Tarlac Agricultural University

College of Business Management

TAKE HOME EXAM
Taxation
2nd Semester, S.Y. 2021-2022
NAME:__________________________________Section/Time:_________

A. USE Notebook. WRITE YOUR NAME IN THE NOTEBOOK.   START WRITING YOUR
ANSWER ON THE SECOND PAGE OF YOUR NOTEBOOK.

B. Write your name on the space provided in this questionnaire.

C. This questionnaire consists of TWO  (2) PARTS in FOUR (4) pages. Read each question very
carefully. Answer legibly, clearly and concisely. 

FOR PART I, start each number on a separate page; an answer to a sub-question under the
same number may be written continuously on the same page and immediately succeeding
pages until completed. 

FOR PART II, number 1, write your answer in letter (a) on one (1 page) and  letter (b) on
another page. For numbers 2 to 11, each page should contain your answers for two (2)
numbers. Do not repeat the question. A mere “YES” or “NO” answer without any
corresponding discussion will not be given any credit. Please check the number of pages in
this set.

D. After the examination, HAND IN YOUR NOTEBOOK WITH THIS QUESTIONNAIRE to the
teacher/proctor, BUT DO NOT INSERT this questionnaire in your Notebook.

E. Follow STRICTLY the above specified instructions.

G         D    D  L U C K!!!

  Atty. Cleo D. Sabado-Andrada, CPA, MBA, LLM

===================================================================== 
 

PART I.
1. ABC Corporation engaged the services of Bias Law Firm in 2016 to defend the corporation’s
title over a property used in the business. For the legal services rendered in 2017, the law
firm billed ABC Corporation only in 2018. ABC Corporation duly paid. ABC Corporation
claimed this expense as a deduction from gross income in its 2018 return, because the exact
amount of the expense was determined only in 2018. Is ABC’s claim of deduction proper?
Explain.
No, the claim for deduction is improper. 
First, litigation expenses incurred in defense of title to property are capital in nature and
not deductible as ordinary and necessary expenses. It is clear in the case that ABC
Corporation’s claim for deduction pertains to legal expenses for the services of Bias Law
Firm in defending their title over a property used in their business, hence not deductible from
gross income.
Second, assuming that it qualifies as an ordinary and necessary expense, it remains
improper since the deduction claimed must have been paid or incurred during the taxable
year. Although ABC was billed only in 2018, the liability to pay was incurred in 2017 when
the legal services were rendered. Under the Accrual Method of Accounting, expenses not
being claimed as deductions by a taxpayer in the current year when they are incurred cannot
be claimed as deduction from income for the succeeding year. For this reason, ABC can no
longer claim deduction in their 2018 gross income.
2. In 2018, Clara, a resident Filipino citizen, received dividend income from U.S. based
corporation which owns a chain of Filipino restaurants in Virginia, USA. The dividend
remitted to Clara is subject to withholding tax with respect to a non-resident alien like
Clara. 

a. What will be your advice to Clara in order to lessen the impact of possible double
taxation on the same income?
I will advise Clara to either claim the amount of income tax withheld in USA as a
deduction from her gross income in the Philippines or to claim it as a tax credit by
signifying in her return her desire for credit against tax for the amount of income tax paid
or incurred during the taxable year to the foreign country.
b. Would your answer in letter (a) be the same if Clara became a US immigrant in
2017 and had become a non-resident Filipino citizen?

No, my answer would be different. The income derived from sources outside the
Philippines is taxable only when the taxpayer is a resident Filipino citizen. Clara, being a
non-resident citizen is exempt from Philippine tax.  With this, there cannot be
international double taxation on said income.

3. Spouses Greg and Nida Santiago, both Filipino citizens, are the owners of a residential
house and lot in Baguio City. After the recent wedding of their son, Samu, to Arianne, the
spouses donated said real property to them. At the time of donation, the real property has
 a fair market value of P3M. Are Samu and Arianne subject to income and donor’s tax
for the value of the real property donated to them? If taxes are to be paid, indicate
the amount of tax.
No, Samu and Arianne are not liable for both income and donor’s tax. They will be liable for
income tax only upon disposal or sale of the property. In such case, their gain is computed
based on the acquisition cost of the property or its value at the hands of the donors or its Fair
Market Value, whichever is lower. 
 As to the donor’s tax, Spouses Greg and Nida are the ones liable being the giver of the
property. The donor’s tax due amounts to P180,000 which is derived from deducting exempt
gift of P250,000 from the gross gift worth P3,000,000.00 multiplied by the donor’s tax rate
of 6%. The spouses being considered as separate donor of his or her interest in the conjugal
property, are liable for a half of donor’s tax due which is P90,000.00.

