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TAXATION LAW BAR EXAM 2015

Questions for Taxation I


1. Explain the principles of a sound tax system. (3%)

c)

d) Domestic corporation (1%)


e)

2. Mr. A, a citizen and resident of the Philippines, is a professional boxer.


In a professional boxing match held in 2013, he won prize money in
United States (US) dollars equivalent to P300,000,000.
a) Is the prize money paid to and received by Mr. A in the US
taxable in the Philippines? Why? (2%)
b) May Mr. A's prize money qualify as an exclusion from his gross
income? Why? (2%)
c) The US already imposed and withheld income taxes from Mr.
A's prize money. How may Mr. A use or apply the income taxes
he paid on his prize money to the US when he computes his
income tax liability in the Philippines for 2013? (4%)
3. Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a
non- resident citizen.
a) If the goods were produced from Ms. B's factory in the
Philippines, is Ms. B's income from the sale to Ms. C taxable in
the Philippines? Explain. (2%)
b) If Ms. B is an alien individual and the goods were produced in
her factory in China, is Ms. B's income from the sale of the
goods to Ms. C taxable in the Philippines? Explain. (2%)
4. Mr. E and Ms. F are both employees of AAA Corp. They got married
onFebruary 14, 2011. On December 29, 2011, the couple gave birth to
triplets. On June 25, 2013, they had twins. What were the personal
exemptions/deductions which Mr. E and Ms. F could claim in the
following taxable years:
a) For 2010 (2%)
b) For 2011 (3%)
c) For 2013 (2%)
5. BBB, Inc., a domestic corporation, enjoyed a particularly profitable year
in 2014. In June 2015, its Board of Directors approved the distribution
of cash dividends to its stockholders. BBB, Inc. has individual and
corporate stockholders. What is tax treatment of the cash dividends
received from BBB, Inc. by the following stockholders:
a)

A resident citizen (l%)

b) Non-resident alien engaged in trade or business (1%)

Non-resident alien not engaged in trade or business (1%)

Non-resident foreign corporation (1%)

6. Differentiate between double taxation in the strict sense and in a broad


sense and give an example of each. (4%)
7. Indicate whether each of the following individuals is required or not
required to file an income tax return:
a) Filipino citizen residing outside the Philippines on his income
from sources outside the Philippines. (1%)
b) Resident alien on income derived from sources within the
Philippines. (1%)
c) Resident citizen earning purely compensation income from two
employers within the Philippines, whose income taxes have
been correctly withheld. (1o/o)
d) Resident citizen who falls under the classification of minimum
wage earners. (1%)
e) An individual whose sole income has been subjected to final
withholding tax. (1%)
8. What are de minimis benefits and how are these taxed? Give three (3)
examples of de minimis benefits. (4%)
9. Mr. H decided to sell the house and lot wherein he and his family have
lived for the past 10 years, hoping to buy and move to a new house and
lot closer to his children's school. Concerned about the capital gains tax
that will be due on the sale of their house, Mr. H approaches you as a
friend for advice if it is possible for the sale of their house to be exempted
from capital gains tax and the conditions they must comply with to avail
themselves of said exemption. How will you respond? (4%)

