Western Leyte College of Ormoc, Inc.

Prelim Exam in Taxation I

October 10, 2020

1. Enumerate the three stages (3) or aspects of taxation. Explain each.

2. Sure Arrival Airways (SAA) is a foreign corporation, organized under the laws of the Republic of
Nigeria. Its commercial airplanes do not operate within Philippine territory, or service passengers
embarking from the Philippine airports. The firm is represented in the Philippines by its general
agent, Narotel.
SAA sells airplane tickets through Narotel, and these tickets are serviced by SAA airplanes outside
the Philippines. The total sales of airplane tickets transacted by Narotel for SAA in 2012 amounted to
₱10,000,000. The Commissioner of Internal Revenue (CIR) assessed SAA deficiency income taxes at
the rate of 30% on its taxable income, finding that SAA’s airline ticket sales constituted income
derived from sources within the Philippines.
SAA filed a protest on the ground that the alleged deficiency income taxes should be considered as
income derived exclusively from sources outside the Philippines since SAA only serviced passengers
outside Philippine territory. It, thus, asserted that the imposition of such income taxes violated the
principle of territoriality in taxation. Is the theory of SAA tenable? Explain.
3. “X” is the owner of a residential lot situated at Quirino Avenue, Pasay City. The lot has an area of
300 square meters. On June 1, 1994, 100 square meters of said lot owned by “X” was appropriated
by the government to be used in the widening of Quirino Avenue, for ₱300,000, representing the
estimated assessed value of said portion. From 1991 to 1995, “X”, who is a businessman, has not
been paying his income taxes. X is now being assessed for the unpaid income taxes in the total
amount of ₱150,000. “X” claims his income tax liability has already been compensated by the
amount of ₱300,000, which the government owes him for the expropriation of his property. Decide.
4. Upon his retirement, Alfredo transferred his savings derived from his salary as a marketing assistant
to a time deposit with AAB Bank. The bank regularly deducted 20% final withholding tax on the
interest income from the time deposit. Alfredo contends that the 20% final tax on the interest
income constituted double taxation because his salary had been already subjected to withholding
tax. Is Alfredo’s contention correct? Explain your answer.
5. Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar year 2019, he came to
the Philippines several times and stayed in the country for an aggregate period of more than 180
days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and
from abroad?
6. “X” Corporation was the recipient in 1990 of two tax exemptions both from Congress, one law
exempting the company’s bond issues from taxes and the other exempting the company from taxes
in the operation of its public utilities. The two laws extending the tax exemptions were revoked by
Congress before their expiry dates. Were the revocations constitutional?
7. The Roman Catholic Church owns a two-hectare lot in a town in Tarlac province. The southern side
and middle part are occupied by the Church and a convent, the eastern side, by a school run by the
Church itself, the southern side, by some commercial establishments, while the rest of the property,
in particular, the northwestern side, is idle or unoccupied. May the Church claim tax exemption on
the entire land? Decide with reasons.
8. “X” sold a piece of land to the United Church of Christ of Quezon City, Inc. The land is to be devoted
strictly for religious purposes by the Church. When the Church tried to register the title of the land,
the Register of Dees refused claiming that the capital gains tax was not paid. Is the transaction
exempt from the capital gains tax? Reasons.
9. Mr. A, a citizen and resident of the Philippines, is a professional boxer. In a professional boxing
match held in 2013, he won prize money in United States (US) dollars equivalent to ₱300,000,00.
a.) Is the prize money paid to and received by Mr. A in the US taxable in the Philippines? Why?
10. Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a nonresident citizen.
a.) If the goods were produced from Ms. B’s factory in the Philippines, is Ms. B’s income from the
sale to Ms. C taxable in the Philippines? Explain.
11. Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a nonresident citizen.
a.) If Ms. B is an alien individual and the goods were produced in her factory in China, is Ms. B’s
