Banggawan InTax

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INCOME TAXATION: LAWS, PRINCIPLES AND APPLICATIONS
2014 EDITION

TAX TEACHER’S MANUAL

By: Rex B. Banggawan, CPA, MBA

OUR SOLEMN DUTY

Dear teachers,

Greetings in God’s grace!

Our taxation system in the Philippines is besmirched by reported abuses in tax administration and
pervasive corruption. These disheartened many taxpayers not to properly reflect their income rationalizing
on corrupt government practices.

Our solemn duty as academician is to lay the foundation for the future correction of this defect in our
society by providing the best tax education our students deserve. In the Philippine setting, we are too
advanced in financial accounting. Our financial accounting standards are taught at school almost
simultaneous with the changes in the international setting. However, it is very saddening to see that our tax
education is too backward and is not advancing from its level in the 1990’s. We are far delayed in tax
theories and practices. The gap keeps on developing. In fact, many graduates claim that only 10% of their
tax proficiency is acquired in the classroom.

This information gap is attributable to two factors: the fact that the CPA Board Exam is restricted to basic
concepts because they are tested hand-in-hand with business laws. Board questioning tends to be very
basic because there are only 35 questions in Taxation. Also because of these, books tend to be complacent
by providing only the basics of taxation with less of practical relevance. Books are limited in providing
what is just enough to make students pass the Board Exam. Also to non-accountancy business students, the
tax teaching is much focused on too basic concepts to be practiced. Most students pass their taxation
subjects but do not actually know how to practice taxation thereafter. In short, graduates are sometimes
undereducated in taxation. This under-education makes tax malpractices and corruption in practices
possible. If the public is generally well educated in taxation, malpractices and corruption may be limited.

Because of this complacency, most schools fail on their duty in transforming their graduates as agents of
change in society. As our mission, let us give our students more practical knowledge by giving them the
totality of taxation. Even if they are not tax majors, they should be given the option and the chance to attain
high level proficiency in taxation. There should be no second-class students in taxation.

Teach well and you will live forever! Your influence will forever stay in the minds and hearts of your
students. That excellence will multiply. Let us give our students a legacy of real excellence. Let us give them
the best tax education we can give. Let us give them the type of excellence which is not feigned, not masked,
but real. Always remember that our service to fellow man is a service to God. As we help others, we are
helping ourselves as well.

Let us join hand to promote a better tax education. Join me at facebook. My facebook is Real Excellence.
Contact me whenever you need assistance. I will assist in the best way I could. God bless you!

REX B. BANGGAWAN, CPA, MBA
0905 245 9060
[email protected]

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HOW TO TEACH INCOME TAXATION MOST EFFECTIVELY?

Income taxation is complex. There are many other teaching alternatives in practice but I found Principle-
based and Structured Approach as the most superior in delivering an organized and compact knowledge to
students.

The Structure of Income Taxation

Gross Income Income for taxation purposes

Final Income is taxable to either Regular Income
Taxation Taxation
Capital Gains
Taxation

Gross Income: Total
P XXX
Compensation income P XXX XXX XXX
P XXX XXX
Business/Prof. income XXX XXX
Dealings in properties XXX
XXX P
Other income

Less:

Note: Deductions XXX XXX
XXX P XXX
1. Regular income tax is the garbage can in the Personal Exemption XXX
taxation of income.
Taxable Income P
2. Mastery of the final tax and capital gains tax is
mandatory to overall mastery of the tax system. Tax table for Individual Taxpayers
30% flat for Corporate Taxpayers
3. Dealing in properties is linked with capital gains
taxation.

4. Certain items of compensation income (i.e. fringe
benefits) are subject to final tax.

5. Passive income that does not qualify for taxation
in final income taxation is subject to regular
income tax.

MINIMUM STANDARD OUTPUT OF TEACHING
Students must understand:
1. the concept of a taxable income. They must know how to identify a taxable and a non-taxable income.
2. the tax structure. They must appreciate in detail the nature and scope of the exceptional final income

tax and capital gains tax.
3. the classification and globalization rules of compensation income and business/professional income.

(see Page 220 – Page 222)
4. the scope and nature of compensation income including exclusions thereto and its boundary with

fringe benefits subject to fringe benefit tax.
5. the disposition of gains or losses in the sale, exchange and other disposition of properties. (ordinary or

capital gains and ordinary or capital losses)
6. the concept of deductions and the mode of claiming deductions.
7. the computation of individual income tax and corporate income tax.

SEQUENCE OF DISCUSSION
Please follow the concept arrangement and chaptering of the book.

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CONCEPTS FOCUS

A. Fundamental principles of taxation
1. Theories of cost allocation
2. Tax as a lifeblood to the government (Lifeblood doctrine)
3. Limitations of the taxation power
4. The concept of situs
5. The concept of double taxation and the remedies to double taxation

B. The concept of income – discusses what income is taxable under the NIRC
1. The concept of gross income
a. The different concepts of capital (with finite and infinite values)
b. The meaning of realized benefit – connect this to the ability to pay theory
2. The classification of income taxpayers
a. Individuals (RC, NRC, RA, NRA-ETB, NRA-NETB)
b. Corporations (DC, RFC, NRFC)
3. The situs of income – students need to know the place of taxation of each type of income
4. The difference between active and passive income

C. The taxation schemes – discusses how income is taxed under the NIRC

Important: Make sure students comprehend how income is taxed. There are three income taxation
schemes under the NIRC.

D. Concepts of accounting periods and accounting methods – discusses how income is measured and
reported to the government:
1. Accounting period
a. Who uses calendar
b. Who uses fiscal year
c. When to file income tax return in either type of accounting period
2. Accounting methods – give focus on:
a. Accrual basis
b. Cash basis
c. Installment method

E. Exceptional taxation scheme
1. Final income taxation – discusses income which will not be reported to the government because
they are taxed at source
a. The list of passive income subject to final tax and their final tax rates
b. Taxpayers subject to final taxation and their final tax rates

Please refer students to Appendix 1 for a comprehensive list of final taxes.

2. Capital gains taxation – discusses income from sale, exchange or other dispositions of properties
that are not subject to regular tax but to capital gains tax
a. The distinction between ordinary assets and capital assets
b. The particular types of capital assets subject to capital gains tax (domestic stocks and real
properties)
c. Computational procedures of the capital gains tax on domestic stocks
1. Transactional and annual compliance
2. Installment payment of capital gains tax on domestic stocks
d. Tax bases and computational procedures to the capital gains tax on real properties
1. Exemption rule and alternative taxation rule
2. Pay as you file and installment payment

Note to non-accountancy classes
The following concepts may be dispensed with and may be given to students as optional
reading if they want greater level of knowledge:
 Installment payment of capital gains tax (stocks and real properties)
 Wash sales rule
 Tax free exchanges

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F. Regular income tax

1. Introduction
Important concepts to emphasize:
a. Regular tax gross income includes all income that qualifies the gross income test in Chapter 3
but is not subject to tax under Chapter 5 and Chapter 6
b. Deductions are deductible from gross income from business only
c. Personal exemptions are deductible from compensation income but a negative compensation
income is deductible to other income
d. Tax reporting of compensation income (highlight the exceptional treatment on fringe benefits –
this serves as a preliminary introduction to Chapter 11)
e. Tax reporting of business or professional income
f. Determination of taxable income

2. Exclusions – discusses income not subject to any income tax schemes

3. Inclusions – discusses income that are subject to regular income tax
a. Compensation income
b. Fringe benefits
c. Dealings in properties

4. Compensation income vs. Fringe benefits
a. Items of non-taxable compensation
b. Components of compensation income
c. Treatment of fringe benefits (those subject to regular tax vs. those subject to final tax)

5. Deductions – discusses expenses of business that are deductible from gross income
a. Itemized deductions
1. Cost of sales or cost of services
2. Regular allowable itemized deductions
3. Special allowable itemized deductions
4. Net operating loss carry-over
b. Optional standard deduction – in lieu of itemized deductions

