2019 BAR EXAMINATIONS

TAXATION LAW

November 10, 2019 2:00 P.M. - 6:00 P.M.

INSTRUCTIONS

1. This Questionnaire contains TEN (10) pages including this page. Check the
number of pages and their proper sequencing. You may write notes on this
Questionnaire.

2. This Questionnaire is divided into two (2) parts: Part I and Part II. Write your
answers to the questions in Part I (consisting of problem sets labelled A.1. to
A.10.) in Booklet I and the answers to the questions in Part II (consisting of
problem sets labelled B.11. to B.20.) in Booklet II. Answers written in the
wrong booklet shall not be given any credit.

3. Read each question carefully and note the points allocated for each question.
In your answers, follow the sequence and the numbering system used in the
Questionnaire. Answer each numbered question on a separate page; an answer
to a sub-question under the same number set may be written continuously on the
same page and succeeding pages until completed.

4. Your answers should demonstrate your ability to analyze the facts, apply the
pertinent laws and jurisprudence, and arrive at sound and logical conclusions.
Always support your answers with the pertinent laws, rules, and/or jurisprudence.
A mere "yes" or "no" answer without any corresponding explanation or discussion
may not be given full credit.

5. Marking of your booklets with your name or other identifying signs or symbols
extraneous to the subject matter of the questions may be considered as cheating,
and may disqualify you for the whole examinations.

YOU CAN BRING HOME THE QUESTIONNAIRE.

JUSTICE ESTELA M. PERLAS-BERNABE

Chairperson
2019 Bar Examinations

PART I
Note: As stated in the Instructions, Part I covers problem sets labelled A.1. to
A.10. All answers to these questions should be written in Booklet I.

A.1.

On October 5, 2016, the Bureau of Internal Revenue (BIR) sent KLM Corp. a
Final Assessment Notice (FAN), stating that after its audit pursuant to a Letter of
Authority duly issued therefor, KLM Corp. had deficiency value-added and
withholding taxes. Subsequently, a warrant of distraint and/or levy was issued
against KLM Corp. KLM Corp. opposed the actions of the BIR on the ground that
it was not accorded due process because it did not even receive a Preliminary
Assessment Notice (PAN) after the BIR' s investigation, which the BIR admitted.:

(a) Distinguish a PAN from a FAN.(2%)

(b) Are the deficiency tax assessment and warrant of distraint and/or
levy issued against KLM Corp. valid? Explain. (3%)

A.2.

For purposes of value-added tax, define, explain or distinguish the

following terms:

(a) Input tax and output tax (3%)

(b) Zero-rated and effectively zero-rated transactions (3%)

(c) Destination principle (3%)

A.3.

All the homeowners belonging to ABC Village Homeowners' Association elected a

new set of members of the Board of Trustees for the Association effective January
2019. The first thing that the Board looked into is the need to increase the
prevailing association dues. Mr. X, one of the trustees, proposed an increase of
100% to account for the payment of the 12% value-added tax (VAT) on the
association dues which were being collected for services allegedly rendered "in
the course of trade or business" by ABC Village Homeowners' Association.

(a) What constitutes transactions done "in the course of trade or

 business" for purposes of applying VAT?(2%)

(b) Is Mr. X correct in stating that the association dues are subject to
VAT? Explain. (3%)

A.4.

Due to rising liquidity problems and pressure from its concerned suppliers, P
Corp. instituted a flash auction sale of its shares of stock. P Corp. was then able
to sell its treasury shares to Z, Inc., an unrelated corporation, for Pl,000,000.00,
which was only a little below the valuation of P Corp. 's shares based on its latest
audited financial statements. In connection therewith, P Corp. sought a Bureau of
Internal Revenue ruling to confirm that, notwithstanding the price difference
between the selling price of the shares and their book value, the said transaction
falls under one of the recognized exemptions to donor's tax under the Tax Code.

(a) Cite the instances under the Tax Code where gifts made are
exempt from donor's tax.(3%)

(b) Does the above transaction fall under any of the exemptions?
Explain. (2%)

A.5.

