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Philippine Taxation Questions

QUALIFYING ROUND
EASY ROUND - Question 1
Gaddy, an official of Lamoiyan Corporation, asked for an earlier retirement because he was immigrating to
Canada. He was paid P2,000,000 as separation pay in recognition of his valuable services to the corporation.

Krisha, another official of the same company, was separated for occupying a redundant position. She was
given P1,000,000 as separation pay.

Joel was separated due to his failing eyesight. He was given P500,000 as separation pay.

All the 3 were not qualified to retire under the BIR approved pension plan of the corporation. The following
statements are derived from the above set of facts:

I. The separation pay given to Gaddy is subject to income tax.


II. The separation pay received by Krisha is subject to income tax.
III. The separation pay received by Joel is excluded from gross income.
IV. The separation pay received by Gaddy, Krisha and Joel are excluded from gross income

Which of the following are correct statements?

ANSWER: I and III

Reference:
 I is a correct statement. The voluntary action on the part of Gaddy is not considered as a cause beyond
his control hence, the separation is not excluded from gross income. It is included for tax purposes. He
does not quality for tax-free retirement because there is no showing that he is 50 years or over, that he
has not previously availed of the tax-free retirement.
 II is not a correct statement because Krisha was separated due to redundancy which is beyond his
control.
 III is a correct statement. The separation pay received by Joel was due to his failing eyesight, a
physical disability, which is for a cause beyond his control.
 IV is not a correct statement because of the above

EASY ROUND - Question 2


resident foreign corporation has the following income and expenses for the current year:

Gross income, Philippines PhP 1,600,000


Gross income, USA 400,000
Business expenses, Philippines 500,000
Business expenses, USA 200,000
Unallocated business expenses 150,000
Interest expense, USA 50,000
Interest expense, Philippines 100,000
Unallocated interest expense 80,000

How much is the taxable net income?

ANSWER: P816,000

Solution:

Gross income, Philippines P 1,600,000


Less: Business expenses, Philippines (P500,000)
Unallocated business expenses
(P1,600,000/P2,000,000 X P150,000)(120,000)
Interest expense, Philippines (100,000)
Unallocated interest expense
(P1,600,000/P2,000,000 X P80,000) (64,000) (784,000)
Taxable net income P 816,000

EASY ROUND - Question 3


Ms. Rita Dayag is the owner of various real estate properties in Cagayan. These properties are for lease and
yield rental income to Miss Dayag. Every year, she pays value-added tax to the BIR. The Cagayan
government enacts an ordinance imposing on her a lessor tax in accordance with the schedule of amounts
related to her gross rental income from the same real properties.

First question: Does the local ordinance, constitute, in effect, double taxation?

Answer: Yes, there is double taxation because there are two kinds of taxes levied on the same person for the
same occupation or business.

The Province of Cagayan enacts an ordinance which imposes an occupation tax upon owners of prawn farms.
The validity of the ordinance is being challenged on the ground that it constitutes double taxation because the
prawn farm is already subject to land tax.

Second question: Is the ordinance valid?

Answer: Yes, because there are two different taxes involved, a tax on occupation and a tax on the land.
Hence, there is no double taxation.

A. Answer to 1st question wrong, answer to 2nd question correct.


B. Answer to both questions are correct.
C. Answer to both questions are wrong.
D. Answer to 1st question is right, answer to 2nd question is wrong.

ANSWER: A

AVERAGE ROUND - Question 1


During the current year, a nonresident alien not engaged in trade or business, came to the Philippines to fulfill
a contract commitment. He stayed at one of the five-star hotels in Makati City. His local contact paid him
PhP500,000 for the services rendered and PhP 90,000 for his hotel bills.

How much is the fringe benefit tax, if any?

ANSWER: PhP 30,000

Reference:
• Section 33 (A), NIRC, as amended
• Section 2.33 (A), Revenue Regulations No. 3-98

Grossed-up monetary value


of the fringe benefit (P90,000/75%) PhP 120,000
Tax rate 25%
Fringe benefits tax PhP 30,000

AVERAGE ROUND - Question 2


Aliza Telecommunications has the following data for the first month of the second calendar quarter of the
current year:
Gross receipts, domestic calls P5,000,000
Payments received, overseas calls (originating from
the Philippines) 3,000,000
Purchases of supplies used in connection with
domestic calls, net of VAT 300,000
Purchases of equipment used in connection with
both domestic calls and overseas calls, net of VAT 800,000
Business expenses 1,000,000

How much is the liability of Aliza Telecommunications in filing the BIR Form No. 2550Q for the second quarter
of CY 2017?

