Session 1: Income Tax on Corporations

Exercise Drill
September 4, 2020

GENERAL INSTRUCTION: Place your answers on a clean paper and summarize your answers especially for the problem solving.
Make sure that your answers are readable when you upload your work in the LMS. Show your
solutions if necessary. Deadline for submission will be at 11:59PM on Saturday, September 5, 2020.

MULTIPLE CHOICE EXERCISES: Write the letter of the correct answer.

1) For the purposes of income taxation, which of the following is not considered a corporation?
a. General partnership in trade
b. General professional partnership
c. Mutual fund Company
d. Regional operating headquarters of multinational company

2) Which of the following is taxable based on income from all sources, within and without?
a. Domestic Corporation c. Non-resident Foreign Corporation
b. Resident Foreign Corporation d. All of the choices

3) Which of the following does not have the benefit of claiming deductions in computing income tax?
a. Domestic Corporation c. Non-resident Foreign Corporation
b. Resident Foreign Corporation d. All of the choices

4) The term applies to a foreign corporation engaged in trade or business in the Philippines
a. Resident Foreign Corporation c. Multinational Corporation
b. Non-resident Foreign Corporation d. Petroleum Contractor

5) The following passive income shall be subject to 20% final withholding tax, EXCEPT
a. Interest income from peso bank deposit c. Dividend income from another domestic corporation
b. Yield from deposit substitutes d. Royalties

6) As a rule, there is no income tax if there is no income. Which of the following is the exception?
a. Capital Gains Tax on sale of land and/or buildings
b. Capital Gains Tax on sale of share of stock outside the local stock exchange
c. Tax on passive income
d. Regular Corporate Income Tax

7) A domestic corporation was registered with the BIR on November 1, 2008. What year would be the first MCIT be
imposed on such corporation?
a. 2009 c. 2011
b. 2010 d. 2012

8) The following statements about MCIT is correct, except?

a. The computation and the payment of MCIT, shall likewise apply at the time of filing the quarterly corporate
income tax
b. In the computation of the tax due for the taxable quarter, if the computed quarterly MCIT is higher than the
quarterly normal income tax, the tax due to be paid for such taxable quarter at the time of filing the quarterly
corporate income tax return shall be the MCIT which is two percent (2%) of the gross income as of the end
of the taxable quarter.
c. In the payment of the quarterly MCIT, excess MCIT from the previous taxable year/s shall not be allowed to
be credited.
d. Expanded withholding tax, quarterly corporate income tax payments under the normal income tax, and the
MCIT paid in the previous taxable quarter/s are not allowed to be applied against the quarterly MCIT due.

9) If the taxpayer is a seller of services, which of the following shall not form part of its cost of services?
a. Salaries and supplies c. Depreciation and rental expenses
b. Employee benefits d. Interest expense

10) One of the following is not accepted basic relief from the MCIT:
a. Prolonged labor dispute c. Legitimate business reverse
b. Force majeure problems d. Law suits filed by the company

11) Which is not a characteristic of corporate income tax?

a. Progressive tax c. General tax
b. Direct tax d. National tax

Session 1_Income Tax on Corporation Exercise Drill September 4, 2020 Page 1

 12) The following is excluded in the “Gross Philippine Billings” for income tax purposes of an international air carrier,
except,
a. Tickets sold outside the Philippines for passengers originating from outside the Philippines
b. Passage documents sold outside the Philippines for excess baggage originating from the Philippines
c. Tickets sold in the Philippines for passengers originating from the Philippines but are not actually flown
d. Passage documents sold in the Philippines for cargoes originating from outside the Philippines

13) In order for an international carrier to qualify for exemption on the basis of reciprocity, what type of tax shall be
exempted as well by its home country?
a. Income tax c. Transfer tax
b. Business tax d. Any of the choices