6. Determination of taxable income
a. Individual income taxpayers
b. Corporate income taxpayers

G. Taxation of individual taxpayers
1. Personal exemption
2. Determination of tax due and tax payable
a. Revisit the computation of individual income tax due in Chapter 7
b. Review the computation of foreign tax credits in Chapter 13-A, foreign tax credit

H. Taxation of corporate taxpayers
1. Special corporations
2. Regular corporations
a. Gross income tax
b. Regular corporate income tax
c. Minimum corporate income tax
3. Improperly accumulated earnings tax
4. Branch profit remittance tax

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TEACHER’S SOLUTION MANUAL

CHAPTER 1: INTRODUCTION TO TAXATION

EXERCISE DRILL

1. C 11. C

2. C and I 12. C

3. C and I 13. C

4. N (real property tax not income tax) 14. N *

5. C 15. C

6. I 16. C

7. C 17. I

8. C 18. I

9. N * 19. N *

10. N (it should be ‘non-imprisonment’) 20. C (This is the equality rule)

*These are tax principles but are not limitation to the exercise of taxation power

TRUE OR FALSE
1. True
2. True (reciprocal duty is the basis, the necessity for a government is the theory of taxation)
3. False (Receipt of benefits is conclusively presumed)
4. True
5. True (The lifeblood doctrine)
6. False (Taxation, police power and eminent domain are all inherent in sovereignty. There is no need to

grant their exercise to the government.)
7. True

8. False (See No. 6)
9. False (This is police power)
10. True
11. True
12. True
13. True
14. False (The government should not taxed itself as it becomes inefficient to do so)
15. True (It will result to violation of Substantive due process)
16. False (The equality rule requires the same taxation of taxpayers under the same circumstances)
17. False (The constitutional guarantee for non-imprisonment applies to debt not tax)
18. False (The Constitution guarantees the sanctity of contract by its non-impairment clause)

Errata: Please disregard the word “that”
19. False (Constitutional exemption refers only to real property tax, not to income tax. In the case of non-

stock, non-profit educational institution, exemption covers both real property tax and income tax)
20. False (The Constitution requires the majority of all members of congress to pass a tax exemption law)

MULTIPLE CHOICE – Theory: Part 1

1. A 13. D 25. B
2. B 14. C 26. C
27. C
3. A 15. C 28. D
4. A 16. C 29. C
5. B 17. D 30. B
31. D
6. A 18. A 32. A
7. D 19. D 33. D
34. D
8. A 20. D
9. B 21. C

10. D 22. C
11. D 23. C

12. D 24. C

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MULTIPLE CHOICE – Theory: Part 2

1. D 9. A 17. B
2. B 10. B 18. C
3. D 11. D 19. B
4. A 12. C 20. D
5. C 13. C 21. A
6. B 14. D 22. B
7. C 15. C
8. C 16. A

MULTIPLE CHOICE – Theory: Part 3

1. A 10. C 19. B
2. D 11. B 20. A
3. B 12. C 21. C
4. D 13. B 22. D (the best answer)
5. A 14. C 23. B
6. C 15. C 24. B (category connotes
7. D 16. A
8. D 17. B dissimilarity)
9. A 18. D 25. D

CHAPTER 2: TAXES, TAX LAWS AND TAX ADMINISTRATION

EXERCISE DRILL NO. 1

1. Community tax
2. Excise tax or privilege tax
3. Fiscal/General/Revenue tax
4. Indirect tax
5. Ad valorem tax
6. Regressive tax
7. National tax
8. Excise tax or sin tax*
9. Estate tax
10. Percentage tax
11. Proportional tax
12. Specific tax
13. Direct tax
14. Regulatory tax
15. Donor’s tax

*This is different with excise tax as a privilege tax

EXERCISE DRILL NO. 2

1. License
2. Debt
3. Special assessment
4. Toll
5. Revenue
6. Tax
7. Debt
8. Customs duties
9. Penalty
10. Tax

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EXERCISE DRILL NO. 3

1. Value Added Tax ≥ P200,000/quarter
2. Excise Tax ≥ P1,000,000/year
3. Income Tax ≥ P1,000,000/year
4. Withholding Tax ≥ P1,000,000/year
5. Percentage Tax ≥ P200,000/quarter
6. Documentary Stamp Tax ≥ P1,000,000/year

1. Gross receipts or sales ≥ P1,000,000,000 in a year
2. Net worth ≥ P300,000,000 at year end
3. Gross purchases ≥ P800,000,000 in the preceding year

MULTIPLE CHOICE – Theory: Part 1

1. A 16. D 31. A
2. A 17. D 32. B
3. D 18. D 33. C
4. D 19. C 34. C
5. C 20. A 35. D
6. D 21. B 36. B
7. A 22. A 37. D
8. B 23. B 38. B
9. C 24. B 39. D
10. A 25. B 40. A
11. B 26. B 41. B
12. B 27. D 42. A
13. C 28. D 43. D

14. A 29. B 44. A
15. B 30. D 45. C

MULTIPLE CHOICE – Theory: Part 2

1. C 6. B 11. C
2. D 7. A 12. D
13. C
3. B 8. A 14. D
4. D 9. D

5. C 10. A

MULTIPLE CHOICE – Theory: Part 3

1. C 8. A 15. D
2. C 9. C 16. C
3. D 10. B 17. D
4. B 11. A 18. C
5. A 12. D 19. A
6. B 13. B 20. A
7. D 14. A

CHAPTER 3: INTRODUCTION TO INCOME TAXATION

EXERCISE DRILL NO. 1: Return of capital and Return on capital

Consideration For the loss of Return OF Capital Return ON Capital

1. P 1,000,000 Life P 1,000,000 P0

2. P 500,000 P400,000 building P 400,000 P 100,000

3. P 300,000 P350,000 car P 300,000 P0

4. P 600,000 Income P 0 P 600,000

5. P 1,200,000 Health P 1,200,000 P0

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EXERCISE DRILL NO. 2: Income tax and transfer tax

Transaction Income Tax Transfer Tax

1. Sale of goods  
2. Rendering of services 

3. Donation of properties

4. Barter of properties
5. Transfer of properties from a

decedent to his heirs upon death
6. Transfer for less than full and

adequate consideration

EXERCISE DRILL NO. 3: The tax concept of income

Item Taxable Exempt
1. Indemnity for moral damages  
2. Harvest of fruits from an orchard  *
3. Compensation income 
4. Interest income  
5. Amount received by the insured in excess of insurance premiums paid  
6. Proceeds of life insurance received by the heirs of the insured
7. Gain on sale of goods by the home office to its branch  
8. Gain on sale of goods and services between relatives  *
9. Gain on sale of goods by a parent corporation to a subsidiary
 
corporation 
10. Appreciation in the value of land
11. Birth of animal offspring 
12. Winnings from gambling 
13. Income of a registered Barangay Micro-Business Enterprise 
14. Cancellation of debt out of gratuity of the creditor 
15. Cancellation of debt by the creditor in exchange of services rendered

by the debtor
16. Receipt of bank loan
17. Salaries of a minimum wage earner
18. PCSO or lotto winnings
19. Benefits from GSIS, SSS, Pag-Ibig or PhilHealth
20. Matured interest from coupon bonds

*This are unrealized income taxable upon realization by sale or disposition

EXERCISE DRILL NO. 4: Income taxpayer classification Classification
NRC
Person or Entity RC
1. An overseas Filipino worker RC
2. A Filipino who is privately employed in the Philippines
3. An unemployed Filipino residing in the Philippines NRA-ETB
4. A Chinese businessman who have his domicile in the Philippines for 6
RA
months
5. A Japanese who married a Filipina and residing in the Philippines for 2 NRA-NETB
RA
years DC
6. An American tourist RFC
7. A 2nd year Korean college student studying in the Philippines RC*
8. A corporation incorporated under Philippine law NT
9. A foreign corporation doing business in the Philippines DC
10. Donation of a property in trust designated by the donor as irrevocable
11. Donation of a property in trust designated by the donor as revocable NRFC
12. A business partnership (Partnership are classified as corporations
RC*
under the NIRC, presumption if silent = domestic) NT
13. A joint venture organized under a foreign law and is not operating in

the Philippines
14. An estate of a Filipino citizen judicially administered in the Philippines
15. An estate of a Filipino citizen extra-judicially administered in the