ANSWER: PhP 504,000

Solution:

Output Tax On Domestic Calls


(P5,000,000 X 12%) P 600,000
Less: Input Taxes
Supplies (P300,000 X 12%) P 36,000
Equipment
(P5,000,000/P8,000,000 X P96,000) 60,000 96,000
Vat Payable P 504,000

AVERAGE ROUND - Question 3


The prescriptive period for the issuance of a formal notice of assessment may not ordinarily be stayed because
of the lifeblood theory. However, there are certain instances where the running of the prescriptive period may
be suspended. One of the following is not among the recognized instances which suspend the running of the
prescriptive period within which to assess.

A. where the taxpayer requests for and is granted a reinvestigation by the Commissioner
B. if the Commissioner of the BIR is out of the country
C. if the taxpayer changes his address stated in the return without informing the BIR Commissioner
D. answer not given

ANSWER: B.

DIFFICULT ROUND - Question 1


Levi died intestate on September 30, 2017. He was survived by his wife and his two children. He and
his wife were under conjugal partnership of gains. He left the following properties:

Land (900 sq. m.) inherited form the decedent’s father who died on June 15, 2007;
FMV per tax declaration, P1,900,000;
Zonal value, P3,000 per sq. m.;
Car inherited from the decedent’s father, FMV, P500,000;
Cost, P700,000;
House and lot acquired during the marriage (family home),
Zonal value, P4,100,000; assessed value, P3,300,000;
Household furniture and appliances acquired during the marriage, FMV, P500,000;
Other tangible personal properties (mode of acquisition unknown),
FMV, P1,800,000.
The following were considered as deductions from the gross estate:

Actual funeral expenses P 480,000


Judicial expenses 100,000
Other claims against the conjugal properties 500,000
Claims against insolvent persons 50,000
Medical expenses 120,000
The estate of the decedent’s father paid the estate on the land at the fair market value of P2,500,000 and
on the car, P700,000. During the marriage, Levi mortgaged the inherited land
for P700,000 for the benefit of the family. He paid P350,000 before he died.

How much was the total deductions?

ANSWER: P1,725,389

Solution:

Schedule of deductions Exclusive Conjugal


Funereal expenses (maximum) P - P 200,000
Judicial expenses - 100,000
Claims against the estate - 500,000
Claims against insolvent - 50,000
Unpaid mortgage (P700,000 - P350,000) - 350,000
Vanishing deduction 525,389 -
Total P 525,389 P 1,200,000

Vanishing deduction
Value to take
Land P 2,500,000
Car 500,000 P 3,000,000
Less: Mortgage paid ( - )
Initial basis P 3,000,000
Less: [(P3,000,000/P9,650,000) X P1,200,000] 373,057
Final basis P 2,626,943
Rate 20%
Vanishing deduction P 525,389

DIFFICULT ROUND - Question 2


During the 1st day of August 2015, Coat Corporation voluntarily registered with BIR as a VAT-registered entity
(effective August 2015). Following are the details of the Company’s inventory immediately prior to the VAT
registration:

Inventory Amount (as approved Actual VAT paid in


by the Secretary of acquiring the inventory
Finance)
Merchandise inventory PhP900,000 PhP50,000
Supplies inventory 150,000 2,000

Based on the foregoing, how much is the transitional input tax that the Company may claim in its August 2015
VAT declaration?

ANSWER: PhP 53,000

Solution:

Inventory Actual VAT paid in 2% of the value of Higher between [A]


acquiring the inventory inventory and [B]
[A] [B]
Merchandise inventory PhP 50,000 PhP 18,000 PhP 50,000
Supplies inventory 2,000 3,000 3,000
Total PhP 53,000
Reference:

Section 111 (A) of the 1997 Tax Code, as amended by R.A. 9337

A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to
the filing of an inventory according to rules and regulations prescribed by the Secretary of Finance, upon recommendation
of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to two
percent (2%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies,
whichever is higher, which shall be creditable against the output tax.