14) If a branch of a foreign corporation in the Philippines remits passive income earned in the Philippines to the head
office, what is the applicable tax on the said transactions?
a. Subject to 30% final withholding tax c. Subject to 15% branch profit remittances tax
b. Subject to 12% creditable withholding tax d. Exempt from branch profit remittances tax

15) Which of the following shall pay a tax of ten percent (10%) of their taxable income?
I - Regional or area headquarters
II - Regional operating expenses
a. Both I and II c. I only
b. Neither I nor II d. II only

16) (Phil. CPA) Which of the following statements is incorrect?

a. Resident foreign corporations are subject to income tax based on net income from sources within the
Philippines
b. Domestic corporations are subject to income tax based on net income from all sources
c. Nonresident foreign corporations are subject to income tax based on gross income from sources within the
Philippines
d. Private educational corporations are subject to income tax based on the net income from sources within
the Philippines at the tax rate of 10%

17) A tax imposed in the nature of a penalty to the corporation to prevent the scheme of accumulating income rather
than distribute the same to the stockholders for the purpose of avoiding tax on dividends.
a. Minimum corporate income tax c. Improperly accumulated earnings tax
b. Optional corporate income tax d. Capital Gains Tax

18) The Improperly Accumulated Earnings Tax shall not apply to the following except?
a. Banks and other non-bank financial intermediaries c. Publicly-held Corporation
b. Insurance companies d. Closely-held Corporation

19) It is a test used in determining the reasonable needs of the business to justify the accumulation of earnings which will
exempt the corporation from paying Improperly Accumulated Earnings Tax:
a. Urgency test c. Immediacy Test
b. Reasonable needs test d. Control Test

20) The following income shall be exempt from income tax, except?
a. In the case of a religious corporation, income from the conduct of strictly religious activities, such as fees
received from administering baptismal, solemnizing marriages, attending burials, holding masses and other
like income.
b. In the case of educational corporation, income from the holding of an educational fair or exhibit.
c. Income from the above mentioned corporations (letters a and b) from investment, such as interests from
capital where the capital has been loaned
d. Donations and other similar contributions received by the above mentioned corporations from other persons

21) The share of a corporation in the net income after tax of a joint venture or consortium taxable as a corporation of
which it is a co-venturer is subject to:
a. Creditable withholding tax of 10% c. Capital gains tax
b. Final withholding tax of 10% d. Exempt

22) Teri Yaki Corp., a Japanese Corp. having no business in the Philippines, is engaged in ship building. It leases some of its
newly constructed ships to Super Fairy Inc., a Philippine Carrier. What income tax rate will apply to the rental payments
to the lessor?
a. 10% basic income tax c. 7.5% final withholding tax
b. 25% final withholding tax d. 4.5 final withholding tax

Session 1_Income Tax on Corporation Exercise Drill September 4, 2020 Page 2

SHORT ANSWER PROBLEMS. Summarize your answers and show your solutions.
PROBLEM 1
Sputnik Corportion reported the following gross income and expenses in 2019:
Philippines Russia Total
Gross Income P 500,000 P 400,000 P 900,000
Less: Deductions 200,000 180,000 380,000
Taxable Income P 300,000 P 220,000 P 520,000
Compute the income tax due if the corporation is a/an:
1. Domestic Corporation
2. Resident Foreign Corporation
3. Non-Resident Foreign Corporation
4. Private Proprietary Educational Institution, majority of its income is from related activities
5. Non-Profit Organization
6. Government-Owned and Controlled Corporation
7. International Carrier
8. Offshore Banking Unit
9. Non-resident cinematographic film owner, distributor or lessor
10. Non-resident owner or lessor of vessels
11. Non-resident owner of lessor of aircraft, machineries and other equipment
12. Non-profit association, 70% of its income was derived from unrelated activities

PROBLEM 2
Sunny Tyzer Corporation reported the following income and expenses data in 2020:

Philippines China
Gross income from operations P 2,500,000 P 500,000
Gain on sale of real property capital asset 400,000 200,000
Gain on sale of stocks directly to buyer 280,000 0
Dividends from a domestic corporation 100,000 0
Dividends from a foreign corporation 0 150,000
Interest income from bank deposit 50,000 40,000
Royalty income 200,000 100,000
Business Expenses 1,300,000 250,000

The real property has a tax basis of P2,000,000 and a fair value of P2,300,000.

