PERSONAL INCOME TAX

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INCOME TAX – INDIVIDUALS

**Rice subsidy and monetized unused vacation leaves are not included in the computation of
SAMPLE PROBLEMS taxable income since both are part of de minimis benefits which are non-taxable for income tax
purposes.

A. COMPENSATION INCOME

1. Mr. A, is the finance manager of XYZ Corp, a corporation engaged in the business of
providing back-office support, accounting outsourcing, payroll and legal administration and
compliance services. The following data were taken from the monthly pay slip of Mr. A:

Monthly salary P100,000

SSS contribution 900
Pag-Ibig contribution 100
PhilHealth contribution 900
Rice subsidy 1,500
Transportation allowance 2,000

At the end of the year, Mr. A received 13th month pay of P100,000 and performance bonus
amounting to P150,000. He also received P20,000 for the 6 unutilized vacation leaves. Total taxes
withheld on compensation by his employer amounted to P174,957.30.

Compute for the annual income tax due and payable.

Solutions:

Annual salary (P100,000 x 12 months) 1,200,000.00

Add:
Transportation allowance (P2,000 x 12) 24,000.00
13th month bonus 100,000.00
Performance bonus 150,000.00 274,000.00
Total compensation income 1,474,000.00
Less: Exclusions
SSS contributions (P900 x 12) 10,800.00
Pag-Ibig contributions (P100 x 12) 1,200.00
PhilHealth contributions (P900 x 12) 10,800.00
Non-taxable bonus and other benefits 90,000.00 112,800.00
Taxable income 1,361,200.00
Less: 800,000.00
Income subject to additional tax 561,200.00
Multiply by tax rate 30%
Income tax on excess income over bracket 168,360.00
Add: Basic tax due 130,000.00
Total income tax due 298,360.00
Less: Total taxes withheld on compensation 174,957.30
Total income tax payable 123,402.70

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2. Mr. A, is the finance manager of XYZ Corp, a corporation engaged in the business of 3. Ms. B, is the accounting staff of LMN Company, a corporation engaged in the manufacturing
providing back-office support, accounting outsourcing, payroll and legal administration and of canned tuna. The following data were taken from the monthly pay slip of Ms. B:
compliance services. The following data were taken from the monthly pay slip of Mr. A:
Monthly salary P30,000
Monthly salary P100,000 SSS contribution 300
SSS contribution 900 Pag-Ibig contribution 100
Pag-Ibig contribution 100 PhilHealth contribution 300
PhilHealth contribution 900
Rice subsidy 3,500 At the end of the year, Ms. B received her 13th month pay of P30,000. Total taxes withheld on
Car allowance 20,000 compensation by her employer amounted to P16,932.

At the end of the year, Mr. A received 13th month pay of P100,000 and performance bonus Compute for the annual income tax due and payable.
amounting to P150,000. He also received P40,000 for the 12 unutilized vacation leaves. Total taxes
withheld on compensation by his employer amounted to P174,957.30. Solutions:

Compute for the annual income tax due and payable. Annual salary (P30,000 x 12 months) 360,000.00
Add: 13th month bonus 30,000.00
Solutions: Total compensation income 390,000.00
Less: Exclusions
Annual salary (P100,000 x 12 months) 1,200,000.00 SSS contributions (P300 x 12) 3,600.00
Add: Pag-Ibig contributions (P100 x 12) 1,200.00
Excess of rice subsidy over threshold (P1,500 x 12) 18,000.00 PhilHealth contributions (P300 x 12) 3,600.00
Excess of VL credits over threshold (P40,000 / 12 * 2) 6,666,67 Non-taxable bonus and other benefits 30,000.00 38,400.00
13th month bonus 100,000.00 Taxable income 351,600.00
Performance bonus 150,000.00 274,666.67 Less: 250,000.00
Total compensation income 1,474,666.67 Income subject to additional tax 101,600.00
Less: Exclusions Multiply by tax rate 20%
SSS contributions (P900 x 12) 10,800.00 Total income tax due 20,320.00
Pag-Ibig contributions (P100 x 12) 1,200.00 Less: Total taxes withheld on compensation 16,932.00
PhilHealth contributions (P900 x 12) 10,800.00 Total income tax payable 3,388.00
Non-taxable bonus and other benefits 90,000.00 112,800.00
Taxable income 1,361,866.67
Less: 800,000.00
Income subject to additional tax 561,866.67
Multiply by tax rate 30%
Income tax on excess income over bracket 168,560.00
Add: Basic tax due 130,000.00
Total income tax due 298,560.00
Less: Total taxes withheld on compensation 174,957.30
Total income tax payable 123,602.70

**Excess of de minimis benefits are considered taxable income subject to graduated income tax.
***Car allowance is subject to Fringe benefits tax.

Note: Fringe benefits that are relatively of small value, if note subject to FBT, shall be subject to
regular income tax (such as transportation allowance).

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B. BUSINESS INCOME 2. Compairs, a sole proprietor, is engaged in computer repairs and maintenance, reporting the
following income and expenses during the year:
1. Compairs, a sole proprietor, is engaged in computer sales, reporting the following income and
expenses during the year: Net revenue 1,300,000
Cost of services 300,000
Net sales 1,700,000 Salaries expense 90,000
Cost of sales 500,000 Rent expense 60,000
Salaries expense 90,000 Representation expense 10,000
Rent expense 60,000
Representation expense 10,000 a) How much is the income tax due?
b) Assuming Compairs opted to use OSD, what is the income tax due?
a) How much is the income tax due? c) Supposed Compairs opted to be taxed at 8%, how much is the income tax due?
b) Assuming Compairs opted to use OSD, what is the income tax due?
c) Supposed Compairs opted to be taxed at 8%, how much is the income tax due? SOLUTIONS:

SOLUTIONS: Itemized OSD 8%

Net revenue 1,300,000 1,300,000 1,300,000
Itemized OSD 8%
Less: Cost of services 300,000 300,000 0
Net sales 1,700,000 1,700,000 1,700,000
Gross profit 1,000,000 1,000,000 1,300,000
Less: Cost of sales 500,000 500,000 0
Less: Allowable deductions 160,000 520,000 250,000
Gross profit 1,200,000 1,200,000 1,700,000
Salaries 90,000
Less: Allowable deductions 158,500 680,000 250,000
Rent 60,000
Salaries 90,000
Representation expense 10,000*
Rent 60,000
Taxable income 840,000 480,000 1,050,000
Representation expense 8,500*
Income tax bracket 800,000 400,000 0
Taxable income 1,041,500 520,000 1,450,000
Excess income tax 40,000 80,000 1,050,000
Income tax bracket 800,000 400,000 0
Multiply by 30% 25% 8%
Excess income tax 241,500 120,000 1,450,000
Tax on excess income 12,000 20,000 84,000
Multiply by 30% 25% 8%
Basic tax due 130,000 30,000 0
Tax on excess income 72,450 30,000 116,000
Total income tax due 142,000 50,000 84,000
Basic tax due 130,000 30,000 0
Total income tax due 202,450 60,000 116,000
*Computation for limitations Services
Representation expense 10,000
*Computation for limitations Goods
Limit (1% x P1,300,000) 13,000
Representation expense 10,000
Non-deductible expense 0
Limit (0.5% x P1,700,000) 8,500
Non-deductible expense 1,500

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C. MIXED INCOME 3. Mr. Madz, a comptroller of JAC Company, earned annual compensation of P1,500,000,
inclusive of 13th month and other benefits of P120,000 but net of mandatory contributions.
1. Ms. Terry Yaki, operates a convenience store while she offers bookkeeping services to her Aside from the employment income, he owns a convenience store, with gross sales of
clients. Her gross sales amounted to P800,000 for the year. In addition, she earned P300,000 P2,400,000. His cost of sales and operating expenses are P1,000,000 and P600,000,
from bookkeeping services. She incurred cost of sales and operating expenses amounting to respectively, and with non-operating income of P100,000.
P600,000 and P200,000, respectively. She already signified her intention to be taxed at 8%
income tax rate in her 1st quarter return. a) What is his income tax liability using itemized deductions?
b) In case of OSD, what is his income tax liability?
What is her income tax liability for the year? c) Supposed he opted to use 8% income tax, what is his income tax due?

