taxation - ex 1

8/11/2019 Taxation - Ex 1

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TAXATIONEX. 1

1. What is the meaning of the term De minimis benefits?

De minimis benefits are benefits of relatively small value or of minimum amount

provided by the employer in favor of the employee for the promotion of health,

goodwill and efficiency.

2.

Are corporations allowed to avail OSD? If yes, how much?

YES. Corporations are allowed Optional Standard Deductions in case of corporations

subject to tax under sec. 27 (A) and sec. 28 (A) it may elect standard deduction in the

amount not exceeding 40% of the gross income.

3.

Does the principle of pre-dominance test apply to hospitals?

YES. Sec. 27 (b). Proprietary educational institutions and HOSPITALS which are non-

profit shall pay 10% of tax, provided, however, that if gross income from unrelated

trade, business or activities exceeds 50% of total gross incomea tax of 30% shall beimposed on the entire taxable income.

4. Are dividends subject to income tax?

NO. General rule is that stock dividends are not subject to tax since; the mere issuance

thereof is not yet subject to income tax as they are nothing but enrichment through

increase in value of capital investment.

Exceptionsare:

a.

Change in the stockholders equity, right or interest in the net

assets of the corporation;b.

Cancellation or redemption of shares of stock.

c.

Distribution of treasury share.

5.

Are corporations subject to tax on compensation?

Corporations are not subject to tax on compensation because compensation income

refers to all income payments in money or in kind, arising from personal services under

ee-er relationship HOWEVER if dividends ,whether in cash or stock, are givento

shareholders not as a return on investment but in payment of services rendered, then

they are taxableas part of compensation income, or income derived from self-

employment or exercise of profession but NOT PASSIVE INCOME.

6.

When is an investment considered long term for the purpose of income tax exemption?

For an investment to be considered long term it shall have a maturity period of not less

than 5 years, formof which shall be prescribed by BSPand issued by banks to

individuals and other denominations prescribed by BSP.


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7.

Why gifts, bequest and devices excluded from gross income?

Because such transfers shall be subject to Donors or Estate tax.

8. Are retirement benefits subject to income tax?

It DEPENDS. Generally, retirement benefits are subject to tax. However, Sec. 32 B of the

tax code provides that retirement benefits received by officials and employeesmay not

be subject to tax if:

i.

Retiring official or employee has been in the service of the same employer for

at least 10 years,

ii.

That he is not less than 50 years of ageat the time of retirement,

iii.

That it has been availed only ONCE.

9.

Are termination pay taxable?

It DEPENDS. If such termination is voluntarythen that would be taxable. However, if it is

caused due to the death, sickness/ other physical disabilities for any caused beyond the

control of said employee or official then it shall be exempt from tax.

10.

What are the methods of income taxation?

The NET INCOME TAXATIONand the GROSS INCOME TAXATION.

NET INCOME TAXATION, it is taxation based on net income afteryou are allowed to

deduct some items.

GROSS INCOME TAXATION, income is taxed without the benefit of deductions and

expenses.

11.

How shall the Fringe Benefit Tax be computed?

Taxation of Fringe Benefit received by certain individuals

25 %shall be imposed on the GMV received by NRA-NEBT.

i.

MV divided by 75% = GMV X 25% = FBT

15 % for :

i.

An alien indiv. Employed :

a.

By regional or area head-quarters and regional operating head-quarters of a multinational company;

b.

By an offshore banking unit in a foreign bank established in the

Philippines;

c.

By a foreign service contractor or subcontractor engaged in

petroleum operations in the Philippines; and


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ii.

Any Filipino employees employed and occupying the same position as those

occupied or held by aforesaid alien employees.

12.Are gains from redemption of shares in mutual fund subject to income tax?

NO. Gains realized by the investors upon redemption of shares of stock in mutual fund

company are exempt from tax, as provided for by the tax code enumerated under

exclusions from gross income Sec. 32 (B)(7)( h).

13.

What is the income tax treatment of dividends if the same are paid to a non-resident alien

engaged in trade or business in the Philippines?

The income tax treatment of dividends of NRA engaged in trade or businessin the

Philippines shall be subject to 20% on the total amountthereof.

i.

Except: Royalties on books as well as other literary works and royalties on

musical compositions shall be subject to final tax of 10%.

ii.

For interest on long-term investmentsthat are pre-terminated;

a.

4 yrs. To less than 5 years ---- 5 %

b.

