Philippine Taxation Questions

EASY ROUND – Theory Question1

Which of the following is/are exempt from income tax?

I. Matt Cooperative, a registered cooperative doing construction business, equipment rental and
buy-and-sell of hardware materials and basic commodities to members and non-members with
accumulative reserves and undivided net savings of PhP 1.43 M, on all its income from operations
II. Nathanson Company, a Board of Investments (BOI)-registered entity undertaking a low-cost housing
project, on its interest income from in-house financing
III. ILY University, a non-stock, non-profit, educational institution, on its income from all sources supported
by a Certificate of Tax Exemption
IV. GG Company, a regional operating headquarters (ROHQ), on their taxable income and any income
derived from Philippine sources

ANSWER: I only

Reference:

● Statements I is correct [Court of Tax Appeals (CTA) Case No. 8751 dated November 16, 2016]
● Statement II is wrong because Bureau of Internal Revenue (BIR) Ruling No. 29-17 dated February 02, 2017
provides that only income directly attributable to its registered project shall be exempt from income tax.
● Statement III is wrong because as clarified by CTA En Banc (CTA EB) Case No. 1298 dated September 20, 2016,
while a Certificate of Tax Exemption is not a condition precedent for the enjoyment or entitlement of the income
tax exemption, it still has to prove that its income is used actually, directly, and exclusively for educational
purposes.
● Statement IV is wrong because ROHQsshall be subject to a tax rate of ten percent (10%) of their taxable income
and any income derived from Philippine sources.

AVERAGE ROUND – Problem 1

Tire A. Bank (the Bank), a foreign currency deposit unit (FCDU), has the following sources of income:

Interest income from foreign currency transactions with non-residents, PhP9,000,000

other offshore banking units and other depository banks under the
expanded foreign currency deposit system
Interest income from foreign currency loans granted to residents (other 45,000,000
than offshore banking units in the Philippines or other depository banks
under the expanded system)
“All-Other” income 15,000,000

In relation to the above, the Bank incurred the following expenses:

Interest expense PhP30,000,000

General Administrative Expenses 15,000,000

Compute the final withholding tax (FWT) due from the Bank.

ANSWER: PhP 2,000,000

Solution:

Interest income from foreign currency loans granted to residents PhP 45,000,000
(other than offshore banking units in the Philippines or other
depository banks under the expanded system) – Onshore
income
Less: Interest expense allocable to the on shore income [30M x 25,000,000
(45M/45M + 9M)]
 Gross income subject to FWT PhP 20,000,000
Multiply by: 10% FWT 10%
FWT due PhP 2,000,000

Notes:
● The offshore income amounting to PhP 9,000,000 is exempt from all taxes.
● “All-Other” income amounting to PhP 15,000,000 is subject to the higher between Regular Corporate Income Tax
(RCIT) and Minimum Corporate Income Tax (MCIT).
● Section 28 (4) of the 1997 Tax Code, as amended

DIFFICULT ROUND – Theory Question 1

Establishments granting sales discounts to person with disability (PWD) on their sale of goods and/or services
may be entitled to deduct the said sales discount from their gross income if the following conditions are met
except:

A. The cost of the discount shall be allowed as deduction from gross income for the same taxable year
that the discount is granted
B. The seller must record its sales inclusive of the discount granted, as a reduction of sales to arrive at net
sales
C. The total amount of claimed tax deduction net of value-added tax (VAT), if applicable, shall be included
in their gross sales receipts for tax purposes
D. Only the portion of the gross sales exclusively used, consumed, or enjoyed by the PWD shall be
eligible for the deductible sales discount

ANSWER: B.

Reference:

● RR No. 05-2017 states that establishments granting sales discounts to PWD on their sale of goods and/or
services may be entitled to deduct the said sales discount from their gross income subject to the following
conditions:

► The cost of the discount shall be allowed as deduction from gross income for the same taxable year that
the discount is granted
► The total amount of claimed tax deduction net of VAT, if applicable, shall be included in their gross sales
receipts for tax purposes
► The total amount of claimed tax deduction shall be subject to proper documentation and to the provisions
of the 1997 Tax Code, as amended.
► Only the portion of the gross sales exclusively used, consumed, or enjoyed by the PWD shall be eligible
for the deductible sales discount;
► The seller must record its sales inclusive of the discount granted, not as a reduction of sales to arrive at
net sales, but as a deduction from gross income.

