tax on passive income = P38,600 ** same with 2.C except that the DI from DC shall be @ 20%
d. Capital gains tax = P120,600 (all individual taxpayers are subject to the same types of CGTs)

2-6
a. Taxable income of the husband = P1,115,000
b. Taxable income of the wife = P840,000
c. Consolidated tax due of the husband and the wife = P555,600

2-7
a. Total capital gains taxes
Total capital gains tax P310,000
Note: Sale of shares in the local stock exchange is subject to transaction tax of of 1% of GSP

b.
Total Final tax on passive income of Daniel and Kat P13,550

c.
Taxable net income of Daniel P547,000

d.
Taxable net income of Kat P515,000

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Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 6 E d i t i o n ) by Tabag & Garcia
2-8
a. Income tax payable, first quarter = P32,500
b. Income tax payable, second quarter = P14,500
c. Income tax payable, third quarter = P19,233
d. Income tax payable, fourth quarter = P59,823
e. Final tax on passive income = P15,800
f. Capital gains tax = P600,000 x 6% = P36,000

2-9
Taxable income P167,600

2-10
Taxable income P291,000

2-11
a. Special Alien employed by ROHQ = P170,000 computed as follows:
Being a nonresident alien-not engaged in trade or business for income taxation purposes, a Special
Alien is not entitled to personal exemptions and all income other than compensation income, unless
exempt under the law, shall be subject to 25% final tax on other income including PCSO winnings.

b. Filipino Citizen employed by ROHQ = P218,500 computed as follows:

**Filipinos employed by ROHQs/RHQs holding managerial or technical position shall have the option to
be taxed either at 15% on their gross compensation income or based on Section 24(A) of the tax code.
However, Filipinos exercising the option to be taxed at 15% preferential rate must meet all the three (3)
requirements as discussed in page 98. In the problem provided, the Filipino counterpart failed to meet
the compensation threshold test of at least P975,000. Consequently, the taxpayer shall be subject to
basic income tax on its compensation income under Section 24(A) of the tax code. The applicable
personal exemptions shall be deducted in computing the taxable income subject to basic tax

c. Filipino Citizen employed by an OBU = P141,000 computed as follows:

***Filipinos employed by OBUs as well as Petroleum Contractors/Subcontractors shall be subject to 15%
Final Tax on their compensation income.
The 15% tax rate is a final tax on gross compensation income. Hence, personal exemptions shall not
be deducted from such income.

d. Filipino Citizen employed by a Petroleum Contractor = P141,000

(refer to computations in assumption c)

e. Filipino Citizen employed by ROHQ with gross compensation income of P1,250,000 = P346,500 OR
P201,000 computed as follows:
****Filipinos employed by ROHQs/RHQs holding managerial or technical position shall have the option
to be taxed either at 15% on their gross compensation income or based on Section 24(A) of the tax
code, provided, however, that Filipinos exercising the option to be taxed at 15% preferential rate must
meet all the three (3) requirements as discussed in page 98.

2-12
1. P6M x 6% = P360,000
2. ZV P2.2M vs. SP of P2.5M**; CGT = P2.5M x 6% = P150,000; **SP = Cost + Gain
3. Unutilized Proceeds = none; the proceeds were fully utilized; CGT = P0
4. Unutilized Proceeds = P5M x 20% = P1M; CGT = 1/5 x 6M x 6% = P72,000
2-13
a. P15M x 6% = P900,000

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Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 6 E d i t i o n ) by Tabag & Garcia
 b. P20M x 6% = P1,200,000
c. P0
2-14 C.G. Tax = none; the transaction resulted to a loss
2-15 C.G. Tax = P100,000 x 5% = P5,000
2-16 C.G. Tax = (P100,000 x 5%) + (P50,000 x 10%) = P10,000
2-17 C.G. Tax = none

TRUE OR FALSE
1. TRUE 11. TRUE 21. FALSE
2. TRUE 12. TRUE 22. TRUE
3. TRUE 13. FALSE 23. TRUE
4. TRUE 14. TRUE 24. FALSE
5. TRUE 15. FALSE 25. TRUE
6. FALSE 16. FALSE 26. TRUE
7. TRUE 17. TRUE 27. FALSE
8. TRUE 18. TRUE 28. FALSE
9. FALSE 19. FALSE 29. TRUE
10. FALSE 20. TRUE 30. FALSE
MULTIPLE CHOICE
1. D 16. B 31. A 46. A
2. C 17. D 32. B 47. B
3. D 18. B 33. D 48. B
4. D 19. C 34. D 49. D
5. B 20. D 35. B 50. B
6. A 21. D 36. D 51. A
7. B 22. B 37. A 52. B
8. B 23. D 38. D 53. C
9. D 24. B 39. A
10. B 25. A 40. B
11. B 26. D 41. D
12. B 27. D 42. B
13. A 28. C 43. D
14. C 29. B 44. D
15. D 30. A 45. D

#49
***The SFE is not qualified for the 15% preferential tax rate. However, the fringe benefits received shall still be
subject to 15% FBT because under RR 11-2010, the option to be subject to 15% preferential tax rate and the
coverage of fringe benefit tax are independent to each other. Thus, as provided in the aforementioned RR, there
would be instances where a Filipino employee shall enjoy 15% preferential tax rate but may not be covered by
fringe benefit tax for not being a supervisory/managerial employee. Likewise, there would be instances where such
SFE may not be subject to 15% preferential tax rate due to failure to meet any of the three (3) tests discussed
earlier but may be subject to 15% FBT for being a managerial employee. The taxpayer in this particular case is
occupying a managerial position.

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Solutions Manual- I n c o m e Tax a t i o n ( 2 0 1 6 E d i t i o n ) by Tabag & Garcia