Philippines

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16. A taxable joint venture organized in the Philippines

*Treated as individual income taxpayers by the law

EXERCISE DRILL NO. 5: General Income Tax Rule

Taxpayer World Philippine
income income
1. Non-resident citizen 
2. Resident alien  
3. Non-resident alien engaged in trade or  

business 
4. Resident citizen 
5. Non-resident alien not engaged in business 
6. Resident foreign corporation
7. Non-resident foreign corporation 
8. Domestic corporation
9. Resident foreign corporation 
10. Taxable trusts established by a Filipino

citizen in the Philippines (treated as RC)
11. Taxable estate of a non-resident citizen

judicially administered abroad

EXERCISE DRILL NO. 6: Location and situs of income

Income description Within Without

1. A finance company earned P100,000 interest income. 20%
of these were from non-resident debtors. P 80,000 P 20,000

2. Rey earns P1,000,000 royalties from his Mr. Burger P 600,000 P 400,000
franchise. 40% of these were derived abroad.

3. Raymund earned P100,000 rent from OFWs in his
apartment in the US. He also earned P40,000 rent from his P 100,000 P 40,000

Philippine condominium unit.

4. Mark, a resident citizen, works home online and submits his P 120,000

output to clients. He collected P100,000 service fee from (situs is where P0
foreign clients and P20,000 from resident clients. rendered)

5. Chester rendered audit services to client in Afghanistan for P 0 P 500,000
P500,000. The services were paid in Afghanistan.

6. Jun has a store in a tourist park in Baguio City, Philippines. P 40,000 (stitus
He earned a total of P40,000 gain from selling souvenir is place of sale) P0

items. 40% were from foreign tourists.

7. Don Mariano sold to his friend abroad a commercial building P2M P0
located in Quezon City, Philippines at a gain of P2,000,000. (situs is location)

8. John sold his stocks in a domestic corporation to a foreign P 50,000 P0
investor at a gain of P50,000.

9. Manso received P20,000 dividends from a domestic P 20,000 P 30,000
corporation and P30,000 dividend income from a non-

resident foreign corporation.

10. Andrew received P40,00 dividend from a resident foreign P 24,000 P 16,000

corporation 60% of its historical income is from the (60% x P40,000) (40% x P40,000)
Philippines.

11. James received P100,000 dividend from a resident foreign P 100,000
corporation which realized 40% of its income from the P 0 (fails dominance
test)
Philippines.

12. Ellis received P20,000 dividend from a non-resident foreign P 0 P 20,000

corporation.

13. Davao plant manufactures tables and sells to resident P0
clients. A total of P400,000 gross income were realized P 400,000

during a period.

14. CDO, Inc. manufactures in the Philippines and sells to P 100,000 P0

unaffiliated export clients. A total of P100,000 gross income Income is
were earned during a period. presumed within*

*Since manufacturing activity is within, the sale is presumed agreed within. Hence, the entire gain is earned within.

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MULTIPLE CHOICE – Theory: Part 1

1. C 7. A 13. D
2. A 8. B 14. A
3. D 9. B 15. B
4. A 10. C 16. D
5. D 11. B
6. B 12. B

MULTIPLE CHOICE – Theory: Part 2

1. D 8. B 15. C
2. B 9. A 16. A
3. C 10. A 17. A
4. B 11. B 18. C
5. C 12. C 19. D
6. A 13. A 20. D
7. A 14. D

MULTIPLE CHOICE – Theory: Part 3

1. A 4. B 7. A
2. D 5. C
3. A 6. D

MULTIPLE CHOICES – Problems Problem 3-10: C Problem 3-19: A
Problem 3-1: C Problem 3-11: C Problem 3-20: C
Problem 3-2: C
Problem 3-12: D Problem 3-21: C
Problem 3-3: A Problem 3-13: C Problem 3-22: B
Problem 3-4: C Problem 3-14: C Problem 3-23:
Problem 3-5: C Problem 3-15: B
Problem 3-6: C Problem 3-16: C 1. A
Problem 3-7: D Problem 3-17: A 2. C
Problem 3-8: A Problem 3-18: D 3. C
Problem 3-9: C 4. A

MULTIPLE CHOICES – Case Problems

Case Problem 3-1 Within Without
P 40,000 P 10,000
 P10,000 interest income from a non-resident Japanese friend
 P40,000 interest income from Philippine residents 200,000 500,000
 P500,000 rent income from a commercial complex located in the USA 300,000
100,000 200,000
leased to resident Filipinos
 P200,000 rent income from a boarding house in Baguio City, 400,000 50,000
P1,040,000 -
Philippines
 P200,000 professional fees rendered to Chinese clients in Hong Kong P 760,000
 P300,000 salary from a resident employer
 P100,000 gain from sale of merchandise imported and sold to

Filipino residents
 P50,000 gain on sale of merchandise purchased locally and sold

during his business travel in Hong Kong
 P400,000 gain on sale of the boarding house located in Baguio City to

a non-resident buyer
Total

Case Problem 3-2 Within Without
P 500,000
 P500,000 royalty fees from local Hot Burger outlets P 200,000
 P200,000 royalty fees from foreign Hot Burger outlets 100,000
 P100,000 gain from sales of equipment to foreign franchisees

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50,000 P 340,000
 P200,000 gain from sales of equipment to local franchisees
 P50,000 gains from sale of investment in domestic stocks to foreign -
P 950,000
investors
 P40,000 gains from sale of investments in foreign stocks to Filipino

investors (The stock is presumed stocks of a non-resident foreign
corporation.)

Total

Case Problem 3-3
In this problem, billing is based on free market conditions. TC bills its foreign outlet (branch) at the same
rate as it bills foreign clients. The transfer pricing is considered arms’ length.

Gross income within = P3,400,000 x 70%/170% = P1,400,000 Note billing is on cost.
Gross income without = P2,720,000 x 100/200% = P1,360,000

The answer is B.

CHAPTER 4: INCOME TAX SCHEMES, ACCOUNTING PERIODS AND
ACCOUNTING METHODS

TRUE OR FALSE
1. True
2. True
3. False
4. True (Most types of passive income are subject to final tax with the exception of rent.)
5. True (Active income is subject to regular tax. Capital gains are generally subject to regular tax. There

are only two types of capital gains that are exceptionally subject to capital gains tax)
6. False (from ordinary assets, not any assets)
7. False (two types: ordinary asset and capital asset)
8. False (The definition of capital asset is a residual definition.)
9. True
10. True
11. True
12. True
13. False (The accounting period shall be terminated at the point of death.)
14. False [Only corporations (and partnerships) can change accounting periods.]
15. True
16. False (Deductible as they are used up or are expired in the business of the taxpayer.)
17. False (Advanced income is taxable upon receipt)
18. True
19. False (Contract price is the total amount receivable in money or property from the buyer. This amount

is usually the selling price but will differ when there is an encumbrance on the property to be assumed
by the buyer.)
20. False (Crop year method is an accounting period)
21. False (Based on percentage of progress of the construction project)
22. True
23. True (The mix of the different methods is referred to as hybrid method.)
24. False (Only capital gains tax and regular income tax has tax returns. Note that final income tax are
withheld at source.)
25. False (Only large taxpayers that meet certain criteria are required to file through the EFPS. Small
taxpayers shall file their returns in their respective Revenue District Office.)

Multiple Choices – Theory 4-1: General Concepts

1. B 8. A 15. C
2. D 9. C 16. C
3. C 10. A 17. D
4. C 11. A 18. B
5. D 12. D 19. D
6. B 13. D 20. B
7. B 14. C

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Multiple Choices – Problem 4-1: Accounting period

1. D 5. A 9. B
2. C 6. B 10. B

3. D 7. B
4. C 8. C

Multiple Choices – Problems 4-2: Tax schemes and accounting methods
Please pattern your solution to the book illustration. If you encounter any problem, feel free to contact me.
Thank you!

