201

0–201
5
TAXATI
ONBAREXAM QUESTI
ONSON
I
NCOMETAX
ThePhi
l
ippi
nesadopt
edt
hesemi
-gl
obal
taxsyst
em,whi
chmeanst
hat
:(201
2BarQuest
ion)

a)Alltaxabl
eincomes,r egardlessofthenatureofi ncome,areaddedt oget
hert oarri
veatgr oss
i
ncome,andal lal
lowablededuct ionsarededuct edfrom thegrossincomet oar r
iveatthetax able
i
ncome;
b)Al lincomessubj ecttofinalwi t
hhol
ding t axesliabl
et oincomet axundert heschedul art ax
system,whi l
eallordinaryi
ncomeaswel lasincomenotsubj ecttof i
nalwithholdingtaxundert he
globaltaxsystem;
c)Alltaxabl
eincomesar esubjecttofi
nalwithholdi
ngt axesundertheschedul artaxsystem;
d)Alltaxabl
eincomesf r
om sour ceswit
hinandwi t
houtthePhili
ppinesar el
i
abl etoincomet ax .

SUGGESTEDANSWER:

b)Al li
ncomessubjecttofi
nalwi
thhol
ding taxesl
i
abl
etoincometaxundertheschedul
art
ax
system,whil
eallor
dinar
yincomeaswellasincomenotsubj
ectt
ofi
nalwi
thhol
dingt
axundert
he
globalt
axsystem

Anexampl
eofat
axwher
etheconceptofpr
ogr
essi
vi
tyf
indsappl
i
cat
ioni
sthe:(
201
1Bar

Quest
ion)

(
A)i
ncomet axonindivi
duals.
(
B)exci
setaxonpetroleum pr
oduct
s .
(
C)val
ue-addedtaxoncer t
ainar
ti
cles.
(
D)amusementtaxonboxi ngexhi
biti
ons.

SUGGESTEDANSWER:

(
A)i
ncomet
axoni
ndi
vi
dual
s.

Alai
nDescartes,aFrenchci
ti
zenper
manentl
yresi
dingi
nthePhi
li
ppines,received severali
tems
duri
ngthetaxableyear
.Whichamongthef
oll
owingisNOTsubj
ecttoPhil
ippineincomet axati
on?
(2011BarQues t
ion)

(A)Consul tancyf eesr eceived fordesigning acomput erpr ogram and i

nstal
l
ing t
he same i
n
the
Shanghai f
acili
tyofaChi nesefi
rm.
(B)Interestsf rom hi sdepositsinal ocalbankoff oreign currencyear
ned abroad
converted t o
Phil
ippinepes os.
(C)Dividendsr eceivedfrom anAmer icancorporat
ionwhichder i
ved60% ofitsannualgr
oss
receipt
sf rom Phi l
ippinesourcesforthepast7year s.
(D)Gainsder i
vedf rom thesaleofhiscondomi ni
um unitl
ocatedi nTheFort
,TaguigCityt
o
anotherr esidentalien.

SUGGESTEDANSWER:

(A)Consul
tancyfeesr
ecei
ved f
ordesi
gni
ng acomput
erpr
ogr
am and i
nst
all
i
ng t
he same i
n
t
he
Shanghaif
acil
it
yofaChi
nesef
ir
m.

I
ncomefrom t
heper
for
manceofser
vicesi
str
eat
edasi
ncomef
rom wi
thi
nthePhi
l
ippi
nes,i
f:
(201
2
BarQuest
ion)

a)Thepaymentofcompensat
ionf
ort
heser
vicei
smadei
nthePhi
l
ippi
nes;
b)Thecontr
actcal
l
ingfort
heperf
ormanceofser
vicesi
ssi
gnedi
nthePhi
l
ippi
nes;
c)Theser
vicei
sactual
l
yperfor
medinthePhi
li
ppines;
d)Ther
eci
pientofser
vicei
ncomei
sar
esi
dentoft
hePhi
l
ippi
nes.

SUGGESTEDANSWER:

c)Theser
vicei
sact
ual
l
yper
for
medi
nthePhi
l
ippi
nes

Sect
ion42,NI
RC.

Anindi
vi
dualtaxpayercanadoptei
thert
hecal
endarorf
iscal
per
iodf
orpur
posesoff
il
inghi
s
i
ncomet axr
eturn.(2010BarQuest
ion)

SUGGESTEDANSWER:

Fal
se.(
Sec.43,NI
RC)

Whi
chamongt
hef ol
l
owi
ngt
axpayer
sisr
equi
redt
ouseonl
ythecal
endaryearf
ort
axpur
poses?
(
201
1BarQuest
ion)

(A)Partnership exclusi
velyfort
hedesignofgovernmenti nf
rastr
uct
ure pr oj
ectsconsi dered as
pract
iceofci vi
lengineer i
ng.
(B)Joint-st
ockcompanyf or
medf orthepur
poseofunder t
aki
ngconstructionprojects.
(C)Busi nesspar tnershi
p engaged inenergyoperat
ionsunderaser vice contractwi t
ht he
government .
(D)Jointaccount( cuentasenparti
cipaci
on)engagedi
nt hetr
adingofmi neralores.

SUGGESTEDANSWER:

(A)Part
nership excl
usi
velyf
ort
hedesi
gnofgover
nmenti
nfr
ast
ruct
ure pr
oject
sconsi
der
ed as
pract
iceofcivi
lengineeri
ng.

Pier
redeSavigny,aFrenchman,ar ri
vedinthePhili
ppi
nesonJanuary1,2010andcont inuedto
l
iveandengageinbusinessi
nt hePhil
ippi
nes.Hewentonat ourofSoutheastAsiaf r
om August1
toNovember5,2010.Her eturnedtothePhil
ippi
nesonNovember6,2010andst ayedunt ilApr
il
15,
2011whenher etur
nedtoFrance.Heear nedduringhisst
ayinthePhil
i
ppinesagr ossi ncomeof
P3mi l
l
ionfr
om hisi
nvestmentsinthecountr
y.Fortheyear2010,Pi
err
e’staxabl
est atusisthatof:
(2011BarQuesti
on)

(A)anon-resi
dentali
ennotengagedintr
adeorbusinessinthePhil
i
ppines.(
B)anon-
resi
dent
ali
enengagedintradeorbusi
nessinthePhil
i
ppines.
(C)aresi
dentali
ennotengagedintradeorbusi
nessinthePhil
ippi
nes.
(D)aresi
dentali
enengagedintradeorbusi
nessinthePhil
ippi
nes.

SUGGESTEDANSWER:

(
B)anon-
resi
dental
i
enengagedi
ntr
adeorbusi
nessi
nthePhi
l
ippi
nes.

Ar
esi
dentcor
por
ati
oni
sonet
hati
s:(
201
2BarQuest
ion)
a)Or ganizedundert hel
awsoft
hePhili
ppinesthatdoesbusinessinanothercountry;
b)Or gani zed underthe l
awsofaforeigncount r
yt hatsetsup ar egi
onalheadquarterin
the
Phil
i
ppi nesdoingpr oductpr
omot
ionandi nf
ormati
ondi sseminat
ion;
c)Or ganizedundert hel
awsoft
hePhili
ppinesthatengagesbusinessinaspeci al
economiczone;
d)Or ganized underthelawsofaf orei
gncount rythatengagesi n businessin MakatiCit
y,
Phil
ippines .

SUGGESTEDANSWER:

d)Organi
zed undert
he l
awsofaf
orei
gncount
ryt
hatengagesi
nbusi
nessi
n Makat
iCi
ty,
Phi
l
ippi
nes

Sect
ion22(
H),NI
RC.

ApletsCorpor
ati
onisregist
eredunderthelawsoftheVi
rgi
nIslands.I
thasextensi
veoper at
ionsin
SoutheastAsia.Inthe Phil
ippi
nes,It
spr oduct
sar ei
mpor t
ed and sold ata mar k-
up byi t
s
exclusi
vedist
ri
butor
,Kim'sTradi
ng,Inc.TheBIRcompil
edar ecordofallt
heimpor t
sofKi mf r
om
Apletsandimposedat axonApletsneti
ncomeder i
vedf
rom it
sexportstoKim.IstheBIRcor r
ect?
(2011
BarQues t
ion)

(A)Yes.Apl etsisanon- resi

dentforeigncorporati
on engaged intrade orbusi nessinthe
Phil
ippines.
(B)No.Thet axshoul
dhavebeencomput edonthebasisofgrossrevenuesandnotneti ncome.
(C)No.Apl etsisanon-residentfor
eigncor porat
ion notengaged intrade orbusi nessin
the
Phil
ippines.
(D)Yes.Apl etsisdoing businessi
nt hePhi l
i
ppinest hr
ough i
tsexclusive di
str
ibutorKim's
Trading.Inc.

SUGGESTEDANSWER:

(C)No.Apl
etsi
sanon-
resi
dentf
orei
gncor
por
ati
on notengaged i
ntr
ade orbusi
nessi
nthe
Phil
i
ppi
nes.

Agener
alpr
ofessi
onal
par
tner
shi
p(GPP)i
sone:(
201
2BarQuest
ion)

a)Thati
sregister
edassuchwi t
ht heSecuri
ti
esandExchangeCommi ssi
on andtheBur
eauof
I
nternal
Revenue;
b)Thati
scomposedofi ndivi
dualswhoexer ciseacommonpr ofessi
on;
c)Thatexcl
usivel
yderivesincomef rom t
hepr act
iceoft
hecommonpr of
ession;
d)Thatderi
vesprofessionali
ncomeandr entali
ncomefrom pr
opertyownedbyit.

SUGGESTEDANSWER:

c)Thatexcl
usi
vel
yder
ivesi
ncomef
rom t
hepr
act
iceoft
hecommonpr
ofessi
on

Sect
ion26,NI
RC.

[Note:Thequest
ioni
sunfairbecausei
tgi
vesani
nit
iali
mpressi
onthatt
heexamineri
saski
ngthe
stat
ementwhichbestcharact
eri
zesaGPPbuttherealquest
ioni
sfoundaf
tert
heenumerati
onof
thechoiceswhi
chmightnotbenotbenoti
cedbytheexaminee.]
I
ncomei
sconsi
der
edr
eal
i
zedf
ort
axpur
poseswhen:(
201
1BarQuest
ion)

(A)itisr
ecognizedasrevenueunderaccounti
ngstandar
dsevenifthel
awdoesnotdoso.(B)t
he
taxpayerret
ir
esf r
om t
hebusinesswit
houtapprovalf
rom t
heBIR.
(C)thetaxpayerhasbeenpaidandhasr ecei
vedincashornearcashthet
axabl
eincome.(
D)the
earningprocessiscomplet
eorvirt
ual
lycompleteandanexchangehastakenpl
ace.

SUGGESTEDANSWER:

(
D)t
heear
ningpr
ocessi
scompl
eteorvi
rt
ual
l
ycompl
eteandanexchangehast
akenpl
ace.

Al
etasuedBoboyforbreachofpromiset
omarr
y.Boboylostt
hecaseanddulypai
dt hecour
t'
s
awardthatincl
uded,among others,Pl
00,
000 as mor
aldamages forthe mentalangui
sh
Al
etasuff
ered.

Di
dAl
etaear
nat
axabl
eincome?(
1%)
(201
3BarQuest
ion)

(A)ShehadataxableincomeofP100,
000sinceincomei
sincomefr
om what
eversour
ce.(
B)She
hadnotaxabl
eincomebecauseitwasadonat i
on.
(C)Shehadtaxableincomesi
nceshemadeapr ofi
t.
(D)Shehadnot axablei
ncomesi
ncemoraldamagesarecompensator
y.

SUGGESTEDANSWER:

(
D)Shehadnot
axabl
eincomesi
ncemor
aldamagesar
ecompensat
ory.

Exemplaryandmor aldamagesawarded t
oaparty-
li
ti
gantarenotconsi
der
ed t
axabl
eincome
(Ameri
ca N. A.
-Manil
a Br
anch vs.Commissi
onerofInter
nalRevenue,CTA Case No.6144,
March1 4,2005).

Hopef ulCorporat
ion obt ai
ned aloanfrom Gener ousBankandexecut ed amor tgage onitsreal
propertyt osecur
et heloan.When Hopef ulCorporat
ion f
ail
ed topayt heloan,GenerousBank
extr
ajudicial
l
yf oreclosed the mor t
gage on t he property and acqui r
ed the same as t he
highestbi dder.A mont h aft
ert he f
or ecl
osure,HopefulCor porati
on exercised i
tsr ightof
redempt i
onandwasabl etoredeem thepr opert
y.IsGenerousBankl i
abletopaycapi t
al gainstax
asar esultofthef
or eclosuresal
e?Explain.(2014BarQues t
ion)

SUGGESTEDANSWER:
No.SinceHopef ulCor porationexer ci sedi t
sr i
ghtt or edeem t heproper y,Gener
t ousBank
i
snotli
abletopaycapi talgainstaxont hef orecl osuresal e.Asst atedintheanal ogouscaseof
SupremeTr ansli
ner,I
nc.,v.BPIFami lySavi ngsBank,I nc.(G. R.No.1 65617,February25,201 1,
644SCRA59) ,Rev.Regs.No.4- 99expr essl ypr ovi
dest hatifamor tgagorexer ci
seshisrightof
redempti
onwi thi
noneyearf rom thei ssuanceoft hecer tif
icateofsal e,nocapi talgai
nstaxshall
beimposedbecausenosal eortransf erofr eal proper tywasr ealized.Iti
sonlyincaseofnon-
redemptonbyHopef
i ulCor porat
iont hattheobl i
gationt opaycapi t
algainstaxar i
ses,whichshall
bebasedont hebi dpri
ceoft hehi ghestbi dder .Thet axwi llbeimposedonl yupont heexpirat
ion
oftheone-yearper i
odofr edempt ion.Fur t
her mor e,theobl i
gationt opayt hecapitalgai
nst ax
wouldpri
mar i
lyfall
onthemor tgagor ,Hopef ulCor por ati
on,andnotonGener ousBank.
Mr.Awaspr epar
ing hisincome taxreturn andhadsome doubtonwhet heracommi ssi
on he
earnedshouldbedecl aredforthecurr
entyearorf orthesucceedingyear.Hesoughtt heopi ni
on
ofhisl awyer who advi sed him tor eportthe commi ssion int he succeeding year.He
heeded hislawyer'
sadvi ceandr epor
tedt hecommi ssi
on int hesucceeding year
.Thel awyer'
s
adviceturnedouttobewr ong;i
nMr .A' speti
ti
onagai nsttheBIRassessment ,thecour trul
ed
againstMr.A.