SOLUTION: SOLUTIONS:

Gross sales – business income 800,000.00 Compensation income

Gross receipts – professional income 300,000.00 Annual compensation, including benefits 1,500,000.00
Total gross income 1,100,000.00 Less: Non-taxable benefits 90,000.00
Less: Allowable deductions 250,000.00 Total taxable compensation income 1,410,000.000
Taxable income 850,000.00 Less: 800,000.00
Multiply by tax rate 8% Income subject to additional tax 610,000.00
Total income tax due and payable 68,000.00 Multiply by tax rate 30%
Income tax on excess income over bracket 183,000.00
2. Supposed Ms. Terry Yaki failed to signify her intention to be taxed at 8% income tax rate, Add: Basic tax due 130,000.00
what is her income tax liability for the year? Total income tax due and payable 313,000.00

SOLUTION: Business income

Itemized OSD 8%
Gross sales – business income 800,000.00 Gross sales 2,400,000 2,400,000 2,400,000
Gross receipts – professional income 300,000.00 Less: Cost of sales 1,000,000 1,000,000 0
Total gross revenue 1,100,000.00 Gross profit 1,400,000 1,400,000 2,400,000
Less: Cost of sales 600,000.00 Less: Allowable deductions 600,000 560,000 0
Gross income 500,000.00 Taxable income 800,000 840,000 2,400,000
Less: Allowable deductions 200,000.00 Add: Non-operating income 100,000 100,000 100,000
Taxable income 300,000.00 Total Taxable income - business 900,000 940,000 2,500,000
Less: 250,000.00 Add: Total compensation income 1,410,000 1,410,000 0*
Income subject to tax 50,000.00 Total taxable income 2,310,000 2,350,000 2,500,000
Multiply by tax rate 20% Income tax bracket 2,000,000 2,000,000 0
Total income tax due and payable 10,000.00 Excess income tax 310,000 350,000 2,500,00
Multiply by 32% 32% 8%
Note: Business income and professional income are the taxed the same way, either graduated Tax on excess income 99,200 112,000 200,000
income tax or 8% income tax. Basic tax due 490,000 490,000 313,000**
Total income tax due and payable
(business and compensation) 589,200 602,000 513,000

*Compensation income is not subject to 8% income tax

**Tax due on compensation

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D. 8% INCOME TAX 4th Quarter /Annual Income Tax

Total sales 3,500,000
1. Mr. Ser Yoso signified his intention to be taxed at 8% income tax rate on gross sales in his 1st Total sales from previous quarters 3,000,000
quarter ITR. He has no other source of income. His total sales for the 1st 3 quarters amounted Total annual sales 6,500,000
to P3,000,000 with 4th quarter sales of P3,500,000. Less: Cost of sales (annual) 3,000,000
Gross profit 3,500,000
Q1 Q2 Q3 Q4 Less: Operating expenses (annual) 1,440,000
Total sales 500,000 500,000 2,000,000 3,500,000 Taxable income 2,060,000
Cost of sales 300,000 300,000 1,200,000 1,200,000 Less: 2,000,000
Operating expenses 120,000 120,000 480,000 720,000
Excess income subject to additional tax 60,000
Compute for the income tax due for each quarter and for the year. Multiply by tax rate on excess income 32%
Tax on excess income 19,200
SOLUTIONS: Add: Basic tax due 490,000
1st Quarter Income Tax Total income tax due 509,200
Total sales 500,000 Less: Income tax paid in previous quarters 220,000
Less: allowable deductions 250,000 Total income tax due and payable 289,200
Taxable income 250,000
Multiply by tax rate 8%
Total income tax due and payable 20,000

2nd Quarter Income Tax

Total sales 500,000
Total sales – 1st quarter 500,000
Total income for the 2 quarters 1,000,000
Less: allowable deductions 250,000
Taxable income 750,000
Multiply by tax rate 8%
Total income tax due 60,000
Less: Income tax paid – 1st quarter 20,000
Total income tax due and payable – 2nd quarter 40,000

3rd Quarter Income Tax

Total sales 2,000,000
Total sales from previous quarters 1,000,000
Total sales for the 3 quarters 3,000,000
Less: allowable deductions 250,000
Taxable income 2,750,000
Multiply by tax rate 8%
Total income tax due 220,000
Less: Income tax paid in previous quarters 60,000
Total income tax due and payable – 3rd quarter 160,000

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2. Mr. Swabe owns a nightclub and videoke bar, with gross sales/receipts of P2,500,000. His E. OTHERS
cost of sales and operating expenses are P1,000,000 and P600,000, respectively, and with non-
operating income of P100,000. Compute for his income tax due using 8%. 1. Mr. H and Mrs. W are husband and wife. Mr. H is in business, while Mrs. W is in the practice
of profession. Mr. H and Mrs. W had a gross rent income and expenses related to it. Moreover,
the following data are extracted from their books of accounts:
SOLUTION:

8% income tax due is not applicable because the nature of business of Mr. Swabe is subject Gross sales of Mr. H from business 1,500,000
to Other Percentage Tax under Sec 125 of the Tax Code. Hence, Mr. Swabe is subject to the Gross receipts of Mrs. W from practice of profession 900,000
graduated income tax rate instead. Gross rent income 500,000
Cost and expenses, business of Mr. H 700,000
Cost and expenses, profession of Mrs. W 200,000
Expenses related on the rental property 200,000
Dividend income received by Mr. H from shares of stocks 40,000
Royalties from books published by Mrs. W 80,000
Interest income from joint account, net of final tax 20,000

Compute for the income tax of Mr. H and Mrs. W, respectively.

SOLUTIONS:

Mr. H Mrs. W
Gross sales from business 1,500,000
Gross receipts from profession 900,000
Gross receipt from rental 250,000 250,000
Total gross income 1,750,000 1,150,000
Less:
Cost and expenses from business 700,000
Cost and expenses from profession 200,000
Cost and expenses from rental 100,000 100,000
Taxable income 950,000 850,000
Less: 800,000 800,000
Excess income subject to additional tax 150,000 50,000
Multiply by tax rate on excess income 30% 30%
Tax on excess income 45,000 15,000
Add: Basic tax due on income bracket 130,000 130,000
Total income tax due and payable 175,000 145,000

*Dividend income, royalties and interest income are not included in the computation of
income tax subject to regular tax rate since they are subject to final withholding tax.