1. A (P2M – P1.1M COGS + 6. A 13. A
P60K + P30K). * 7. C 14. A
8. D 15. D
2. B (P2M – P1.1M COGS + 9. C 16. B
P60K + P40K) 10. A 17. A
11. D
3. D 12. C (80% x P1M – P600K)
4. C
5. B

*Note that the deductible amount for inventory (a form of prepayment) shall be the expired (sold) portion for both cash
basis and accrual basis. Advanced income is taxable upon receipt for both methods. For cash basis collected income
excluding accrued income is included. For both accrual and cash basis, unrealized income is not subject to tax.

CHAPTER 5: FINAL INCOME TAXATION

TRUE OR FALSE
1. True
2. False (Final tax applies only on identified passive income from sources WITHIN.)
3. True
4. True (Final tax on interest covers only interest income from banks and trust funds)
5. True
6. True
7. True (They are considered deposits substitutes.)
8. False (Only dividends from domestic corporations are subject to final tax.)
9. False (REIT dividends are generally subject to 10% final tax.)
10. False (Stock dividend is generally exempt, except when it confers upon the recipient an interest

different from what he previously owned or when the declaration of stock dividends amounts to a
declaration of cash dividends.)
11. False (subject to final tax of 10%)
12. False (Resident aliens are subject to 7.5% final tax.)
13. False (The NIRC did not contemplate final taxation of prizes on corporations, hence, corporate prizes is
deemed subject to regular income tax.)
14. False (Active royalties are subject to regular tax. Passive royalties are subject to final tax.)
15. False (It applies only to non-resident foreign corporations)
16. False (Passive income abroad, including winnings are subject to regular tax.)
17. True (In the context of individual taxpayers)
18. True
19. False
20. True
21. True
22. True
23. True
24. True
25. False (It is exempt)
26. True
27. True

28. False (On the 10th day, not on the 15th day)
29. True
30. True (They are exempt from income tax: final tax, capital gains tax or regular income tax.)

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Not feigned, not masked but real excellence!

Multiple Choices – Theory 12. C 23. A
1. C 24. B
13. C 25. D
2. D 14. C 26. D
3. D 15. B 27. A
4. B 16. B 28. C
5. C 17. D 29. B
6. A 18. C 30. D
7. A 19. C 31. C
8. A 20. D 32. A
9. B 21. D 33. C
10. C 22. C
11. C 27. C
28. C
Multiple Choices – Problems 14. B 29. D
1. D 15. D 30. A
2. C 16. C 31. B
3. D 17. A 32. D
4. C 18. B 33. D
5. D 19. C 34. D
6. A 20. B 35. D
7. C 21. A 36. D
8. B 22. D 37. D
9. B 23. A 38. A
10. C 24. B
11. A 25. A 12. True
12. A 26. A 13. False
13. A 14. False
15. False (only exchange)
CHAPTER 6: CAPITAL GAINS TAXATION 16. True
17. False (tax is based on selling price)
TRUE OR FALSE 1 18. False (tax is based on SP or FMV)
1. True 19. False (only domestic stocks)
2. True 20. False (only real property capital assets
3. False
4. True within)
5. False
6. True 12. True
7. True 13. False
8. True 14. False (Assessed Value and Zonal value are
9. False
10. True (Such as in the case of sale by realtors) independent valuations)
11. True 15. True
16. False (foreign corporations are exempt)
TRUE OR FALSE 2 17. True
1. False (or the fair value whichever is lower) 18. True
2. False (by moving average method) 19. True
3. False (adjusted basis of the shares received) 20. True
4. True
5. True
6. False (not downpayment but initial payment)
7. True
8. False (not selling price but contract price)
9. True
10. True

11. True

13

Not feigned, not masked but real excellence!

Multiple Choices – Theory: Part 1 11. B 21. C
1. A
12. D 22. D
2. C 13. A 23. B
3. A 14. D 24. C
4. A 15. D 25. C
5. A 16. C 26. D
6. D 17. D 27. B
7. C 18. B 28. A
8. D 19. B 29. B
9. C 20. A 30. D
10. C

Multiple Choices – Theory: Part 2 5. D 9. B
1. B 6. D 10. D
2. D 7. C 11. B
3. B 8. B 12. A
4. D

Multiple Choices – Problems: Part 1

1. C 8. A 15. A
2. B 9. B 16. D
17. B
3. D 10. D 18. B
4. C 11. C 19. C
20. A
5. C 12. D
6. B 13. C

7. B 14. B

Multiple Choices – Problems: Part 2 5. B 9. A
1. A 10. B

2. C 6. D
3. D 7. D
4. D 8. A

Multiple Choices – Problems: Part 3

1. A 5. C 9. C
2. B 6. B 10. B
11. C
3. A 7. C
4. C 8. D

CHAPTER 7: INTRODUCTION TO REGULAR INCOME TAX

TRUE OR FALSE 11. False (only against business gross income)
12. True (effectively, yes)
1. True 13. False (deductions apply to individuals and
2. False
3. True corporations)
4. True (As a rule) 14. True
5. False (NRA-NETB and NRFC are not subject to 15. True
16. True
RIT) 17. True
6. False 18. True
7. True 19. True
8. True 20. False
9. False
10. False (only in lieu of personal expense)

Multiple Choices – Theory: Part 1 9. B 17. D
10. C 18. D
1. C 11. C 19. A
2. A 12. B 20. B
3. C 13. B 21. B
4. C 14. D 22. C
5. D 15. C
6. D 16. B
7. C
8. D

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Not feigned, not masked but real excellence!

Multiple Choices – Theory: Part 2 10. B 19. C
11. A 20. A (best answer)
1. A 12. D 21. D
2. B 13. B 22. D
3. C 14. B 23. B
4. C 15. C 24. A
5. C 16. C 25. A
6. B 17. C
7. D 18. B
8. A
9. B

Multiple Choices – Problems 8. B 15. D
1. C 9. C 16. C
2. B 10. B 17. D
3. A 11. D 18. C
4. B 12. C 19. C
5. D 13. A
6. C 14. B
7. C

CHAPTER 8: REGULAR INCOME TAX: EXCLUSION FROM GROSS INCOME

TRUE OR FALSE 1 6. False (Other requisites 11. True
1. True exist.) 12. False
2. True 13. False
3. False 7. False 14. True
4. False 8. True 15. False
5. True 9. True

10. False

TRUE OR FALSE 2 6. False 10. True
1. True 7. False (More than 5 years) 11. True
2. False 8. True (As a rule) 12. False
3. True 9. False (They are still 13. True
4. True 14. True
5. False (It depends on taxable on income from 15. True
unrelated operations.)
source and amount)

Multiple Choices – Theory 11. D 21. C
1. B 12. D 22. D
2. A
13. D 23. B
3. C 14. B 24. D
4. D 15. D 25. D
5. A 16. D 26. B
6. A 17. C 27. C
7. D 18. A 28. D
8. D 19. C 29. A
9. D 20. D 30. A
10. C

Multiple Choices – Problem: Part 1 7. D (The excess is payment
1. B 12. B
13. D
2. C for health) 14. B
3. B 8. C (P2M – P.8M + P.5M)
15. D
4. B 9. D (P1.8M+P.4M)
5. A (the P100K premium is 10. C (Income from related

an expense) operations only)
6. D 11. B

15

Not feigned, not masked but real excellence!

Multiple Choices – Problems: Part 2
1. C 8. B 13. D **
14. C
2. B 9. C 15. C
3. D 10. A *

4. B 11. D (P9K and P6.8K are
5. C inclusion to gross income

6. A subject to final tax)
7. A 12. D

*When the holiday pay, overtime, night shift differential and hazard pay exceeds P30,000, the entire amount of
compensation ins subject to income tax. This is an advanced question intended to test students self-learning. You may
void the item on the ground that it is not yet discussed or give extra credit for those who got the correct answer. 
**The best answer. The most correct answer would have been P400K + P20K + P18K. Note that dividends from stocks and
interest on time deposits are items of gross income subject to final tax; hence, exclusion in gross income subject to regular
tax.