A, a resident Filipino citizen, died in December 2018. A's only assets consist of a
house and lot in Alabang, where his heirs currently reside, as well as a house in
Los Angeles, California, USA. In computing A's taxable net estate, his heirs only
deducted: 1. ₱10,000,000.00 constituting the value of their house in Alabang as
their family home; and 2. ₱200,000.00 in funeral expenses because no other
expenses could be substantiated.

(a) Are both deductions claimed by A's heirs correct? Explain.(2%)

(b) May a standard deduction be claimed by A's heirs? If so, how

much and what proof needs to be presented for the same to be validly
made?(2%)

(c) In determining the gross estate of A, should the heirs include A's
house in Los Angeles, California, USA? Explain.(2%)

A.6.
XYZ Air, a 100% foreign-owned airline company based and registered in
Netherlands, is engaged in the international airline business and is a member
signatory of the International Air Transport Association. Its commercial airplanes
neither operate within the Philippine territory nor are its service passengers
embarking from Philippine airports. Nevertheless, XYZ Air is able to sell its
airplane tickets in the Philippines through ABC Agency, its general agent in the
Philippines. As XYZ Air's ticket sales, sold through ABC Agency for the year 2013,
amounted to ₱5,000,000.00, the Bureau of Internal Revenue (BIR) assessed XYZ
Air deficiency income taxes on the ground that the income from the said sales
constituted income derived from sources within the Philippines.

Aggrieved, XYZ Air filed a protest, arguing that, as a non-resident foreign

corporation, it should only be taxed for income derived from sources within the
Philippines. However, since it only serviced passengers outside the Philippine
territory, the situs of the income from its ticket sales should be considered outside
the Philippines. Hence, no income tax should be imposed on the same.

Is XYZ Air's protest meritorious? Explain.(5%)

A.7.

Differentiate tax exclusions from tax deductions.(3%)

A.8.

B transferred his ownership over a 1,000-square meter commercial land and

three-door apartment to ABC Corp., a family corporation of which B is a
stockholder. The transfer was in exchange of 10,000 shares of stock of ABC
Corp. As a result, B acquired 51 % ownership of ABC Corp., with all the shares of
stock having the right to vote. B paid no tax on the exchange, maintaining that it is
a tax avoidance scheme allowed under the law. The Bureau of Internal Revenue,
on the other hand, insisted that B's alleged scheme amounted to tax evasion.

Should B pay taxes on the exchange? Explain.(3%)

A.9.

GHI, Inc. is a corporation authorized to engage in the business of manufacturing

ultra-high density microprocessor unit packages. After its registration on July 5,
2005, GHI, Inc. constructed buildings and purchased machineries and equipment.
As of December 31, 2005, the total cost of the machineries and equipment
amounted to ₱250,000,000.00. However, GHI, Inc. failed to commence
operations. Its factory was temporarily closed effective September 15, 2010. On
October 1, 2010, it sold its machineries and equipment to JKL Integrated for
₱300,000,000.00. Thereafter, GHI, Inc. was dissolved on November 30, 2010.

(a) Is the sale of the machineries and equipment to JKL Integrated

subject to normal corporate income tax or capital gains tax? Explain.
(3%)

(b) Distinguish an ordinary asset from a capital asset.(2%)

A.10.

In 2018, City X amended its Revenue Code to include a new provision imposing a
tax on every sale of merchandise by a wholesaler based on the total selling price
of the goods, inclusive of value-added taxes (VAT). ABC Corp., a wholesaler
operating within City X, challenged the new provision based on the following
contentions: 1. the new provision is a form of prohibited double taxation because
it essentially amounts to City X imposing VAT which was already being levied by
the national government; and 2. since the tax being imposed is akin to VAT, it is
beyond the power of City X to levy the same

Rule on each of ABC Corp.'s contentions. (5%)

- END OF PART I -

Note: This marks the end of Part I. The forthcoming problem sets will fall under
Part II and the answers therefor should be written in Booklet II.