I
sMr
.Agui
l
tyoff
raud?(
1%)
(201
3BarQuest
ion)

(A)Mr.Aisnotguil
tyoffraudashesi mplyfoll
owedt headviceofhislawyer
.
(B)Mr.Aisguil
tyoffraud;hedel
iberatel
ydi dnotreportthecommi ssi
on i
nthecurr
entyearwhen
heshouldhavedones o.
(C)Mr.A'sl
awyershoul dpaythetaxforgivi
ngt hewr ongadvice.(
D)Mr .Aisgui
l
tyforf
ail
i
ngto
consul
thisaccountant.

SUGGESTEDANSWER:

(
A)Mr
.Ai
snotgui
l
tyoff
raudashesi
mpl
yfol
l
owedt
headvi
ceofhi
slawyer
.

nSant
I osv.PeopleofthePhi l
i
ppinesandBI R,theCour tofTaxAppeal s(CTA)acqui t
tedSantos
fr
om t he cr
imi
nalcase oftaxevasi on and r
uled thatfail
ureto suppl ycor rectand accurate
i
nformationmustbefull
yestabli
shedasaposi t
iveactorst ateofmind;itcannotbepr esumednor
att
ri
buted tomereinadvert
entornegl i
gentact s.Mor eover,theCTAr ei
terated thedoctri
ne in
Yuli
voSonshardwarev.Cour tofTaxAppeals(G.R.No.L-1 3203),January28,1 961,1SCRA
169)thatmereunderst
atementofat axi
snotitselfpr
oofoff raudforthepur poseoft axevasi
on.

I
nthepr
esentcase,Mr.Areli
edingoodfai
thontheexpert
iseofhi
slawyeri
nnotdecl
ari
nghi
s
i
ncomefort
hatyear.Ther
efore,hei
snotguil
tyoff
raud.

Acorpor
ati
onmaychangei
tst
axableyeart
ocal
endarorf
iscal
yeari
nfi
l
ingi
tsannual
incomet
ax
r
etur
n,provi
ded:(
201
1BarQuest
ion)

(A)i
tseekspri
orBIRapproval
ofitspr
oposedchangei
naccount
ingper
iod.(B)itsi
mul
taneousl
y
seeksBIRapproval
ofitsnewaccounti
ngperi
od.
(C)i
tshoul
dchangei t
saccounti
ngperiodt
woyearspr
iort
ochangi
ngit
staxableyear.
(D)i
tsconst
it
uti
onandby- l
awsauthori
zest
hechange.

SUGGESTEDANSWER:

(
A)i
tseekspr
iorBI
Rappr
oval
ofi
tspr
oposedchangei
naccount
ingper
iod.

Theappr opr
iat
emethodofaccounti
ngforacont
ract
oronhisl
ong-
ter
m const
ruct
ioncont
ract
(i
.e.
,itt
akesmor et
hanayeartofi
nish)i
s:(
2012BarQuest
ion)

a)Cashmet hod;
b)Accrual
met hod;
c)I
nstal
lmentsal
emethod;
d)Percent
ageofcomplet
ionmet
hod.

SUGGESTEDANSWER:

d)Per
cent
ageofcompl
eti
onmet
hod
Sect
ion1
27,NI
RC.

Whati
st al
he" l
event
stest
"?Expl
ainbr
ief
ly.(
201
0BarQuest
ion)

SUGGESTEDANSWER:

The“alleventstest”isat estappl
iedinthereal
izat
ionofincomeandexpensebyan
accr
ual-basi
st axpayer
.Thet estr
equires(
a)thef
ixi
ngofar i
ghttotheincomeorl
iabi
l
ityt
opay,
and(b)theavai l
abi
li
tyofreasonablyaccur
atedet
erminat
ionofsuchincomeordeduct
iondur
ing
thet
axableyear .

The"
all
event
stest
"ref
erst
o:(
201
2BarQuest
ion)

a)Aper sonwhousest hecashmet hodwher eallsal

eshavebeenfull
ypaidbythebuyersther
eof
;
b)Aper sonwhousest hei nst
all
mentsal esmet hod,wheretheful
lamountofconsider
ati
onispai
d
i
nf ull
bythebuyerthereofwi t
hintheyearofs ale;
c)Aper sonwhousest heaccr ualmet hod,wher ebyanexpenseisdeducti
blef
orthetaxabl
eyear
i
nwhi challt
heeventshadoccur r
edwhi chdeterminedthefactoft
heli
abil
i
tyandtheamount
thereofcoul
dbedet er
mi nedwi t
hr easonabl eaccur acy;
d)A per son who usest hecompl eted met hod,wher ebythe const
ruct
ion pr
ojecthasbeen
compl et
edduringt
heyeart hecontr actwass igned.

SUGGESTEDANSWER:

c)Apersonwhousest heaccr
ualmethod,wher
ebyanexpenseisdeduct
ibl
eforthet
axabl
eyear
i
nwhi challtheevent
shadoccurredwhichdeter
minedthefactoft
heliabi
li
tyandtheamount
ther
eofcouldbedeter
minedwit
hreasonabl
eaccuracy.

Theaccrualofi
ncomeandexpensei sper
mittedwhentheal
l-event
stesthasbeenmet.Thi
stest
requi
res:(
1)fi
xingofar ightt
oi ncomeorliabili
tyt
opay;(
2)t heavai
labi
l
it
yofthereasonabl
e
accurat
edeterminat
ionofsuchincomeorli
abili
ty.

Theal l
-eventst estrequires t
her i
ghtt oincome orl iabil
it
y bef i
xed,andt heamountofs uch
i
ncomeorl iabi
li
tybedet ermi
nedwi threasonabl eaccuracy.However ,t
het estdoesnotdemand
thatthe amountofi ncome orl i
abili
tybe known absol ut
ely,onlythata t axpayerhasathi s
disposaltheinformat i
on necessar ytocomput etheamountwi t
hr easonable accuracy.Theal l
-event stestissatisf
iedwher ecomput ati
onr emainsuncer t
ain,i
fitsbasisisunchangeabl e;the
testissati
sfi
edwher eacomput at
ionmaybeunknown,buti snotasmuchasunknowabl e,withi
n
thetaxable year.“The amountofl i
abili
ty does nothave t o be determined exactly;itmust
be det er
mined wi thr easonable accuracy.”( Commissioner ofI nter
nalRevenue vs.I sabela
CulturalCorporati
on,G. R.No.172231,Febr uary12,2007)

Therei
snotaxablei
ncomeunt
ilsuchi
ncomei
srecogni
zed.Taxabl
eincomei
srecogni
zedwhen
the:
(2011BarQuest
ion)

(A)taxpayerf
ail
stoi
ncludet
heincomeinhisi
ncomet
axretur
n.(B)i
ncomehasbeenact
ual
l
y
receivedinmoneyorit
sequival
ent
.(C)i
ncomehasbeenrecei
ved,ei
theract
ual
l
yor
cons tr
uct
ivel
y.
 (
D)t
ransact
iont
hati
sthesour
ceoft
hei
ncomei
sconsummat
ed.

SUGGESTEDANSWER:

(
C)i
ncomehasbeenr
ecei
ved,ei
theract
ual
l
yorconst
ruct
ivel
y.

In 2010,Juli
etUlbod earned P500,000.
00 asincome from herbeautypar l
orand recei
ved
P250,000.00asChr i
stmasgiftf
rom herspi
nst
eraunt
.Shehadnoot herrecei
ptsfort
heyear.She
spentP150,000.00fortheoperati
onofherbeaut
yparl
or.Fortaxpur
poses,hergrossi
ncomef or
2010is:(2011BarQues t
ion)

(
A)P750,
000.
00.(
B)P500,
000.
00.(
C)P350,
000.
00.(
D)P600,
000.
00.

SUGGESTEDANSWER:(
B)P500,
000.
00.

In2010,Mr.Plat
onsenthissist
erHel
en$1,000viaat el
egraphictr
ansfert
hroughtheBankofPI.
The bank'
sr emitt
ance cler
k made a mist
ake and cr edi
ted Helen wi
th $1,
000,000 which
shepromptlywithdrew.Thebankdemandedt hereturnoft hemistakenl
ycredi
tedexcess,but
Helenref
used.TheBI Rent
eredthepi
ctur
eandinvest
igatedHelen.

Woul
dtheBIRbecorrecti
fitdet
ermi
nest
hatHel
enear
ned t
axabl
eincome undert
hesef
act
s?
(
2013BarQuest
ion)

(
A)No,shehadnoi ncomebecauseshehadnor i
ghtt
othemist
akenl
ycredi
tedf
unds.(
B)Yes,
i
ncomeisincomeregardl
essofthesource.
(
C)No,itwasnotherfaul
tthatt
hefundsinexcessof$1,
000werecredi
tedt
oher.(
D)No,the
f
undsi
nexcessof$1 ,
000wer ei
neffectdonat
edtoher.

SUGGESTEDANSWER:

(
B)Yes,i
ncomei
sincomer
egar
dlessoft
hesour
ce.

Section32 oft heNIRC definesgr ossi ncomeasal lincomederived f

rom whatevers ource.
Consequent l
y,thefl
ow ofweal th,withoutanydi sti
ncti
on astothelawful
ness ofitssource,is
subjecttoincome t
ax.Inotherwor ds,t hephrase “income fr
om whateversource”discl
osesa
l
egislat
ivepoli
cytoi
ncludeallincomenotexpr esslyexemptedwit
hintheclassoftaxabl
eincome
underthelaw.

Mr.Gi pitborrowed from Mr .Maunawai n P100,000.

00, payabl
ei nfive (
5)equalmont hl
y
i
nstal
lments.Bef or
et he fi
rstinstall
mentbecame due,Mr .Gipitrendered generalcleani
ng
servi
cesi ntheentir
eof f
icebuilding ofMr .Maunawain,andascompensat i
on t heref
or,Mr .
Maunawai ncancel l
edtheindebt ednessofMr .Gipi
tuptotheamountofP75, 000.00.Mr .Gi
pit
cl
aimst hatt
hecancel l
ati
onofhi si ndebt
ednesscannotbeconsideredasgainonhi spar twhi
ch
mustbesubj ectt
oincomet ax,becauseaccor dingtohim,hedidnotact ual
lyreceivepayment
fr
om Mr .Maunawai n
f
ort
hegener
alcl
eani
ngser
vices.I
sMr
.Gi
pitcor
rect
?Expl
ain.(
201
4BarQuest
ion)

SUGGESTEDANSWER:

No.Secti
on50ofRev.Regs.No.2,ot herwiseknownasI ncomeTaxRegulations,provi
des
thati
fadebtorperfor
msser vi
cesf oracr edi
torwhocancel sthedebtinconsiderati
on forsuch
servi
ces,thedebtorr eal
i
zes i
ncome t ot hatamountas compensat i
on forhis ser vi
ces.In
the given probl
em, t hecancel
lat
ion ofMr .Gipit
’si
ndebtedness uptot heamountofPhp
75,000.00gaverisetocompens ati
oni ncome subj ect toi
ncome tax,si
nce Mr .Maunawai n
condoned suchamountasconsi derat
ionf orthegeneralcl
eani
ngservi
cesrenderedbyMr .Gipi
t.

PRTCor p.purchasedar esi

dentialhouseandlotwithaswimmingpooli nanupscalesubdi vi
sion
andrequi r
ed thecompany pr esidenttostayther
ewi t
houtpayi
ngr ent
;itreasoned outthatthe
companypr esidentmustmaintainacer t
ainimageandbeabl etoentert
ainguestsatthehouset o
promot et he company's business.The company pr esi
dentdeclared thatbecause they are
chil
dless,heandhi swif
ecoul dver ywell
li
veinasmal l
erhouse.

Wast
her
eat
axabl
efr
ingebenef
it
?(1%)
(201
3BarQuest
ion)

(A)Therewasnot axablefri
ngebenefi
tsi
nceitwasfort
heconvenienceoft heemployerandwas
necessaryfori
tsbusiness.
(B)Therewasat axablefr
ingebenefi
tsi
ncethestayatt
hehousewasf orf
ree.(C)Therewasa
taxabl
efri
ngebenef i
tbecausethehousewasveryluxuri
ous.
(D)Therewasnot axablefri
ngebenefi
tbecausethecompanypresidentwasonlyrequiredt
ost
ay
thereanddidnotdemandf r
eehousing.

