SANTIAGO, Sara Andrea Nina P.

January 8, 2022
2017-0064 Taxation 1 (Saturday)

FINAL EXAMINATION

ANSWERS:

1. Depletion is an accrual accounting technique used to allocate the

cost of extracting natural resources such as timber, minerals, and oil
from the earth. Depletion reduces a company's taxable income. On
the other hand, depreciation is an annual reasonable allowance to
reduce the wasteful value of the tangible fixed assets resulting from
wear and tear and normal obsolescence. An example of which are
buildings, computers and software, furniture and fixtures, machinery,
and vehicles.

2. TRAIN Law. – Under this law, lowered and simplified personal

income taxes were being implemented. Also, taxes were also
simplified for small and micro self-employed and professional
taxpayers, as well as the estate and donor’s taxes. TRAIN will also
fund VAT-exempt medicines, education, healthcare, infrastructures,
and other social mitigating measures.

CREATE Law – The passage of this law primarily focuses on

lowering corporate income tax rates and rationalizing fiscal incentives
to better attract local and foreign investments in the Philippines. CIT
rates for other entities shall also be reduced from 30% to 20%
(domestic corporations) or 25% (nonresident foreign corporations).
Finally, various fiscal incentive reforms and VAT and percentage tax
reforms are included in the second package.

Bayanihan to Heal as One Act – The act was signed due to the state
of national emergency in the country. In line with this, numerous
agencies were funded for its proper appropriation and utilization.

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 Emergency subsidies for the poor households and benefits of health
workers are implemented in this Act. Certain tax exemptions are
likewise mandated such as exemption on additional DST, VAT,
Excise Tax and Other fees, Donor’s Tax and from issuance of
Authority to Release Imported Goods (ATRIG), and full deductibility
for the income tax.

3. In order to create and efficient tax avoidance scheme, I would brief

Jen on various tools that she could opt to use and utilize for the profit
maximization and tax minimization, to wit:

Tax Avoidance
Description How it works
Scheme
Tax-free exchanges refer An acquisition of assets may be
to those instances structured tax-free (non-recognition
enumerated in Section of gain or loss) when property is
40(C)(2) of the National transferred to a corporation in
Internal Revenue Code exchange for stock or units of
(NIRC) of 1997 that are participation, resulting in the
not subject to Income transferor, alone or with no more
Tax, Capital Gains Tax, than four others, gaining control (at
Tax-free
Documentary Stamp Tax least 51 percent of voting power) of
exchange,
and/or Value-added Tax, the corporation. However, if money
enunciated under
as the case may be. or other property (boot) is received
Sec. 40(C)(2) of
along with the shares in the
the Tax Code
exchange, any gain is recognized
up to the value of the boot and FMV
of other property where the
transferor does not distribute the
boot. Gains should also be
recognized if, in the exchange, a
party assumes liabilities in excess of
the cost of assets transferred.
The concept of Goodwill is an intangible The tax court ruled that a goodwill is
“Goodwill” asset that is associated not an ordinary asset but a capital
with the purchase of one asset since (1) it is not included in
company by another. stock in trade which would properly
Specifically, goodwill is be included in the inventory at the
the portion of the close of the taxable year, (2) nor it is

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 purchase price that is
higher than the sum of
the net fair value of all of
the assets purchased in
the acquisition and the
liabilities assumed in the
process. The value of a
company’s brand name,
solid customer base,
good customer relations,
good employee relations,
and proprietary
technology represent
some reasons why
goodwill exists.
Deductions and/or losses
already deducted from
gross income can no
longer be deducted from
gross estate. Deductions
should not be
compensated for by any
insurance or extrajudicial
settlement. Otherwise,
they are not valid
Allowable and deductions. The effective
Special way is to spread the
Deductions expenses from the
various list of deduction
that the Bureau has
allowed, subject to the
limitations and provisions
of the Tax Code.
held primarily for sale to customers
in the ordinary course of his trade or
business, (3) nor it is a property
used in the trade or business, of a
character which is subject to the
allowance for depreciation provided
in subsection (f) of Section 34 of the
National Internal Revenue Code,
and (4) nor it is real property used in
the trade or business.
Maximizing these deductions can
greatly help in the reduction of tax
obligations. Examples of which are
Advertising and Promotions,
Amortizations, Bad Debts,
Charitable Contributions (Note:
Donations should be made to BIR
accredited donee institutions,
otherwise individual taxpayers can
only claim 10% of the donation as
deductible), Commissions,
Communication, Light and Water,
Depletion, Depreciation, Director’s
Fees, Fringe Benefits, Losses,
Janitorial Services, Management
and Consultancy Fees, Research
and Development, Royalties,
Salaries and Allowances ,Security
Services ,SSS, GSIS, Philhealth,
HDMF and Other, Contributions,
Taxes and Licenses ,Tolling Fees,
Training and Seminars and
Transportation and Travel.
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4. Under the Cohan Principle, it allows a taxpayer an allowance for
certain business deductions even if the taxpayer is unable to verify or
substantiate certain expenses. When a taxpayer is being audited by
the IRS, generally the taxpayer must show a receipt, invoice,
cancelled check or like item for the IRS to allow the expense that is
under audit. If the taxpayer is unable to provide the necessary
documentation, the IRS may disallow the expense or item. Under the
Cohn rule, the IRS or a court may allow a taxpayer reasonable
amount of the deductions.