PART II

Note: As stated in the Instructions, Part II covers problem sets labelled B.11. to
B.20. All answers to these questions should be written in Booklet II.

B.11.

Mr. D, a Filipino amateur boxer, joined an Olympic qualifying tournament held in

Las Vegas, USA, where he won the gold medal. Pleased with Mr. D's
accomplishment, the Philippine Government, through the Philippine Olympic
Committee, awarded him a cash prize amounting to ₱1,000,000.00. Upon receipt
of the funds, he went to a casino in Pasay City and won the ₱30,000,000.00
jackpot in the slot machine. The next day, he went to a nearby Lotto outlet and
bought a Lotto ticket which won him a cash prize of ₱5,000.00.

Which of the above sums of money is/are subject to income tax?

Explain. (5%)

B.12.

JKL-Philippines is a domestic corporation affiliated with JKL-Japan, a Japan-

based information technology company with affiliates across the world. Mr. F is a
Filipino engineer employed by JKL-Philippines. In 2018, Mr. F was sent to the
Tokyo branch of JKL-Japan based on a contract entered into between the two (2)
companies. Under the said contract, Mr. F would be compensated by JKL-
Philippines for the months spent in the Philippines, and by JKL-Japan for months
spent in Japan. For the entirety of 2018, Mr. F spent ten (10) months in the Tokyo
branch.

On the other hand, Mr. J, a Japanese engineer employed by JKL-Japan, was sent
to Manila to work with JKL-Philippines as a technical consultant. Based on the
contract between the two (2) companies, Mr. J's annual compensation would still
be paid by JKL-Japan. However, he would be paid additional compensation by
JKL-Philippines for the months spent working as a consultant. For 2018, Mr. J
stayed in the Philippines for five (5) months.

In 2019, the Bureau of Internal Revenue (BIR) assessed JKL-Philippines for

deficiency withholding taxes for both Mr. F and Mr. J for the year 2018. As to Mr.
F, the BIR argued that he is a resident citizen; hence, his income tax should be
based on his worldwide income. As to Mr. J, the BIR argued that he is a resident
alien; hence, his income tax should be based on his income from sources within
the Philippines at the schedular rate under Section 24 (A) (2) of the Tax Code, as
amended by Republic Act No. 10963, or the "Tax Reform for Acceleration and
Inclusion" Law.

(a) ls the BIR correct in basing its income tax assessment on Mr. F's
worldwide income? Explain. (3%)

(b) Is the BIR correct in basing its income tax assessment on Mr. J's
income within the Philippines at the schedular rate? Explain. (3%)
 B.13.

As a way to augment the income of the employees of DEF, Inc., a private

corporation, the management decided to grant a special stipend of ₱50,000.00 for
the first vacation leave that any employee takes during a given calendar year. In
addition, the senior engineers were also given housing inside the factory
compound for the purpose of ensuring that there are available engineers within
the premises every time there is a breakdown in the factory machineries and
equipment.

(a) Is the special stipend part of the taxable income of the employees
receiving the same? If so, what tax is applicable and what is the tax
rate? Explain. (3%)

(b) Is the cash equivalent value of the housing facilities received by

the senior engineers subject to fringe benefits tax? Explain. (3%)

B.14.

City R owns a piece of land which it leased to V Corp. In turn, V Corp.

constructed a public market thereon and leased the stalls to vendors and small
storeowners. The City Assessor then issued a notice of assessment against V
Corp. for the payment of real property taxes (RPT) accruing on the public market
building, as well as on the land where said market stands.

Is the City Assessor correct in including the land in its assessment of

RPT against V Corp., even if the same is owned by City R? Explain.
(3%)

B.15.

Mr. C is employed as a Chief Executive Officer of MNO Company, receiving an

annual compensation of ₱10,000,000.00, while Mr. S is a security guard in the
same company earning an annual compensation of ₱200,000.00. Both of them
source their income only from their employment with MNO Company.

(a) At the end of the year, is Mr. C personally required to file an annual
income tax return? Explain. (2.5%)

(b) How about Mr. S? Is he personally required to file an annual

income tax return? Explain. (2.5%)
 B.16.