4. JMC, a US Citizen residing in Ortigas City, bought shares of stock of a domestic

corporation whose shares are listed and traded in the Philippines Stock Exchange at the
price of P4M. The other day, he sold the shares of stock through his favorite Ortigas
stockbroker at a gain of P350,000. If JMC directly sold the shares to his best friend, who
is another US Citizen in Makati, at a gain of P350,000, is JMC liable for Philippine
Income Tax? If so, what is the tax base and the tax rate?

Yes, JMC is liable for Philippine income tax. 

All income derived from sources within the Philippines by an alien individual,
whether resident or non-resident, is taxable. 

The sale of shares of stocks of a domestic corporation held as capital asset, not traded
in the local stock exchange, is subject to capital gains tax rate of 15% based on the net capital
gain during the taxable year which is P350,000 in this case.

5. Mr. Ronel Estrada, a resident citizen, is working for a large real estate development
company in the country and in 2017 he was promoted to Executive Vice President of the
company. With more responsibilities, comes higher pay. In 2018, he decided to buy a
new car worth P3M and he traded in his old car with a market value of P1.2M and paid
the difference of P1.8M to the car company. The old car which was bought 5 years ago,
by the father of Ronel at price of P1M was donated by him and registered in the name of
his son. The corresponding donor’s tax thereon was duly paid by the father.

a. How much is the cost basis of the old car to Ronel? Explain your answer.

The cost basis of the old car to Ronel is P1,000,000.00, The cost basis of a property
acquired as gift is determined based on its value as it would be in the hands of the donor
 or the Fair Market Value at the time when the gift was made, whichever is lower. The
market value of the car at the time of donation is P1,200,000, hence the cost basis is the
lower amount of P1,000,000 which is the value of the car as it was at the hands of
Ronel’s father.

b. What is the nature of the old car-capital asset or ordinary asset?  Explain your
answer.

It is a capital asset. The old car is a property held by the taxpayer, that is not of a kind
which would properly be included in his inventory on hand at the close of the taxable
year, or property held primarily for sale to customers in the ordinary course of his trade
or business, or property used in the trade or business, of a character which is subject to
the allowance for depreciation; or real property used in trade or business (Sec. 39, NIRC).

c. Is Ronel liable to pay income tax on the gain from the sale of his old car? What
would be the tax base and the tax rate? Is the taxable gain subject to the holding
period rule? Explain your answer in each of the question. (One paragraph per
question.)

Yes, Ronel is liable to pay income tax on the gain from the sale of his old car.  Gains
derived from dealings in property forms part of the gross income under Section 32 of the
NIRC which is determinative of the taxable income subject to income tax.

Applying the Holding Period Rule, the tax base shall be P100, 000. It is derived by
deducting the cost basis of P1, 000,000 from P1, 200,000 which is the value from which
the car was traded, resulting to a gain of P200, 000. Since the car was held for more than
twelve months, the gain is multiplied by 50% giving a product of P100, 000.

Yes, the taxable gain is subject to the Holding Period Rule. The Holding Period Rule is
applicable to individual taxpayers like Ronel, such that in computing net capital gain or
loss and net income, only 50% of the capital gain or loss shall be reported upon the sale
or exchange of a capital asset held for more than twelve months. If it is held for not more
than twelve months, then 100% of the gain or loss shall be reported. Since the car as a
capital asset was held by Ronel for more than twelve months before the sale, the gain to
be reported is only 50%.