5.
A. Non-stock and non-profit educational institutions are expressly
exempt from tax under Section 30(H) of the Tax Code; thus,
they cannot be the subject matter of Section 27(B) of the Tax
Code which covers the taxation of domestic corporations in
general. The exemption covers income, property, and donor’s
taxes, custom duties, and other taxes imposed by either or both
the national government or political subdivisions on all
revenues, assets, property or donations, used actually, directly
and exclusively for educational purposes. Likewise, revenues
derived from assets used in the operation of
cafeterias/canteens and bookstores are exempt from taxation
provided they are owned and operated by the educational
institution as ancillary activities and the same are located within
the school premises. However, they shall be subject to internal
revenue taxes on income from trade, business or other activity,
the conduct of which is not related to the exercise or
performance by such educational institutions of their
educational purposes or functions (Sec. 2, Finance Department
Order No. 137-87 as amended by Finance Department Order
No. 92-88) i.e., rental payment from their building/premises.

B. The tax treatment for stock and profit-oriented financial

institutions (proprietary educational institutions) are subject to

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 the 25% rate for businesses, denying them the benefit of the
10% preferential tax rate under the Tax Code.
C. Without the corporate juridical entity, the assets of the
corporation are deemed transferred to the shareholders as if
the corporation was dissolved or liquidated. Any liquidating gain
could then be subject to the 30% regular corporate income tax.
On top of that, the corporation ceases to be a legal person and
thus incapable to enter into contracts and hold its licenses. It
becomes a non-persona. However, an expired corporation
whose corporate name has already been validly reused by
another existing corporation may likewise apply for a revival of
corporate existence provided it shall change its corporate
name.

6. Under the tax sparing rule, it allows the reduction of the 30% tax rate
to 15% tax, on the condition that the country in which the nonresident
foreign corporation is domiciled allows a credit against the tax due
from the non-resident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to the difference between the
regular tax rate and the 15% tax on dividends. Thus, there are two
instances where the tax sparing provision will apply, which are: (a)
the country of residence of the corporate shareholder allows a credit
of 15 percent tax deemed to have been paid in the Philippines, and
(b) the country of residence of the corporate shareholder does not
impose any tax on the dividends.

7. Married individuals (whether citizens, resident or nonresident aliens)

who do not derive income purely from compensation, shall file only
one consolidated return to cover the income of both spouses for the
taxable year, but where it is impracticable for the spouses to file one
return, each spouse may file a separate return of income but the
returns so filed shall be consolidated by the BIR for verification.
Common law spouses shall file their separate income tax returns,
there being no binding contract with regards to their property regime.

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 Further, the law expressly provides that married individuals may file
one consolidated ITR.

8. No, he is not qualified for substituted filing. Based on Revenue

Regulation no. 3-2002, substituted tax filing only applies to
employees who meet all the following conditions:(1) Employee
receives purely compensation income (regardless of amount) during
the taxable year;(2) Employee receives income from a single
employer in the Philippines during the taxable year; and (3) The
amount of tax due from the employee at the end of the year equals
the amount of tax withheld by the employer. Since he is only a part-
time professor and does not have any contract of employment, he
cannot qualify for such filing.

9. The preferential tax treatment of 15% shall no longer be applicable to

employees of regional headquarters (RHQs), regional operating
headquarters (ROHQs), offshore banking units (OBUs) or petroleum
service contractors and subcontractors. They are now subject to
regular income tax rates, as provided under Sec. 25 (F) of the Tax
Code. Foreign currency deposit units (FCDUs) which were derived
from sources within the Philippines have a final income tax at tax rate
of 20% of interest income. Interest income derived by RFC from a
depository bank under the expanded foreign currency deposit system
have a 7.5% of interest income.

10.
A. The parcel of land must be treated as an inheritance, thus,
subject to estate tax. The estate tax of every decedent, whether
resident or non-resident of the Philippines, is computed by
multiplying the net estate with six (6) percent.

B. The estate tax imposed is generally paid by the executor or

administrator before the delivery of the distributive share in the
inheritance to any heir or beneficiary. Where there are two or

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more executors or administrators, or hers to that estate, all of
them are severally liable for the payment of the tax.