SUGGESTEDANSWER:

(
B)Ther
ewasat
axabl
efr
ingebenef
itsi
ncet
hest
ayatt
hehousewasf
orf
ree.

First
,thecompanypr esidenti
snotar ank-and-fil
eempl oyee.Thus,thehousingbenef i
tissubject
tof r
ingebenef i
tstaxpur suantt
oSect i
on33oft heNI RCandSect ion2.33(A)oftheRRNo.03-
98.Al thoughthehousi ngbenefittothePr esi
dentmaybef ortheconvenience oft heempl oyer
(PRTCor p.)ornecessar ytoitsbusiness,sti
ll
,italsoinuredt othebenef i
tofthePr esi
dentashi s
stayt hereinisforf r
ee.RR No.03- 98al sopr ovidesf orthegui deli
nesandval uati
onoff r
inge
benef i
tsf orpurposesofcomput ing thepor ti
onwhi chshal lbesubjecttof r
ingebenef i
tstaxin
caseswher ethefringebenef i
tsentai
ljoi
ntbenef i
tstot heempl oyerandempl oyee.

Thus,t
her
ewasat
axabl
efr
ingebenef
it
.

I
ncomef r
om deal
i
ngsi
npr
oper
ty(
real
,per
sonal
,ormi
xed)i
sthegai
norl
ossder
ived:(
201
1Bar
Quest
ion)

(
A)onlyf
rom t
hecashsalesofpropert
y.
(
B)fr
om cashandgrat
uit
ousreceipt
sofproper
ty.(
C)f
rom sal
eandl
easeofpr
oper
ty.
(
D)onlyf
rom t
hesal
eofpr oper
ty.

SUGGESTEDANSWER:

(
D)onl
yfr
om t
hesal
eofpr
oper
ty.
An i
ndivi
dual
,who isar ealestat
e dealer
,sol
d aresi
dent
iallotin Quezon Ci
tyatagai n of
P100,
000.00(sel
li
ngpri
ceofP900, 000.
00andcosti
sP800,00.00).Thesalei
ssubjectt
oincome
t
axasfoll
ows:(2012BarQuesti
on)

a)6% capit
algai
nstaxont
hegai n;
b)6% capit
algai
nstaxonthegrosssell
i
ngpr i
ceoff
airmar
ketval
ue,whi
cheveri
shi
gher
;
c)Ordi
naryincometaxatt
hegr aduat
edr at
esof5% t
o32% ofnett
axabl
eincome;
d)30% incometaxonnettaxablei
ncome.

SUGGESTEDANSWER:

c)Or
dinar
yincomet
axatt
hegr
aduat
edr
atesof5% t
o32% ofnett
axabl
eincome

Sect
ion24,NI
RC.

InMar ch2009,Tonet t
e,whoisf ondofjewel ri
es,boughtadi amondr ingf orP750,000.00,a
braceletforP250, 000.00,anecklaceforP500, 000.00,andabr oochf orP500, 000.00.Tonette
deri
vesi ncomef rom theexerci
seofherpr ofessi
onasal i
censedCPA.I nOct ober2009,Tonette
sold herdi amond r i
ng,bracel
et, and necklace f oronl yP1.25 mi ll
ion incurr
ing a lossof
P250, 000.00.Sheusedt heP1.25mill
i
on tobuyasol odiamond r inginNovember2009whi ch
shesol dforP1.5mi l
li
on inSeptember2010.Tonet tehadnoot hertransactioninjewelryin2010.
Whichamongt hef ol
lowingdescri
besthet aximplicat
ionsarisi
ngf rom t heabovet ransact
ions?
(2011BarQues tion)

(A)Tonett
emaydeducthis2009lossonl
yfrom her2009prof
essi
onal
income.( B)Tonet
temay
carr
yoveranddeducther2009lossonl
yfrom her2010gai
n.
(C)Tonett
emaycarr
yoveranddeducther2009l ossfr
om her2010pr
ofessionali
ncomeaswell
asfrom hergai
n.
(D)Tonett
emaynotdeducther2009lossfrom bot
hher2010prof
essi
onalincomeandhergain.

SUGGESTEDANSWER:

(
B)Tonet
temaycar
ryoveranddeducther2009l
ossonl
yfr
om her201
0gai
n.

Feder
ico,a Fi
l
ipi
no ci
ti
zen,migr
ated t
ot he Unit
ed St
ates some si
x year
s ago and gota
permanentr
esi
dentst
atusorgr
eencard.Heshouldpayhi
sPhili
ppinei
ncometaxeson:(2011Bar
Questi
on)

(A)thegai nsder i
ved f r
om t hesaleinCali
forni
a,U. S.
A.ofjewel
ryhe pur chased inthe
Phil
i
ppines .
(B)t
hepr oceedsher eceivedfrom aPhi
li
ppi
neinsurancecompanyasthesolebenef i
ciar
yofli
fe
i
nsurancet akenbyhi sfatherwhodi edr
ecentl
y.
(C)thegainsder i
vedf r
om t hesal
eintheNewYor kStockExchangeofshar
esofst ockinPLDT,a
Phil
i
ppinecor poration.
(D)divi
dendsr eceivedfrom at woyearol
dforei
gncor por
ati
onwhosegrossincomewasder i
ved
sol
elyfrom Phil
ippinesour ces.

SUGGESTEDANSWER:
(C)thegai
nsder
ivedfr
om t
hesal
eint
heNewYor
kSt
ockExchangeofshar
esofst
ocki
nPLDT,a
Phil
i
ppinecor
porati
on.

Keyr
and,I nc.
,a Phil
i
ppine corpor
ati
on,soldt hr
ough the l
ocalst
ockexchange 10,
000 PLDT
shar
est hati
tbought2yearsago.KeyrandsoldthesharesforP2mil
li
onandreal
i
zedanetgainof
P200,000.00.Howshalli
tpaytaxonthetransacti
on?(2011BarQuesti
on)

(A)I
tshall
decl are aP2mi l
li
ongr ossincomei nit
sincome taxret
urn,deducti
ng i
tscostof
acqui
sit
ionasanex pense.
(B)I
tshall
r eportt
heP200, 000. 00 i
nitscorpor
ateincomet axret
urnadj
usted byt
heholding
peri
od.
(C)I
tshallpay5% t axonthef i
rstP100,000.00oftheP200,000.
00and1 0% taxontheremaini
ng
P100,000.00.
(D)I
tshallpayat axofone- hal
fof1 % oftheP2milli
ongrosssal
es.

SUGGESTEDANSWER:

(
D)I
tshal
lpayat
axofone-
hal
fof1
% oft
heP2mi
l
li
ongr
osssal
es.

In2006,Mr .VicenteTagl
e,ar et
iree,bought10,
000CDA sharesthatareunli
stedinthelocal
stockexchangeforP10pershare.In2010,thesai
dshareshadabookvaluepershareofP60per
share.I
nviewofacaraccidentin2010,Mr .Vi
cent
eTaglehadtosellhi
sCDAsharesbuthecould
sellt
hesameonl yforP50pershare.Thesalei
ssubjectt
otaxasf
oll
ows:(201
2BarQues ti
on)

a)5%/ 10% capit

al gai
nstaxonthecapi talgainfr
om saleofP40pershare(P50selli
ngpricel
ess
P10cos t);
b)5%/ 10% capit
al gai
nstaxonthecapi talgainofP50pershar e,ar
ri
vedatbydeductingthecost
(P10pershar e)from t
hebookval ue(P60pers hare)
;
c)5%/ 10% capitalgai
nstaxont hecapi talgai
nfrom saleofP40pershare( P50sell
ingpri
celess
P10 cost)pl usdonor ’
st axon t he excessoft he f
airmar ketval
ue ofthe sharesovert he
considerati
on;
d)Graduat ed i
ncome t axrat
esof5% t o32% ont henett axabl
eincome fr
om thesaleofthe
shares.

SUGGESTEDANSWER:

c)5%/10% capi
talgai
nstaxont
hecapi t
algai
nfr
om saleofP40pershar
e(P50sel l
i
ngpri
celess
P10 cost
)plusdonor ’
staxon the excessofthe f
airmarketval
ue ofthe sharesoverthe
consi
derat
ion

Sect
ion24(
C)i
nrel
ati
ont
oSect
ion1
00,NI
RC;RRNo.6-
2008.

I
n2000,Mr .Belenboughtar esi
denti
al houseandlotforP1,000,
000.Heusedt hepropert
yashis
andhisfamil
y'
spr i
ncipalr
esi
dence.Itisnowyear2013andhei sthinki
ngofsel
li
ngthepropert
yto
buyanew one.Heseeksyouradvi ceonhow muchi ncomet axhewoul dpayifhesel l
sthe
propert
y.Thetotalzonalval
ueofthepr opert
yisP5,000,000andt hefai
rmarketval
ueperthetax
declar
ati
onisP2,500,000.Heintendst osel
li
tforP6,000,000.
Whatmateri
alconsi
derat
ionswil
lyou t
ake i
nto accountin comput
ing t
he i
ncome tax?
Pl
easeexpl
aint
helegal
rel
evanceofeachoftheseconsider
ati
ons.(
201 3BarQuest
ion)

SUGGESTEDANSWER:

I
ncomputingthecapitalgainstax,afi
nalt
axofsi
xpercent(
6%)basedont hegrosssel
li
ng
pr
iceorcurr
entfairmarketvalue,whicheverishi
gher
,shal
lbeimposed.Inthiscase,t
hebasisof
t
hetaxisP6,000,000.00,the gr oss sell
i
ng pri
ce,bei
ng higherthan P2,500,00.
00,t he f
air
marketval
ue oftheresidenti
alhous e.

Nevert
heless,ifwithinthi
rt
y( 30)daysfrom thedateofsaleordi sposit
ion,Mr .Belen
noti
fi
estheCommi ssi
onert hathe int
endsto uti
li
ze the whol
e P6,
000,000.00 in acquir
ing a
new house wi t
hineighteen( 1
8)calendarmonthsfrom thesal
e,thegr
osssel l
i
ngpr iceshallbe
exemptfrom t
hecapi t
algainstax.

I
fMr .Bel
endoesnotut i
li
zethewholeP6,000,000.
00 inacqui
ri
nganewr esidence under
thecondi t
ionsabove,t hepor t
ionofthegainpresumedt ohavebeenr eal
i
zedfrom thesal eor
disposi
ti
on s hal
lbe subj ectto capi
talgains t
ax.Fort hi
s pur
pose,P6,000,
000. 00 shal
lbe
mul t
ipl
i
edbyaf racti
onwhi chtheunuti
li
zedamountbear stothegrosssel
li
ngpriceinor derto
determine the t
axable porti
on and t
he 6% capitalgai
nstaxshallbe i
mposed thereon under
Section24(D)oftheNI RC.

Mr.Hdeci dedtosellt
hehouseandl otwhereinheandhisfamil
yhavelivedforthepast10years,
hopingtobuyandmovet oanew houseandl otcl
osert
ohischil
dren'
sschool .Concer
nedabout
thecapit
algainstaxthatwillbedueonthesaleofthei
rhouse,Mr.Happr oachesyouasaf ri
end
foradvi
cei fi
tispossibl
ef orthesal
eoftheirhousetobeexempt ed f
r om capit
algai
nstaxand
theconditi
ons theymustcompl ywithtoavailthemsel
ves ofsaidexempt i
on. How wil
lyou
respond?(2015BarQues t
ion)

SUGGESTEDANSWER:

Mr.H mayavai ltheexempt i

onf rom capit
algainstaxonsal eofpr incipalresidenceby
nat ur
alper sons.Undert hel aw,thef oll
owingar etherequisi
tes:(1)proceedsoft hesal eoft he
principalresidencehavebeenf ull
yut i
l
izedinacqui r
ingorconst r
uctingnew pr i
ncipalresidence
withineighteen( 1
8)cal endarmont hsfrom thedateofsal eordisposit
ion;(2)Thehi stor
icalcostor
adjustedbasi softher ealpropertysold ordisposed wi l
lbe car r
ied overt ot he new pr i
ncipal
residence bui l
toracqui red;(3)TheCommi ssi
onerhasbeendul ynot if
ied,thr
oughapr escri
bed
return,withinthi
rty(30)daysf rom thedat eofsaleordisposit
ionoft heper son’sintent
iont oavail
oft hetaxexempt ion;and( 4)Exempt i
onwasavai l
edonlyonceever yten(10)year s.

I
nteresti
ncomeofadomest
iccommerci
albankder
ivedf
rom apesol
oant
oadomest
ic
corporat
ioni
n2010i
s:(
2012BarQuest
ion)

a)Subj
ecttothe30% incomet axbasedonitsnett
axabl
eincome;
b)Subj
ecttothe20% final
withholdi
ngtax;c)Subj
ecttothe7.
5% f
inal
wit
hhol
dingt
ax;d)Subj
ect
to10% f
inal
withhol
dingtax.

SUGGESTEDANSWER:

a)Subj
ectt
othe30% i
ncomet
axbasedoni
tsnett
axabl
eincome
Sect
ion27(
A).

ABCCor
p.wasdi
ssol
vedandl
i
qui
dat
ingdi
vi
dendswer
edecl
aredandpai
dtot
hest
ockhol
der
s.