CHAPTER 9: REGULAR INCOME TAX: INCLUSION IN GROSS INCOME

TRUE OR FALSE 1 9. True 16. True
1. True 10. False 17. False
2. True 11. True 18. True
3. True 12. False 19. False (Subject to RIT, as a
4. True 13. True
5. True 14. True rule)
6. True 15. False (There are 20. True
7. False
8. True exceptions)

TRUE OR FALSE 2 8. False 14. True
9. False (It depends. There is 15. True
1. True 16. True
2. False tax benefit to the excess of 17. False (including domestic)
3. False (Not taxable) the recovery over the 18. False (not required)
4. False (FIT do not apply loss.) 19. True
10. False (No tax benefit) 20. False
abroad) 11. False (Accounting
5. True method)
6. True (generally, exception 12. False
13. True
is when no tax benefit)
7. False (This is a normal

realization of income)

Multiple Choices – Theory: Part 1 8. C 15. A
1. D 9. A 16. D
2. D 10. C 17. B
3. A 11. D 18. D
4. D 12. B 19. A
5. B 13. D 20. D
6. D 14. A
7. D

Multiple Choices – Theory: Part 2 6. D 11. D (The situs on interest on
1. D* 7. C (subject to final tax) domestic bonds is within.)
2. D 8. B
3. C 9. C 12. C
4. C (“Progressive” tax) 10. B 13. D
5. C (Those taxable on world 14. D
15. C
income)

*D is the best answer. Passive royalties are generally subject to final tax; hence, non-reportable. However, passive
royalties earned from sources abroad are subject to regular tax, hence reportable. The capital gain on sale of stocks
through PSE is not subject to tax; hence, non-reportable.

16

Not feigned, not masked but real excellence!

Multiple Choices – Problems: Part 1
1. B 9. C 17. D

2. A 10. A 18. B
3. D (P800K-P124K+P150) 11. C 19. C (The tax benefit is the

4. C 12. C profit erased by the
5. C 13. B deduction.)
20. C (The entire recovery has
6. D 14. C tax benefit.)
7. B 15. A 21. B

8. C 16. A

Multiple Choice – Problems: Part 2 13. C (P800K+P100K+P400K+P200K)
1. C (P500K-P20K) X 20% 14. B
2. B (P490K – P200K – P120K) 15. B (P10K +P400K prizes abroad+P100K
3. B (P120K – P150K)
4. A (P170K – P30K) winning abroad). Note prizes not exceeding
5. C (P1,140K-P40K)/2 P10K are subject to RIT.
6. A (Subject to final tax since this is a business 16. D (Corporate prizes and winnings are subject
to RIT. DC is taxable on world income while
partnership.) RFC is taxable only on Philippine taxable
7. A (This is subject to final tax) income.)
8. C* 17. A (Income from related operations are
9. D (Gains on long term bonds with more than exempt. The unrelated income is subject to
final tax)
5 years is exempt) 18. A
10. C (DCs are taxable on world income but the 19. C (P400K-100K cost of services + P8K)
20. A [None to report since all the income are
capital gains on real property is subject to subject to final withholding tax.(i.e. no ITR)]
CGT. Hence, P300K+P800K+P200K) 21. B (P80K+P100K)
11. C (RFCs are taxable only on Philippine income 22. D (P150K+P120K)
but are not subject to CGT on real properties;
hence, P300K+P400K)
12. A (RAs are taxable only on Philippine income

but are subject to CGT on real properties;
hence, P300K only)

*The employee will not be subject to final tax notwithstanding satisfaction of the compensation threshold test because he is not a
managerial or technical employee

CHAPTER 10: COMPENSATION INCOME

TRUE OR FALSE 1 10. True 16. True
1. True 11. True 17. False (Under current rule,
2. True 12. False (Compensation
3. False only those listed by the
includes only those regulations)
4. True subject to RIT) 18. False (rank and file only)
5. True 13. False (Employer not 19. False (Vacation leave
6. False (Generally taxable) employee) credits not sick leave
7. False (Considered resident 14. True (As a rule) credits)
15. False (Treated as 20. False (No limit for
citizens and taxable) deduction) government employees)
8. True (As a rule)
9. False 21. False (100% exempt)
22. False (regular
TRUE OR FALSE 2 12. False (Note position and
1. True function test) compensation)
2. True 23. False (taxable to final tax)
3. True 13. True (Exclusivity test) 24. True
4. True 14. False (Filipino only) 25. True
5. True 15. False 26. False (It is the reverse)
6. True 16. False 27. True
7. True 17. True 28. True
8. False (higher) 18. True 29. False (Exemption is
9. False (FCDU or EFCDU) 19. True (Non-resident citizen
10. False (final tax only) prospective)
11. True with income abroad) 30. False
20. False (Considered resident
17
citizen in taxation)

Not feigned, not masked but real excellence!

Exercise Drill No. 1

Rank and file Manager or
employee supervisor

1. OB OB

2. DM DM

3. SC SC

4. OB OB

5. DM DM

6. RC RC

7. DM DM

8. OB OB

9. OB OB

10. SC SC

11. DM DM

12. EB EB

13. OB FB

14. RC RC

15. DM DM

16. OB FB

17. SC SC

18. SC SC

19. EB EB

20. RC* RC*

21. OB FB

22. EB & OB for excess EB & FB for excess

23. EB EB

24. EB EB

25. SC** SC**

*Note, this is integrated to the basic pay of the employee and is not separately paid for

**The 13th month pay and other benefits exceeding P30,000 is also considered a supplemental compensation

Exercise Drill No. 2

Limit Annual Excess

1. P1,500/mo. P6,000
(P 500/mo. x 12)

2. P10,000/year P2,000

3. P125/mo. P10,500
(P875/mo. x 12)

4. P 0 P6,000

5. P4,000 year, P2,000
(P6,000 x 10/15)

6. P5,000/year P3,000
(P2k x 4 – P5k)

7. P300/mo. P2,400
(P200/mo. x 12)

8. P 0* P 10,000

9. P5,000/year** P3,000

10. P62.50/day P5,925
(P37.50/day x 158 days)

*This should be in non-cash to be exempt.

**This limit pertains to both anniversary gift and Christmas gift

Exercise Drill No. 3 P 250,000
24,000
Basic salary
Less: Employee share in SSS, PHIC, HDMF and union dues P 226,000
Regular compensation income 16,000
Supplemental compensation – OT 0
13th month pay and other benefits (P21,000 – P30,000)
Gross taxable compensation income P 242,000

Note: The SSS benefits and retirement pay are exempt

18

Not feigned, not masked but real excellence!

Exercise Drill No. 4 Rank & File Managerial/
Employee Supervisory
13th month pay P 25,000 P 25,000
Productivity incentive
De minimis benefits 12,000 12,000

De minimis within their limits - -
Excess de minimis benefits 30,000 *-
Other de minimis benefits 10,000 *-
Other fringe benefits 25,000 *-
Total 13th month pay and other benefits P 102,000 P 37,000
Less: Exclusion limit 30,000 30,000
Taxable 13th month pay and other benefits** P 72,000 P 7,000

*Taxable under fringe benefits tax
**This will be included in compensation income as supplemental compensation

Exercise Drill No. 5

Progressive tax 15% final tax Fringe benefits tax
1. P 360,000* P0 P0
2. P347,000** P0
3. P 0 P 13,000
P 447,000 P 13,000

*P300,000 + P140,000 + (P37,000 + P13,000 - P30,000) – P100,000 personal exemption
**P300,000 + P140,000 + (P37,000 - P30,000) – P100,000 personal exemption

Exercise Drill No. 6

1. P 48,000
2. P 97,000*
3. P145,000**

*13th month pay do not exceed the P30,000 threshold; hence, not taxable
**The compensation for the entire becomes taxable. The P48,000 is deemed inclusive of the P8,000 bonus as it is part of compensation.
The amount of 13th month pay and other benefits not exceeding P30,000 is exempt.