DIFFICULT ROUND – Problem 1

Ms. D. Cayabyab sold the following capital assets:

Land 1 Land 2 Land 3 Land 4 Land 5

Selling Price PhP 400,000 PhP 700,000 PhP 800,000 PhP 900,000 PhP1,200,000
Cost 200,000 200,000 400,000 50,000 400,000
Commission paid 30,000 70,000 - - -
Selling expenses incurred 20,000 30,000 40,000 10,000 50,000
Terms of sale:
Downpayment, 50,000 70,000 50,000 100,000 150,000
Feb 14, 2015
Installment
payments:
September 20, 2015 50,000 70,000 50,000 50,000 150,000
September 20, 2016 150,000 200,000 200,000 200,000 200,000
September 20, 2017 150,000 260,000 - 350,000 200,000
Mortgage assumed by the - 100,000 500,000 200,000 500,000
 buyer

The final tax for 2015 is:

ANSWER: PhP 165,800

Solution:

Installment Deferred
Land 1 Land 2 Land 3 Land 4 Land 5
Initial Payments (IP)* 100,000 = 25% 140,000 = 20% 200,000 = 25% 300,000 = 33% 400,000 = 33%
Selling Price (SP) 400,000 700,000 800,000 900,000 1,200,000
Capital gains tax (CGT) 400,000 X 6% = 700,000 X 6% = 800,000 X 6% = 900,000 X 6% = 1,200,000 X 6% =
due 24,000 42,000 48,000 54,000 72,000
IP X CGT 100,000 X 24,000 140,000 X 42,000 200,000 X 48,000
Contract Price** 400,000 600,000 400,000
Final tax PhP 6,000 PhP 9,800 PhP 24,000 PhP 54,000 PhP 72,000

Notes:

Property sold had no
mortgage
Initial Payments* Down payment + Installment
payments in the year of sale,
per contract
Contract Price** Selling Price
Mortgage assumed by the
Buyer does not exceed the
cost of seller
Down payment + Installment
payments in the year of sale,
per contract
Selling Price – Mortgage
assumed by buyer
Mortgage assumed by the Buyer does
not exceed the cost of seller
Down payment + Installment payments in
the year of sale, per contract + Excess of
mortgage assumed by the buyer over cost
of the seller(Per Section 4 of Revenue
Regulation No 13-85)
Selling Price – Mortgage assumed by buyer
+ Excess of mortgage assumed by the
buyer over cost of the seller(Per Section 4
of Revenue Regulation No 13-85)

CLINCHER ROUND – Theory Question 1

Which of the following is/are subject to documentary stamp tax (DST)?
I. Finance Lease
II. Promissory Notes
III. Stock Options
IV. Advances supported only by office memo
V. Loan Agreements

ANSWER: ALL OF THE ABOVE

Reference:
The nature of a Finance Lease is similar to that of a debt rather than a lease. The mere act of extending credit is already
a means of facilitating an obligation or advancing in behalf of the lessee certain property in lieu of cash in exchange for
a definitive amortization to be paid to the lessor with profit margin included.Hence, any document, transaction or
arrangement entered into under a financial lease is subject to DST of PhP 1 on each PhP 200, or fractional part thereof,
of the issue price pursuant to Section 179 of the 1997 Tax Code, as amended. (RMC. No. 46-2014
)
CLINCHER ROUND – Problem 1
To avail tax deduction incentives under Republic Act (RA) No. 10028 “Expanded Breastfeeding Promotion Act
of 2009”, Henson Electronics which primarily employs women, decided to install a lactation station for its
nursing employees. The following costs were incurred in the foregoing:
Remodeling of a space for the lactation station PhP 80,000.00

Tables and comfortable chairs 40,000.00

Refrigerator 12,000.00

Manual and electric breast pumps 10,000.00

 Supplies (sterile milk containers, soaps, etc.) 8,000.00

TOTAL PhP 150,000.00

If all the requirements under RA 10028 were complied with by the company, how much additional expense may
be claimed as special allowable deduction?