Whatt
axconsequencef
oll
ows?(
1%)(
201
3BarQuest
ion)

(A)ABCCor p.shoul
ddeductaf i
naltaxof1
0% from thedivi
dends.
(B)Thest
ockholdersshoulddecl
arethei
rgainfr
om theiri
nvest
mentandpayi
ncomet
axatt
he
ordi
naryr
ates.
(C)Thedi
videndsareexemptf r
om tax.
(D)ABCCor p.shoul
dwi t
hholda10% credi
tabl
etax.

SUGGESTEDANSWER:

(
C)Thedi
vi
dendsar
eexemptf
rom t
ax.

Li
qui
dat
ingdi
vi
dendsar
enoti
ncomeandar
ethusnotsubj
ectt
oincomet
ax.

In Wise & Co.,Inc.v.Meer( G.R.No.48231 ,June 30,1 947),the Supreme Courtdefi

ned
l
iquidat
ing di
vidends as the dissolvi
ng corporat
ion’s paymentst ot he st
ockhol
dersfortheir
surr
enderandr elinqui
shmentofi nteresti
nthedissolvi
ngcor porat
ion.Theyaregeneral
lyaretur
n
ofcapital
.Liquidati
ng dividendsar eunli
kecashandpr opertydivi
dendswhi chareporti
onsof
corporateprofi
tst hataresetasi def ordist
ri
buti
on t othe stockholder
si npropor
ti
on t
ot hei
r
1
subscri
pti
ontot hecapital
stockoft hecorporati
on.

MGCCor p.secur
edani
ncometaxholi
dayfor5yearsasapioneeri
ndust
ry.Onthefour
thyearof
t
hetaxholi
day,MGCCorp.decl
aredandpaidcashdivi
dendst
oitsst
ockholder
s,al
lofwhom are
i
ndi
vidual
s.

Ar
ethedi
vi
dendst
axabl
e?(
1%)
(201
3BarQuest
ion)

(A)The divi
dendsaretaxabl
e;thetaxexemption ofMGC Cor p.doesnotextend t
oits
stockhol
ders.
(B)Thedivi
dendsar
etaxexemptbecauseofMGCCor p.
'sincomet axholi
day.
(C)Thedivi
dendsar
etaxablei
ftheyexceed50% ofMGCCor p.'
sretai
nedearni
ngs.(
D)The
divi
dendsareexempti
fpaidbeforet
heendofMGCCor p.'
sfiscalyear
.

SUGGESTEDANSWER:

(
A)Thedi vi
dendsar
etaxabl
e;t
het
axexempt
ion ofMGC Cor
p.doesnotext
end t
oit
s
st
ockhol
ders.

MGCCor p.andi
tsst
ockhol
der
saresepar
atet
axenti
ti
esundert
heNI
RC.Consequent
ly,MGC
Cor
p.’
staxexempti
ondoesnotext
endtoi
tsst
ockhol
ders.

Undert
heNIRC,st
ockhol
derswhorecei
vedivi
dendsfr
om adomest iccor
por
ati
onar esubj
ectt
o
t
hef ol
l
owi
ng schedul
erincometaxrates:10% forFi
li
pino ci
ti
zensand i
ndi
vidualresi
dent

1
Campos,TheCor
por
ati
onCode,Vol
umeI
I,p.209.
alens2;20% f
i ornon-r
esi
dental
i
ensengaged intr ness3;and1
ade orbusi 5% f
ornon-resi
dent
4
forei
gncorpor
ati
ons.Thus,t
hestockhol
der
’scl
aimfort
hetaxexemptioni
sunmeri
tor
ious.

I
n June 2013,DDD Cor p.,a domest ic corporat
ion engaged int he busi
nessofl easing r
eal
proper t
iesinthePhili
ppi
nes,ent er
edi ntoal easeagr eementofar esidenti
alhouseandl otwith
EEE,I nc.,anon- resi
dentf or
eign corporation.The resident
ialhouse and lotwil
lbe used by
offi
cialsofEEE,Inc.dur i
ngt heirvisi
ttot hePhi l
i
ppines.Thel easeagr eementwassi gnedby
representati
vesfr
om DDDCor p.andEEE,I nc.inSingapore.DDDCor p.didnotsubjectthesaid
l
easet oVATbel i
evingthati twasnotadomest i
cser vi
cecontract.WasDDD Cor p.cor r
ect?
Explain.(2015BarQues t
ion)

SUGGESTEDANSWER:
DDD Corp.isnotcor r
ect.Anyper sonwho,i nt heordi
narycourseoft r
adeorbusi ness,
l
eas espropert
ies,whet herpersonalorr eal,shallbesubjecttoval
ue-added tax( VAT),except
forunlessthegr ossannualr eceiptsoft he lessordo notexceed P1 ,
91 9,
500.00 ort hatthe
mont hl
yrent
aldoesnotex ceedP1 2,800,forresidenti
alunit
s.Basedont hedesti
nationprinci
ple,
goodsandser vicesaretaxedonlyi nthecount rywher etheyareconsumed.Her e,t heservi
ces
renderedtotheoffi
cial
sofEEEar ewi t
hint
hePhi li
ppines.Hence,DDDCor p.i
ssubjecttoVAT.

Fori
ncomet
axpurposes,t
hesour
ceoft
heser
vicei
ncomei
simpor
tantf
ort
het
axpayer
,whoi
sa:
(201
2BarQuest
ion)

a)Fil
i
pinociti
zenresidinginMakat
iCit
y;
b)Non- r
esidentFil
i
pinociti
zenworki
ngresi
dingi
nLondon,Uni
tedKingdom;
c)Japaneseciti
zenwhoi smarr
iedtoaFil
i
pinoci
ti
zenandresi
dingi
nthei
rfami
l
yhomel
ocat
ed
FortBonif
acio,TaguigCity;
d)Domest i
ccor porati
on.

SUGGESTEDANSWER:

b)Non-
resi
dentFi
l
ipi
noci
ti
zenwor
kingr
esi
dingi
nLondon,Uni
tedKi
ngdom

Sect
ion23i
nrel
ati
ont
oSect
ion42,NI
RC.

Duringtheauditconduct
edbyt heBIRoffi
cial
,itwasfoundthatt
herentali
ncomeclai
medbyt he
corporat
ion wasnotsubjected t
o expanded withhol
ding t
ax.Accor
dingly,t
he cl
aimed r
ental
expense:(2012BarQues t
ion)

a)Isdeductibl
ef rom t hegrossi
ncomeoft hecor por
ation,despit
enon- wit
hholdi
ngofincomet ax
byt hecorporation;
b)I sdeduct i
blef rom t hegrossincomeoft hecor porati
on,pr ovi
ded thatthe 5% expanded
withholdi
ngtaxi spai dbythecorporat
ionduringtheaudi t
;
c)Isnotdeduct iblefrom grossi
ncomeoft hecor por
ationduet onon- wi
thholdi
ngoftax;
d)Isdeductible,ifitcanbeshownt hatthelessorhascor r
ectl
yrepor t
edtherentali
ncomeinhis
taxr et
urn.

SUGGESTEDANSWER:

2
NI
RC,Sect
ion24(
B)(
2).
3
NI
RC,Sect
ion25(
B).
4
NI
RC,Sect
ion28(
5)(
b).
c)I
snotdeduct
ibl
efr
om gr
ossi
ncomeoft
hecor
por
ati
onduet
onon-
wit
hhol
dingoft
ax;

Sect
ion34(K),NIRC.
[Not
e:Percentagetaxi
sout
sideoft
hecover
age]

Ms.C,ar
esi
dentci
ti
zen,boughtr
eady-
to-
weargoodsf
rom Ms.B,anonr
esi
dentci
ti
zen.

a)I
fthegoodswereproducedfrom Ms.B'
sfactor
yint
hePhi
l
ippi
nes,i
sMs.B'
sincomef
rom t
he
sal
etoMs.Ctaxabl
einthePhil
i
ppines?Expl
ain.

b)I
fMs.Bi sanal
i
enindi
vi
dualandt
hegoodswer eproducedi
nherfact
oryi
nChina,i
sMs.B's
i
ncomef r
om thesal
eofthegoodst o Ms.C t
axabl
eint hePhi
l
ippi
nes? Expl
ain.(
201
5 Bar
Quest
ion)

SUGGESTEDANSWER:

a.Yes,t he i ncome ofMs.B f rom the sal

e ofr eady-to-
weargoods t o Ms.C i
s
t
axable. A nonr esidentcit
izen i
st axable onl
y on i
ncome der ived f
rom sourceswit
hint
he
Phi
li
ppines.I
nl i
newi ththesourcerul
eofi ncometaxati
on,si
ncet hegoodsareproducedandsol
d
wit
hinthePhil
ippines,Ms.B’ sPhil
i
ppine-sourcedincomeistaxableinthePhi
l
ippines.

b.Yes,butonlyapr opor
ti
onatepartoft
heincome.Gains,pr
ofi
tsandincomefr
om thesal
e
ofpersonalpropert
ypr oducedbyt hetaxpayerwit
houtandsol dwit
hinthePhil
i
ppi
nes,shal
lbe
t
reat
edasder ivedpartl
yfrom sour
ceswithinandpart
lywi
thoutthePhil
i
ppines.

Tr
ueorFal
se.

Gainsr
eali
zedbythei
nvestoruponr
edemptionofshar
esofst
ocki
namut
ual
fundcompanyar
e
exemptfr
om incomet
ax.(2010BarQuest
ion)

SUGGESTEDANSWER: TRUE.

Theproceedsr
eceivedunderali
fei
nsur
anceendowmentcont
racti
sNOTconsi
der
edpar
tof
grossi
ncome:(201
1BarQues ti
on)

(A)i
fiti
ssostat
edinthelif
einsur
anceendowmentpoli
cy.(B)i
fthepr
icef
ort
heendowment
poli
cywasnotfull
ypaid.
(C)wherepaymentismadeasar esul
toft
hedeat
hoftheinsur
ed.
(D)wherethebenefi
ciar
ywasnott heonewhotookoutt
heendowmentcontr
act
.

SUGGESTEDANSWER:

(
C)wher
epaymenti
smadeasar
esul
toft
hedeat
hoft
hei
nsur
ed.

Al
lt
hei
temsbel
owar
eexcl
udedf
rom gr
ossi
ncome,except
:(201
2BarQuest
ion)

a)Gai
nfr
om sal
eofl
ong-
ter
m bonds,debent
uresandi
ndebt
edness;
 b)Valueofpr opertyreceivedbyaper sonasdonat
ionorinheri
tance;
c)Retir
ementbenef i
tsreceivedf
rom theGSIS,SSS,oraccredi
tedret
ir
ementplan;
d)Separ at
ionpayr eceivedbyar et
ir
ingemployeeunderavoluntaryr
eti
rementprogr
am oft
he
corporateempl oyer.

SUGGESTEDANSWER:

d)Separ
ati
onpayrecei
vedbyar
eti
ri
ngempl
oyeeunderavol
unt
aryr
eti
rementpr
ogr
am oft
he
cor
porat
eemployer
.

Sect
ion32(
B)(
6),NI
RC.

Mr.A,acit
izenandresi
dentofthePhi
l
ippi
nes,i
saprofessi
onalboxer.I
napr of
essi
onalboxi
ng
matchheldin2013,hewonprizemoneyinUnit
edSt
ates(US)doll
arsequival
entt
o
P300,000,000.

a)I
stheprizemoneypai dt
oandr eceivedbyMr .AintheUSt axabl
eint hePhi
l
ippi
nes?Why?
b)MayMr .A' spri
zemoneyqual if
yasanexcl usi
onf rom hi
sgrossincome?Why?
c)TheUSal readyimposedandwi thheldincomet axesfrom Mr.A'sprizemoney.HowmayMr .A
use orapplyt he income taxeshe pai d on hispr i
ze moneyt ot he US when hecomput
es
hi
sincomet axliabi
li
tyi
nthePhili
ppinesf or2013?( 2015BarQues ti
on)

SUGGESTEDANSWER:

a.Yes.UndertheTaxCode,theincomewi t
hinandwit
houtofaresi
dentci
ti
zenistaxabl
e.
Si
nceMr .Aisaresi
dentFi
l
ipi
noci
ti
zen,hisi
ncomewor l
dwi
deist
axabl
eint
hePhil
ippi
nes.

b.No.Undert he l
aw,al lpr
izesand awardsgrant
ed toat
hletesinlocaland i nt
ernati
onal
sport
scompet i
ti
onswhet herheldi nt
hePhili
ppinesorabr
oadandsanct i
onedbyt hei
rnat i
onal
sport
sassociat
ionareexcl udedfrom gr
ossincome.However,i
nt hiscase,thereisnoshowi ng
thatt
heboxingmat chwassanct ionedbythePhili
ppi
neNati
onalSpor t
sCommi ssi
on.Ther ef
or e,
thepri
zemoneyi snotexcluded.

c.Mr .Amayavai
loft
axcredi
tagai
nsthistaxl
iabi
l
it
yinthePhi
li
ppinesf
ort
axespai
dinf
orei
gn
countr
ies.Hehast
osigni
fyi
nhisi
ncomet axretur
nhisdesi
retoavai
lt
hededucti
on.

Pol
i
ti
cal
campai
gncont
ri
but
ionsar
eNOTdeduct
ibl
efr
om gr
ossi
ncome:(
201
1BarQuest
ion)(
A)i
fthey

arenotreport
edtotheCommissi
ononEl ecti
ons.
(B)i
fthecandidat
esupport
edwinstheelect
ionbecauseofpossi
blecor
rupt
ion.(
C)sincet
heydo
nothelpearnthei
ncomefrom whi
cht heyar
et obededucted.
(D)si
ncesuchamount sar
enotconsideredasincomeofthecandi
datetowhom given.