DIFFICULT ROUND - Question 3


The Bureau of Internal Revenue (BIR) is using the Net Worth Method of investigation on Mr. Jacob
Christianson, a married taxpayer with two (2) qualified dependents. The investigation covers the years 2007 to
2011. There are no discrepancies discovered for the years 2007 to 2010. However, the BIR discovers
discrepancies for 2011. Mr. Christianson paid P 20,500 income tax on the income declared for 2011.

The assets, liabilities and net worth at the end of 2010 and 2011 follow:
12.31.10 12.31.11
Assets P 700,000 P 900,000
Liabilities 200,000 100,000
Net worth P 500,000 P 800,000

The following data pertain to 2011:


Personal, family and living expenses P 72,000
Other non-deductible expenses 30,000
Philippine Lotto winnings 100,000
Other non-taxable income 22,000

How much is the deficiency income tax per investigation?

ANSWER: PhP 12,000

Solution:

Net worth, 12.31.11 P 800,000


Net worth, 12.31.10 500,000
Increase in net worth 300,000
Add (Deduct):
Personal, family and living expenses 72,000
Other non-deductible expenses 30,000
Philippine Lotto winnings ( 100,000)
Other non-taxable income ( 22,000)
Net income per investigation P 280,000
Less: Basic personal exemption P50,000
Additional exemption 50,000 100,000
Taxable net income per investigation P 180,000
Tax due Sec. 24 (A) P 32,500
Less: Income tax paid per return ( 20,500)
Deficiency income tax P 12 ,000

FINAL ROUND
EASY ROUND - Question 1
An individual taxpayer, married, and with two (2) qualified dependent children, has the following data for the
current year:

Gross business income P 500,000


Long term capital gain 20,000
Short term capital loss 5,000
Deductions (excluding charitable and
other contributions) 124,200
Contributions to University of the Philippines 10,000
Contributions to a non-profit religious
domestic corporation 25,000
Contribution of office equipment to a non-profit
organization for the rehabilitation of veterans
(acquisition cost, P20,000; FMV, P15,000)

How much is the taxable net income?

ANSWER: PhP 233,220

Solution:

Gross income PhP 500,000


Other income:
Capital gain (50%) PhP 10,000
Capital loss (100%) (5,000)
Net capital gain 5,000
Total PhP 505,000
Less: Deductions (124,200)
Net income before charitable and other contributions PhP 380,800
Less: Charitable and other contributions (47,580)
Net income before exemptions PhP 333,220
Less: Basic personal exemption 50,000
Additional exemption 50,000 (100,000)
Taxable net income PhP 233,200

EASY ROUND - Question 2


Who of the following is an employee?

A. Officers and employees, whether elected or appointed, of the Government of the Philippines, or any
political subdivision thereof or any agency or instrumentality
B. An individual who is subject to the control or direction of another with regards to the result to be
accomplished by the work, but is free as to the means and methods for accomplishing the result
C. Individuals who follow an independent trade, business, or profession, in which they offer their services
to the public
D. None of the choices

ANSWER: A

Reference:
 Section 2.78.3, Revenue Regulations No. 2-98

EASY ROUND - Question 3


X died in 1990 leaving a will which directed all real estate owned by him not to be sold or disposed of for a
period of ten (10) years after his death and ordered that the property be given to Y upon the expiry of the 10-
year period. In 1990, the estate left by X had a fair market value of P1,000,000. In 2002, the fair market value
of said estate increased to P3,000,000 and the Commissioner of Internal Revenue assessed thereon estate
tax based on P3,000,000.
Is the Commissioner’s assessment based on P3,000,000 correct?

A. Yes. The assessment of the Commissioner is correct because on matters of assessment he has the
authority to determine the value to be assessed.
B. No. The assessment of the Commissioner is incorrect because the assessment should have been
based on the fair market value at the time of death which is P1,000,000.
C. Yes. The assessment of the Commissioner is correct because it was based on the value at the time of
assessment.
D. No. The assessment of the Commissioner is incorrect because estate tax is not subject to any
assessment.