3 yrs. To less than 4 years ---- 12 %

c.

Less than 3 years ---- 20 %

14.What are the conditions for expenses to be deductible from gross income?

Expenses that are allowable as deductions to gross income are those

i. Ordinary and Necessary Expenses

Ordinarywhen it is commonly incurred in the trade or

business of the taxpayer as distinguished from capital

expenditure

NecessaryIf it is appropriate and helpful to the taxpayers

business and necessary to increase revenue or in the profit-

making

ii. Paid and incurred during the taxable year

iii.

And those that are directly attributableto the development, management,

operation and conduct of the trade, business or exercise of profession.

15.

Can a taxpayer deduct his grocery expenses from his gross income from trade, business or

exercise of profession?

YES. Provided that such expenses are not used for personal, living or family expense

and that such expenses contained the requisites required for its exemption.

(enumerate - requisites for expenses to be deductible).


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16.

What are the extent of tax exemption granted to a general professional partnership?

30% since a partnership other than a GPP shall be considered as a corporation and

corporations are taxed 30%. A GPP shall not be subject to income tax under the chapter

of taxes on individuals. Persons engaging in business as partners in GPP shall be liable

for income tax onlyin their separate and individual capacity.

17.

Are the shares of the individual partners from general partnership subject to income tax? If

yes, will it not constitute double taxation?

YES. Persons engaging in business as partners in GPP shall be liable for income tax only

in their separate and individual capacity. It will NOTconstitute double taxation on the

ground that shares of the partners will be taxed as ordinary income.

18.

What are the acceptable supporting documents for expenses to be deductible from gross

income?

The tax code provides that expenses shall not be allowed unless taxpayer complies the

ff. requirements:

i.

It must be substantiated with sufficient evidence

a.

Such as Official receipts or other adequate records

Amount of expenses being deducted

The direct connectionor relation of the

expense being deductedto the development,

management, operation and/or conduct of

trade, business or exercise of profession of the

taxpayer

ii.

In relation to Sec. 34 (K), that the tax required to be deducted and withheld

therefrom has been paid to the Bureau of Internal Revenue.

19.Are bad debts actually written off but subsequently recovered subject to income tax?

It DEPENDS.TAX BENEFIT RULE. The recovery of bad debts previously allowed as

deduction in the preceding years shall be included as part of the gross income in the

year of recovery only up to the extent of the income tax benefit of said deduction.

i.

If the taxpayer was benefitedfrom the previous write off of such debt then it

must be included as part of the gross income only up to that extent which

benefited him.

20. Is tax refund subject to income tax?

It DEPENDS. A tax refund may or may not constitute taxable income depending on

whether or not the tax was previously deducted in computing income tax. Rule is that a

tax w/c was previously deducted as an expenseshould be reported as incomewhen

refund of the same was received in a subsequent year.


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21.

What is the treatment of the cancellation of debts by the creditor?

The cancellation of debt by creditor shall be tax exemptif there is no services to the

creditor by debtor is rendered. It is considered as taxable giftand not income.

However, if there is service by the debtorto the creditor then it shall be consideredas

taxable incometo the debtor.

22.

May a taxpayer who opted to avail of the OSD change his mind and instead claim for itemized

deduction during the taxable year?

NO, once an option is made it will already become irrevocableduring the taxable year.

23.

What are the rules for NOL to be deductible from the gross income of a taxpayer?

NOLCO

i.

That the loss must be business related

ii.

That the loss must notbe compensated for by insurance

a.

i.e. casualty losses

i.

must first be reported to the BIR for deduction to be

allowed.

(TN: NOL not deducted from gross income shall be carried over as a deduction from GI for the next 3

consecutive years, provided :

that the taxpayer was not exempt from income tax in the year of such NOL

no substantial change in the ownership or business or enterprise.)

24.What is a passive income?

It is when an individual just let his wealth create more wealthwith it and he doesnthave to exert effortto earn more wealth. i.e, bank deposits, rents, pensions.

i.

Active incomeyou have to work hard to earn it.

25.

Is withholding tax a tax?

NO. It is not one of the items enumerated under sec. 21 of the tax code which classifies

the sources of income. It is only a mode. The means employed to collect the tax at the

very source.

Kinds of withholding tax:

1.

On compensation

2.

Expanded

3.

Final withholding taxes

4. Withholding taxes on govt payment

taxation - ex 1

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