SUGGESTEDANSWER:

(
C)si
ncet
heydonothel
pear
nthei
ncomef
rom whi
cht
heyar
etobededuct
ed.

Theint
erestexpenseofadomest
iccor
porati
ononabankl
oani
nconnect
ionwi
tht
hepur
chaseof
aproducti
onequipment:(
2012BarQuest
ion)

a)I
snotdeduct
ibl
efr
om gr
ossi
ncomeoft
hebor
rower
-cor
por
ati
on;
b)Isdeduct
ibl
efr
om thegrossincomeoft heborr
ower-cor
por
ati
on duri
ngt
heyearori
tmaybe
capit
ali
zedaspar
tofcostoftheequipment ;
c)I
sdeductibl
eonlyf
oraper i
odoffiveyearsfr
om dat
eofpurchase;
d)Isdeduct
ibl
eonlyi
fthet
axpayerusest hecashmethodofaccount
ing.

SUGGESTEDANSWER:

b)Isdeduct
ibl
efr
om t
hegr ossi
ncomeofthebor
rower
-cor
por
ati
on dur
ingt
heyearori
tmaybe
capit
ali
zedaspar
tofcostoftheequi
pment.

Sect
ion34(
B)(
3),NI
RC.

Aisatravel
l
ingsal esmanwor ki
ngful
lti
mef orNuSki nProducts.Hereceivesamont hlysal
ary
pl
us3% commi ssi
ononhi ssalesinaSouthernpr
ovincewher eheisbased.Heregularl
yuseshis
owncartomaximi zehisvi
sit
seventofarfl
ungareas.Onef i
nedayagr oupofmili
tantssei
zedhis
car
.Hewasnot if
iedt hefol
lowi
ngdaybyt hepoli
cet hatthemar i
nesandt hemi l
i
tantshada
bl
oodyencounterandhi scarwascompletel
ydestr
oyedaf t
eragrenadehiti
t.

Awantstofi
l
e acl
aim f
orcasual
tyl
oss.Expl
aint
he l
egalbasi
s ofyourt
ax advi
ce.(
201
0
Bar
Quest
ion)

SUGGESTEDANSWER:

Ai s notent
it
led to clai
m a casual tyloss because al
lofhi sincome par t
ake the
nature ofcompensati
oni ncome.Taxpayer searni
ngcompensat i
onincomearisi
ngfrom per
sonal
servi
cesunderanempl oyer-employee r
elati
onshi
p are notal
lowed tocl
aim deducti
on except
thoseallowed underSec.
34(M)oft he Tax Code r efer
ri
ng onlyt o Php 2,400 healt
h and hospit
ali
zat
ion i
nsurance
premiums .
Therefore,t
heclai
m ofcasualtyl
osshasnol egalbasi
s.

Dr.Tai
mti
mi sanalumnusoft
heCol
l
egeofMedici
neofUniversalUniver
sit
y(UU)
,apr
ivat
ely-
ownedcenterf
orl
earni
ngwhi
chgr
ant
syear
lydi
vi
dendst
oit
sstockholders.

UUhasaf amouschapellocat
edwithi
nthecampuswher etheoldf ol
ksusedt osaythatanyone
whowant edtopasst hemedicalboardexaminati
ons shoul
dof feradozenr osesonal lthe
SundaysofOct ober.Thi
swaswhatDr .Taimti
m didwhenhewasst i
llr
eviewi
ngf ortheboard
examinati
ons.Inhiscase,thefol
ksayingprovedt obetruebecausehei snow asuccessf ul
cardi
ologi
st.Wanti
ng to gi
ve back to the chapel and hel p def r
ay the costs of i ts
maintenance, Dr
. Taimtim donatedP50,000.00tothecaretakersoft hechapelwhichwas
evi
dencedbyanacknowl edgmentrecei
pt.

I
n computi
ng hi
snettaxabl
eincome,can Dr
.Taimt
im use hi
sdonati
on t
othe chapelasan
al
lowabl
ededucti
onf
rom hi
sgrossi
ncomeundertheNat
ionalI
nter
nal
RevenueCode(NIRC)?

SUGGESTEDANSWER:

No.thedonationisnotdeducti
ble.Thechapelisownedbyapr i
vat
ely-owned univer
sit
y
hence,the donat
ion forthe maint
enance ofthe chapelisa donat i
on t
ot he univer
sit
y.The
donati
on to bededuct iblemustcomplywi t
htherequirementthatthenetincomeoft hedone
mustnoti nur
et othebenef i
tofanypr ivat
estockholderorindivi
dual
.Inthei nst
antcase,the
uni
versi
tyi
sgr ant
ingyearlydi
vi
dendsto
i
tsstockhol
derswhichisaclearvi
olat
ionofthelaw appert
aini
ng totheso-cal
l
ed “
pri
vat
e
i
nurementdoct
ri
ne”t
herebymaki
ngthedonat
ionnon-deduct
ibl
e(Sect
ion34(
H)(
1),NI
RC).

I
n2012,Dr .Kdecidedtoreturntohishomet owntostar
thisownpr acti
ce.Att
heendof2012,Dr .
Kf ound thathe earned grossprofessi
onalincome int he amountofP1, 000,
000.00;whi l
e
heincurredexpensesamount ingt
oP560, 000.
00 constit
uti
ng most l
yofhisoffi
cespacer ent,
uti
li
ti
es,andmiscell
aneousexpensesr el
atedtohismedicalpracti
ce.However,t
oDr .K'sdi
smay,
onlyP320,000.00ofhisexpenseswer edulycoveredbyr eceipt
s.Whataretheoptionsavai
labl
e
forDr.Ksohecouldmaxi mizethedeductionsfr
om hi
sgr ossincome?(2015BarQues ti
on)

SUGGESTEDANSWER:

Dr.K mayoptt o use t

he opti
onalst
andard deducti
on (OSD)inlieu ofthe it
emized
deducti
on.OSDisamaxi mum offort
ypercent(40%)ofgr ossrecei
ptsduri
ngt hetaxabl
e year
.
Proofofact
ualexpensesi
snotrequir
ed,butDr.Kshal
lkeepsuchr ecordspert
aini
ngt ohi
sgross
recei
pts.

Tr
ueorFal
se.

Acor
por at
ioncancl
aimt
heopti
onal
standar
ddeduct
ionequi
val
entt
o40% ofi
tsgr
osssal
esor
r
ecei
pts,asthecasemaybe.(
2010BarQuesti
on)

SUGGESTEDANSWER:

FALSE.TheOSDshoul
dnotexceed40% ofi
tsgr
ossi
ncome.

Dondon and Helenawer elegall

ysepar at
ed.Theyhad si xmi norchildren,allqual
if
ied to be
clai
medasaddi t
ionalexempt i
onsf orincome t axpurposes.The cour tawar ded custody of
two ofthechil
drent oDondonandt hreetoHelena,wi
thDondondi rectedt oprovi
defullf
inancial
supportfort
hem aswel l
.Thecour tawardedthe6t hchil
dt oDondon'sf atherwit
hDondonal so
provi
dingful
lfi
nancialsupport
.Assumi ngthatonlyDondoni sgainf
ull
yempl oyedwhil
eHel enai s
not,forhow many chi l
dren could Dondon cl aim addit
ionalexempt i
ons when hef il
eshi s
i
ncome t axr
eturn?(2011BarQues t
ion)

(
A)Si
xchi
l
dren.(
B)Fi
vechi
l
dren.(
C)Thr
eechi
l
dren.(
D)Twochi
l
dren.

SUGGESTEDANSWER:

(
D)Twochi
l
dren.

Premium paymentf
orheal
thi
nsur
anceofani
ndivi
dual
whoisanemployeeinanamountof
P2,500peryearmaybedeductedfr
om gr
ossi
ncomeifhi
sgrosssal
aryperyeari
snotmor
ethan
P250,000.(
2010BarQuest
ion)

SUGGESTEDANSWER:

Fal
se.(
Sec.34(
M),NI
RC)
Tr
ueorFal
se.

Anon-resi
dentali
enwhostaysi
nthePhi
li
ppinesforl
essthan180daysdur
ingthecalendaryear
shal
lbeenti
tl
edtopersonal
exempti
onnottoexceedtheamountall
owedtoci t
izensoft
he
Phil
i
ppi
nesbyt hecountr
yofwhi
chheissubjectorci
ti
zen.(201
0BarQuestion)

SUGGESTEDANSWER:

Fal
se.[
Sec.25(
A)(
1)i
nrel
ati
ont
oSec.35,NI
RC]

Theheadpriestofthereli
gioussectTr
esPersonasSol
oDi os,asthecorporati
onsole,rent
edout
a
5,000sq.m.lotregist
eredinit
snamef oruseasschoolsi
teofaschool organizedforprof
it
.The
sectusedt
her ental
sforthesupportandupkeepofit
spr i
ests.Therent
edlotis:(2011Bar
Questi
on)

(A)notexemptfrom real
pr opert
ytaxesbecausetheuserisorganizedforprof
it.
(B)exemptf rom realpropertytaxessinceitisactual
ly,direct
ly,and exclusi
vel
yused f or
rel
igi
ouspurposes.
(C)notexemptfrom realpropert
ytaxessincei
tist
herents,nottheland,t
hatisusedf orr
eli
gious
purposes.
(D)exemptf r
om realpr opertytaxessinceitisact
uall
y,di r
ectl
y,and exclusivel
yused for
educati
onalpurposes.

SUGGESTEDANSWER:

(D)exemptfrom r
ealproper
tyt
axessi
ncei
tisact
ual
l
y,di
rect
ly,and excl
usi
vel
yused f
or
educati
onal
purposes.

Whi
choft hef ol
lowingisanexcl
usi
onfrom gr
ossi
ncome?(201
4BarQuest
ion)
(
A)Sal
ariesandwages
(
B)Cashdi vidends
(
C)Li
quidatingdi vi
dendsaft
erdi
ssol
uti
onofacorpor
ati
on
(
D)Demi nimi sbenefi
ts
(
E)Embezzl edmoney

SUGGESTEDANSWER:

D.Demi
nimi
sbenef
it
s

Whatarede mi
nimi
sbenef
it
s and how ar
ethese t
axed? Gi
ve t
hree (
3) exampl
es of
demi
nimi
sbenef
it
s.(
201
5BarQuesti
on)

SUGGESTEDANSWER:

Demi ni
mis benefi
ts aref aci
l
it
ies,and pr i
vil
eges fur
nished oroffer
ed byanempl oyer
tohisemployees,which are notconsi dered as compensation subjecttoincome t ax and
consequent
lytowithholdi
ngt ax,i
fsuchf aci
li
ti
esorpr i
vi
legesareofrelati
vel
ysmallvalueandare
off
eredorfurni
shedbyt he empl oyermer ely as means ofpr omot i
ng the healt
h,goodwi l
l
,
content
ment,oreffici
encyofhi sempl oyees.
 The excessoverthe de mi
nimisli
mitpr escr
ibed shal
lbe consider
ed,along wit
ht he
“ot
herbenefit
s”underSecti
on32(B)(7)
(e)
(i
v),NIRC,indeter mi
ningwhetherornottheP82, 000
thr
esholdhasbeenexceeded.Anyexcessovert hedemi ni
misceil
i
ngmaybeexempti fi tis
coveredbytheunus edport
ion ofthe P82,000.00 non-taxabl
e“ otherbenefi
ts”
.Ot her
wi se,
anyamounti nexcessoft heP82,000.00threshol
dbecomessubj ecttotax.