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2. Mr. Balim Bing was a non-resident citizen in 2017. He returned to the Philippines on June 5,
2018 to reside permanently. He had an income from January 1 to June 4, 2018 of P300,000
from Philippine sources and P200,000 from foreign sources. Moreover, he had an income of
P600,000 from Philippine sources and P400,000 from foreign sources from June 6 to
December 31, 2018. How much is the income tax due of Mr. Bing in 2018?

SOLUTION:

Income from PH sources (Jan 1 – Jun 4) 300,000

Income from PH sources (Jun 6 – Dec 31) 600,000
Income from foreign sources (Jun 6 – Dec 31) 400,000
Total taxable income 1,300,000
Less: 800,000
Excess income subject to additional tax 500,000
Multiply by tax rate for excess income 30%
Tax on excess income 150,000
Add: Basic tax due 130,000
Total tax due and payable 280,000

3. Mr. Arai Nakurot, a Japanese engineer residing in Tokyo, Japan, was contracted by a domestic
corp to assemble in the Philippines an equipment it bought in Japan. He started the work in
Japan and spent 10 days there. The assembling job was completed in the Philippines for
another 20 days. He was paid 300,000 for the job. How much is the income tax due of Mr.
Nakurot?

SOLUTION:

Total income 300,000

Multiply by rate of income attributable to PH (20/30 days) 66.67%
Income from PH sources 200,000
Multiply by tax rate 25%
Total tax due and payable 50,000

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4 5

b. The domestic corporation’s net assets (excluding the land on which its office, plant, or equipment Note: Even if the computed net taxable income of the corporation is not more than ₱5.0
are situated) are not more than ₱100 Million. Million, the applicable tax rate would still be 25% because its total assets excluding the land
c. All of the above. amounts to ₱130 Million (₱180 Million - ₱50 Million) which is more than the ₱100 Million
d. None of the above. threshold.

The MCIT will already be imposed. It is imposed starting on the 4th year following the year
22. The MCIT is 2% of gross income. However, the MCIT rate to be imposed shall be 1% of commencement of its business, or the 5th year of operations.
a. From January 1, 2021 to June 30, 2023
b. From October 8, 2021 to June 30, 2023
c. From July 1, 2020 to June 30, 2023.
d. None of the above. 24. Compute the income tax due in number 23 if the taxpayer is a foreign corporation with a branch in the
Philippines (RFC).
23. Panalo Corporation had the following data for calendar year 2022, its 5th year of operations: (a) ₱ 500,000 Gross sales, Philippines ₱ 7,900,000
(b) ₱ 850,000 Cost of sales, Philippines (3,250,000)
Gross sales, Philippines ₱ 7,900,000 (c) ₱ 175,000 Gross income ₱ 4,650,000
Gross sales, US 5,050,000 (d) None of the above Add: Other taxable income 50,000
Cost of sales, Philippines 3,250,000
Total Gross Income ₱ 4,700,000
Cost of sales, US 2,300,000 RCIT maT
Allowable deductions, Phils. (1,300,000)
Allowable deductions, Philippines 1,300,000
850, u 47 , m Taxable net income ₱ 3,400,000
Allowable deductions, US 6,100,000
Non-operating income, Philippines 50,000 RCIT (25%) ₱ 850,000
MCIT (1% of Total Gross Income) ₱ 47,000
The corporation’s latest audited financial statements includes the following accounts:
Note: The lower 20% RCIT is available only for Domestic Corporations.
Land, Philippines ₱ 50,000,000
Building, Philippines 25,000,000
Total Assets 180,000,000
25. Compute the income tax in number 23 if the taxpayer is a foreign corporation with no branch or office
Compute the income tax due if the taxpayer is a domestic corporation: in the Philippines (NRFC).
(a) ₱ 74,500 maT
(b) ₱ 975,000
(c) ₱1,175,000 RUT 74 500 ,
(a)
(b)
₱1,700,000
₱1,975,000
(d) None of the above (c) ₱1,175,000 Gross income, Phils. ₱4,650,000
(d) None of the above Non-operating income, Phils. 50,000
Gross sales, Philippines 7,900,000 Total ₱4,700,000
Gross sales, US 5,050,000 12,950,000 Income tax rate x 25%
Cost of sales, Philippines 3,250,000 Final Withholding Tax ₱1,175,000
Cost of sales, US 2,300,000 (5,550,000) .
Gross income from ops. 7,400,000
Add: Other taxable income 50,000
Total Gross Income 7,450,000
Allowable deductions, Phils. 1,300,000 26. MVP Corporation, domestic corporation, had the following financial data for taxable year ending April
Allowable deductions, US 6,100,000 (7,400,000) 30, 2021:
Net taxable income 50,000 may 1 ,
2020 -

April 30 , 2011

RCIT (25%) 12,500 Gross sales ₱15,000,000

2020 40 , 2020 April 2021
Cost of sales 8,500,000
1 + ,2020
may June July no ,
- -
,

MCIT (1% of Total Gross Inc.) 74,500 70%; 2 % 20% 1%

Allowable deductions 2,500,000 2/12 10/12

Non-operating income 30,000 -

5% 70.9M
put mat %;
16 67. 0 81
.

=
21 47% 1 17
:
. %

Compute the corporation’s income tax due for taxable year ending April 30, 2021, if it is taxable at the
new RCIT rate of 20% effective July 1, 2020. 873 401
, ; 76 , 401

(a) ₱873,301 (c) ₱75,833

(b) ₱1,000,000 (d) None of the above
Tax 95-03 Tax 95-03

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2021
RCIT MCIT Sales 1, 800 , un

May 1, 2020 to June 30, 2020 (2 months) 30% 2% Cost of Sales

Gross income from operations T
( O
July 1, 2020 to April 30, 2021 (10 months) 20% 1%
Add: Other taxable income not subject to FTs 400 , Gro

Blended Rates 21.67% 1.17% Total Gross Income 1 , 770 , Gro

Less: Itemized Deductions (or OSD) [1 , 740 , 200)

Taxable income 29 800,

RCIT (25%) . 450

7
101250 [
MCIT (1%) 17 , 700
Gross sales 15 , 000 , 000

Cost of sales 18 , 500 , 0

Tax due: 2021 (MCIT) 17 700 ,

Gross income from ops. 4 , 500 , u

Less: Tax Credits:
Add: Other taxable income 30 , un
(1) Excess tax credits from prior year
Total Gross Income 4 , 530 , u (2) Tax paid in previous quarters (5 500) ,

Allowable deductions (2 , 500 , Gro) (3) CWTs per BIR Form 2307 Cloud
Net taxable income 4) , 0n0 , Gro (4) Excess MCIT from prior years
(5) Foreign tax credits
RCIT (21.67%) 873, 301
(6) Tax paid in previous return if filing amended return
Tax payable/(refundable) (5 8007
MCIT (1.17%) 70 , 401
,