Multiple Choice –Theory: Part 1 6. D 11. B
1. D 7. B 12. D
2. B 8. B 13. B
3. A 9. B 14. D
4. A 10. A 15. B
5. C

Multiple Choices – Theory: Part 2 9. C 17. C
10. C 18. C
1. A 11. D 19. C
2. D 12. D 20. D
3. A 13. C 21. A
4. A 14. B 22. B
5. B 15. C 23. D
6. D 16. B
7. C
8. D

Multiple Choices – Problems: Part 1
1. A
2. B
3. B

4. B (P11K x 12 + 12K – P5.2K)
5. E (P60K + P8K – P50K); tax is P1,300. Note 13th month pay do not exceed P30K.
6. C {P128K regular + P8K supplemental + {(P120K x140/150 + P12K) – P30K}]
7. C (P230K – P50K)
8. C (P630K regular + P240K supplemental + (P60K – P30K) excess 13th month and other benefits)
9. C
10. B (P258K regular + P20K supplemental + P0 excess) – P50K personal exemption
11. A

19

Not feigned, not masked but real excellence!

12. D (P144 regular + P20K + P0 excess). This is not an exempt minimum wage earner since he is a
recipient of a taxable supplemental compensation.

13. C (P168K regular + P30K and 45K supplemental + P2K excess). This is not an exempt minimum wage as
there is excess over P30K)

14. B (P262K regular + P43K supplemental + P15K excess computed as [P25K + P12K + (P32K-P24K) de
minimis) – P30K]

15. A (P262K regular + P43K supplemental + P7K excess computed as [P25K + P12K – P30K]

Multiple Choice – Problems: Part 2
1. C (P45K – P30K); P50K – P45K is subject to capital gains tax.

2. B (P12K + P12K + P8K + P24K)
3. D

De minimis Limit Excess
Rice allowance P 20,000 P 18,000 P 2,000
5,000
Christmas gift 8,000 23,000 3,000

Exempt de minimis P 30,000 P 5,000
Taxable de minimis 53,000 16,000
16,000
13th month pay
P 37,000
14th month pay - 30,000
Total 13th month pay and other benefits
P 7,000
Less: Exclusion 12,000

Total non-taxable benefits P P 19,000
192,000
Taxable 13th month pay and other benefits
Commission P 211,000

Total supplemental compensation

Regular compensation
Gross taxable compensation income

4. C
5. B
6. E P211,000
7. C (P1,080K regular + (P30K – P25K)x12 + P60K excess, computed as (P90K – P30K)]
8. C For a government employee, RATA and PERA are exempt while Christmas gift is part of “13th month pay and

other benefits”.

Laundry allowance De minimis Limit Excess
P 4,800 P 3,600 P 1,200
P 1,200
Taxable de minimis
24,000
Additional compensation 17,000
Christmas bonus
5,000
Christmas gift (not a de minimis for government employees) P 47,200

Total 13th month pay and other benefits 30,000
P 17,200
Less: Exclusion
Taxable 13th month pay and other benefits (a supplemental compensation) 204,000

Regular compensation P 221,200

Gross taxable compensation income

9. A

De minimis Limit Excess
Christmas gift (de minmis for private employees) P 5,000 P 5,000 P 0

Laundry allowance 6,000 3,600 2,400

Total exempt de minimis P 8,600
Taxable de minimis benefits P 2,400

13th month pay 28,000

Total 13th month pay and other benefits P 30,400
Less: Exclusion 30,000 - 30,000

Total exempt benefits (Non-taxable benefits) P 38,600

Taxable 13th month pay and other benefits P 400

Regular compensation (P314K + P12K + P24K) 350,000
Gross taxable compensation income P 350,400

10. A
11. D
12. B (P33K + P3K + P33K + P6K – P1.2K – P1.2K); 13th month pay is within exclusion limit
13. C (P24Kx3 + P4K + P5K + P3K – 1K – 1K – 1K)
14. B The employee is disqualified as MWE in the entire year since his 13th month and other benefits

totaling P35K (P8K+P22K+P5K) exceeds the exclusion threshold of P30,000.

(P24K x 4 – 1Kx 4 SSS, PHIC & HDMF + P4K + P5K + P3K + P6K + 5K excess 13th month pay

20

Not feigned, not masked but real excellence!

15. D (P1K x 4 SSS, PHIC & HDMF + P30K)
16. C (P800,000 gross taxable compensation income x 15%. Note this is an special alien)
17. C [P1,000,000 professional fees (not compensation income) x 25%.] The general final tax of 25% on all

income within applies since the service provider is not an employee, hence, not an special alien.

CHAPTER 11: FRINGE BENEFITS TAX

TRUE OR FALSE Part1 5. False 9. True
1. False 6. False (Final tax) 10. True
2. True 7. True
3. False 8. False (100% exempt)
4. True

TRUE OR FALSE Part 2 6. True 10. True
1. False (100% of cash paid)
7. True (The only exception 11. False (exempt)
2. False (rental or rule on benefits paid) 12. True (only business class
depreciation value x 50%)
8. False (Still a taxable fringe ticket is exempt)
3. True benefit) 13. True
4. False (5%) 14. True
5. True 9. True

Multiple Choice –Theory 11. A (A is the intended 14. B
1. B answer but the most 15. A
2. C appropriate answer to this 16. C
3. D question is (50% x 5%) or 17. C
4. D 2.5% since the problem 18. A
5. D talks about percentage of 19. B
6. B
the fair value) 20. D
7. C 12. C (The problem speaks 21. D
8. A 22. A (Yatch is considered real
9. D bout percentage of the
10. C depreciation value) property in fringe benefit
13. D taxation)

Multiple Choice –Problem: Part 1 3. D 8. B
1. D The question should be 4. A 9. D
5. C 10. B
“Compute the fringe 6. C
benefits SUBJECT to the 7. A
fringe benefits tax.”
2. B

Multiple Choice –Problem: Part 2 10. C
1. D 11. D
2. D (P19,000 X 32/68) 12. D
3. A 13. B
4. B (P800,000 X 25/75) 14. C
5. B 15. B
6. C (P2M+P1.6M) X 15/85. NOTE: The last 16. D
17. C
statement should say “if they actually 18. B
purchase their cars.”) 19. D
7. C
8. D [(P1,200,000 X 20%)/4] X 50%) X 32/68
9. D

CHAPTER 12: DEALINGS IN PROPERTIES

TRUE OR FALSE 1 7. True 12. False
1. False 8. True 13. True (ordinary loss is
2. True 9. False (bonds & debentures
3. False deductible in full)
4. True only) 14. False
5. False 15. True
6. True 10. False (within 1 year)
11. False (more than 1 year) 21

Not feigned, not masked but real excellence!

TRUE OR FALSE 2 9. True
10. True
1. False 11. False (one to five persons)
2. False 12. False (this is an ordinary exchange
3. True
4. False (fair value or cost to original donor- transaction)
13. True
purchaser w/e is lower) 14. False (SP – cost)
5. True 15. True (the wash sales rule)
6. True
7. True
8. False (as a rule both is not recognized, but

gain may be recognized when there is cash or
other assets received as consideration)

Multiple Choice –Theory: Part 1 11. D 21. C
1. B 12. D 22. A
2. B 13. C 23. B
3. A 14. A 24. C
4. C 15. B 25. B
5. A 16. B 26. D
6. D 17. C 27. D
7. D 18. C 28. D
8. A 19. A 29. C
9. D 20. A 30. B
10. A
13. A
Multiple Choice –Theory: Part 2 7. B 14. B
1. D 8. A 15. A
2. D 16. D
9. B 17. D
3. C 10. A
4. A 11. A
5. D 12. C
6. A

Multiple Choice –Problems: Part 1 9. C
1. C 10. D
2. C (P200K OG – P150K OL) 11. C
3. A 12. D
4. B 13. B
5. B 14. C
6. B 15. C
7. B 16. A

8. C 9. D
10. B
Multiple Choice –Problem: Part 2 11. D
1. D 12. A
2. C 13. A
3. A 14. B
4. D 15. C
5. D 16. B
6. D
7. A
8. D

CHAPTER 13: PRINCIPLES OF DEDUCTIONS

Exercise Drill No. 1

Business Expense Personal expense
1. 
2. 
3. 
4. 