TAXATION LAW 1
Questions for Finals
1. Mr. X is a non resident senior citizen. He receives monthly pension
from SSS which he deposits with ABC Bank. Mr. X claims that he is
absolutely exempt from any tax and therefore he is not required to
file an income tax return. Is Mr. X correct?
Answer:
No. Mr. X is not absolutely exempt from tax. Although he is exempt from
income tax on his monthly SSS pensions, the interest income which
accrues on the pension deposited ABC Bank is subject to final tax. On
the issue of filing an income tax return, since Mr. X sole taxable income
is already subject to final tax, he is not required anymore to file an
income
tax
return.
2. X Corporation entered into an agreement with(B) Corporation for
mining. The agreement stated that B Corp. will operate the min. In
turn, X Corp will be liable for the financing operations.After such
operations, X and B Corporations will have a proportion in whatever
net income will accrue to the operations. X Corp. in accordance with
the agreement made advances to B Corp. However, the mining did
not go well and B Corp. became insolvent. B Corp. entered into a
second agreement with X Corp. acknowledging its indebtedness to
X Corp. for the amounts that were advanced to it. X Corp. now tries
to claim as deductions the advances to B Corp. which unpaid as
bad debts written off. Will C Corpc claim be allowed?
Answer:
No. The requirements for write-off are not complete. To be written off as
bad debts, the following must concur: (1) there must be an indebtedness
and (2) it must be due and legally demandable. In this case, the
agreement between X and B Corporations is a contract of partnership or
joint venture, since they intended to contribute money, property, or
industry to a common fund, with the intention of dividing the profits
among themselves. Hence, X Corporations advances cannot be treated
as a debt of B to X Corp. Rather, the advances were mere capital
investments in the partnership.
3. In order to facilitate the processing of its application for a
telecommunications franchise, SME Corporation found it necessary
to pay the amount of P500,000 as a bribe to Mr. Bee, the approving
official. SME Corporation deducted the P500,000 from its gross
income.

(A) Is SME Corporation correct?


(B) On the other hand, is the P500,000 taxable income on the
part of Mr. Bee?
Answer:
(A) No. The amount of P500,000 constitutes a bribe and is therefore not
deductible pursuant to Sec 34(A)(1)(c) of the NIRC. No deduction from
gross income shall be allowed for any payment made directly or
indirectly, to an official or employee of the national government if the
payment constitutes a bribe.
(B) Yes. The P500,000 is taxable income on the part of Mr. Bee. Gross
income includes all income from whatever source. All income, whether
legal or illegally acquired is taxable absent any clear provision exempting
the same. Illegally acquired income constitutes realized income under
the claim of right doctrine. In the case, there was income on Mr. Bee
because there was an accession to his wealth (an addition of the amount
of P500,000), it was clearly realized when he received the cash from SME
Corp, and over which he has complete dominion - Mr.Bee has a choice
or control on whatever he may want to do with it.
4. YYY Corporation engaged the services of the Mannington Law Firm
in 2006 to defend the corporation's title over a property used in the
business. For the legal services rendered in 2007, the law firm billed
the corporation only in 2008. The corporation duly paid. YYY
Corporation claimed this expense as a deduction from gross
income in its 2008return, because the exact amount of the expense
was determined only in 2008. Is YYY's claim of deduction proper?
Explain.
Answer:
No. The expense is deductible in the year it complies with the all-events
test. The test is considered met if the liability is fixed, and the amount
of such liability today is already fixed in 2007 when the services were
rendered, and the amount of such liability is determinable with
reasonable accuracy in the same year. Hence the deduction should
have been claimed in 2007 and not in 2008 (CIR v. Isabela Cultural
Corporation, 515 SCRA556 (2007)).
5. Nutrition Choppy Corporation gives all its employees (rank and file,
supervisors and managers) one sack of rice every month valued at
P800 per sack. During an audit investigation made by the Bureau of
Internal Revenue (BIR), the BIR assessed the company for failure to
withhold the corresponding withholding tax on the amount