ANSWER: PhP 150,000.00

Reference:
Under RA 10028, an additional expense for the same amount may be claimed under special itemized allowable
deduction.

Philippine Taxation Questions

EASY ROUND – Theory Question 1

Which of the following is not among the power of the Commissioner of Internal Revenue (CIR)?

A. To interpret tax laws and decide tax cases

B. To obtain information, and to summon, examine and take testimony of persons
C. To terminate taxable period
D. To change the accounting method of the Company

ANSWER: D.

Reference:

• Section 4 to 8 of the National Internal Revenue Code (NIRC), as amended

EASY ROUND – Theory Question 2

The following Resident Foreign Corporations (RFCs) are subject to preferential tax rates, except:

A. Regional Operating Headquarters

B. Regional Area Headquarters
C. International Carriers
D. Offshore Banking units

ANSWER: B.

Reference:

• Section 28 (6) (a) of the 1997 Tax Code, as amended, states that regional or area headquarters as defined in
Section 22 (DD) shall not be subject to income tax.

AVERAGE ROUND – Problem 1

J Company, a domestic corporation, has the following purchases during the month of September:

Supplier’s Country Amount of

Transaction Supplier
of Incorporation Income Payment
Purchase of toiletries and hygiene supplies A Company Malaysia PhP 212,000
Payment of continuous improvement B Company China 890,000
workshop conducted in J Company’s office
Payment of preventive maintenance C Company Hong Kong 740,000
services to J Company’s equipment
located in Japan
Royalty payments in connection with the D Company Singapore 560,000
use of secret formula or process, patent,
 know-how and trademark
Lease payments for an equipment rented E Company Indonesia 934,000
near J Company’s plant in Mindanao

The amount of withholding VAT (WVAT) due for the month is ____________.

ANSWER: PhP 286,080

Solution:

Payment of continuous improvement workshop conducted in PhP 890,000

J Company’s office
Royalty payments in connection with the use of secret 560,000
formula or process, patent, know-how and trademark
Lease payments for an equipment rented near J Company’s 934,000
plant in Mindanao
Total income payment subject to WVAT PhP 2,384,000
Multiply by: 12%
WVAT due PhP 286,080

DIFFICULT ROUND – Problem 1

Hedley Corporation, a retailer of goods, uses the accrual method of accounting in declaring its income and
expenses under a calendar year basis.

For the period January to June 30, 2008, it reported a net income of PhP 300,000.00 using the itemized
method of deduction where its gross sales for the period amounted to PhP1,000,000.00 and its cost of sales
for the same period amounted to PhP 620,000.00.

With the effectivity of Republic Act (RA) No. 9504, it decided to use the 40% optional standard deduction
(OSD) in claiming its business expenses for the third quarter covering July 1 to September 30, 2008. Its gross
income for said period amounted to PhP 400,000.00 with actual operating expenses of PhP50,000.00.

For the last quarter of calendar year (CY) 2008, its net income amounted to PhP 150,000.00. The gross sales
and operating expenses for the same last quarter amounted to PhP600,000.00and PhP150,000.00,
respectively.

If Hedley Corporation decides to use the OSD method of deduction when it files its annual income tax return,
how much will be the net income for CY 2008?

ANSWER: PhP 700,000

Solution:

Gross Income
January to June (P1,000,000 - P620,000) P 380,000
Third Quarter 400,000
Fourth Quarter (P150,000 + P150,000) 300,000 P 1,080,000

Less: Deductions
Itemized deductions from January 1 to June 30* P 100,000
OSD deduction from July 1 to September 30 160,000
OSD deduction from October 1 to December 31 120,000 P 380,000

Net Income P 700,000

*For taxable period 2008 which is the initial year of the implementation of the 40% OSD under RA 9504 which modified
the OSD for individuals from 10% of gross income to 40% of gross sales/gross receipts and introduced the OSD as an
alternative deduction for corporations, the 40% maximum deduction shall only cover the period beginning the effectivity of
RA 9504. RA 9504 became effective July 06, 2008. However, in order to simplify and provide ease of administration
during the transition period, July 1, 2008 shall be considered as the start of the period when the 40% OSD may be
allowed. (Section 8, RR No. 16-08)
Hence, itemized deductions was used for the period January to June 30, 2008 computed as follows:
P1,000,000 – P600,000 = P400,000 – P300,000 = P100,000.