PART II.
1. The following data were taken from the records of Gino during the year:

SOURCES from SOURCES from WITHOUT

WITHIN
Properties donated P3,000,000 P2,000,000
Sales P6,000,000 P4,000,000
Cost of Sales P2,000,000 P1,500,000
Operating Expenses P1,000,000 P   500,000

a. If the taxpayer is a resident citizen of the Philippines, his gross taxable amount in the
Philippines for the following would be: (present your answer neatly)

BUSINESS TAX 
Gross Sales:  
Sources Within: 6,000,000 

TRANSFER TAX
Gross Gift: Within 3,000,000
      Without 2,000,000
Gross Taxable Amount 5,000,000

INCOME TAX
Gross Sales: Within 6,000,000
         Without 4,000,000                     10,000,000
Less: Cost of Sales: Within 2,000,000
        Without 1,500,000                       3,500,000
Gross Income   6,500,000

b. If the taxpayer is a non-resident citizen of the Philippines, his gross taxable amount in the
Philippines for the following would be: (present your answer neatly)

BUSINESS TAX
Gross Sales: 
Sources Within: 6,000,000

TRANSFER TAX
Gross Gift: Within 3,000,000
      Without 2,000,000
Gross Taxable Amount
5,000,000

INCOME TAX
Gross Sales 6,000,000
Less: Cost of Sales 2,000,000
 Gross Taxable Income 4,000,000

FOR NUMBERS 2 to11, you have to show how you arrived with your answer. In cases that   
the question is answerable by YES or No, you have to explain your answer. Apply the
principles in Business Taxes,
 
2. Golda, a non-VAT business decided to shift from non-VAT to VAT. Its total inventory
before transition amounts to P1M. If Golda, after becoming a VAT registered during the
year of transition, sold 80% of the goods, how much is the VAT payable. 
Output Tax (800,000 x 12%)     96,000
      Less: Transitional Input Tax (1,000,000 x 2%)   20,000
      VAT Payable   76,000

3. Fiona, a VAT registered business, bought products from fisherman and farmers to
process as sardines. Its total cost is P400,000 which was sold for P850,000. How much is
the VAT payable?

Output Tax (850,000 x 12%) 102,000.00

Less: Input Tax: 
  Products from Fisherman and Farmers (400,000 x 4%) 16,000.00
VAT Payable 86,000.00

4. What is the sales or gross receipts threshold for VAT?

Under the Republic Act No. 10963, the sales or gross receipts threshold for VAT is P3,
000,000.00.

5. How much is the percent of VAT withholding on government purchases or services and
public work contracts?

Section 114 (C) of the NIRC provides that the Value-added Tax withholding on government
purchases or services and public work contracts is 5% of the gross payment.

6. X sold gold to Bangko Sentral ng Pilipinas amounting to P10M. How much is the output
VAT?

There is no output VAT since the Sale of to the Bangko Sentral ng Pilipinas is an exempt
transaction under Section 109 of the NIRC. VAT-exempt transactions refer to the sale of
goods, properties or services and the use or lease of properties that is not subject to VAT.
7. Elmer is a service contractor. Total billings reported amounts to P5M. Total collection is
P3.5M. How much is the VAT payable?

Total Collection 3,500,000

Multiply by VAT tax rate         12%
VAT Payable   420,000

8. Cielo is a real estate broker. She sold a house and lot by installment for P5M with a
downpayment of 30% and the remaining balance is payable in 5 years. How much is the
output VAT? 

Gross Selling Price           5,000,000

Multiply by VAT Tax Rate       12%
Output VAT 600,000

9. Yoyong sold his residential family home for P5M. The house and lot was previously
purchased for P3.3M inclusive input VAT from a real estate broker. How much is the
VAT payable of the sale?

There is no VAT payable on the sale of the residential family home since the property is sold
as a capital asset. Real properties sold as capital asset is subject to Capital Gains Tax of 6%
based on the selling price or the fair market value, whichever is higher, not of VAT.

10. If Alma, a non VAT business collects as VAT business from customers and her total
sales amounted to P10M, how much is the total business tax including surcharge?

VAT (10,000,000 x 12%)           1,200,000

Surcharge (1,200,000 x 50%) 600,000
Total Business Tax including surcharge           1,800,000

11. Baldo bought a machine from Japan as capital goods. The machine has an invoice cost of
P2M. The custom duty is 50% of the invoice cost and the excise tax is 20% of the invoice
cost and custom duty. How much is the input VAT?

Invoice Cost 2,000,000

Customs Duty (Invoice Cost x 50%) 1,000,000
Excise Tax (Invoice Cost – Customs Duty x 20%)     600,000                   3,600,000
Multiply by VAT rate         12%
Input VAT     432,000