SAINT LOUIS UNIVERSITY. TAXATION LAW.

ACADEMIC YEAR 2016-2017

28 September 2016

INSTRUCTIONS

1. Read each question very carefully and write your answers in your
Examination Notebook in the same order the questions are posed. Write
your answers only on the front, not the back, page of every sheet in
your Notebook. In your answers, use the numbering system in the
questionnaire.
If the sheets provided in your Examination Notebook are not sufficient
for your answers, use the back page of every sheet of your Examination
Notebook, starting at the back page of the first sheet and the back of
the succeeding sheets thereafter.
2. Answer the Essay questions legibly, clearly, and concisely. Start
each number on a separate page. An answer to a sub-question under the
same number may be written continuously on the same page and the
immediately succeeding pages until completed.
3. Submit not later than 28 September 2016 at 4 p.m. Late submission
will merit ten points deduction from your score.

I.

Mr. A, a citizen and resident of the Philippines, is a professional writer. He is being sub-contracted
by book authors practicing their profession at United States. Before he receives his share from the
royalties of the book authors, a tax will be withheld.
a) Is the money paid to and received by Mr. A taxable in the Philippines? May Mr. A's money
qualify as an exclusion from his gross income? Why? (5%)
b) The US already imposed and withheld taxes from Mr. A's money. How may Mr. A use or apply
the income taxes he paid on his money to the US when he computes his income tax liability in the
Philippines? (5%)

II.

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.
b) I f 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.

III.

GGG, Inc. offered to sell through competitive bidding its shares in HHH Corp., equivalent to 40%
of the total outstanding capital stock of the latter. JJJ, Inc. acquired the said shares in HHH Corp.
as the highest bidder. Before it could secure a certificate authorizing registration/tax clearance
for the transfer of the shares of stock to JJJ, Inc., GGG, Inc. had to request a ruling from the BIR
confirming that its sale of the said shares was at fair market value and was thus not subject to
donor's tax. In BIR Ruling No. 012-14, the CIR held that the selling price for the shares of stock of
H Corp. was lower than their book value, so the difference between the selling price and the book
value of said shares was a donation, and thus subject to income tax. This BIR Ruling was reversed
by the CIR in BIR Ruling No. 009-15 where the CIR held that the donation is not subject to income
tax. Is the difference between the selling price and the book value o f said shares subject to income
tax?

IV.

1
LLL is a government instrumentality created by Executive Order to be primarily responsible for
integrating and directing all reclamation projects for the National Government. It was not
organized as a stock or a non-stock corporation, nor was it intended to operate commercially and
compete in the private market.

By virtue of its mandate, LLL reclaimed several portions of the foreshore and offshore areas of
the Manila Bay, some of which were within the territorial jurisdiction of City. Certificates of title
to the reclaimed properties in Q City were issued in the name of LLL in 2008. In 2014, Q City
issued Warrants of Levy on said reclaimed properties of LLL based on the assessment for
delinquent property taxes for the years 2010 to 2013.
a. Are the reclaimed properties registered in the name of LLL subject to real property tax?
b. Will your answer be the same in (a) iffrom 2010 to the present time, LLL is leasing portions of
the reclaimed properties for the establishment and use o f popular fast food restaurants J Burgers,
G Pizza, and K Chicken?

V.

MMM, Inc., a domestic telecommunications company, handles incoming telecommunications

services for non-resident foreign companies by relaying international calls within the Philippines.
To broaden the coverage of its telecommunications services throughout the country, MMM, Inc.
entered into various interconnection agreements with local carriers. The non-resident foreign
corporations pay MMM, Inc. in US dollars inwardly remitted through Philippine banks, in
accordance with the rules and regulations ofthe Bangko Sentral ng Pilipinas. Is MMM, Inc. subject
to tax?

VI.

CIC, a domestic corporation, entered into reinsurance contracts with 32 British insurance
companies not engaged in trade or business in the Philippines, whereby the former agreed to
cede to them a portion of the premiums on insurances on fire, marine and other risks it has
underwritten in the Philippines. AHC, also a British corporation not engaged in business in this
Philippines, represented the aforesaid British insurance companies. The reinsurance contracts
were prepared and signed by the foreign reinsurers in England and sent to Manila where CIC
signed them.

Pursuant to the aforesaid contracts, CIC remitted P7,098,297.47 to AHC as reinsurance premiums.
In behalf of AHC, CIC filed an income tax return declaring the sum of P7,098,297.47, plus the
accrued interest thereon, as AHC's gross income. It also paid the Bureau of Internal Revenue the
income tax thereon. Is the payment of the tax proper?

VII.

A law was passed giving authority to the President, upon prior recommendation by the NEDA
after it has determined compliance with certain conditions set forth in the law, the power to adjust
the existing value added tax (VAT) rate ranging from the present 10% up to a rate of 12%. Is the
law valid? Explain.

VIII.

VAT Ruling No. 231-88 issued by the Commissioner of Internal Revenue has confirmed XYZ
Corporations entitlement to VAT exemption under Section 103 of the Tax Code. In saying so,
CIR has actually broadened the scope of medical services to include the case of XYZ- a health care
provider. This VAT ruling was even confirmed subsequently by the Regional Director of the
Bureau of Internal Revenue (BIR), which served as basis for the issuance of the said VAT ruling
in favor of XYZ. The ruling sufficiently described the business of XYZ. The records do not show
that XYZ deliberately committed mistakes or omitted material facts when it obtained the said

2
ruling from the BIR. if VAT Ruling No. 231-88 will be revoked, will the revocation be retroactively
applied to its case? Explain

IX.