equivalent to the one sack of rice received by all the employees,


contending that the sack of rice is considered as additional
compensation for the rank and file employees and additional fringe
benefit for the supervisors and managers. Therefore, the value of
the one sack of rice every month should be considered as part of
the compensation of the rank and file subject to tax. For the
supervisors and managers, the employer should be the one
assessed pursuant to Section 33 (a) of them. Is there a legal basis
for the assessment made by the BIR? Explain your answer.
Answer:
There is no legal basis for the assessment. The one sack of rice given to
the supervisors and managers are considered de Minimis fringe benefits
considering that the value per sack does not exceed P1,000, hence
exempted from the fringe benefits tax. (Section 33, NIRC as
implemented by RR No. 10-2000). The one sack of rice per month given
tithe rank and file employees is, likewise, not subject to tax as part of
compensation income. This is a benefit of relatively small value intended
to promote the health, goodwill, contentment and efficiency of the
employee which will not constitute taxable income of the recipient.
(Section2.78.1
(A)(3)
of
RR
No.
2-98).
6.
(A) In 2007, spouses Renato and Judy Garcia opened peso and dollar
deposits at the Philippine branch of the Hong Kong Bank in Manila.
Renato is an overseas worker in Hong Kong while Judy lives and works
in Manila. During the year, the bank paid interest income of P10,000 on
the peso deposit and US$1,000 on the dollar deposit. The bank withheld
final income tax equivalent to 20% of the entire interest income and
remitted the same to the BIR. (A) Are the interest incomes on the bank
deposits of spouses Renato and Judy Garcia subject to income tax?
Explain.
Answer:
The interest income of Renato, who is an on-resident, is exempt from income
tax under Sec. 27(D3) (2) NIRC. Any bank interest of non-residents from an
expanded foreign currency deposit system is exempt from income tax
(Sec.24[B1] NIRC). An expanded foreign currency deposit refers to any bank
authorized by the Central Bank to transact business in local and acceptable
foreign currencies. Judy Garcia, who is a resident of the Philippines, is liable
for 7.5% final income tax on interest income (Sec.24[B1] NIRC)
(B) Is the bank correct in withholding the 20% final tax on the entire
interest income? Explain.

No, the bank should withhold only 7.5%on the final interest income of the
wife. The husband is exempt.
7. Company L, a luxury car company, recently celebrated their 6th year
anniversary. In line with the anniversary, they crafted an event to
celebrate with their employees. Part of the anniversary program
included having a priest hold mass in gratitude for achieving the
coveted number 2 slot in the local luxury car market and a motivational
speech by Gilas national coach, Coach Chot Reyes. L then paid fees to
both the priest and Coach Chot, claiming both as deductions. Proper?
Answer:
Not entirely. The fees for Coach Chot are deductible as it can be argued by
L that the motivational talk given by Coach Chot is an ordinary and necessary
business expense. L can claim that this is to increase the productivity of its
sales staff, and as such, can be deductible. The fees paid to the priest cannot
be deducted though. A mass cannot be held as an expense that can be
considered ordinary and necessary. As it has been held in Trebilcock v.
Commissioner, it is inherently personal in nature and is thus disallowed as a
deduction.
8. Who are deemed nonresident citizens under the NIRC?
Answer:
(1) A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a
definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the
taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be physically
present abroad most of the time during the taxable year.
(4) A citizen who has been previously considered as nonresident citizen
and who arrives in the Philippines at any time during the taxable year
to reside permanently in the Philippines shall likewise be treated as
a nonresident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad
until the date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his
intention of leaving the Philippines to reside permanently abroad or
to return to and reside in the Philippines as the case may be for
purpose of this Section. (NIRC, Section 22,E)

9. In 2008, Juan Dela Cruz, a resident Filipino citizen, received dividend


income from a U.S.-based corporation which owns a chain of Filipino
restaurants in the West Coast, U.S.A. The dividend remitted to Juan is
subject to U.S. Withholding tax with respect to a non-resident alien like
Juan.
a) What would you advise Juan to lessen the impact of possible
double taxation on the same income?
b) Would your answer in A be the same if Juan because a U.S.
immigrant in 2007 and had become a non-resident Filipino
citizen? Explain the difference in treatment of Philippine income
tax purposes.
Answer:
a) Juan can either claim the taxes which he paid to the U.S. as a deduction
from his gross income or claim it as a tax credit. Sec. 34(C)(3)(a) allows
resident citizens to claim taxes paid to a foreign country to be deducted
or claim as a tax credit. As a resident Citizen, Juan can avail of either.
b) My answer in a would be different because Juan is a non-resident
citizen. The NIRC limits the taxes imposed on non-resident citizens to
sources of income WITHIN the Philippines. Since the income is sourced
outside the Philippines, Juan cannot be taxed. (Sec. 24(A)(1))
10. Juan earns income from interest income from bank deposits and
from his professional fees which are subjected to a 15% professional
withholding tax. Is Juan required to file an ITR?
Answer:
Yes. Although the interest income from bank desposit is subject to a final
withholding tax of 20% which does not need an ITR, the professional fee is
subjected to an Expanded Withholding Tax, which needs to be in an ITR .
(Sec. 51(A)(2)(c))