Excess MCIT (2021-2024) 10,250

27. The records of Jester Corporation, domestic, organized in 2014, engaged in retail, show the following
in calendar years 2021, 2022, 2023:
Note: We use the 25% corporate income tax rate because there is no information that
↑ mut 1 5
. %
the taxpayer qualifies for the lower 20% income tax rate.
2021 2022 2023
Sales, gross of CWT 1,800,000 1,740,000 2,100,200
Cost of Sales 430,000 110,000 510,100
Operating Expenses 1,740,200 1,600,000 1,300,400
Non-operating income 400,000 70,000 230,000 28. In number 27, what would be the tax payable/(refundable) of Jester Corporation for taxable years
CWT on sales per BIR Form 2307 18,000 7,400 21,002 2022 and 2023?
Taxes paid in previous 3 quarters 5,500 1,250 31,900
RCIT 7 , 450 25 , u 129 , 925 a) ₱300; ₱77,023
MCIT 17 , 700 000 27 , 301 50
Excess MCIT (2021
-

2024)
10 , 250
17 , .

b) ₱6,440; ₱134,908
The corporation chooses to credit in future years any excess tax credits it may have in a taxable year. c) ₱30,500; ₱131,908
2021 2022 2013 d) None of the above.
Compute the tax due and tax payable in its 2021 AITR.
a. ₱17,700; ₱(5,800) Tax Due 17 00 25 , c 129 , 925
(7 ,400)
b. ₱35,400; ₱17,400 (5 500) , (9) , 900)
(18 Cr) (1 , 250) (21 , 002)
c. ₱8,940; ₱0 ,

(10 , 250)
d. None of the above (5 , 800

TaxPayable (5:800) 300 77 , 023

or credits

Tax 95-03 Tax 95-03

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QUARTER 1% umos a 1% cmos /2

mcIT excess mat credits
If Due = no
/9 /2
,
mos
8 2% 2% cemos 9
Due =
RCT V excess mat credits
1%
>
.
%
0 67 % + 0 07 .
0 . %
5 +

↑ A
I

2022 29. The records of CAMEL Corporation, domestic, show the following for calendar year 2023.
mut % 1% 1% 1047% 1n 500
Sales 1, 740 , uro

Cost of Sales 1st Q 2nd Q 3rd Q 4th Q

Gross income from operations Close un
Sales, gross of CWT 4,000,000 12,400,000 5,500,000 5,200,000
Cost of Sales 50,000 50,000 245,000 45,000
Add: Other taxable income not subject to FTs 70 , u
Operating Expenses 3,700,000 12,100,000 4,000,000 4,500,000
Total Gross Income 1 , 700 , wo
Non-operating income 30,000 120,000 70,000 45,000
Less: Itemized Deductions (or OSD) (1 , 600 , c)
Excess tax credit (previous year) 10,000
Taxable income 100 , No
CWT 50,000 30,000 40,000 35,000
RCIT (25%) 25 , 0
Excess MCIT (previous year) 30,000
MCIT (1%) 17 , und RUIT 7o , un 162 , 500 49n , 750
289 , 607 5
668 , 750
404 , 425
mOIT 39 ,800 164 ,500 .

The income tax payable/(overpayment) for the first 3 quarters and in the annual return are:
and 45h
Tax due 2022 (RCIT) 25 , mo a. ₱84,000; ₱329,000; ₱592,500; ₱802,500 4aX Due
1st
70 on
2nd

a
144 500 , ,

Less: Tax Credits: b. ₱84,000; ₱195,000; ₱435,500; ₱802,500

(1) Excess tax credits from prior year ian aw (2010)
(5 , 800) c. ₱54,000; ₱245,000; ₱193,500; ₱175,000 (20 on) (10 (0) 500) , (74 ,
(2) Tax paid in previous quarters
,

(1 , 250) d. ₱(20,000); ₱74,500; ₱259,250; ₱140,000 (10 UN)

(74 500)
,

,
(10 UN)
(3) CWTs (71 400) e. None of the above Tax Payable (20 000) 74 500
(30 (h)
259 250 , ,
,

,
,

140 , UN

(4) Excess MCIT from prior years (10 , 250)

(5) Foreign tax credits 1st Q 2nd Q 3rd Q Annual

(6) Tax paid in previous return if filing amended return Sales 4,000,000 16,400,000 21 ,900 , u 27 , 100 , un

Tax payable/(refundable) 308 Cost of Sales (50,000) (100,000) (345 c) , (390 , No

Gross income from operations 3,950,000 16,300,000 21 , 55 , u 24 , 70 , co

Add: Other taxable income not subject to FTs 30,000 150,000 220 , o 265 , un

Total Gross Income 3,980,000 16,450,000 2) , 775 , wo 26 , 975 , 00

Less: Itemized Deductions (or OSD) (3,700,000) (15,800,000) (19 000 00)
, , (24 , 300 , 2)

Taxable income 280,000 650,000 1 , 975 , u , 675 , un

2

Rate of tax 25% 25% %

25 %
25
2023
RCIT (25%) 70,000 162,500 493, 755 668 , 750
Sales 2 ,100 , 200

Cost of Sales (20 , 100) MCIT (1%,1%,1.33%,1.5%) 39,800 164,500 289 , 607 56 . 404 , 625

Gross income from operations 1 , 590 , 100

Add: Other taxable income not subject to FTs 2no , on

Tax Due 70,000 164,500 493 , 750 668 , 750
Total Gross Income 1 , 820 , 000

Less: Itemized Deductions (or OSD) (1 , 300 , 400)

Less: Tax Credits:
(1) Excess tax credits from prior year (10,000) (10,000) (10 , 07 (10 , Gro)
Taxable income 519 , 700

RCIT (25%) 129 , 925

(2) Tax paid in previous quarters 0 (74 , 500) (309 , 755)

MCIT (1.5%) 27 , 308

(3) CWTs (50,000) (80,000) (120 , u0) (155 , 00)
(4) Excess MCIT from prior year (30,000) none be due
(30 , un) 190 , 0007
is mOIT

Tax due 2023 (RCIT) 129 925 ,

(5) Foreign tax credits
Less: Tax Credits: (6) Tax paid in previous return if filing
(1) Excess tax credits from prior year amended return
(2) Tax paid in previous quarters (31 900) , Tax payable (20,000) 74,500 259 , 250 140 ,
00

(3) CWTs (21 002) ,

(4) Excess MCIT from prior years Notes:

(5) Foreign tax credits The 25% corporate tax rate was used because there is no information that the taxpayer qualifies for the lower 20% rate.
(6) Tax paid in previous return if filing amended return
Tax payable/(refundable) 77 023 , For the MCIT, a rate of 1% was applied in the first 2 quarters. Blended rates of 1.33% and 1.5% were applied in the 3rd
quarter and in the Annual ITR, respectively. Both rates are weighted by the number of months to which the 1% and 2%
rates apply.

The revenue regulations do not provide guidance on the specific quarterly MCIT rates to apply in a year where the MCIT
rate reverts back to 2%. However, we believe that this calculation is consistent the past revenue regulations dealing with
the calculation of blended rates.