ANSWER: B

References:
 Section 88 (B), NIRC, as amended Section 5, Revenue Regulations 2-2003

AVERAGE ROUND – Question 1


Based on the details below, compute the deductible retirement expense of Oliver Company for CY 2016:

Normal Cost for CY 2016 PhP8,934,660


Normal Cost for CY 2015 9,512,991
Current Service Cost for CY 2016 11,122,100
Current Service Cost for CY 2015 10,443,189
Contribution to the fund per Actuarial Valuation Report (AVR) 9,555,111
for CY 2016*
Contribution to the fund per Actuarial Valuation Report (AVR) 8,001,167
for CY 2015*
Payment to retirees from the fund 10,000,000
Amortization of past services cost – CY 2014 190,655
*Funding requirement is available.

ANSWER: PhP9,765,691.10

Solution:

Contribution to the fund per Actuarial Valuation Report (AVR) for CY PhP 9,555,111.00
2016
Normal Cost for CY 2016 8,934,660.00
Current year past service cost PhP 620,452.00

Normal Cost for CY 2016 PhP 8,934,660.00


Amortization of current year past service cost (1/10) 62,045.10
Amortization of past services cost – CY 2014 190,655.00
Deductible retirement expense for CY 2016 PhP 9,765,691.10

AVERAGE ROUND – Question 2


The following condensed data were taken from Quarterly income statements of DDS Corporation, which was
registered with the BIR in 2009. The data were for the year 2015.

First Second Third Fourth


Quarter Quarter Quarter Quarter
Sales P 1,200,000P 1,000,000 P2,200,000 P1,500,000
Beginning inventory 500,000 - - -
Purchases 300,000 200,000 400,000 500,000
Ending inventory 200,000 300,000 300,000 600,000
Rent income, gross
of 5% withholding
tax 150,000 150,000 200,000 -
Selling expenses250,000 350,000 150,000 300,000

How much is the tax payable for the entire year assuming the taxpayer uses itemized deduction method?

ANSWER: P 300,000

Solution:
Quarterly Declarations (Returns)

First Q Second Q Third Q


Sales P 1,200,000 P 1,000,000 P 2,200,000
Less: Cost of sales ( 600,000) ( 100,000 ) ( 400,000 )
Gross income P 600,000 P 900,000 P 1,800,000
Add: Other income 150,000 150,000 200,000
Total gross income P 750,000 P 1,050,000 P 2,000,000
Less: Deductions ( 250,000) ( 350,000 ) ( 150,000 )
Taxable income,
this quarter P 500,000 P 700,000 P 1,850,000
Add: Taxable income,
previous quarters - 500,000 1,200,000
Total taxable income
to date P 500,000 P 1,200,000 P 3,050,000
Tax rate 30% 30% 30%
Tax due P 150,000 P 360,000 P 915,000
Less: Tax credits/payments
Prior year’s excess
tax credit ( - ) ( - ) ( - )
Tax payments, previous
quarters ( - ) ( 142,500 ) ( 345,000 )
Creditable tax withheld,
previous quarters ( - ) ( 7,500 ) ( 15,000 )
Creditable tax withheld,
this quarter ( 7,500) ( 7,500 ) ( 10,000 )
Tax payable (overpayment) P 142,500 P 202,500 P 545,000

First Q Second Q Third Q


Beginning inventory P 500,000 P 200,000 P 300,000
Add: Purchases 300,000 200,000 400,000
Goods available for sale 800,000 400,000 700,000
Less: Ending inventory ( 200,000) ( 300,000 ) ( 300,000 )
Cost of sales P 600,000 P 100,000 P 400,000

Annual Return
Sales P 5,900,000
Less: Cost of sales ( 1,300,000 )
Gross income from operation P 4,600,000
Add: Non-operating and other income 500,000
Total gross income P 5,100,000
Less: Deductions ( 1,050,000 )
Taxable income P 4,050,000
Tax rate (except MCIT rate) 30%
Income tax P 1,215,000
Less: Tax credits/payments
Prior year’s excess credits ( - )
Tax payments, first 3 quarters ( 890,000 )
Creditable tax withheld, first 3 quarters ( 25,000 )
Creditable tax withheld, fourth quarter ( - )
Tax payable (overpayment) P 300,000