Thef
oll
owi
ngshal
lbeconsi
der
edas“
demi
nimi
s”benef
it
s:

1. Monet izedunusedvacat i
onl eavecr editsofpr ivateempl oyeesnotexceedi ng10daysdur i
ngt he
year;
2. Monet izedunusedvacat ionandsi ckleavecr editspai dt ogover nmentof f
ici
alsandempl oyees ,
regardlessoft henumberofdays ;
3. Medi calcash al l
owance t o dependent s ofempl oyees,notexceedi ng P750 perempl oyee
persemest erorP1 25permont h;
4.Ri cesubsi dyofP1 ,500orone( 1)sackof50kg.r icepermont hamount i
ng tonotmor et han
P1 ,
500;
5.Uni f or m andcl othingal l
owancenotexceedi ngP5, 000perannum;
6.Act ual medi cal assist
ancenotexceedi ngP1 0,000perannum;
7.Laundr yal lowancenotexceedi ngP300permont h;
8. Empl oyeesachi evementawar ds,e. g.,forlengt hofser viceorsaf etyachievement,whi chmustbe
i
nt hef or m ofat angibl e per sonalpr oper t
y ot hert hancashorgi ftcert
if
icat
e,wi thanannual
monet ar yval uenotexceedi ng P1 0,000r eceived byt heempl oyee underanest abli
shed wr itt
en
planwhi chdoesnotdi scri
mi nat einf avorofhi ghlypai dempl oyees ;
9. Gi f
ts gi ven dur ing Chr i
stmas and maj oranni ver sar y celebrati
ons notexceedi ng P50, 000
perempl oyeeperannum;
10.Dailymeal all
owance f orover timewor kandni ght /graveyard shiftnotexceedi
ng 25% oft he
basicmi ni mum wageonaperr egionbas i
s;
11
.Benef it
sr ecei ved byanempl oyee byvi r
tue ofacol l
ect i
ve bargaining agreement( CBA)and
product i
vi t
yi ncent iveschemespr ovidedt hatt het otalannualmonet aryvaluereceivedf r
om bot h
CBA and pr oduct i
vity incent ive schemes combi ned do not exceed t en t housand
pesos( P1 0,000. 00)perempl oyeepert axableyear

I
nJanuary2013,yourf ri
endgothi sfir
stjobasanof f
iceclerk.Heissingleandliveswithhi
sf amil
y
whodependsuponhi mf orf i
nancialsuppor t.Hi
spar ent
shavel ongr eti
redfrom thei
rwor k,and
hist
wo( 2)sibl
ingsarest i
llminorsandst udyingingr adeschool.InFebr uary2014,heconsul ted
youashewant edt ocompl ywithallt
her ulespertaini
ngt otheprepar at
ionandf i
li
ngofhisincome
taxr
etur
n.Henowasksyout hef ol
lowing:
(A)I
sheent i
tl
edt opersonal exempt i
ons?I fso,howmuch?( 1%)
(B)I
sheent i
tl
edt oaddit
ional exempt i
ons?I fso,howmuch?( 1%)
(C)Whatistheef f
ectofthet axeswi t
hheldf rom hissalari
esonhi staxableincome?( 2014
BarQues t
ion)

SUGGESTEDANSWER:

(A)Yes.The law all

owsabasi cpersonalexempti
on ofPhp 50,000.00 f
oreach
i
ndivi
dual t
axpayer(Sect
ion35(A)
,NIRC)
.
(B)No.Whi l
ehisparent
sandminorsi
bli
ngareli
vi
ngwi t
handdependentuponhi mf or
f
inancialsuppor
t,t
heyarenotquali
fi
eddependentsf
orpurposesofaddi
ti
onalexemptions.The
t
erm“ dependent”
f
orpurposesoft
headdit
ional
personal
exempti
onwoul
dincl
udeonl
ylegi
ti
mat
e,i
l
legi
ti
mat
e,or
l
egal
lyadoptedchi
l
dren(Sect
ion35(B)
,NIRC)
.

(
C)Thetaxeswithhel
dfrom hi
ssalar
ieswil
lnotaf
fecthistaxabl
eincomebecausetheyar
e
notal
lowed astaxdeducti
onsbutast axcr
edit
s.Taxdeduct i
onsr educe taxabl
eincome whi
l
e
taxcr
edit
sreducethetaxli
abi
li
t Cent
y( ralDr
ugCor por
ati
onv.CI R).

Mr.EandMs.Far ebothemployeesofAAACor p.Theygotmarr

iedonFebruary14,2011.On
December29,2011,t
hecouplegavebirtht
otr
iplet
s.OnJune25,2013,t
heyhadt wins.What
weretheper
sonalexempti
ons/deduct
ionswhi
chMr .EandMs.Fcoul
dclai
mi nthefoll
owing
t
axabl
eyears:(
2015BarQues ti
on)

a)For201
0b)For201
1c)For201
3

SUGGESTEDANSWER:

a.Bot
hMr
.EandMs.Fcancl
aimf
orper
sonal
exempt
ionupt
oP50,
000.
00.

b.Eit
herMr.EorMs.Fcancl ai
mf oraddi
tionalexempti
onofP25,000.00eachfortheir
chil
dren.Thi
sisinaddi
ti
ontothepersonalexempt
ionofP50, 000.00whi
chtheycanrespect
ively
cl
aim.AccordingtotheTaxCode,onlyoneofthespousescancl aimf
oraddi
ti
onalexempti
onf or
everydependent.

c.Mr .EandMs.Fcancl ai
mf orpersonal exempt
ions,r
especti
vel
y.I
naddi
ti
on,anyoneof
them,exclusivel
y,canclai
mf ort
headdi t
ionalexempt ions i
nrelati
ontot
hei
rfourdependents
amount i
ng toP25, 000.
00 each.Under t heTaxCode,ani ndi
vidualmay cl
aim upt ofour
addit
ionalexempt i
onsinconnect
ionwit
hhi s/herdependents.

Passi
vei
ncomeincludesincomederi
vedfr
om anacti
vi
tyi
nwhichtheear
nerdoesnothaveany
subst
ant
ial
par
ti
cipati
on.Thi
stypeofi
ncomeis:(
2011BarQuest
ion)

(
A)usuall
ysubj
ectt
oaf i
nalt
ax.(
B)exemptfr
om i
ncomet
axati
on.
(
C)taxabl
eonlyi
fearnedbyacit
izen.(
D)i
ncl
udedint
hei
ncometaxr
etur
n.

SUGGESTEDANSWER:

(
A)usual
l
ysubj
ectt
oaf
inal
tax.

ABC,adomest i
ccor porat
ion,ent
eredintoasoftwareli
censeagreementwithXYZ,anon- resi
dent
for
eigncor por
ation basedintheU. S.Undertheagreementwhi cht hepart
iesfor
gedintheU. S.
,
XYZgr antedABCt heri
ghttouseacomput ersystem progr
am andt oavai
loftechni
calknow-how
rel
ati
vet osuchpr ogram.Inconsiderat
ionforsuchri
ghts,ABCagr eedtopay5% oft herevenues
i
treceivesfrom customerswhowi lluseandapplytheprogram i
nthePhili
ppines.

Di
scusst
het
axi
mpl
i
cat
ionoft
het
ransact
ion.(
201
0BarQuest
ion)
SUGGESTEDANSWER:

Theamountpayableundertheagr eementisinthenatureofar oyal

ty.Thetermroyalt
yis
broadenought oincl
udecompensat ionf ortheuseofani ntel
l
ectualpropertyandsuppl yof
t
echnicalknow-howasameansofenabl i
ngtheappl
icati
onorenjoymentofanysuchpr opertyor
ri
ght.Theroyal
ti
espai
dtot henon-residentUSCor porati
on,equivalentto5% oft herevenues
deri
vedbyABCf ort
heuseoft heprogram i nt
hePhil
ippi
nes,i
ssubj ectt
oa30% f inalwi
thhol
ding
t
ax,unlessalowert
axrat
eisprescr
ibedunderanexi sti
ngtaxtreat
y.

Aresi
dentFi
l
ipinoci
ti
zen(notadeal
eri
nsecuri
ti
es)sol
dshar
esofstocksofadomest
ic
cor
porat
ionthatar
eli
stedandtr
adedinthePhi
li
ppineSt
ockExchange.(
2012BarQuesti
on)

a)Thesal
eisexemptfrom i
ncomet axbutsubjectt
othe½ of1 % st
ockt
ransacti
ont
ax;
b)Thesal
eissubj
ecttoincometaxcomput edatthegraduat
edi ncomet
axr at
esof5% t
o32% on
nett
axabl
eincome;
c)Thesal
eissubj
ecttothestocktr
ansact
iontaxandincometax ;
d)Thesal
eisbothexemptfrom thest
ocktransacti
ontaxandincometax.

SUGGESTEDANSWER:

a)Thesal
eisexemptf
rom i
ncomet
axbutsubj
ectt
othe½ of1
% st
ockt
ransact
iont
ax

Sect
ion1
27,NI
RC.

Adealeri
nsecur
it
iessol
dunli
stedsharesofst
ocksofadomest
iccorpor
ati
oni
n2010and
der
ivedagai
nofP1Mi l
li
ont
herefrom.Thegainis:(
201
2BarQuesti
on)

a)Taxableat30% regul
arcor
porat
eincometaxbasedonnett axablei
ncome;
b)Taxableat5%/10% capi
tal
gainst
axbasedonnetcapit
al gai
n;
c)Taxableat½ of1% st
ocktr
ansacti
ontaxbasedonthegrosssell
ingpri
ceorf
airmar
ketval
ue,
whicheveri
shigher
d)Exemptf r
om i
ncomet ax

SUGGESTEDANSWER:

a)Taxabl
eat30% r
egul
arcor
por
atei
ncomet
axbasedonnett
axabl
eincome

Sect
ion22(
U)i
nrel
ati
ont
oSect
ion27,NI
RC.

Which st
atementiscorr
ect
?A non-st
ock,non-
prof
itchar
it
abl
e associ
ati
on t
hatsel
l
sit
sidl
e
agr
icul
tur
alproper
tyi
s:(
2012BarQuest
ion)

a)Notrequiredtof i
l
eani ncometaxreturnnorpayincomet axont hetr
ansacti
on totheBIR,
provi
dedt hesalesproceedsareinvestedinanotherrealest
ateduringt
heyear ;
b)Required topayt he6% capi t
algai nstaxont he grosssell
i
ng price offai
rmar ketval
ue,
whicheverishigher;
c)Mandat edtopayt he30% regularcorporat
eincomet axonthegai nf
rom sale;
d)Requiredtowi t
hholdtheappli
cableexpandedwi thhol
dingtaxrateonthetransact
ionandremit
thesamet otheBI R.
SUGGESTEDANSWER:

b)Required t
opaythe 6% capi
talgai
nst
axont
hegr
osssel
l
ing pr
ice off
airmar
ketval
ue,
whicheveri
shigher

Sect
ion30,NI
RC.

Pr
iortotheVAT law,sales ofcar
s wer
e subjecttoasal
es t
axbutthetaxappl
ied onl
ytot
he
or
igi
nalort
hefi
rstsal
e;thesecondandsubsequentsal
eswerenotsubj
ectt
otax.

Del
toi
d Mot ors,Inc.(Deltoid)hi
tontheideaofsett
ingupawholl
y-owned subsidi
ary,Gonmad
Motor
s,Inc.(Gonmad) ,andofsell
i
ngitsassembledcarst
oGonmadatal owpricesoitwouldpay
alowertaxont hef i
rstsale.Gonmadwoul dthensellt
hecar
stot hepubli
catahi gherpri
ce
wit
houtpayinganysal est axonthi
ssubsequentsal
e.

Char
act
eri
zet
hear
rangement
.(1%)
(201
3BarQuest
ion)

(A)Theplanisalegiti
mateexerciseoftaxpl
anningandmer elyt
akesadvantageofaloopholei
n
thelaw.
(B)Theplanisl
egal becausethegovernmentcol l
ectstaxesanyway.
(C)Theplanisi
mpr oper;theveilofcor
porat
eficti
oncanbepi ercedsothatt
hesecondsalewil
l
beconsideredt
het axablesale.
(D)Thegovernmentmustr espectGonmad'ssepar at
ejuridi
calpersonal
i
tyandDelt
oid'
staxabl
e
sal
et oi
t.

SUGGESTEDANSWER:

(C)Thepl
anisimproper
;theveilofcor
por
atef
ict
ioncanbepi
ercedsot
hatt
hesecondsal
ewi
l
l
beconsi
deredt
hetaxabl
es al
e.

Thegi venpr obl

em issimilartothecaseofCommi ssi
oner ofI nt
ernalRevenue v.Nor tonand
Har r
ison Company (G.R.No.L- 17618,August31,1 964).The Supr eme Cour theldt hat“a
taxpayermaygai nadvantageofdoi ngbusi
nesst
hruacor porat
ionifhepl eases,buttherevenue
offi
cersi npropercases,maydi sregar
dtheseparatecorporat
eent it
ywher eitservesbutasa
shiel
df ortaxevasi
on andt r
eatthepersonwhoactual
lymayt akebenef it
soft hetr
ansacti
onsas
theper sonaccordi
nglytaxable.

Toall
ow at axpayert
odenyt axli
abi
l
it
yont hegroundthatthesalesweremadet
hroughanot
her
anddist
inctcorporat
ionwheni ti
sprovedthatthelat
terisvi
rt
uall
yownedbytheformerort
hat
theyar
epr acti
call
yoneandthesamei stosanct
ionacircumvent
ionofourt
axl
aws.”

ABSCorporat
ioni
saPEZA-regi
ster
edexpor
tenterpr
isewhi
chmanufact
urescamerasandsel
l
s
al
li
tsf
ini
shedproduct
sabr
oad.Whichst
atementisNOTcorrect
?(201
2BarQues t
ion)

a)ABSCor por
ati
onissubj
ectt
ot he5% fi
nal
taxongrossincomeear
ned,i
nli
euofal
lnati
onaland
l
ocaltaxes;
b)ABSCor por
ati
on i
sexemptfrom the30% cor
por
ateincometaxonneti
ncome,pr
ovidedit
paysval
ueaddedt ax;
c)ABSCor
por
ati
oni
ssubj
ectt
othe30% corporat
eincomet axonnetincome;
d)ABSCor
por
ati
oni
sexemptfr
om al
lnat
ionalandlocal
taxes,exceptr
ealpr
oper
tyt
ax.

SUGGESTEDANSWER:

a)ABSCorpor
ati
oni
ssubj
ectt
othe5% f
inal
taxongr
ossi
ncomeear
ned,i
nli
euofal
lnat
ional
and
l
ocalt
axes

Sect
ions23&24,RA791
6.