Tax 95-03 Tax 95-03

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10 11

30. If the gross income from unrelated activity exceeds 50% of the total gross income derived by any Notes:
proprietary educational institution, the tax rate shall be the RCIT rate (25%/20%) based on the entire
taxable income. This is known as the (a) The private non-profit hospital is subject to the regular income tax rate because it did not
a. Constructive receipt pass the predominance test. Its gross income from unrelated activities (₱7.0 Million)
b. Tax benefit rule exceeds its gross income from hospital-related activities (₱6.0 Million). The gross income
c. End trust doctrine from unrelated activities thus exceeds 50% of its total gross income derived from all
d. Predominance test sources.

31. Holy Hospital, Inc. (domestic corporation), a private non-profit hospital, has the following financial (b) The regular income tax rate to be imposed is 25% since the net taxable income exceeds
information for CY 2023: ₱5.0 Million. The taxpayer is also subject to the blended rate of 1.5% MCIT.
-

0%
5
mut 1

Hospital-related activities:
Gross receipts ₱10,000,000
J 6,n un ,

Cost of services 4,000,000

Operating expenses 1,250,000 32. CPA University, a proprietary educational institution organized in 2006, had the following data for
2023:
Unrelated business activities:
Gross receipts ₱10,000,000 & Tuition fees ₱850,000
400,000 7450
no ,

Cost of services 3,000,000

7 , no , and X
Cost of services (tuition)
Operating expenses 1,000,000 -

19 000 , No
,
x
reshold
50 % = 6 , 500 , 00
Rental income (net of 5% CWT)
Cost of services (rental)
School related expenses
142,500 15000y140 000
10,000
420,000
,

Compute the income tax due for CY 2023.

# x5% , co
=
295 , 00 threshold

(a) ₱2,687,500
(b) ₱2,500,000 The income tax still due/(refundable) for 2023 is
(c) ₱2,680,000 a. P 9,500
(d) None of the above. b. P 10,500
c. P 1,850
d. None of the above.
Related
Unrelated
Total
Activities
Activites
Gross sales/receipts 10,000,000
10,000,000 20, wo un Related Unrelated
,
Total
Cost of sales/sevices (4,000,000)
(3,000,000) Activities Activites
En,
7, aro () ,

Gross income 6,000,000

7,000,000 un u ,
Gross sales/receipts 850,000 150,000 1 , 00 , mo

Deductible expenses C cro cros (2 200 as Cost of sales/sevices (400,000) (10,000) (410 4)
Atazo
nos ,
, , , , ,

Net taxable income .750 , un

4 G , cro , no 10 , 750 , 00 Gross income 450,000 140,000 590 , wo

Deductible expenses
Tax rate
170 (o)
420 ,
25
%

RCIT 2 , 607 506 ,

Net taxable income , un

MCIT (blended rate 1.5%) 195 , u

Tax rate (5.5%) %
5 5 .

Tax due 9
, 350
Income tax due 2
. 687 , 58
Less: Credit (CWT) (7 , 500)
Income tax still due/(refundable) 1 , 850

Jan 1 -
June 30 July-Dec
1% 10 %

% %
5

0 5%
.
+
5 =
,5

33. CPA Airlines, a resident foreign international carrier has the following records of income for the
period. ( The income represents gross billings.)
a. Continuous flight from Manila to Tokyo = 1,000 tickets at P2,000 per ticket i00 , un
2
b. Flight from Manila to Taipei; transfer flight (on CPAR Airlines) from Taipei to Tokyo = 2,000 2 , cro , u

tickets at P2,000 per ticket 3, wo , on

Tax 95-03 Tax 95-03

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12 13

c. Continuous flight from Manila to Taipei = 3,000 tickets at P1,000 per ticket 38. If it is a resident foreign corporation but its expenses within and outside the Philippines is P3m,
The income tax due is unallocated (disregard original data on expense). Furthermore, its total assets amount to ₱90,000,000. -

a. P 225,000 What is its total income tax liability if it remits 60% of its net profit to its head office abroad? only
*
relevant

b. P 125,000 7 000 000

, , to domestic corporations

c. P 100,000 a. P635,000 -en

50
-2
.

d. P 175,000 b. P726,000 Em X =
2m
-
com
c. P480,000 -
All sources
d. None of the above.
Gross Philippine Billings
a) From Manila to Tokyo 1,000 tickets at 2,000 per ticket = 2 , co , mo

c) From Manila to Taipei 3,000 tickets at 1,000 per ticket = 3,co , un Allocation of expenses
b) From Manila to Taipei 2,000 tickets at 1,000 per ticket = 2 , un , u 4,000,000
3,000,000 x = 2,000,000
7 ,cro , m 6,000,000
2.5%
175 , M

ITR
Total Gross Income 4,000,000
34 -38. The Alliance Corporation provided the following data for the calendar year ending December 31, Less: Itemized Deductions (2,000,000)
2023 ($ 1 = P50)
Taxable income 2,000,000
Philippines U.S.A.
Gross Income ₱4,000,000 $40,000 2 00 cro Giuro mo , , ,
Rate of tax 25%
Deductions ₱2,500,000 $15,000 RCIT 500,000
Income Tax Paid $ 3,000 MCIT (1.5%) 60,000
Tax in ITR 500,000
34. If it is a resident international carrier, its income tax is
a. P100,000 c. P 37,000
BPRT
b. P 10,000 d. P125,000
₱4,000,000 x .%
2
5
= 100 , 00 Taxable income 2 , 000 , U

Less income tax in ITR (500 , N)

After-tax net income 1 , 500 , M

35. If it is a non-resident cinematographic film owner/lessor, its income tax is % Remitted 20 %

a. P1,000,000 c. P300,000 Branch profits remitted 900 , no

b. P 100,000 d. P128,000 BPRT rate 150/

135 , o
₱4,000,000 x %
25 = 1 , 000 , Gro Total tax liability 675 , un

Note: RFCs do not qualify for the 20% income tax rate.
36. If it is a non-resident lessor of vessels, its income tax is
a. P100,000 c. P300,000
b. P180,000 d. P128,000
₱4,000,000 x 4
.500 = 180 , u 39. DBH Corporation, an RFC, is also a registered ROHQ since 2009. For taxable years 2020 to 2023,
-

₱4,000,000 x 4.5% = ₱180,000 its operations show the following financial results:
1 % 1 5%
.

10 % 10 % 25 % 25 %

37. If it is a non-resident lessor of aircrafts, machineries and equipment, its income tax is 2020 2021 2022 2023
a. P100,000 c. P300,000 Gross sales/receipts 35,000,000 12,000,000 13,000,000 7,000,000
b. P180,000 d. P128,000 Cost of services (11,250,000 > (
6,000,000> (6,500,000> (4,250,000&
Allowable deductions [ 3,625,000 7 4,200,000> (1,250,000>3,125,000 &
₱4,000,000 x 7 %
5
= 300 , C Non-operating income 250,000 150,000 400,000 525,000
.

₱4,000,000 x 4.5% = ₱180,000

2 037 , 500
,
/ 195 , 000 1 , 412 , 500 - 37 , 500
J 11 , 425

Tax 95-03 69 , 000 49 , 125/ up to 2020 Tax 95-03

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14 15

for capital expenditures. On October 8, 2024, it invested the remaining ₱2.5 Million in a domestic
Compute income tax due for each of the years. subsidiary.