Computation of the Cost of Sale for the Whole Year


Beginning inventory P 500,000
Add: Purchases 1,400,000
Goods available for sale P 1,900,000
Less: Ending inventory ( 600,000 )
Cost of sales P 1,300,000
AVERAGE ROUND – Question 3
ADAKO Hotel, VAT-registered, offers different services to its guests. The following data taken from the books
of the taxpayer are for the first quarter of 2016:

Revenues Collections
Hotel rooms (local guests) P 800,000 P 700,000
Dining hall:
Sale of food and refreshments 1,000,000 850,000
Sale of wine, beer and liquor 700,000 600,000
Disco:
Sale of food and refreshments 600,000 550,000
Sale of wine, beer and liquor 500,000 450,000
How much is the output tax for the first quarter of 2016 using 12% VAT rate?

ANSWER: P 258,000

Solution:

Collections, hotel rooms P 700,000


Collections, dining hall (sale of food and refreshments) 850,000
Collections, dining hall (sale of wine, beer and liquor) 600,000
Gross receipts P 2,150,000
Tax rate 12%
Output tax P 258,000
Sales of food, refreshments, wine, beer and liquor in disco are subject to amusement taxes.

DIFFICULT ROUND – Question 1


From the following data, compute the income tax still due from a domestic corporation engaged in
merchandising business. For the calendar year 2011, the net income per books is P150,000, after considering
among others:

Non-taxable income (others) P 5,500


Inter-corporate dividends 5,500
Net capital loss 2,500
Bad debts written off 6,500
Non-deductible expenses (others) 12,000
Contribution to a non-profit religious organization 12,000
Contribution to Government’s priority program 1,500
Quarterly income tax payments 65,000
Provision for bad debts 8,000
The net income per books should be reconciled with the provisions of the Tax Code, meaning, items which are
not taxable must be excluded and items which are not deductible are to be added back.
How much is the net tax due and payable?

ANSWER: PhP 1,240

Solution:

Net income per books P 150,000


Add (Deduct):
Non-taxable income (others) ( 5,500 )
Inter-corporate dividends ( 5,000 )
Net capital loss 2,500
Bad debts written off ( 6,500 )
Non-deductible expenses (others) 12,000
Quarterly income tax 65,000
Provision for bad debts 8,000
Net income after charitable and other contributions P 220,500
Add: Charitable and other contributions
(P12,000 + P1,500) 13,500
Net income before charitable and other contributions P 234,000
Less: Charitable and other contributions
Deductible in full (P 1,500 )
Deductible with limit
Actual (P12,000)
Limit (5% X P234,000) (P11,700) ( 11,700 ) ( 13,200 )
Taxable net income P 220,800
Tax due (30%) P 66,240
Less: Payments, first 3 quarters ( 65,000 )
Tax payable P 1,240

DIFFICULT ROUND – Question 2


Babes Corp. imported an article from Japan. The invoice value of the imported article was Y1,000,000
(Y1=P0.35). The following were incurred in connection with the importation:

Insurance P 15,000
Freight 10,000
Postage 5,000
Wharfage dues 7,000
Arrastre charges 8,000
Brokerage fees 25,000
Facilitation fee 3,000

The imported article was subject to P50,000 customs duties and to P30,000 excise tax. After the release from
the Bureau of Customs, Babes Corp. paid P5,000, net of VAT, for trucking to a warehouse in Quezon City. It
also paid warehousing rent of P10,000, net of VAT.

How much was the VAT on importation using 12% VAT rate?

ANSWER: PhP 60,000

Solution:
Value of imported goods (Y1,000,000 X 0.35) P 350,000
Add: Customs duties P 50,000
Excise tax 30,000
Insurance 15,000
Freight 10,000
Postage 5,000
Wharfage 7,000
Arrastre charges 8,000
Brokerage fees 25,000 150,000
Total P 500,000
Tax rate 12%
VAT on importation P 60,000

Facilitation fee is not a legal charge. It is not included in the term “other charges prior to release of goods from Customs
custody.”

DIFFICULT ROUND – Question 3


Which of the following statements is not correct?

A. MCIT is not applicable to non-resident foreign corporations


B. The corporate quarterly return shall be filed within 60 days following the close of each of the first 3
quarters of the taxable year
C. Resident foreign corporations would be taxed on net income from within the Philippines only
D. Non-resident foreign corporations are taxed on gross income from within and without the Philippines.

ANSWER: D.