TAXATION OF CORPORATIONS

from the book of "Income Taxation" made easy by Win Ballada 18th edition

page 94-144

Multiple Choice. Choose the correct answer

1.Guidant Resources Corporation, a corporation registered in Norway, has a 50 MW electricpower plant in San Jose, Batangas. Aside from Guidant's income from its power plant, which among the following is considered as part of its income from Piers within the Philippines?

A.Gains from the sale to an locos Norte power plant of generators bought from the United States.

B.interests earned on its dollar deposits in a Philippine bank under the Expanded " foreign Currency Deposit System.

C.Dividends '2from a two-year old Norwegian subsidiary with operations in Zambia put derives 60% of its gross income from the Philippines.

D.Royalties from the use in Brazil of generator sets designed in the Philippines by its engineers.

2.Aplets Corporation is registered under the laws of the Virgin Islands. It has extensive operations in Southeast Asia. In the Philippines, Its products are imported and sold at a mark-up by its exclusive distributor, Kim's Trading, Inc. The BIR compiled a record of all the imports of Kim from Aplets and imposed a tax on Aplets net income derived from its exports to Kim. Is the BIR correct?

A.Yes. Aplets is a non-resident foreign corporation engaged in trade or business in the Philippines.

B.No. The tax should have been computed on the basis of gross revenues and not net income.

C.No. Aplets is a non-resident foreign corporation not engaged in trade or business in the Philippines.

D.Yes. Aplets is doing business in the Philippines through its exclusive distributor Kim's Trading. Inc.

3.Zygomite Minerals, Inc., a corporation registered and holding office in Australia, not operating in the Philippines, may be subject to Philippine income taxation on

A.gains it derived from sale in Australia of an ore crusher it bought from the Philippines with the proceeds converted to pesos.

B.gains it derived from sale in Australia of shares of stock of Philex Mining Corporation, a Philippine corporation.

C.dividends earned from investment in a foreign corporation that derived 40% of its gross income from Philippine sources.

D.interests derived from its dollar deposits in a Philippine bank under the Expanded Foreign Currency Deposit System.

4.Lualthati Educational Foundation, Inc., a stock educational institution organized for profit, decided to lease for commercial use a 1,500 sq. m. portion of its school. The school actually, directly, and exclusively used the rents for the maintenance of its school buildings, including payment of janitorial services. Is the leased portion subject to real property tax?

A.Yes, since Lualhati is a stock and for profit educational institution.

B.No, since the school actually, directly, and exclusively used the rents for educational purposes.

C.No, but it may be subject to income taxation on the rents it receives.

D.Yes, since the leased portion is not actually, directly, and exclusively used for educational purposes.

5.Which is not true about resident foreign corporations?

A.Gross Philippine billings, in case of international shipping, means gross revenue whether for passenger, Cargo or mail originating from the Philippines up to final destination.

B.Gross Philippine billings, in case of international carrier, refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mailoriginating from the Philippines in a continuous and uninterrupted flight.

C.Any profit remitted by a branch to its head office shall be subject to a tax of 15% which shall be based on the net profits applied or earmarked for remittance with deduction for the tax component thereof.

D.None of the above

6.Which is not true?

A.Non-resident cinematographic film owner, lessor or distributor is taxed at 25% of gross income.

B.Non-resident owner or lessor of aircraft, machinery and other equipment is taxed at 7 4% of gross rentals, charters-and other fees.

C.Non-resident owner or lessor of vessels chartered by Philippine nationals is taxed at 4 %% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.

D.None of the above

7.To be exempt from taxation revenues derived from assets used incafeterias/canteens and bookstores by non-profit, non-stock institutions should be

A.located within the school premises.

B.owned by such educational institution.

C.operated by the educational institution as ancillary activities.

D.all of the above

8.The following may constitute gross income of a non-resident foreign corporation. Which one cannot

A.Emoluments

B.Dividends

C.Reinsurance premiums

D.Royalties

9.Which corporation does not receive the same treatment with regard to the income tax imposed on the net capital gain from sale, exchange or other disposition of shares of stock in a domestic corporation not traded in the stock exchange?

A.non-resident foreign corporation

B.resident foreign corporations

C.domestic corporations

10.For purposes of determining the Improperly Accumulated Taxable Income for a taxable year, the following, except one, are added to that year's taxable income. Which one?

A.Income exempt from tax

B.Income subject to final tax

C.Income excluded from gross income

D.The amount of net operating loss carry-over (NOLCO)

11.Which statement is correct? The gross income tax of corporation is

A.15% of gross income.

B.15% of gross sales.

C.15% of net sales.

D.all of the above

12.Which statement is wrong? The gross income tax

A.available only if the ratio of cost of sales does not exceed fifty-five percent of gross sales or receipts from all sources.

B.the choice shall be irrevocable for three consecutive years that the corporation is qualified under the scheme.

C.is always computed to compare with the normal income tax and minimum corporate income tax.

D.is optional to a qualified corporation.

13.Which of the following statements about IAET is false?

A.It is in the nature of a penalty to the corporation for improperly accumulating earnings.

B.It aims to deter the avoidance of tax on the part of shareholders on earnings received.

C.If undistributed earnings are used for the reasonable needs of the business, generally, such earnings is not subject to IAET.