(a) Good Vibes will be subject to income tax on ₱2.0 Million for the taxable year 2021, plus
a. ₱2,037,500; ₱195,000; ₱1,412.500; ₱49,125
surcharge, interest, and penalties.
b. ₱20,012,500; ₱1,800,000; ₱5,250,000; ₱0 (b) Good Vibes will be subject to income tax on ₱2.5 Million for the taxable year 2021, plus
c. ₱2,012,500; ₱180,000; ₱1,312,000; ₱0 surcharge, interest, and penalties.
d. None of the above. (c) Good Vibes will be subject to income tax on ₱3.0 Million for the taxable year 2021, plus
surcharge, interest, and penalties.
(d) None of the above.
2020 2021 2022 2023
Gross sales/receipts 35,000,000 12,000,000 13,000,000 7,000,000
Cost of services (11,250,000) (6,000,000) (6,500,000) (4,250,000) Foreign-sourced dividends received by a domestic corporation may be exempt from income
Gross income 23,750,000 6,000,000 6,500,000 2,750,000 tax when the following requirements under Section 27(D)(4) of the Tax Code are met:
Non-op. income 250,000 150,000 400,000 525,000
Total gross income 24,000,000 6,150,000 6,900,000 3,275,000 (1) Such dividends are reinvested in the business operations of the DC in the Philippines
Allowable deductions (3,625,000) (4,200,000) (1,250,000) (3,125,000) within the next taxable year from receipt thereof;
Net taxable income 20,375,000 1,950,000 5,650,000 150,000
Tax rate 10% 10% 25% 25% (2) The use thereof shall be limited to funding the working capital requirements, capital
RCIT 2,037,500 195,000 1,412,500 37,500 expenditures, dividend payments, investment in domestic subsidiaries, and
infrastructure projects, of the DC recipient; and
&

MCIT rate N/A N/A 1.0% 1.5%

(3) The DC directly holds at least 20% in value of the outstanding shares of the foreign
MCIT 69,000 49,125 corporation, and has held the same uninterruptedly for a minimum of 2 years at the
time of the dividend distribution. In case the foreign corporation has been in existence
Income Tax Due 2,037,500 195,000 1,412,500 49,125 for less than 2 years at time of the dividend distribution, the DC must have continuously
directly held at least 20% in value of the foreign corporation’s outstanding shares
during the entire existence of the foreign corporation.
Notes:

(a) The regular rate of 25% shall be effective on January 1, 2022 for an ROHQ. It will
also be subject to MCIT beginning on January 1, 2022.
(b) The MCIT rate of 1.5% was used for CY 2023. The MCIT rate from January 1 to 42-46)
June 30, 2023 is 1%, while the MCIT rate for July 1 to December 31, 2023 is 2%.
The weighted average rate is 1.5%. GILI Inc., a domestic corporation, had the following financial information for CY 2022:
DC RFC nRFC
(c) For 2023, excess MCIT = 11,625 (2023-2026)
Gross income, Philippines 3,895,000 3 ,895 , u 250/FT
15 195 , , mo

Gross income, abroad 1,300,000

Business expenses, Philippines 878,000 218 87, und
40. Any income from transactions with depository banks under the expanded foreign currency deposit Business expenses, abroad 340,000 J1 , , un

system shall be exempt from income tax if derived by a Dividend income from a domestic corporation 40,000 not taxable 150/ FT

I
a. Domestic corporation Dividend income from a foreign corporation* 30,000 ITR
- 20 , u 25
% FT 20K
b. Resident foreign corporation Interest income, BPI Manila 50,000 20 % FT 25
% FT
c. Non-resident foreign corporation Interest income, Citibank New York 25,000 not taxable - same not taxable
d. Resident alien Interest income, BPI FCDU 34,000 15/ FT exempt

Royalty income (Phils.), copyright (book) 450,000

1,350,000 COY
250/ FT

Royalty income (Phils.), patent 25% FT

41. Good Vibes Corporation is a domestic corporation and has, since 2015, owned 50% of the outstanding Raffle draw winnings 60,000 ITR % FT
25
shares of FirstWorld Corporation, a non-resident foreign corporation. On May 10, 2021, Good Vibes CWT per Form 2307s 194,750
received a dividend from FirstWorld in the amount of ₱5.0 Million.

On November 8, 2022, Good Vibes paid ₱2.0 Million (out of the ₱5.0 Million) as dividends to its *Note: 2/3 of the foreign corporation’s income in the last 3 years was earned in the Philippines.
I
shareholders. On February 14, 2023, Good Vibes utilized ₱500,000 (of the remaining ₱3.0 Million)

2m is it is
Tax 95-03 Tax 95-03
only exempt be

the part reinvested in DC

within 2022

(w/in next taxable year)

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16 17

A. ₱375,100 same if DC

42. What is the total amount of final taxes to be withheld from GILI’s income in 2022? B. ₱346,100
A. ₱375,100 C. ₱379,600
B. ₱346,100 D. None of the above
C. ₱379,600
D. None of the above IF GILI is an RFC: Amount Characterization Rate FT
Dividend income from a DC 40,000 not taxable (exempt)- -

IF GILI is a DC: Amount Characterization Rate Final Tax -213

Dividend income from a FC 30,000 20 , 00 ITR
Dividend income from a DC 40,000
-

(exempt) O
-
-

not taxable
-

Dividend income from a FC 30,000 ITR

-
-
:
70 , 000

Interest income, BPI Manila 50,000 % on bank deposit 20% 10 ur Interest income, BPI Manila 50,000 % in bank deposit 20 % 10 , 000

Interest income, Citibank New York 25,000 FTR - -

Interest income, Citibank New York 25,000 not taxable
- -

Interest income, BPI FCDU 34,000 % on FCDU Interest income, BPI FCDU 34,000 % FCDU 150/ 5 , 100
150/ 5 , 100

Royalty (Phils.), copyright (book) 450,000 royalties 20 %

Royalty (Phils.), copyright (book) 450,000 royalties 20 % 90 , u
go , u
Royalty (Phils.), patent 1,350,000 royalties 20 % 270 , mo Royalty (Phils.), patent 1,350,000 nyalties 20 % 270 ,
u

Raffle draw winnings 60,000 Prizes/winnings ER) -

IR
-
Raffle draw winnings 60,000 FAR
-
-

Total FTs 3751 100 Total FTs 375 ,

108

43. Compute GILI’s income tax payable in its AITR for CY 2022.
A. ₱828,250
B. ₱623,650 45. If GILI is an RFC, compute its income tax payable in its 2022 AITR if it avails of the 40% OSD.
C. ₱813,250 A. ₱401,500
D. None of the above B. ₱596,500
C. ₱714,000
D. None of the above
Gross income from operations 5 , 195 , Gro

Add Other taxable income not subject to FTs:

Dividend income from a FC 30 , wo
Gross income from operations 3, 895 , 000

Interest income, Citibank New York 25 ,

un
Add Other taxable income not subject to FTs:
Raffle draw winnings wo , wo
Foreign dividend - part within 20 , wo

Total Gross Income 5 , 310 , mo

Raffle draw winnings 40 , u

Less: Itemized Deductions (1 ,

218 , un
Total Gross Income , 975 , 00
3

Taxable net income 4 , 092 u

Less: 40% OSD (11590 , (r)
,

Taxable net income 2 , 785 , un

RCIT (25%) 1 , 02n , uro
RCIT (25%) 596 , 258
MCIT (1%) 53 , 100
MCIT (1%) 99
, 755
Tax due 1 , 023 , un

Less: Tax Credits:

CWT per Form 2307s (194 750) ,
Tax due 596 , 250

Tax payable 828 , 250

Less: Tax Credits:
CWT per Form 2307s (194 , 758)
Tax payable 401 , 500

Note: RCIT of 25% was used because the facts in the problem do not indicate
if the taxpayer DC qualifies for the lower 20% RCIT.