22

Not feigned, not masked but real excellence!

5. 
6. 
7. 
8. 
9. 
10. 
11. 
12. 
13. 
14.  *
15. 
*if silent personal, if business seminar, it is an expense

Exercise Drill No. 2

2011 2012 2013

1. P 200,000

2. P 25,000 P 50,000 P 50,000

3. P 200,000

4. P 200,000

5. P 100,000 P 100,000

Exercise Drill No. 3

Beginning inventory P 520,000

Purchases (P800,000 + P1,200,000) 2,000,000
Total cost of goods available for sale P 2,520,000

Less: Ending inventory
Zircon (400/1000 x P800,000) P 320,000

Ruby (800/4,000 x P1,200,000) 240,000 560,000
Cost of goods sold P 1,960,000

Exercise Drill No. 4 (You can skip this for classroom drills. It is complicated and time consuming. It
may be given as an assignment. )

SLM SYD 150%DB 200% DB

Expense Tax basis Expense Tax basis Expense Tax basis Expense Tax basis

2010 P 225,000 P 1,775,000 P 360,000 1,640,000 P 375,000 P 1,625,000 P 500,000 P1,500,000
2011
2012 450,000 1,325,000 630,000 1,010,000 609,375 1,015,625 750,000 750,000
2013
2014 450,000 875,000 450,000 560,000 380,859.38 634,765.63 375,000 375,000
2015
450,000 425,000 270,000 290,000 238,037.11 396,728.52 150,000 225,000

225,000 200,000 90,000 200,000 196,728.52 200,000 25,000 200,000

0 200,000 0 200,000 0 200,000 - 200,000

Sum of the years digit method

Annual dep’n Semi-annual Actual dep’n Book value
360,000.00 360,000.00 1,640,000.00
2010 4 720,000.00 360,000.00
270,000.00 630,000.00 1,010,000.00
2011 3 540,000.00 270,000.00
180,000.00 450,000.00 560,000.00
2012 2 360,000.00 180,000.00
90,000.00 270,000.00 290,000.00
2013 1 180,000.00 90,000.00 90,000.00 200,000.00
2014 10
SYD

23

Not feigned, not masked but real excellence!

150% Declining balance

Declining rate* 0.375 Annual Semi-annual Actual dep'n Tax Basis
375,000.00 1,625,000.00
2010 4 750,000.00 375,000.00 609,375.00 1,015,625.00
380,859.38
375,000.00 238,037.11 634,765.63
196,728.52 396,728.52
2011 3 468,750.00 234,375.00 200,000.00

234,375.00 Tax Basis
1,500,000.00
2012 2 292,968.75 146,484.38
750,000.00
146,484.38 375,000.00
225,000.00
2013 1 183,105.47 91,552.73 200,000.00

91,552.73 200,000

2014 105,175.78 105,175.78

Declining rate = 1/4x150% = 37.50%

Double declining balance Semi-annual Actual dep'n
Declining rate* 0.5 Annual 500,000.00 500,000.00
500,000.00
2010 4 1,000,000.00 250,000.00 750,000.00
250,000.00
2011 3 500,000.00 125,000.00 375,000.00
125,000.00
2012 2 250,000.00 25,000.00 150,000.00
25,000.00
2013 1 175,000.00 - 25,000
- -
2014 -
-
2015

*1/4 x 200% = 50%

Exercise Drill No. 5
1. CE
2. DE
3. CE
4. NDE
5. NDE
6. NDE
7. CE
8. NDE
9. DE
10. NDE
11. NDE
12. NDE
13. NDE
14. NDE
15. CE
16. DE
17. CE
18. CE
19. CE
20. NDE
21. DE
22. DE
23. NDE
24. NDE
25. DE
26. NDE
27. DE
28. NDE
29. NDE
30. NDE(best answer but this is not an expense)

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Not feigned, not masked but real excellence!

TRUE OR FALSE 11. False
12. True
1. False 13. True
2. True 14. True
3. True 15. False
4. True 16. False (As a rule, expense of regular income
5. False (In taxation this is a capital
only)
expenditure) 17. True
6. False 18. True
7. True 19. False (records of gross income)
8. True 20. False (because allowed by law)
9. False (tax basis or book value not cost)
10. False

Multiple Choice – Theory – Part 1 10. C 19. B
1. C 11. D 20. D
2. C 12. D 21. D
3. B 13. B 22. C
4. B 14. D 23. C
5. A 15. B 24. C
6. C 16. D 25. D
7. A 17. A
8. A 18. A
9. B

Multiple Choice – Theory – Part 2 10. C 19. A
1. B 11. C 20. D
2. A 12. D 21. B
3. B
13. D 22. C
4. D 14. D 23. A
5. D 15. A 24. D (no outflow)
6. D 16. D 25. D
7. A 17. A
8. D 18. D
9. D

Multiple Choice – Problem – Part 1 7. B 13. B
1. C 14. E (P1,50,000)
15. A (NRFC is subject to final
2. C 8. C
3. A 9. A tax)

4. B 10. C
5. A 11. D

6. B 12. C

Multiple Choice – Problem – Part 2 6. A
1. B 11. B
2. C 7. A 12. B
13. D
3. C 8. B 14. C
4. B 9. A 15. D

5. A 10. A

CHAPTER 13-A: REGULAR ALLOWABLE ITEMIZED DEDUCTIONS

TRUE OR FALSE 1 8. False (no qualification) 14. False
1. True
9. False (as tax expense, 15. True
2. True basic only) 16. True
3. False 17. True
4. True 10. True 18. True
5. False (non-deductible) 11. False 19. True
6. True 12. False 20. False
7. True 13. True

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Not feigned, not masked but real excellence!

TRUE OR FALSE 2 10. True 19. True
1. True
11. True 20. False (tax basis of value
2. True 12. True given)
3. False 13. True
4. False 14. True 21. False (5%)
5. True 15. True 22. False (fixed by law as 10
6. True (This is recovery of 16. False (expensed or
years)
lost profits) capitalized) 23. False
7. False 17. True 24. True
8. True 18. True 25. False (not exceeding)
9. True

Multiple Choice – Theory 10. A 18. C (note errata: up to the
1. A 11. B extent OF gain on)
2. C 12. C
3. C 13. A 19. D
4. D 14. D 20. A (securities becoming
5. C 15. C
6. C 16. B worthless is generally a
7. C 17. A capital loss)
8. D 21. D
9. C 22. D

Multiple Choice – Problems 12. C 23. C
1. A 13. C 24. C
2. D 14. C 25. B
3. B 15. C 26. A
4. A 16. B 27. C
5. C
17. B 28. B
6. C 18. C 29. C (Errata: Please disregard
7. D 19. C
8. B 20. C the phrase “A taxpayer is
9. A 21. B engaged in the sales of”)
10. C 22. B
11. C

CHAPTER 13-B: SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS AND NOLCO

TRUE OR FALSE 12. True
1. False (only distribution of income) 13. True
2. True 14. True
3. True
15. True
4. False 16. True
5. False (20%) 17. False
6. True 18. True (Note: acquirer’s own NOLCO)
7. False (15%) 19. False
8. False (25%) 20. True (Both of them however can be carried
9. False (additional 50%)
10. True over so long as both of them did not arise
11. True (deductible amount in total is twice the from the same year. In other words the
NOLCO occurred earlier than the NCLCO)
amount of expense)

Exercise Drills

Deduction incentive Incentive limit

1. 15% of salaries to senior citizen None

2. 25% of salaries paid to disabled persons None

3. 50% of training expense None

4. 50% of the cost of improvement None

5. 50% of the contribution None

6. 100% of the compliance expense None

7. Value of pro-bono services 10% of gross income

8. 50% of productivity incentive bonus None

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Not feigned, not masked but real excellence!