(a) Differentiate between a calendar year and a fiscal year. (2.5%)

(b) When is the deadline for the filing of a corporation's final

adjustment return for a calendar year? How about for a fiscal year?
(2.5%)

B.17.

XYZ Corp. is listed as a top 20,000 Philippine corporation by the Bureau of

Internal Revenue. It secured a loan from ABC Bank with a 6% per annum interest.
All interest payments made by XYZ Corp. to ABC Bank is subject to a 2%
creditable withholding tax. At the same time, XYZ Corp. has a trust deposit with
ABC Bank in the amount of ₱100,000,000.00, which earns 2% interest per
annum, but is subject to a 20% final withholding tax on the interest income
received by XYZ Corp.

(a) Who are the withholding agents in the case of: 1. the 20% final
withholding tax; and 2. the 2% creditable withholding tax? Explain.
(2.5%)

(a) When is the deadline for filing a judicial claim for refund for any
excess or erroneous taxes paid in the case of: 1. the 20% final
withholding tax; and 2. the 2% creditable withholding tax? (2.5%)

B.18.

After a Bureau of Internal Revenue (BIR) audit, T Corp., a domestic corporation

engaged in buying and selling of scrap metals, was found to have deficiency
income tax of ₱25,000,000.00, including interests and penalties, for the year
2012. For 2012, T Corp. filed its income tax return (ITR) on April 15, 2013
because it used the calendar year for its accounting. The BIR sent the Preliminary
Assessment Notice (PAN) on December 23, 2015, and eventually, the Final
Assessment Notice (FAN) on April 11, 2016, which were received by T Corp. on
the same dates that they were sent. Upon receipt of the FAN, T Corp. filed its
protest letter on June 25, 2016.

Thereafter, and without action from the Commissioner of Internal Revenue (CIR),
T Corp. filed a petition for review before the Court of Tax Appeals, alleging that
the assessment has prescribed. For its part, the CIR moved to dismiss the case,
pointing out that the assessment had already become final because the protest
was filed beyond the allowable period.

(a) Is T Corp.'s contention regarding the prescription of the

assessment meritorious? Explain. (2.5%)

(b) Should the CIR's motion to dismiss be granted? Explain. (2.5%)

B.19.

On May 10, 2011, the final withholding tax for certain income payments to W
Corp. was withheld and remitted to the Bureau of Internal Revenue (BIR), and the
corresponding return therefor was concomitantly filed on the same date. Upon
discovering that the amount withheld was excessive, W Corp. filed with the BIR a
claim for refund for erroneously withheld and collected final withholding income
tax on May 3, 2013. A week after, and without waiting for any decision from the
Commissioner of Internal Revenue (CIR), W Corp. filed a petition for review
before the Court of Tax Appeals (CTA) to make sure that the petition was filed
within the two (2)-year period for claiming refunds.

In resisting the claim, the BIR contended that the claim must be dismissed by the
CT A on the ground of non-exhaustion of administrative remedies because it did
not give the CIR the opportunity to act on the claim of refund.

(a) Is the BIR's contention meritorious? Explain. (2.5%)

(b) Assuming that the claim for refund filed by W Corp. is for excess
and/or unutilized input VAT for the second quarter of 2011, and for
which the return was timely filed on July 25, 2011, would your answer
be the same? Explain. (2.5%)

B.20.

ABC, Inc. owns a 950-square meter commercial lot in Quezon City. It received a
notice of assessment from the City Assessor, subjecting the property to real
property taxes (RPT). Believing that the assessment was erroneous, ABC, Inc.
filed a protest with the City Treasurer. However, for failure to pay the RPT, the City
Treasurer dismissed the protest.

(a) Was the City Treasurer correct in dismissing ABC, Inc.'s protest?
Explain. (2.5%)

(b) Assuming that ABC, Inc. decides to appeal the dismissal, where
should the appeal be filed? (2.5%)

- END OF PART II -
Nothing follows