KKKCor p.securedit
sCer t
if
icateofI
ncorporati
onf rom t
heSecuri
tiesandExchangeCommi ssi
on
onJune3,2013.I tcommenced busi nessoperationsonAugust12,2013.I nApri
l2014,Ms.J,an
employeeofKKKCor p.i
nchar geofprepar
ingt heannual i
ncometaxr et
urnofthecorporat
ionfor
2013,gotconfusedonwhet hersheshouldpr eparepaymentf ort
her egul
arcorporat
eincomet ax
ortheminimum corporat
eincomet ax.

a)AsMs.J'
ssuper vi
sor,whatwil
lbeyouradvice?
b)Whataret he dist
inct
ionsbetween r
egularcorpor
atei
ncome t
axand mi
nimum cor
por
ate
i
ncometax?(2015BarQues t
ion)

SUGGESTEDANSWER:

a. AsMs.J’ssupervi
sor
,Iwill
advise t
hatKKK Corp.should prepar
e paymentfor
ther
egularcorporat
ei ncome tax.Undert he Tax Code,Mi ni
mum Cor porat
eI ncome Tax
(MCI
T) isappl i
cabl
e beginni
ng on t
he f
ourthtaxabl
e yearfoll
owing t
he commencementof
oper
ati
on.Thus,i
nthi
scase,KKKCor p.wil
lonlyappl
yMCI Tst
art
ingtaxabl
eyear2017.

b. Dist
inct
ion as t ot
axpayer
:Regul
ar corpor
ateincome t
ax appli
es t
o al
l
cor
poratetaxpayers;whi l
emi ni
mum corpor
atei
ncomet axappl
iestodomest
ic cor
por
ati
ons
andresi
dentforei
gncor porat
ions.

Di
sti
nct
ionast
orat
e:Regul
ari
ncomet
axi
s30%;whi
l
emi
nimum cor
por
atei
ncomet
axi
s2%.

Dist
inct
ionastotaxbase:Regul
arcorpor
atei
ncome taxi
sbased onthenett
axabl
eincome,
exceptnonresi
dentforei
gncorpor
ati
onwhichisbased on gr
ossincome;whil
e mini
mum
corporate
i
ncomet axi
sbasedongrossi
ncome.

Dist
incti
on astoperiod ofappli
cabi
l
it
y:Regular cor
porat
e income t axi
sapplicabl
e
once t
hecor porat
ion commenced it
s operat
ion,whil
e MCI Tis appl
icabl
e beginni
ng the
four
tht
axableyearf ol
l
owingthecommencementofoperati
on.

Whichoft hefoll
owingshouldnotbeclai
medasdeduct i
onsfrom grossi
ncome?(2014Bar
Ques ti
on)
(A)discountsgi
vent oseni
orci
ti
zensoncer t
aingoodsandservices.
(B)adverti
singexpensetomaintai
nsomef orm ofgoodwi
ll
forthetaxpayer
’sbusi
ness.(
C)
sal
ariesandbonusespai dtoemployees.
(D)interestpaymenton loansf orthe pur
chase ofmachineryand equipmentused in
business.

SUGGESTEDANSWER:
B.Adver
ti
si
ngexpenset
omai
ntai
nsomef
orm ofgoodwi
l
lfort
het
axpayer
’sbusi
ness.
Freezy Corpor
ati
on, adomest
ic corporat
ion engaged int hemanuf act
ure andsaleofice
cream,made payment stoanoffi
cer ofFr ost
y Corporat
ion,acompet i
tor i
ntheicecr
eam
business,i
nexchangef
orsai
doff
icer
’srevel
ationofFr
ostyCorporat
ion’
stradesecret
s.

MayFr eezyCorpor
ati
on cl
aim t
hepaymentt
otheof
fi
cerasdeduct
ion f
rom i
tsgr
ossi
ncome?
Expl
ain.(
2014BarQuesti
on)

SUGGESTEDANSWER:

No.The payment s made in exchange for the revel

ati
on ofa compet it
orstrade
secret
si sconsi
dered an expense which i
s againstlaw,mor als,good customs,orpubl i
c
poli
cy,whi ch i
s notdeductibl
e(3M Phil
ippines,Inc.v.CI
R,G. R.No.82833,Sept ember26,
1988).Al
so,thelaw wil
lnotall
ow t
hedeductionofbr i
bes,ki
ckback,andothersimil
arpayment s.
Applyi
ngt hepri
ncipleofejusdem generi
s,paymentmadebyFr eezyCorporati
on woul dfall
under“othersi
milarpayments”whichar
enotal lowedasdeduct i
onf r
om grossincome( Secti
on
34(A)(
1)(
c),NIRC).

Theexcessofal
l
owablededuct
ionsovergr
ossi
ncomeoft
hebusi
nessi
nat
axabl
eyeari
sknown
as:
(201
1BarQues t
ion)

(
A)netoperat
ingloss.(B)ordi
nar
yloss.
(
C)netdeducti
bleloss.(D)NOLCO.

SUGGESTEDANSWER:

(
A)netoper
ati
ngl
oss.

Sal
eofresi
dential
houseandlotbyanoffi
cial
ofadomest
iccorpor
ati
ontoanot
heroff
ici
ali
nthe
samecorporat
ionforaconsi
derat
ionofP2.5Mil
l
ioni
n2011is:(
2012BarQuest
ion)

a)Exemptfr
om VATbecauset
hegrosssal
esdonotexceedP2.5Mi l
l
ion;
b)Exemptfr
om VATbecauset
hepropert
ysoldi
sacapit
alasset
,regardl
essoft
hegrosssel
l
ing
pri
ce;
c)Exemptfr
om VATbecauset
hesell
eri
snotapersonengagedinrealest
atebusi
ness;
d)Taxabl
eat12% VATout
putt
axonthegrosssel
li
ngpri
ceofP2.5Mi l
li
on.

SUGGESTEDANSWER:

b)Exemptf
rom VATbecauset
hepr
oper
tysol
disacapi
tal
asset
,regar
dlessoft
hegr
osssel
l
ing
pri
ce

Sect
ion1
06,NI
RC.

LualhatiEducati
onalFoundation,I
nc.
,astockeducationali
nstit
uti
onor
ganizedforprofi
t,decided
toleasef orcommer ci
alusea1, 500sq.m.por t
ionofit
sschool.Theschoolact
uall
y,direct
ly,and
exclusi
vely used the rent
sf orthe maintenance ofits schoolbui
ldi
ngs,incl
uding payment
ofjanit
orialser
vices.I
stheleasedport
ionsubjectt
orealpropertyt
ax?(2011BarQues t
ion)
(A)Yes,sinceLualhatii
sast ockandforpr of
iteducati
onalinst
it
uti
on.
(B)No,sincet heschool actuall
y,di
rect
ly,andexclusivel
yusedt herent
sforeducat
ional
pur
poses.
(C)No,buti tmaybesubj ecttoincomet axat
ionont herentsi
treceives.
(D)Yes,si nce t
he leased por t
ionisnotact ual
l
y,di r
ectl
y,and exclusi
vel
yused for
educati
onal pur
poses .

SUGGESTEDANSWER:

(D)Yes,si
nce t
heleased por
ti
oni
snotact
ual
l
y,di
rect
ly,and excl
usi
vel
yused f
or
educati
onalpur
poses.

Zygomi
teMi
neral
s,I
nc.
,acorporat
ionregi
ster
edandholdingof
fi
ceinAust
ral
i
a,notoper
ati
ngi
n
t
hePhil
i
ppi
nes,maybesubj
ecttoPhil
ippi
neincometaxat
ionon:(201
1BarQuesti
on)

(A)gainsi tderi
vedf rom salei nAustr
ali
aofanorecrusheritboughtfr
om thePhi l
i
ppineswit
hthe
proceedsconver tedt opes os.
(B)gainsi tderi
vedf rom salei nAustr
ali
aofsharesofstockofPhilexMini
ngCor porati
on,a
Phil
ippinecor poration.
(C)dividendsear ned f r
om i nvestmentinafor
eign corporat
ion t
hatderived 40% ofit
sgross
i
ncomef r
om Philippines ources.
(D)interestsderi
vedf r
om itsdollardeposi
tsi
naPhili
ppinebankundert heExpandedFor ei
gn
CurrencyDeposi tSys tem.

SUGGESTEDANSWER:

(B)gai
nsitderi
vedfrom sal
einAust
ral
i
aofshar
esofst
ockofPhi
l
exMi
ningCor
por
ati
on,a
Phil
i
ppinecorporat
ion.

Whati
st i
he"mmedi
acyt
est
"?Expl
ainbr
ief
ly.(
201
0BarQuest
ion)

SUGGESTEDANSWER:

Thistesti
sappl ied t
o deter
mine whetherthe accumulat
ion ofaf tert
axpr ofi
tsbya
domesticorresi
dentf orei
gn corpor
ati
on isreal
lyforthe reasonable needsoft he busi
ness.
Under thistest,ther easonabl
eneedsoft hebusinessareconst r
uedt omeant heimmedi at
e
needs.Thecor porat
ionshoul dbeabl etoproveani mmedi at
eneedf ortheaccumul ati
onof
earni
ngsandpr of
it
s,ort hedir
ectcorr
elat
ionofant
ici
patedneedst osuchaccumulationofprofi
ts
toj
usti
fythesaidaccumul at
ion.

Tr
ueorFal
se.

Thecapi
tali
zat
ionr
ulesmayber esort
edtobytheBIRi
nordert
ocompelcor
por
atet
axpayer
sto
decl
aredivi
dendst
ot hei
rst
ockholder
sregul
arl
y.(
2010BarQuest
ion)

SUGGESTEDANSWER:

Tr
ue.[
Sec.244,NI
RC;Rev.Regul
ati
onNo.2-
2001i
mpl
ement
ingSec.29,NI
RC)

I
n2009,Sprat
z,Inc.’
snetpr
ofi
tbef
oret
axwasP35mil
li
onwhi l
eit
soperat
ingexpenseswasP31
mil
l
ion.I
n 2010,itsnetprofi
tbef
oretaxwasP40 mil
li
on and i
tsoperat
ing expenseswas
P38
mil
li
on.Itdid notdecl
are di
vi
dends for2009 and 2010.And ithas no proposed capi
tal
expendi
tur
esf or2011and the i
mmedi at
efut
ure.May Spratz be subj
ecttothe i
mproperl
y
accumul
atedtaxonit
sret
ainedprof
it
sfor2009and2010?(2011BarQues t
ion)

(A)Yes,since the accumulated amountsar ereasonableforoper ati

onsi nrelat
ion t
o what
i
tusuall
yneededannual ly.
(B)Yes,since t
heaccumul at
ionisnotr easonabl
ynecessar yfort he i
mmedi at
e needsof
the
business.
(C)No,becauset hereisnoshowi ng thatt
hetaxpayer'
s2009and201 0netpr ofi
tbeforetax
exceededitspai
d-upcapi t
al.
(D)No,becauset hetaxpayeri snotshownt obeapubl i
cly-
li
sted corporat
ion,abank,oran
i
nsurancecompany.

SUGGESTEDANSWER:

(
B)Yes,si
nce t
heaccumul
ati
oni
snotr
easonabl
ynecessar
yfort
he i
mmedi
ate needsof
t
hebusi
ness.

Att
y.Gambinoisapartneri
nageneralprof
essi
onalpar
tner
shi
p.Thepart
nershi
pcomput esi
ts
gr
ossrevenues,cl
aimsdeducti
onsall
owedundertheTaxCode,anddist
ri
butestheneti
ncometo
t
hepartner
s,incl
udi
ngAt t
y.Gambino,i
naccordancewit
hit
sart
icl
esofpart
nership.

I
nfil
inghi
sowni ncometaxret
urn,Att
y.Gambinoclai
meddeduct i
onsthatthepar
tner
shi
pdi
dnot
cl
aim,suchaspurchaseoflawbooks,ent
ert
ainmentexpenses,cari
nsuranceandcar
depreci
ati
on.TheBIRdisal
l
owedt hededuct
ions.

Wast
heBI
Rcor
rect
?(201
3BarQuest
ion)

SUGGESTEDANSWER:

TheBI
Riswr
ongi
ndi
sal
l
owi
ngt
hededuct
ions.

UnderSect i
on26oft heNIRC,agenr ealprofessionalpartnershipi sexemptf rom income
taxand,thus,cannotclaim deducti
ons.However ,par t
nersinagener alpr of
essionalpart
ner shi
p
areli
abl
e,intheirseparateandindi
vidualcapaci
ti
es,f orthepaymentofi ncomet axcomput edon
thei
rdist
ri
butiveshar eoft hegeneralprofessi
onalpar t
nership’
spr of i
ts.Consequent ly, these
part
nersmaycl aim deducti
onsunderSect i
on34oft heNI RCf rom theirgr ossincome.

I
nt hegi venpr oblem,Atty.Gambi no’sexpensesf orthepur chaseofl aw booksandt he
avail
mentof car i nsurance ar e allowable deduct i
ons because t hey ar e ordinary and
necessaryexpensesi nt heexercise ofhisprof ession.Law booksar e directl
yat t
ributabl
et o
Atty.Gambi no’s developmentandconductasal awyerpur suantt oSect i
on34( A)(1)(
a)oft he
NIRC.Meanwhi l
e,carinsuranceisanor di
naryandnecessar yexpensei nthepur chaseofacar .I
t
shouldbenot edthatcar sareordinari
lyusedbyl awyer swho t ravelf rom one pl ace to anot her
forpur poses ofat tending hearings,meet i
ng cl ients,s i
gni ngagr eement s,andt helike.For
thesesamer easons,ar easonable allowance f ort hecar ’
sdepr eciati
on isdeduct i
bl e under
Section ( 34)(F)(
1 ) of t he NI RC. A r easonabl e al lowance f or ent er
tai
nment or
representati
on expenses can al so be clai
med as deduct ion from gr oss income,as t hese
expenses ar edi rectl
y connected ori nthe furtherance oft he conductofAt t
y.Gambi no’s
professi
on asa l awyer,applyi
ngSect i
on(34)(A) (
1)(a)(
iv)oft heNI RCandRevenueRegul ation
No.1 0-2002.
XYZLaw Of f
ices,alaw part
nershipi
nt hePhilippinesandaVAT- regist
eredtaxpayer,recei
veda
query by e-mailfrom Gainsburg Cor porat
ion,a cor porat
ion or
ganized undert he laws of
Delaware,butthee-mailcamef rom Calif
orni
awher eGainsburghasanof f
ice.Gainsburghasno
off
icei
nt hePhil
ippi
nesanddoesnobusi nessint hePhil
i
ppines.