44. If GILI, Inc. is an RFC, what is the total amount of final taxes to be withheld from its income in CY
2022?

Tax 95-03 Tax 95-03

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46. If GILI Inc. is an NRFC, what are the total final taxes to be withheld from its income in 2022?
A. ₱1,462,250
B. ₱1,464,750
C. ₱1,466,250
D. None of the above

IF GILI is an NRFC Amount Characterization Rate FT

Gross income, Philippines 3,895,000 FT %

25 973, 756
Dividend income from a DC 40,000 FT % 6 , un

Dividend income from a FC 30,000 Part w/in (20K) - FT; 25

% 5, u
Part w/o- Exempt -

Interest income, BPI Manila 50,000 FT 250/ 12 , 500

Interest income, Citibank New York 25,000 Exempt

=
-

Interest income, BPI FCDU 34,000 Exempt -

Royalty (Phils.), copyright (book) 450,000 FT 250/ 112

1 500
Royalty (Phils.), patent 1,350,000 FT 25
% 347 , 500
Raffle draw winnings 60,000 FT %
25 15 , un

Total FTs 1 , 462 , 250

END

Tax 95-03

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 Introduction to Transfer Taxation Tax rules on transfers for adequate consideration
Transfers for adequate consideration are deemed pure exchanges and are subject to income tax, not to transfer
 Transfers refer to any transmission of property from one person to another. tax.

 A person may be a natural person such as individuals or a juridical person created by law such as Transfer for less than adequate and full consideration
corporation, partnership or joint ventures.  Transfers for less than full and adequate consideration are split into its components: transfer element
and exchange element. The transfer element is subject to transfer tax while the realized gain on the
Types of transfers exchange element is subject to income tax.
1. Bilateral transfers 2. Unilateral transfers 3. Complex transfers
Illustration
Bilateral Transfers Assume a property with a fair value of P70,000 and tax basis of P20,000 is sold for merely P40,000.
 Bilateral transfers involve transmission of property for a consideration. They are referred to as onerous Fair value P70,000
transactions or exchanges. Gratuity (indirect donation) 30,000 Transfer tax
Ex: Consideration or selling price P40,000
1. Sale-exchange of property for money Less: Cost or tax basis 20,000
2. Barter-exchange for another property Realized gain P20,000 Income tax

Unilateral Transfers The transfer element is generally considered as an inter-vivos donation, but it is a donation mortis-causa if:
 Unilateral transfers involve the transmission of property by a person without consideration. They are  the sale is made in comtemplation of the death of the seller, or
commonly referred to as gratuitous transactions or simply, transfers.  if title to the property is agreed to be transferred upon the death of the seller.
 The right or privilege to transfer properties is subject to transfer taxes. Rationale of Transfer Taxation
 Tax evasion or minimization theory
Types of Unilateral Transfers  Tax Recoupment theory
1. Donation is the gratuitous transfer of the property from a living donor to a donee. Since it is made between  Benefit received theory
living persons, it is called donation inter vivos.  State partnership theory
 Wealth redistribution theory
2. Succession is the gratuitous transfer of the properties of the deceased person upon his death to his heirs.  Ability to pay theory
When a person dies, his legal identity including proprietary rights are extinguished. His properties transferred to
his successors either by operation of law or by virtue of a written will. Succession is a donation of all the Comparison of the Two Types of Transfer Tax
properties of the decedent caused by his death. Hence, it is called donation mortis causa. Donor's Tax Estate Tax
Subject transfer Inter-vivos Mortis causa
Comparison between inter-vivos and mortis causa
Nature Annual tax One-time tax
Inter-vivos Mortis causa
Taxpayer Donor Decedent
Transferor Living donor Decedent
Who actually pay the tax? The donor himself Executor, administrator or heirs in
Nature Voluntary Involuntary
behalf of the decedent
Reason Gratuity Death
Scope of the transfer of properties Only properties selected by All properties of the decedent at Nature of Transfer Taxes
the donor death  Privilege Tax
Property given Gift Estate  Ad valorem tax
Transferee Donee Heir  Proportional tax-flat 6%
Transfer tax Donor's tax Estate tax  National tax
Timing of valuation of donation Date of donation Date of death  Direct tax
 Fiscal tax
Complex Transfers
 Complex transfers are transfers for less than full and adequate consideration. These are sales made at Classification of Transfer Taxpayers and their extent of Taxation
prices which are significantly lower that the fair value of the property sold. 1. Residents or Citizens-such as
a. Resident citizens
What constitutes an adequate consideration? b. Resident aliens
There is no fixed quantitative rule on what constitutes an adequate consideration. c. Non-resident citizens
-these are taxable on global transfers of property.

2. Non-resident Aliens

-these are taxable on Philippine transfers of property The following properties are considered located in the Philippines:
1. Interest in a domestic business
 The citizenship of juridical persons is determined by the incorporation tests. Juridical persons that are a. Shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the
organized in the Philippines are considered Philippine citizens. Those organized abroad are considered Philippines in accordance with its laws
aliens. b. Shares or rights in any partnership, business or industry established in the Philippines

 In donor’s taxation, the term resident citizen or alien includes domestic or resident foreign corporation. 2. Foreign securities, under certain conditions:
Obviously, corporations are not subject to estate taxation. a. Shares, obligations, or bonds issued by any foreign corporation 85% of the business of which is located in the
Philippines.
Situs of Transfer b. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations, or bonds have
 Properties are transferred mortis causa in the place where they are located at the point of death. They acquired business situs in the Philippines
are not transferred at the place where the decedent died. Likewise, properties are transferred inter-vivos
in the place where they are located at the date of donation. They are not transferred at the place where 3. Franchise exercisable in the Philippines
the donor executed the deed of donation. 4. Any personal property, whether tangible or intangible, located in the Philippines

Examples: Reciprocity Rule on Non-Resident Aliens

1. A resident alien who has P10M properties in the Philippines and P40M properties in Japan died in an airplane Examples of intangible properties:
crash in Malaysia. 1. Financial assets (cash, receivables or credit, investment in bonds, shares of stock in a corporation, interest in
The P10M properties is deemed transferred mortis causa in the Philippines while the P40M properties is also deemed a partnership)
transferred mortis causa in Japan. 2. Accounting intangible assets (patent, franchise, leasehold right, copyright, trademark)