OSD deduction from July 1 to September 30

Gross Income P 400,000
OSD rate 40%
OSD 160,000

OSD deduction from October 1 to December 31

Gross Income (P150,000 + P150,000) P 300,000
OSD rate 40%
OSD 120,000

Reference: RR 16-08 dated November 26, 2008

DIFFICULT ROUND – Problem 2

Rick Grimes, married in 2008 under the absolute community of property regime died, on August 30, 2010. He
left the following properties and obligations:

Properties
Cash in bank PhP 200,000
Residential lot inherited from his father on June 12, 2007 1,200,000
Family home:
House (community property) 1,300,000
Lot (exclusive property of Angelo) 1,000,000
Personal properties acquired by the spouses during marriage 200,000
Receivable from his sister (insolvent) 100,000
Inter vivos donation from his mother on July 2010, revocable 150,000
Receivable from SSS as indemnity for hospitalization 12,000

Obligations
Unpaid mortgage on the residential lot contracted by the father:
At the time of death of father 300,000
At the time of death of Angelo 100,000
Funeral expenses (40% were shouldered by relatives) 80,000
Judicial expenses (30% were incurred after 6 months) 35,000
Claims against the estate (includes unpaid medical expenses of 12,000) 35,000
Unpaid mortgage on the house (loaned to Angelo’s sister) 100,000
Casualty loss (50% was indemnified by the insurance company) 60,000
Donation to Barangay BagongPag-asa (verbal donation) 25,000

The net taxable estate is __________.

ANSWER: PhP 96,525

Solution:
Exclusive Communal Total
Cash in bank 200,000
Residential lot inherited from his father on June 12, 2007 1,200,000
Family home:
House (community property) 1,300,000
Lot (exclusive property of Angelo) 1,000,000
Personal properties acquired by the spouses during 200,000
marriage
Receivable from his sister (insolvent) 100,000
 Inter vivos donation from his mother on July 2010, revocable Subject to estate Subject to
tax to his mother estate tax to his
mother
Receivable from SSS as indemnity for hospitalization Exempt Exempt
Gross Estate 1,000,000 3,000,000 4,000,000

Unpaid mortgage on the residential lot contracted by the

father:
At the time of death of father
At the time of death of Angelo 100,000
Funeral expenses (40% were shouldered by relatives) 48,000
Judicial expenses (30% were incurred after 6 months) 24,500
Claims against the estate (includes unpaid medical 23,000
expenses of 12,000)
Unpaid mortgage on the house (loaned to Penduko’s sister) 100,000
Casualty loss (50% was indemnified by the insurance 30,000
company)
Donation to Barangay BagongPag-asa (verbal donation) Not valid
Bad debts (loan to sister) 100,000
Vanishing deduction *357,450
Total ordinary deductions -Nil- 782,950

Net estate before share of surviving spouse 1,000,000 2,217,050 3,217,050

Share of surviving spouse (1,108,525) (1,108,525)
Net estate after share of surviving spouse 1,000,000 1,108,525 2,108,525

Family home (limit) 1,000,000

Standard deduction 1,000,000
Medical expenses 12,000
Net Taxable Estate 96,525

Value of property 1,200,000

Less : Mortgage paid (200,000)
Initial basis: 1,000,000
Divide : Gross estate 4,000,000
Percentage 25%
Multiply by : Ordinary deductions 425,500
Deduction to initial basis 106,375

Initial basis 1,000,000

Deductions (106,375)
Base 893,625
Rate (more than 3 years not more than 4 years) 40%
Vanishing deduction 357,450*

Reference: RR No. 02-03