XYZLawOf f
icesrenderedi
tsopi
nionont
hequer
yandbil
l
edGainsbur
gUS$1,000fort
heopi
nion.
Gai
nsburgremitt
edi t
spaymentt hr
oughCi
ti
bankwhi
chconvertedtheremit
tedUS$1,000to
pesosanddepositedt
heconvert
edamounti
ntheXYZLawOff
icesaccount.

Whataret
hetaximpl
i
cations oft
hepaymentt
oXYZLaw Of
fi
cesi
nter
msofVATandi
ncome
t
axes?(
2013BarQuest
ion)

SUGGESTEDANSWER:

Prel
iminaril
y,XYZLawOf fi
cesi sagener alpr
ofessi
onalpart
nershi
pwhichisdef
inedunderSec.
22(B)oft heNI RC asapar tnershipformedbyper sonsforthesolepurposeofexerci
singthei
r
commonpr ofessi
on,nopar toft heincomeofwhi chisderi
vedf r
om engagi
nginanyt radeor
business.Ont heotherhand,Gai nsburgisconsi
deredasanonr esi
dentf
orei
gncorporat
ionunder
Sec.22( I
)oftheNIRC.Thet aximpl i
cati
onsareasfollows:

Ast
oVAT:XYZLawOf fi
ces,asagener alprof
essi
onalpar
tnershi
p,i
ssubj
ectt
oVATasi
t
rendered ser
vices toGainsburg. Pur
suant toSec.105oftheNI RC,anyper
sonwho,i
nthe
courseofbusi
ness,render
sservicesshal
lbesubjectt
oVAT.

Int he gi
ven pr
obl
em,t he XYZ Law Of f
ices r
endered services to a nonresi
dent
person notengagedinbusi
nessandwhi chisoutsi
dethePhil
ippines.Theconsiderat
ionforthe
servi
ceswaspai dinanaccept abl
ef or
eigncurr
ency.Therefore,thetransacti
onint hegiven
problem i
ssubj
ecttozer
opercent(0%)rateofVATprovi
dedunderSec.1 08( B)(
2)oftheNIRC.

As toincome tax:XYZ Law Of f

ice i
s notsubj ecttheret
o because i tis a general
prof
es si
onalpart
nershi
p.Sec.26oft heNI RC expresslyprovi
dest hatagener alprofessi
onal
part
nershipshal
lnotbesubj
ecttotheincomet ax.Personsengaginginbusinessaspar t
nersina
generalprof
essi
onalpart
ner
shi
pshallbeliabl
eforincomet axonlyinthei
rseparat
eandi ndivi
dual
capacit
ies.

A,B,andC,all
lawyers,for
medapar t
nershi
pcall
edABCLawFir
m sothattheycanpr
acti
cethei
r
prof
essi
on asl
awyers.Fort heyear2012,ABC LawFir
m r
ecei
ved ear
ningsandpaidexpenses,
amongwhichareasfollows:

Earni
ngs:
(1)Pr
ofessi
onal /l
egal f
eesfr
om vari
ousclients
(2)Cashprizer eceivedfr
om areli
gioussociet
yinrecogni
ti
onoft
heexempl
aryser
viceof
ABCLawFi r m
(3)Gainsderivedf r
om saleofexcesscomput ersandlapt
ops

Payment s:
(1)Sal
ariesofoffi
cestaff
(2)Rentalsforoff
icespace
(3)Representati
onexpensesincur
redi
nmeetingswit
hcl
ients
(A)Whatar etheitemsintheabovementi
onedearni
ngswhichshoul
dbei
ncl
udedi
nthe
computat i
onofABCLawFi rm’sgr
ossi
ncome?Explai
n.
(B)Whatar ethe items int he above-
mentioned payments which may be consi
der
ed as
deducti
onsfrom t
hegr ossincomeofABCLawFi rm?Explai
n.
(C)IfABCLawFi r
m ear nsnetincomein2012,what,i
fany,i
sthetaxconsequenceonthe
partofABCLawFi rmi nsofarasthepaymentofincometaxisconcerned?What,i
fany,i
sthe t
ax
consequence on the partofA,B,and C asi ndi
vi
dualpartner
s,insofarasthepaymentof
i
ncomet axisconcerned?(201 4BarQuesti
on)

SUGGESTEDANSWER:

(A)Thet hree( 3)itemsofear ni

ngsshoul dbei ncl udedi nthecomput at
ionofABC Law
Fir
m’sgr ossincome.Thepr ofessi
onal/l
egalfeesfrom var iousclient
si sincludedaspar tofgross
i
ncomebei ngi nthenat ureofcompensat ionforser vi
ces( Section32( A)(1),NIRC).Thecashpr i
ze
fr
om ar eli
giouss ocietyinrecognit
ionofitsexempl aryservicesisalsoi ncludedtherebeingnolaw
provi
ding fori tsex clusi
on.Thi sisnota pr i
ze inr ecogni ti
on ofany oft he achievements
enumer ated undert helawhence,s houl
df or
m par tofgrossi ncome( Section 32(
B) (
7)(
c) ,NI
RC) .
Thegainsf rom saleofexcesscomput er
sandl aptopsshoul d also be included aspar tofthe
fi
rm’s gross income because t he term gross incomespeci fi
call
yincludesgai nsderivedfr
om
deali
ngsinpr oper t
y( Secti
on32( A)
(3),NIRC).

(B)The law f i
rm being formed asgener alprofessionalpart
nershi
pi sentitl
ed tothe
same deduct i
onsal l
owed to cor porati
on (Secti
on 26,NI RC) .Hence,the three (
3)i t
emsof
deducti
onsment ionedi nthepr obl
em ar ealldeduct
ibl
e,theybei nginthenatureofordinaryand
necessaryexpensesi ncur
redi nthe pr acti
ce ofprofessi
on ( Sect
ion 34(A)
,NI RC)
.However ,
the amountdeduct i
bleforr epresentationexpensesincurredbyat axpayerengagedi nsaleof
servi
ces,i
ncludi
ngal awf i
rm,issubjectt oaceil
ingof
1% ofnetrevenue.(RRNo.10- 2002)

(C)The neti ncome havi ng been ear ned bythel aw fi

rm whi ch i
sf or
med andqual i
fi
es
asagener alpr ofessionalpartnership,isnotsubj ecttoincomet axbecauset heear nerisdevoi dof
anyincomet ax per sonali
ty. Each par tner shal lrepor t as gross income hi s di str
ibuti
ve
shar
es, act ualit
y orconst ructivel
yr ecei ved,int he neti ncome oft he partnership.The
part
nershipismer elytreat
edf ori ncomet axpur posesasapass- thr
oughent it
ysot hati tsnet
i
ncomei snott axabl eatthel eveloft hepar t
ner shi
pbursai dneti ncomeshoul dbeat tributedto
thepartners,whet herornotdi str
ibutedtot hem,andt heyar el
iabletopayt heincomet axbased
ontheirrespect i
vet axableincomeasi ndividual t
axpayer s(Sect
ion26,NI RC).

BBB,Inc.,adomest i
ccor porati
on,enj oyedapar ticul
arlyprofi
tabl
eyearin2014.InJune2015,i
ts
BoardofDi rect
orsappr ovedt hedi str
ibuti
onofcashdi videndstoitsst
ockhol
ders.BBB,Inc.has
i
ndivi
dual and cor porate stockhol ders. Whati st he taxtreat
ment oft he cash di
vi
dends
recei
vedf r
om BBB,I nc.bythef ol
lowingst ockholders:(2015BarQues ti
on)
a)Aresidentcit
izen
b)Non-residentali
enengagedi ntradeorbus iness
c)Non-residentali
ennotengagedi ntradeorbus i
nessd)Domest iccorpor
ati
on
e)Non-residentforeigncorpor ati
on

SUGGESTEDANSWER:

a.Af
inal
withhol
dingtaxoftenper
cent(1
0%)shallbeimposedupont
hecashdi
vi
dends
act
ual
l
yorconst
ructi
vel
yr ecei
vedbyaresi
dentcit
izenf
rom BBB,I
nc.

b.Afi
nalwit
hhol
ding t
axoftwent
ypercent(
20%)shall
bei mposeduponthecash
divi
dendsactual
l
yorconstr
ucti
vel
yrecei
vedbyanonresi
dentali
enengagedint
radeorbusi
ness
fr
om BBB,Inc.
 c.Afinalwi
thhol
dingt
axequalt
otwent
y-fi
vepercent(
25%)oftheenti
rei
ncomer ecei
ved
f
rom al
lsour
ceswit
hinthePhi
li
ppi
nes,i
ncl
udi
ngthecashdivi
dendsr
eceivedf
rom BBB,I
nc.

d.Divi
dendsr
ecei
vedbyadomest
iccor
por
ati
on f
rom anot
hercor
por
ati
on,suchasBBB,
I
nc.
,shal
lnotbesubj
ectt
otax.

e.A fi
nalwithhol
ding taxoff i
fteenper cent( 15%)isimposedont heamountofcash
di
videndsr ecei
vedfrom BBB,Inc.,subjecttothet axspari
ngcredi
tprovisi
on(Sect
ion28(B)(5)
(b),
NIRC).Theappl icat
ion oft hetaxspar ingcredi ti
st hatt
hecountry-domicil
e ofther eci
pient
corporati
on al l
owsa cr editagainstthe taxdue f rom t
he non-r
esidentforei
gn corporat
ion.
Otherwise,theapplicabl
et axrateisthirtypercent( 30%)ofthegrossi ncomer ecei
veddur i
ng
eachtaxableyearfrom al
lsourceswi t
hinthePhi l
ippines.

Tr
ueorFal
se.

I
ndicatewhethereachofthef
oll
owi
ngi
ndi
vi
dual
sisr
equi
redornotr
equi
redt
ofi
l
eani
ncomet
ax
r
eturn:(201
5BarQues ti
on)

a)Fil
ipino cit
izen r
esiding outside t
he Phil
ippines on hi sincome fr
om sour cesoutsi
de t
he
Phi
li
ppines.
b)Residentalienoni ncomeder ivedfrom sourceswi thi
nthePhi l
ippi
nes.
c)Residentciti
zenear ni
ngpur elycompensat ionincomef r
om twoempl oyer
swi thi
nthe
Phi
li
ppines,whosei ncomet axeshavebeencor rectlywithheld.
d)Residentcitizenwhof al
lsundert hecl
assifi
cationofmi nimum wageear ners.e)Anindi
vi
dual
whosesol eincomehasbeensubj ect
edtofinalwithholdi
ngt ax.

SUGGESTEDANSWER:

a.No,because anon-
resi
dentFi
l
ipi
no ci
ti
zeni
staxabl
e onl
yini
ncome sour
ced wi
thi
nthe
Phi
l
ippi
nes.

b.Yesbecausear
esi
dental
i
eni
staxabl
efori
ncomeder
ivedf
rom sour
ceswi
thi
nthePhi
l
ippi
nes.

c.Yes.Ar
esidentci
ti
zenwhoisear
ningpurel
ycompensat i
onincomef
rom t
woempl
oyer
sshoul
d
fi
l
eincometaxretur
nfornotbei
ngqual
if
iedforsubst
it
utedfi
li
ng.

d.No.Underthel
aw,al
lmi
nimum wageear
ner
sint
hepr
ivat
eandpubl
i
csect
orshal
lbe
exemptf
rom paymentofi
ncomet
ax.

e.No.Underthelaw,ani
ndivi
dualwhosesol
eincomehasbeensubj
ect
edt
ofi
nal
wi
thhol
dingt
axpursuanttoSect
ion57(A)oft
heNIRCneednotfi
l
ear et
urn.

I
nfor
mer
’sr
ewar
dissubj
ectt
oaf
inal
wit
hhol
dingt
axof10%.(
201
0BarQuest
ion)

SUGGESTEDANSWER:

Tr
ue.(
Sec.282,NI
RC)
Thepayorofpassi
vei
ncomesubjectt
ofinal
taxisr
equi
redtowi
thholdthetaxfr
om the
paymentduethereci
pient
.Thewi
thhol
dingofthet
axhastheef
fectof:(2011BarQuesti
on)

(
A)afinalsett
lementoft
hetaxl
iabi
l
it
yontheincome.(B)acredi
tfr
om t
hereci
pient'
sincome
t
axli
abil
it
y.
(
C)consummat i
ngthetr
ansact
ionr
esul
ti
nginanincome.(D)adeduct
ioni
nther eci
pient
's
i
ncomet axretur
n.

SUGGESTEDANSWER:

(
A)af
inal
set
tl
ementoft
het
axl
i
abi
l
it
yont
hei
ncome.