D.AET shall not be imposed despite determination that a corporation has accumulated beyond the reasonable needs of business.

14.A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year imposed upon any domestic and resident foreign corporation subject to the normal tax

A.whenever such corporation has zero or negative taxable income.

B.whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.

C.beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations.

D.all of the above

15.One of the following statements is correct. Which is it? The minimum corporate income tax of a corporation is computed

A.only in the quarterly return of the corporation.

B.only in the annual income tax return of the corporation.

C.in all the taxable years of operations of the corporation.

D.in the quarterly and the annual returns of the corporation.

16.The following, except one, give rise to the presumption that a corporation is improperly accumulating profits. Identify the exception.

A.The corporation permits its profits to accumulate beyond the reasonable needs of the business.

B.The corporation is a mere holding company.

C.The corporation is an investment company.

D.The corporation is a service enterprise.

17.Cost of services for MCIT purposes means all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including

A.interest expense in the case of banks and other financial institutions.

B.salaries and employee benefits of personnel, consultants and specialists directly rendering the service.

C.cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies.

D.all of the above

18.Which of the following does not constitute accumulation of earnings for the reasonable needs of the business?

A.Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure even without approval by the Board of Directors or equivalent body

B.Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement

C.Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution

D.Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other years

19.Which of the following statements about improperly accumulated earnings tax (IAET) is false?

A.If there is no distribution of corporate earnings,

B.shareholders are not liable for income tax on such earnings. b. Once a corporation is subjected to the corporate income tax, the IAET can no longer be imposed.

C.If corporate earnings are distributed to shareholders, such earnings shall not be subject to IAET. d.

D.Shareholders are liable to income tax for corporate earnings received.

20.In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT shall apply on

A.operations covered by both regular and special income tax systems.

B.operations covered by the regular income tax system.

C.operations covered under a special income tax system.

D.none of the above

21.Which of the following may be not be deducted from gross sales to arrive at gross income for purposes of computing the gross income tax of a merchandising/manufacturing concern?

A.Sales discounts

B.Cost of goods sold

C.Sales returns and allowances

D.None of the above

22.Improperly Accumulated Earnings Tax shall not apply to the following corporations except one. Which one?

A.Closely-held corporations

B.Publicly-held corporations

C.Taxable and general professional partnerships

D.Banks and other non-bank financial intermediaries

23.Which of the following may not be deducted from gross sales to arrive at gross income for purposes of computing the MCIT of a merchandising/manufacturing concern?

A.Sales discounts

B.Cost of goods sold

C.Sales returns and allowances

D.None of the above

24.For purposes of determining the improperly Accumulated Taxable income for a taxable year, the following, except one, are reduced from that year's taxable income after appropriately adding certain items. Which one?

A.Amount reserved for the reasonable needs of the business

B.Dividends actually or constructively paid/issued

C.Income tax paid/payable for the taxable year

D.10% improperly accumulated earnings tax

25.The minimum corporate income tax of a domestic or resident service corporation is

A.2% of gross income

B.2% of net sales.

C.15% of gross income.

D.15% of gross sales.

26.The tax rate on improperly accumulated earnings

A.2%

B.10%

C.15%

D.30-35%

27.The MCIT applies to which of the following domestic corporations?

A.Non-profit hospitals

B.Proprietary educational institutions

C.Firms that are taxed under a special income tax regime

D.Depository banks under the expanded foreign currency deposit system on their income from foreign currency transactions with local commercial banks

E.All of the above f. None of the above

28.The MCIT shall not apply to which of the following resident foreign corporations?

A.Regional operating headquarters

B.International carrier

C.Firms that are taxed under a special income tax regime

D.Offshore Banking Units (OBUs) on their income from foreign currency transactions with local commercial banks

E.All of the above

F.None of the above

29.Which of the following statements is false?

A.The dividends must be declared and paid or issued not later than one year following the close of the taxable year

B.lAET on dividends declared but unpaid or unissued within one year following the close of the taxable year should be paid within one (1) year thereafter.

C.Profit subjected to IAET shall no longer be subjected to the same tax in later years even if not declared as dividend.

D.Profit subjected to AET shall still be subjected to tax on dividends when declared as dividend.

30.One of the following statements is wrong. Identify. The improperly accumulated earnings tax imposed on corporations

A.is based on the net income per books after income tax.

B.is based on a statutory formula for improperly accumulated income.

C.is calculated to force corporations to pay out dividends.

D.is computed on the year's improperly accumulated income.

31.Improperly accumulated taxable income means taxable income adjusted by

A.income exempt from tax.

B.income subject to final tax.

C.income excluded from gross income.

D.the amount of net operating loss carry-over deducted.

E.all of the above C.

32.Improperly accumulated taxable income means taxable income reduced by the sum of

A.income tax paid for the taxable year.

B.dividends actually or constructively paid.

C.both of the above

D.none of the above

33.All, except one, of the following are not subject to the improperly accumulated earnings tax. Which is the exception?

A.Service enterprises

B.Insurance companies

C.Publicly-held corporations

D.Banks and other non-bank financial intermediaries

34.Substantial losses from a prolonged labor dispute means

A.the strike resulted to temporary shutdown of business operations.

B.losses arising from a strike staged by the employees which lasted for more than six months within a taxable period.

C.both of the above

D.none of the above