income from the sale of the goods to Ms. C taxable in the Philippines? Explain.
12. A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can practice their
profession as lawyers. For the year 2012, ABC Law Firm received earnings and paid expenses, among
which are as follows:
Earnings:
(1) Professional/legal fees from various clients
(2) Cash prize received from a religious society in recognition of the exemplary service of ABC
Law Firm
 (3) Gains derived from sale of excess computers and laptops
Payments:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred in meetings with clients
(A) What are the items in the above-mentioned earning which should be included in the
computation of ABC Law Firm’s gross income? Explain.
(B) What are the times in the above-mentioned payments which may be considered as
deductions from the gross income of ABC Law Firm? Explain.
(C) If ABC Law Firm earns net income in 2012, what, if any, is the tax consequence on the
part of ABC Law Firm insofar as the payment of income tax is concerned? What, if any, is
the tax consequence on the part of A, B, and C as individual partners, insofar as the
payment of income tax is concerned?
13. Mr. Francisco borrowed ₱10,000 from his friend, Mr. Gutierrez, payable in one year without
interest. When the loan became due, Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was
unable to pay because of business reverses. Mr. Gutierrez took pity on Mr. Francisco and condoned
the loan. Mr. Francisco was solvent at the time he borrowed the ₱10,000 and at the time the loan
was condoned. Did Mr. Francisco derive any income from the cancellation or condonation of his
indebtedness? Explain.
14. Mapagbigay Corporation grants all its employees (rank-and-file, supervisors, and managers) five
percent discount of the purchase price of its products. During an audit investigation, the BIR
assessed the company the corresponding tax on the amount equivalent to the courtesy discount
received by all the employees, contending that the courtesy discount is considered as additional
compensation for the rank-and-file employees and additional fringe benefit for the supervisors and
managers. In its defense, the company argues that the discount given to the rank-and-file
employees is a de minimis benefit and not subject to tax. As to its managerial employees, it
contends that the discount is nothing more than a privilege and its availment is restricted. Is the BIR
assessment correct? Explain.
15. In 2007, Mr. & Mrs. Renato Garcia, an overseas Filipino contractor worker in Hong Kong, opened
peso and dollar deposits at the Philippine branch of the Hong Kong Bank in Manila. During the year,
the bank paid interest income of ₱10,0000 on the peso deposit and $1,000 on the dollar deposit.
The bank withheld final income tax equivalent to 20% of the entire interest income and remitted the
same to BIR.
a. Are the interest incomes on the bank deposits of Mr. & Mrs. Renato Garcia subject to income
tax? Explain.
b. Is the bank correct in withholding the 20% final tax on the entire interest income? Explain.
16. BBB, Inc., a domestic corporation, enjoyed a particularly profitable year in 2014 In June 2015, its
Board of Directors approved the distribution of cash dividends to its stockholders. BBB, Inc. has
individual and corporate stockholders. What is the tax treatment of the cash dividends received
from BBB, Inc. by the following stockholders:
a.) A resident citizen
b.) Non-resident alien engaged in trade or business
c.) Non-resident alien not engaged in trade or business
d.) Domestic corporation
e.) Non-resident foreign corporation
17. Mr. A, a citizen and resident of the Philippines, is a professional boxer. In a professional boxing
match held in 2013, he won prize money in United States (US) dollars equivalent to ₱300,000,000.
b.) May Mr. A’s prize money qualify as an exclusion from his gross income? Why?
18. State with reasons the tax treatment of the following in the preparation of annual income tax
returns:
a. Proceeds of life insurance received by a child as irrevocable beneficiary;
b. 13th month pay and de minimis benefits;
c. Dividends received by a domestic corporation from (i) another domestic corporation; and (ii)
a foreign corporation;
d. Interest on deposits with (i) BPI Family Bank; and (ii) a local offshore banking unit of a
foreign bank;
e. Income realized from sale of (i) capital assets, and (ii) ordinary assets.