2. While in Korea, a non-resident Filipino donated his car in Japan worth P5,000,000 to his American best friend. Illustration 1
The P5M is deemed transferred inter-vivos in Japan. Mr. Gato, a Japanese citizen, donated the following properties in the Philippines:
General Rule in Transfer Taxation Car; Cash in bank; Shares of stocks of a domestic corporation
Taxpayers Inter-vivos Mortis causa
Resident or citizens Global donation Global estate Under Japanese laws, non-resident Filipinos are exempt on transfers of intangible properties in Japan
Non-resident aliens Philippine donation Philippine estate
Since the reciprocity exemption applies, Mr.Gato is subject to donor’s tax only on the donation of the car. The donation of
the intangible personal properties such as cash and shares of stocks are exempt.
Illustration 1
Mr. Lugaw, an American residing in the Philippines, donated a car in Mexico to a friend and a motorbike in the
Note: non-resident alien’s intangible properties (PH) under reciprocity rule, whether the transfer is donation or
Philippines to his brother in America.
Since the taxpayer is a resident, both the donation of a car abroad and the donation of a motorbike in the Philippines are
estate there is no donor’s tax or estate tax to impose.
subject to transfer tax. Since the donor is living, the transfers are donations inter-vivos subject to donor’s tax.
What if Mr. Gato died leaving those properties mentioned above?
Illustration 2 Only the tangible property would be subject to estate tax.
Eddie Wow, a non-resident Filipino citizen, died leaving a building in the United States and an agricultural land in
the Philippines for his heirs. What if in the previous illustration Mr. Gato is a resident alien, died leaving those properties
Since the taxpayer is a citizen, the transfer mortis causa of the building in the US and the agricultural land in the Philipp ines All of the properties will be subject to estate tax since reciprocity exemption applies only to non-resident aliens.
is subject to Philippine estate tax.
Transfers intended to take effect upon death
Illustration 3  A donation that is made on the decedent’s last will and testament is a donation mortis causa. Similarly,
Mr. Kobid, a Japanese citizen residing in Japan, donated a parcel of land in Japan to a resident Filipino friend. a donation that is a made during the lifetime of the decedent with a stipulation that ownership shall
He also donated his investment in the shares of stocks of a Philippines corporation to his Japanese sister. transfer upon his death, the same is a donation mortis causa.
Since the donor is neither a Philippine resident nor a citizen, only the donation of domestic shares of stock in the Philippines
is subject to transfer tax. Also, since the donor is living at the date of donation, the transfer is a donation inter-vivos subject Incomplete Transfers
to donor’s tax.  Incomplete transfers involve the transmission or delivery of properties from one person to another, but
ownership is not transferred at the point of delivery.
Illustration 4
Mr. Bo Kung, a Chinese citizen residing in Hong Kong, died leaving a building in Hong Kong and a car in the Types of income transfers
Philippines. 1. Conditional transfers
The donor is neither a resident nor a citizen. Only the car in the Philippines is subject to transfer tax. Since the transfer is 2. Revocable transfers
effected by death, it is a donation mortis causa subject to estate tax. 3. Transfers with reservation of title to property until death

Properties located in the Philippines How are incomplete transfers completed?

1. Conditional transfers
a. fulfillment of the condition Since Mr. Intoy was still living upon the perfection of the transfer, the transfer is a donation inter-vivos. It shall be valued at P800,000 less
b. waiver of the condition P300,000. Hence, P500,000 shall be subject to donor’s tax.

2. Revocable transfers Case 2: Death without revocation

a. waiver by the transferor to exercise his right of revocation Assume instead that Mr. Intoy died on November 1, 2019 without saving his right to revoke the transfer. The fair
b. the lapse of his reserved right to revoke value of the property was P850,000 at that time.
Since the revocable transfer is pre-terminated by death, it is a donation mortis causa. It shall be valued at P850,000 less P300,000.
Hence, P550,000 shall be subject to estate tax.
3. Transfers with reservation of title to property until death are completed by the death of the decedent.
Illustration 2
*1 and 2 transfers become donation mortis causa when the transfer is pre-terminated by death. Artison has a rare Egyptian artifact which has a fair value of P3M. He gave the artifact to Gustoko for a
consideration of P2,950,000 but revocable if Gustoko did not graduate as cum laude. Gustoko subsequently
Timing of Taxation of Incomplete Transfers graduated cum laude when the artifact was worth P4M.
Illustration:
On June 1, 2019, Don Condesion donated a luxury car with a value of P5M to his son, Sonny, under a condition *Adequate consideration= bona fide sale
that Sonny must be a topnotcher in the October 2019 CPA Board Exam. To motivate Sonny, Don Condesion
delivered the car to him on June 1, 2019. Illustration 3
Leon sold a gold bullion with a fair value of P2.5M to Carlo at a price of P1.8M but revocable within one year. The
*June 1, 2019-no donor’s tax even if there is a physical transfer of the car one-year period lapse when the gold bullion had a fair value of P1.7M.
*Assuming Sonny topped the Board Exam on October 2019, there is a completed donation subject donor’s tax.
*If Sonny failed the exam, there is no donation at all.
*If Don Condesion waived his condition, the donation will be perfected at that time he waived the condition. *FV upon completion is less than the consideration, there is no gratuity subject to donor’s tax. In case of mortis
*If Don Condesion died before the exam, the car would be transferred mortis causa as part of his estate and would be subject to estate causa, there is still no estate tax in this case.
tax.
Non-Taxable Transfers
Illustration 2 1. Void transfers
On February 14, 2019, GeneRoss transferred a phone to Clara but subject to revocation if GeneRoss so 2. Quasi-transfers
pleases.
Void transfers are those that are prohibited by law or those do not conform to legal requirements for their validity.
Although there is an actual physical transfer of property on February 14, 2019, the same cannot be subject to donor’s tax since there is no
transfer of ownership at that date.
Void transfers do not transfer ownership over property and are therefore not subject to transfer tax.

Assuming GeneRoss waived his right to revoke, the donation shall be subject to donor’s tax at its fair value at the time of waiver. If Ex.
GeneRoss revoked the property, there is no donation to speak of. Donation of properties not owned
Donation between spouses
Assuming GeneRoss died without revoking the phone, the same would be transferred mortis-causa and would be included part of his
estate subject to estate tax at its fair value at the point of death. Donation refused by the done
Donations that do not conform to formal requirements such as oral donation of real properties.
Complex Incomplete Transfers
 Incomplete transfers are sometimes made for less than full and adequate consideration. Quasi-transfers
-there is no also transfer of ownership.
Test of Taxability of Complex Incomplete Transfers 1. Transmission of the property by the usufructuary to the owner of the naked title.
1. There is adequate consideration at the date of delivery of the property. 2. Transmission of the property by a trustee to the real owner.
2. At the completion of the transfer the property must have not have decrease in value below the consideration 3. Transmission of property by first heir to the second heir (owner of naked title) according to predecessor’s
paid. desire.

Valuation of complex incomplete transfers

Mortis causa- FV at death less consideration upon transfer
Inter-vivos- FV at completion or perfection of donation less consideration upon transfer

Illustration:
In October 1, 2017, Mr. Intoy transferred his car worth P1M to Mr. Bitoy but for a minimal consideration of
P300,000 only. The transfer shall be revocable by Mr. Intoy in 4 years.

Case 1: Waiver before death

On November 1, 2019, Mr. Intoy intimated to Mr. Bitoy that he was waiving his right of revocation. The fair value
of the car was P800,000 less P300,000. Hence, P500,000 shall be subject to donor’s tax.