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ANSWERS TO BAR
EXAMINATION QUESTIONS
IN
TAXATION LAW
* ARRANGED BY TOPIC *
(1994 2006)
FOREWARD
This work is NOT intended FOR SALE or COMMERCE. This work is a freeware. It may
be freely copied and distributed, nevertheless, PERMISSION TO COPY from the editors
of this material. It is primarily intended for all those who desire to have a
for law students from the provinces who, very often, are recipients of deliberately
I would like to seek the indulgence of the reader for some Bar Questions which
are improperly classified under a topic and for some topics which are improperly
or ignorantly phrased, for the arranger is just a Bar Reviewee who has prepared this
nd
work while reviewing for the 2 time for the Bar Exams 2007 under time
constraints and within his limited knowledge of the law. I would like to seek the readers
The Arranger
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) sirdondee@gmail.com 3 of 73
corporations are exempt from income tax; It depends. An individual with pure
and gains from stock transactions with the compensation income is not required to file
Philippine Stock Exchange are subject to an income tax returns when she meets the
transaction tax which is in lieu of the income following conditions; (1) the total gross
compensation income does not exceed
tax.
Php60,000.00 and (2) the income tax has
ITR; Domestic Corporate Taxation (2001) been correctly withheld, meaning
a) How often does a domestic corporation
file income tax return for income earned
during a single taxable
year? Explain the process. (3%)
SUGGESTED ANSWER:
a) A domestic corporation is required to file
income tax returns four (4) times for income
earned during a single taxable year.
Quarterly returns are required to be filed for
the first three quarters where the corporation
shall declare its quarterly summary of gross
income and deductions on a cumulative
basis. (Section 75, NIRC). Then, a final
adjustment return is required to be filed
covering the total taxable income for the
entire year, calendar or fiscal.
(Section 76, NIRC).
DEDUCTIONS, EXEMPTIONS,
EXCLUSIONS & INCLUSIONS
Deduction: Facilitation Fees or "kickback" (1998)
MC Garcia, a contractor who won
the bid for the construction of a
public highway, claims as expenses,
facilitation fees which according to
him is standard operating procedure in
transactions with the government. Are
these expenses allowable as deduction
from gross income? [5%]
SUGGESTED ANSWER:
No. The alleged facilitation fees which he
claims as standard operating procedure in
transactions with the government comes
in the form of bribes or "kickback" which
are not allowed as deductions from gross
income
(Section 34(A)(l)(c), NIRC).
1) The separation pay given to Reyes No, Mr. Jacobo did not derive any taxable
is subject to income tax as compensation income because the separation pay was
income because it arises from a service due to a retrenchment policy adopted by
rendered pursuant to an employer- the company so that any employee
employee rela- tionship. It is not terminated by virtue thereof is considered
to have been separated due to causes
considered an exclusion from gross
beyond the employee's control. The
income because the rule in taxation is
voluntary redundancy program requiring
tax construed in strictissimi juris or the
employees to make an offer to resign is
rule on strict Interpretation of tax
only considered as a tool to expedite the
exemptions.
lay-off of excess manpower whose services
2) The separation pay received by Cruz is are no longer needed by the employer,
not subject to income tax because his but is not the main reason or cause for
the termination
separation from the company was
involuntary (Sec. 28 b (7), Tax Code). SUGGESTED ANSWER:
2) No, Mr. Kintanar did not derive any
3) The separation pay received by Bautista income when he received his separation
is likewise not subject to tax. His pay because his separation from
separation is due to disability, hence
involuntary. Under the law, separation
pay received through involuntary causes
are exempt from taxation.
Provincial and City Assessors. The fact that If Dino held on to the property as a capital
the property is worth P20 million as of the asset in that it is neither for sale in the
time of donation is immaterial unless it can be ordinary course of business nor used in
shown that this value is one of the two values Dino's business, then upon sale thereof
mentioned as provided under Section 81 of there is presumed to be realized an income
the Tax Code. of P20 million which is the gross selling
price of the property. (Sec. 21(e), NIRC).
(2) The Revenue District Officer questions The same would be subject to the 5%
the splitting of the donations into 1994 capital gains tax.
and 1995. He says that since there
were only two (2) days separating the two Donors Tax; Dacion en Pago; Effect: Taxation (1997)
donations they should be treated as one,
having been
made within one year. Is he correct?
Explain.
SUGGESTED ANSWER:
2) The Revenue District Officer is not
correct because the computation of the gift
tax is cumulative but only insofar as gifts
made within the same calendar year.
Therefore, there is no legal justification for
treating two gifts effected in two separate
calendar years as one gift.
BUSINESS TAXES
VAT: Basis of VAT (1996)
What is the basis of the Value-Added
Tax on taxable sales of real property?
SUGGESTED ANSWER:
The basis of the Value-Added Tax on
taxable sale of real property is "GROSS
SELLING PRICE" which is either selling
price stated in the sale document or
the "Zonal Value", whichever is higher.
In the absence of zonal values, the
gross selling price shall refer to the
market value as shown in the latest
tax declaration or the consideration,
whichever is higher.
reviewed by the Secretary of No. Prescription has not set in because the
Finance. period of limitations for the Bureau of Internal
Revenue to issue an assessment was
Resort to judicial relief can be SUSPENDED during the time that Mr. Reyes
had by the taxpayer by was out of the Philippines or from the
appealing the decision of the period
Commissioner or of the Secretary
of Finance (for cases subject to
automatic review) within 30 days
from the promulgation of the
adverse decision to the CTA.
Taxpayer: Overwitholding Claim for Refund (1999)
A Co. is the wholly owned subsidiary of B
Co., a non- resident German company. A
Co. has a trademark licensing agreement
with B Co. On Feb. 10, 1995, A Co. remitted
to B Co. royalties of P 10,000,000, which A Co.
subjected to a withholding tax of 25% or
P2,500,000. Upon advice of counsel, A Co.
realized that the proper withholding tax
rate is 10%. On March 20, 1996, A Co.
filed a claim for refund of P2.500.000 with the
BIR. The BIR denied the claim on Nov.
15, 1996. On Nov. 28, 1996, A Co. filed a
petition for review with the CTA. The BIR
attacked the capacity of A Co., as agent, to
bring the refund case. Decide the issue. (5%)
SUGGESTED ANSWER:
A Co., the withholding agent of the non-
resident foreign corporation is entitled to
claim the refund of excess withholding tax
paid on the income of said corporation in the
Philippines. Being a withholding agent, it
is the one held liable for any violation of
the withholding tax law should such a
violation occur. In the same vein, it should be
allowed to claim a refund in case of
overwitholding.
(CIR v. Wander Phils. Inc., GR No. 68378,
April 15, 1988,
160 SCRA 573; CIR v. Procter & Gamble
PMC, 2O4 SCRA 377).
SUGGESTED ANSWER:
Yes, the buyer is subject to capital gains
tax on the exchange of lots on the basis
of prevailing fair market value of the
property transferred at the time of the
exchange or the fair market value of the
property received, whichever is higher
(Section 21(e), NIRC). Real property
transactions subject to capital gains tax are
not limited to sales but also exchanges of
property unless exempted by a specific
provision of law.
ALTERNATIVE ANSWER:
No. The exchange is not subject to
capital gains tax because it is merely done
to comply with the intentions of the parties
to the previous contract regarding the sale
and acquisition of a property with a
good view. This is a simple substitution
of the object of sale and since the
previous transaction was already subjected
to tax, no new tax should be imposed on
the exchange (BIR Ruling No. 21(e) 053-
89 008-95).