A Co., a Philippine corporation has two divisions manufacturing and construction. Due to the
economic situation, it had to close its construction division and lay-off the employees in that
division. A Co. has a retirement plan approved by the BIR, which requires a minimum of 50 years
of age and 10 years of service in the same employer at the time of retirement.
There are two groups of employees to be laid off:
a. Employees who are at least 50 years of age and has at least 10 years of service at the time of
termination of employment.
b. Employees who do not meet either the age or length of service A Co. plans to give the
following:
1. For category (A) employees the benefits under the BIR approved plan plus an ex gratia
payment of the month of every year of service.
2. For category (B) employees one month for every year of service.
3. For both categories, the cash equivalent of unused vacation and sick leave credits.

A Co. seeks your advice as to whether or not it will subject any of these payments to withholding
tax. Explain your advice.

X.

X died leaving behind several properties. In his will, X bequeathed all his properties to his
children A, B and C. D, asserting that he is an illegitimate child of X, opposed the probate of the
will, claiming that it is intrinsically invalid because of preterition. The probate court appointed
A as the administrator of the properties of X. Having an entrepreneurial mind, A continued the
businesses of X. As per agreement by the heirs, no one shall take any portion of the estate, as
such will be used for the furtherance of the business of X. The Commissioner of Internal Revenue
(CIR), having received reliable information that the administrator is generating a lot of income
for the estate, assessed the heirs of deficiency corporate taxes. Discuss the propriety of this move
by the CIR.

XI.

M filed a case against C for illegal dismissal. A decision, which had become final and executory,
found C guilty of illegal dismissal and awarded the following in favor of M:
1. Backwages from the time of dismissal up to the date of the decision computed in the total
amount of P300,000.00;
2. Proportionate 13th month pay from in the amount of P35,000.00; and
3. Considering the strained relationship of the parties where reinstatement would not be wise,
separation pay was granted in the aggregate amount of P65,000.00;
The aforesaid award totaled to P400,000.00. To satisfy the said judgment award, C and M, during
the pre-execution conference, agreed that C will give to M her 100 square meter parcel of land in
Baguio City, which is presently idle. Pursuant to the aforesaid arrangement during the pre-
execution conference, C and M executed a Deed of Quitclaim and Conveyance in Satisfaction of
Judgment Award. Discuss the income tax consequences of the aforesaid transaction.

XII.

Triple Star, a domestic corporation, entered into a Management Service Contract with Single Star,
a non-resident foreign corporation with no property in the Philippines. Under the contract, Single
Star shall provide managerial services for Triple Stars Hongkong branch. All said services shall
be performed in Hongkong.

3
Is the compensation for the services of Single Star taxable as income from sources within the
Philippines? Explain.

XIII.

XYZ Law Offices, a law partnership in the Philippines and a VAT-registered taxpayer, received
a query by e-mail from Gainsburg Corporation, a corporation organized under the laws of
Delaware, but the e-mail came from California where Gainsburg has an office. Gainsburg has no
office in the Philippines and does no business in the Philippines.

XYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the
opinion. Gainsburg remitted its payment through Citibank which converted the remitted US$1
,000 to pesos and deposited the converted amount in the XYZ Law Offices account.

What are the tax implications of the payment to XYZ Law Offices in terms of income taxes?

XIV.

XYZ Corporation manufactures glass panels and is almost at the point of insolvency. It has no
more cash and all it has are unsold glass panels. It received an assessment from the BIR for
deficiency income taxes. It wants to pay but due to lack of cash, it seeks permission to pay in kind
with glass panels.

Should the BIR grant the requested permission?

XV.

Foster Corporation (FC) is a Singapore-based foreign corporation engaged in construction and

installation projects. In 2010, Global Oil Corporation (GOC), a domestic corpoartion engaged in
the refinery of petroleum products, awarded an anti-pollution project to Foster Corporation,
whereby FC shall design in accordance with the specifications provided by GOC, supply
machinery and equipment, and install an anti-pollution device for GOCs refinery in the
Philippines, provided that the installation part of the project may be sub-contracted to a local
construction company. Pursuant to the contract, the design and supply contracts were done in
Singapore by FC, while the installation works were sub-contracted by the FC with the Philippine
Construction Corporation (PCC), a domestic corporation. The project with a total cost of P100
Million was completed in 2011 at the following cost components: (design P20Million; machinery
and equipment P50 Million; and installation P30 Million). Assume that the project was 40%
complete in 2010 and 100% complete in 2011, based on the certificates issued by the certificates
issued by the architects and engineers working on the project. GOC paid FC as follows: P60
Million in 2010 and P40 Million in 2011, and FC paid PCC ion foreign currency through a
Philippine bank as follows: P10 Million in 2010 and P20 Million in 2011.

Is FC liable to Philippines income tax, and if so, how much revenue shall be reported by it in 2010
and in 2011? Explain your answer.

XVI.

What is the tax treatment of copyright rights?

XVII.

A nonresident citizen bought shares of stocks from a non-resident foreign corporation. Ten
percent of the gross income of the non-resident foreign corporation was sourced from the
Philippines. In 2015, the non-resident foreign corporation declared a cash dividend of
Php100,00.00 to all its stockholders. Is the dividend income of the non-resident citizen subject to
tax? Explain.

4
- END of the EXAMINATION -