Compute for the regular income tax payable, final income tax payable, and capital gains tax if the corporation is:
1. Domestic corporation
2. Resident foreign corporation
3. Non-resident foreign corporation (with and without tax sparing)

PROBLEM 3
The following are the income and expenses of CAEbigan School, a private school in Davao City.

Philippines Abroad
Gross profit from educational services P 2,500,000 P 500,000
Dividend from a domestic corporation 50,000 0
Dividend from a foreign corporation 0 100,000
Interest income from a bank deposit 40,000 50,000
Business expenses 1,000,000 300,000
Income taxes paid 150,000 45,000

Compute the regular income tax due assuming that

1. The foreign taxes are claimed as tax credit
2. The foreign taxes are claimed as deductions

PROBLEM 4
Wabad Medical Center is a non-profit hospital. In 2020, it reported the following gross income and expenses:

Activities
Related Unrelated Total
Gross Income P 3,000,000 P 5,000,000 P 8,000,000
Directly traceable expenses 2,800,000 2,800,000 5,600,000
Common expenses of both activities 1,400,000
Net Income 1,000,000

Session 1_Income Tax on Corporation Exercise Drill September 4, 2020 Page 3

Compute the income tax due assuming
1. The given facts.
2. That Wabad Medical Center is a private hospital
3. That Wabad Medical Center is a government hospital

PROBLEM 5
A corporate taxpayer had the following data on its fifth year of operation:
Philippines Abroad Total
Sales P 2,000,000 P 3,000,000 P 5,000,000
Less: Cost of services 1,200,000 1,800,000 3,000,000
Gross income from operation P 800,000 P 1,200,000 P 2,000,000
Interest on deposits 50,000 250,000 300,000
Total Income P 850,000 P 1,450,000 P 2,300,000
Less: Business Expenses 800,000 1,300,000 2,100,000
Net Income P 50,000 P 150,000 P 200,000

Answer the following questions:

1. What is the income tax due assuming the taxpayer is a domestic corporation?
2. What is the income tax due assuming the corporation is a resident foreign corporation?
3. What is the final income tax due assuming the corporation is a nonresident foreign corporation?4

PROBLEM 6
Al Kuhol Corporation had the following data in 2019:

MCIT RCIT CWTs

First Quarter P 500,000 P 480,000 P 150,000
Second Quarter 450,000 490,000 120,000
Third Quarter 500,000 520,000 140,000
Fourth Quarter 700,000 480,000 160,000

There were excess MCIT of P70,000 and P 130,000 respectively in 2017 and 2018. Compute for the income tax payable from
first to third quarter and compute for the income tax payable for the taxable year 2019.

PROBLEM 7
The following data relates to a taxpayer assessed for improperly accumulating profits:
Taxable income 1,200,000
Net operating loss carry-over 400,000
Dividend income 100,000
Appropriation for plant expansion 400,000
Dividend declared 700,000
Minimum corporate income tax 380,000

Compute the improperly accumulated earnings tax.

PROBLEM 8
Equipments Corporation, a domestic corporation, has the following records of income and expenses in 2018:
Gross income, net of 1% withholding tax P 1,435,500
Expenses 756,000
Rent income, net of 5% withholding tax 136,800
Expenses on rent 34,600
Dividend from domestic corporation 25,000
Royalty 80,000
Interest from bank deposit with PNB, gross of tax 15,000

Questions:
1. What is the income tax payable of Equipments Corporation?
2. Compute for the total final taxes of Equipments Corporation.

Session 1_Income Tax on Corporation Exercise Drill September 4, 2020 Page 4