Multiple Choice – Theory and Problem

1. A 9. B 17. A 25. B
2. B 10. B 18. C 26. B
19. B 27. A
3. B 11. D 20. B 28. A
4. B 12. D 21. D 29. B
22. C 30. C
5. D 13. D 23. B 31. A
6. B 14. A 24. A 32. D

7. D 15. D
8. B 16. C

CHAPTER 13-C: OPTIONAL STANDARD DEDUCTIONS

TRUE OR FALSE 12. True
1. False 13. True
2. True 14. False
3. False 15. False
4. False (Note: or gross income) 16. False
5. True 17. True
6. False 18. False (Note that NCLCO is used in the
7. False (when OSD is used, 60% of sales or
measurement of an item of gross income (i.e.
gross receipts) net capital gain) and is not an expense.
8. True 19. True
9. True 20. False
10. True
11. False

Exercise Drill No. 1 
1. RC 
2. RA 
3. NRC
4. NRA 
5. Regular DC 
6. Regular RFC
7. Special corporations 
8. Corporations under special regimes 
9. Business partnership
10. GPP

Exercise Drill No. 2
1. P2,008,000 (P5,020,000 x 2%)
2. P1,008,000 (P2,520,000 x 2%)

Exercise Drill No. 3 Cash basis Accrual basis
Taxpayer P 3,120,000 P 3,600,000
1,380,000 1,740,000
1. Individual
2. Corporation

Exercise Drill No. 4
1. P2,000,000, computed as (P5,000,000 x 40%)
2. P840,000, computed as (P2,000,000 + P100,000) x 40%

Multiple Choice – Theory 9. D 17. D
1. B 10. A 18. D
2. A 11. D 19. A
3. A 12. D 20. D
4. D 13. A 21. D
5. A 14. C 22. C
6. D 15. C 23. D
7. A 16. B 24. C
8. B

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Not feigned, not masked but real excellence!

Multiple Choice – Problem 7. A 13. A
1. C
8. A 14. C
2. B 9. B 15. B
3. D 10. A 16. C
4. B 11. B 17. B
5. D 12. A 18. C
6. A

CHAPTER 14: INDIVIDUAL INCOME TAXATION

True or False – Part 1 13. True 23. False (only additional
1. False 14. False (Do not forget PHHI, exemption are claimable)
2. True
3. False P152,400) 24. False
4. False 15. True (P50,000 + 25. False (family income)
5. False 26. True
6. False P152,400) 27. True
7. False 16. False 28. False (under current rule,
8. False 17. True
9. True 18. False no more head of the
10. False 19. True family)
11. False 20. False 29. False
12. True 21. False 30. False
22. True
16. False
True or False – Part 2 8. True 17. True
1. False (Not all NRA-NETB 9. False 18. False
10. True 19. False (It depends upon
and special aliens not all 11. True
NRAs) type of fund and if BIR
2. True 12. True registered)
13. True 20. True
3. True 14. False (these are exempt
4. True
5. False (through guardian) entities)
6. True 15. False
7. True

Multiple Choice Theory – Part 1 10. D 19. D
1. A 11. B 20. D
2. B 12. D 21. D
3. D 13. A 22. C
4. C 14. C 23. C
5. A 15. B 24. D
6. A
16. C 25. A
7. D 17. D
8. A 18. C
9. A

Multiple Choice Theory – Part 2 10. D 19. C
1. A 11. D 20. A
2. A 12. C 21. D
3. C 13. D 22. C
4. D 14. A 23. C
5. D 15. D 24. D
6. A 16. A 25. C
7. C 17. A
8. A
18. D
9. A

Multiple Choice – Problems: Part 1 11. B
1. B 6. C 12. D
13. B
2. A 7. A 14. C
3. B 8. B 15. C
4. B 9. C

5. C 10. D

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Not feigned, not masked but real excellence!

16. D 18. A 20. D
17. C 19. A

Multiple Choice – Problems: Part 2

1. A 11. A 21. B
2. D 12. C 22. A
23. B
3. B 13. C 24. D
4. C 14. B 25. C (This problem is NIRC-

5. B 15. C based since there is no
6. D 16. C P50K choice.)
26. A
7. A 17. C
8. B 18. B

9. B 19. B
10. B 20. C

CHAPTER 15-A: CORPORATE INCOME TAX – SPECIAL CORPORATIONS

True or False – Part 1 10. True 17. False (Philippine income)
1. True 11. True 18. False (gross income)
2. False 12. False (exempt) 19. False (4.5% of gross
3. True 13. True
4. False 14. False (gross Philippine income)
5. True 20. False (7.5% of gross
6. True billings)
7. False 15. False (world taxable income)
8. False
9. False (Except FCDU) income)
16. True

True or False – Part 2 13. True 17. False
14. True 18. False
1. False (dominance test) 15. You may void this 19. True
2. False 20. False (wherever billed so
3. True problem for lack of details.
4. True (Please highlight that the long as outgoing)
5. True expenses from exempt 21. True
6. True activities cannot be 22. True
7. True deducted against income 23. True
8. True taxable activities. This is 24. True
9. True what it is supposed to test. 25. False (30% on world
10. False (three years) ).
11. True 16. True (the dominance test) taxable income)
12. True

Multiple Choice – Theory 12. D 23. C
1. C 13. D 24. C
2. A 14. C 25. B
3. A 15. D 26. D
4. A 16. D 27. C
5. C 17. B 28. B
6. D 18. C 29. A
7. A 19. B 30. A
8. D 20. D 31. B
9. B 21. B
10. A 22. D
11. C

Multiple Choices – Case Problems

Problem 1: 5. D 9. C
1. C 6. A 10. C
2. D 7. C 11. C
3. B 8. D 12. B
4. C

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Not feigned, not masked but real excellence!

Problem 2:
13. B
14. C
15. C

Problem 3:
16. C
17. B

Problem 4:
18. C
19. D
20. C
21. B

Problem 5:
22. A
23. C

Problem 6:
24. C
25. A

Problem 7:
26. C
27. C

Problem 8:
28. B
29. D (Failed dominance test; hence, 30% applies)

Problem 9:
30. D

CHAPTER 15-B: CORPORATE INCOME TAX – REGULAR CORPORATIONS

TRUE OR FALSE 15-B: Part 1 8. True 16. True
1. True 9. True 17. True
2. False 10. False (start by 1/1/ 2015) 18. False
3. False 11. True 19. False
4. True 12. False (cost of goods sold) 20. True
5. False
13. True
6. True 14. True
7. False (also when RCIT < 15. False

MCIT)

TRUE OR FALSE: Part 2 9. True 15. True
1. True 10. True 16. True
2. False (Third year) 11. False 17. True
3. False (comparison is made 12. False (not holding 18. True
19. False (excluding domestic
with cumulative balances.) companies)
4. True 13. False (if held by more than corporation branches)
5. True 20. True
6. False (Sec. of Finance) 20 people, it is closed
7. False (domestic only) corporation)

8. True 14. False

MULTIPLE CHOICE – THEORY: PART 1
1. C 6. A 11. C
12. A
2. C 7. B 13. A
3. D 8. A 14. A
4. A 9. C 15. A

5. C 10. D

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Not feigned, not masked but real excellence!

16. B 18. A 20. C
17. B 19. D
15. D
Multiple Choice – Theory: Part 2 8. A 16. D
1. A 9. D 17. B
2. D 10. C 18. C
3. A 11. A 19. B
4. B 12. A 20. D
5. D 13. A
6. D 14. D 11. D
7. C 12. A
13. C
Multiple Choice – Problem: Part 1 6. D 14. B
1. C 7. B 15. D
2. A 8. C
3. D 9. C 11. C
4. D 10. C 12. C
5. B 13. B
14. C
Multiple Choice – Problem: Part 2 6. A 15. C
1. A 7. B
2. C 8. C
3. B 9. D
4. C 10. A
5. D

This is the first edition of the book. Like any other books, errors are unavoidable. I will appreciate it very
much if you could give me feedback which could help me further upgrade and improve our book. God bless
you! I hope this humble piece of work assisted you in your teaching needs.

Thank you and God bless!

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