Income Taxation Systems Quiz

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Questions and Answers

Which of the following is NOT a fringe benefit subject to fringe benefit tax for individuals earning purely compensation income?

Travel expenses for work-related events (correct)

Educational assistance to the employee

Interest on loan at less than market rate

Health insurance premiums below the allowable limit

What type of expenses borne by the employer for the employee are subject to fringe benefit tax?

Holiday and vacation expenses (correct)

Entertainment expenses

Educational assistance

Vehicle expenses

Which of the following is an example of a fringe benefit subject to fringe benefit tax as outlined in the text?

Medical insurance paid by the employee

Interest-free loan to an employee (correct)

Membership fees for social clubs paid by the employee

Donations made by the employer

When it comes to educational assistance, what is the tax treatment for the employer's contributions for an employee's dependent?

Exempt from tax Signup and view all the answers

Which of the following expenses related to insurance is NOT considered a fringe benefit subject to fringe benefit tax?

Car insurance premiums for company vehicles Signup and view all the answers

Which income tax system groups all income together without any classification?

Global (Unitary) Tax System Signup and view all the answers

What is the key characteristic of the Schedular Tax System?

Different tax treatments for various types of income Signup and view all the answers

Which Income tax feature is described as 'founded on the ability-to-pay principle'?

Progressive Tax Signup and view all the answers

In which country is the Semi-Schedular Tax System followed?

Philippines Signup and view all the answers

What type of income is exempted from taxation in the Global (Unitary) Tax System?

Passive incomes and capital gains Signup and view all the answers

Which income tax system allows for deductions to arrive at the taxable income?

Schedular Tax System Signup and view all the answers

What is the main reason why MCIT is not considered a tax on capital?

MCIT is imposed on the corporation's gross income after deducting the capital spent Signup and view all the answers

What is the constitutional basis for MCIT?

MCIT is not a tax on capital, and is therefore constitutional Signup and view all the answers

When can the imposition of MCIT be suspended?

All of the above Signup and view all the answers

What does the acronym 'MCIT' stand for?

Minimum Corporate Income Tax Signup and view all the answers

Which of the following is true about the application of MCIT?

MCIT applies only to the unregistered activities of a BOI-registered enterprise Signup and view all the answers

When is MCIT imposed?

MCIT is imposed on the corporation's gross income Signup and view all the answers

What is the first requisite for the nonrecognition of gain or loss in a tax-free exchange?

The transferee is a corporation. Signup and view all the answers

How many persons can be involved in the transfer of property/ies for it to qualify as a tax-free exchange?

No more than 4 persons. Signup and view all the answers

What must the transferor gain as a result of the exchange for it to be considered a tax-free exchange?

Control of the transferee. Signup and view all the answers

What is the maximum number of persons that can be involved in a tax-free exchange, including the transferor?

4 persons Signup and view all the answers

What must the transferee exchange for the property/ies of the transferor in a tax-free exchange?

Shares of stock Signup and view all the answers

What type of transaction is being discussed?

Tax-free exchanges Signup and view all the answers

What is the tax rate for proprietary educational institutions on their taxable income derived from related trade, business, or activity?

10% of the taxable income Signup and view all the answers

If the total gross income from unrelated trade, business, or activity exceeds 50% of the total income for proprietary educational institutions and non-profit hospitals, what percentage of the entire taxable income is taxed?

25% Signup and view all the answers

Which government entities are exempt from tax according to Section 27(C)?

All of the above Signup and view all the answers

What is the tax rate for government-owned or controlled corporations, agencies, and instrumentalities on their taxable income in a similar business, industry, or activity?

25% Signup and view all the answers

What do Foreign Currency Deposit Units (FCDUs) refer to in the context provided?

Units within the banking system that engage in foreign currency denominated transactions Signup and view all the answers

What is the tax rate for Foreign Currency Deposit Units (FCDUs) on their foreign currency transactions?

Exempt from tax Signup and view all the answers

Study Notes

Income Taxation

Fringe benefits subject to fringe benefit tax (FBT) include:
- Housing
- Expense account
- Vehicle of any kind
- Household personnel (e.g., maid, driver)
- Interest on loan at less than market rate
- Membership fees, dues, and expenses borne by the employer
- Expense for foreign travel
- Holiday and vacation expenses
- Educational assistance to the employee or dependents
- Life or health insurance and other non-life insurance premiums

Income Tax Systems

Global (Unitary) Tax System:
- All income grouped together without distinction
- Subjected to tax at a fixed rate
- Taxes all categories of income except certain passive incomes and capital gains
Schedular Tax System:
- Various types of income classified accordingly
- Accorded different tax treatments according to schedules with graduated tax rates
Semi-Schedular or Semi-Global Tax System:
- Certain passive income and capital gains subject to final taxes
- Other income added to arrive at gross income (where deductions are used to arrive at taxable income)
- Followed in the Philippines

Philippines Income Tax System

Direct Tax: tax burden borne by the income recipient
Progressive Tax: tax rate increases as the tax base increases
Founded on the ability-to-pay principle, consistent with Sec. 28(1), Art. VI, 1987 Constitution

Minimum Corporate Income Tax (MCIT)

Imposed on gross income
Not a tax on capital (Chamber of Real Estate and Builders' Association, Inc. vs. Romulo, G.R. No. 160756, March 9, 2010)
Constitutional (Chamber of Real Estate and Builders' Association, Inc. vs. Romulo, G.R. No. 160756, March 9, 2010)
Imposition may be suspended due to labor dispute, force majeure, or legitimate business reverses (R.R. No. 09-98, Sec. 2.27(E)(3))

Taxpayers

Different kinds of taxpayers (Sec. 23)
Income classified based on situs of taxation (Sec. 42)

Sources of Income

Sources of income (Sec. 32(A))
Items subject to exclusions from gross income (Sec. 32(B))
Tax-free exchanges (Sec. 40(C)(2))
Capital assets vs. ordinary assets (Sec. 39(A)(1))
Allowable deductions from gross income (Sec. 34, 36)
Exclusions vs. deductions

Proprietary Educational Institutions and Non-Profit Hospitals

Tax base and rate:
- Private: 10% of taxable income
- Non-Profit: exempt
- Government: exempt

Government-Owned or Controlled Corporations

General rule: taxable and pays same rate as corporations or associations engaged in similar business
Exceptions:
- GSIS
- SSS
- PHIC
- PCSO
- Local Water Districts
Tax base and rate:
- 30% (2009 onwards; previous rate)
- 25%/20% (effective July 1, 2020; refer to RR 5-2021 & RMC 69-2023)

Foreign Currency Deposit Units

Authorized by the BSP to engage in foreign currency denominated transactions pursuant to R.A.
Units or departments of local banks or local branches of foreign banks

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Description

Test your knowledge on different kinds of income tax systems including the Global (Unitary) Tax System which groups all income together without distinction. Explore how income is taxed and deductions are applied in this quiz.