CUP 7

TAXATION

Easy Round 1 point each Theory – 10 seconds

Problem – 15 seconds

1. Which theory in taxation states that without taxes, a government would be paralyzed for lack of
power to activate and operate it, resulting in its destruction?

ANSWER: Lifeblood Theory

2. Although the power of taxation is basically legislative in character, it is NOT the function of
Congress to
a. Fix with certainty the amount of taxes.
b. Collect the tax levied under the law.
c. Identify who should collect the tax.
d. Determine who should be subject to the tax.

ANSWER: b

3. Exempted from donor’s taxation are gifts made

a. For the use of the barangay.
b. In consideration of marriage.
c. To a school which is a stock corporation.
d. To a for-profit government corporation.

ANSWER: a

4. TRUE OR FALSE. Under RMC 70-2015, transport network vehicle services, such as, but not limited
to, UBER and Grab, their partners/suppliers and similar arrangements, which are holders of a valid
and current Certificate of Public Convenience for the transport of passengers by land, shall be
subject to the three per cent (3%) common carriers tax.

ANSWER: True

5. One of the following does not form part of gross income,

a. Interest
b. Annuities
c. Royalties
d. None listed

ANSWER: d

6. Mr. A, CPA practitioner, is also employed with a manufacturing company and receives the following
for the year:
Salary P150,000
Overtime 30,000
13th Month 15,000
Deposit of client 20,000
Retainer fee of P5,000/month 60,000
Out-of-pocket charged to a client 80,000

How much is Mr. A’s gross compensation income?

 a. P180,000
b. P240,000
c. P215,000
d. P265,000

ANSWER: a

7. TRUE OR FALSE: Banks are subject to VAT on its interest income.

ANSWER: False

8. Reflected in the books of accounts of a company is a fringe benefit expense of P304,000. It was
found out that out of this amount, P100,000 was given to rank and file employees. How much is the
fringe benefit tax?
a. P65,289
b. P97,280
c. P129,280
d. P96,000

ANSWER: d

9. Which of the following is not within the scope of tax legislation?

a. Assessment of tax
b. Fixing the possible tax rate
c. Determining the purpose of the tax
d. Determining the subjects to be taxed

ANSWER: a

10. The following items were found in the accounting records of a VAT-registered company:
Accounts receivable, beginning P100,000
Accounts receivable, ending 140,000
Inventory, beginning 50,000
Inventory, ending 65,000
Purchases 90,000
Sales 250,000
Purchase discount 5,000
Sales return 10,000
Collections 200,000
Cost of sales 70,000

How much is the VATable sales?

a. P250,000
b. P240,000
c. P230,000
d. P200,000

ANSWER: b
EXTRA QUESTIONS:

11. Which of the following is not an inherent limitation in the exercise of the power of taxation?
a. Territoriality
b. International comity
c. Public purpose test
d. Veto power of the President

ANSWER: d

12. TRUE OR FALSE: Transfer Tax is a tax imposed on the privilege to transfer property ownership
onerously.

ANSWER: False

Average Round 3 points each Theory – 15 seconds

Problem – 30 seconds

1. A, an individual, sold to B, his brother-in-law, his residential lot with a market value of P1,000,000
for P600,000.00. A’s cost in the lot is P100,000.00. B is financially capable of buying the lot. What
tax should be imposed and collected from A as a result of the transaction?
a. Donor’s tax
b. Presumed capital gains tax
c. Real property tax
d. Tax on the transfer of real property

ANSWER: a

2. Ligaya Educational Foundation, Inc., a stock educational institution organized for profit, decided to
lease for commercial use a 1,500 sq. m. portion of its school. The school actually, directly, and
exclusively use the rents for the maintenance of its school buildings, including payment of janitorial
services. Is the leased portion subject to real property tax?
a. Yes, since Lualhati is a stock and for profit educational institution.
b. No, since the school actually, directly, and exclusively used the rents for educational
purposes.
c. No, but it may be subject to income taxation on the rents it receives.
d. Yes, since the leased portion is not actually, directly, and exclusively used for educational
purposes.

ANSWER: d

3. Dwaine, VAT-registered, made the following purchases during the month of January 2018:
Goods for sale, inclusive of VAT P 246,400
Supplies, exclusive of VAT 20,000
Packaging materials, total invoice amount 56,000
Home appliances for residence, gross of VAT 17,920
Office machines (5 pcs), 8 years useful life, net of VAT 2,000,000

How much input taxes are creditable for the month of January?
a. P38,800
b. P34,800
c. P37,440
d. P35,520
ANSWER: a

4. The following items were found in the accounting records of a VAT-registered company (amounts
are VAT-exclusive):
Accounts receivable, beginning P100,000
Accounts receivable, ending 140,000
Inventory, beginning 50,000
Inventory, ending 65,000
Purchases 90,000
Sales 250,000
Purchase discount 5,000
Sales return 10,000
Collections 200,000
Cost of sales 70,000

How much is the input tax?

a. P10,200
b. P10,800
c. P8,400
d. P0

ANSWER: a

5. Mayaman wanted the painting hanging on the wall of his living room replaced with a new one. He
then sells it to his bosom friend, Salamat, at a very low price of P500,000. Its fair market value is
P750,000. He bought the painting several years ago at an exhibit held in Shangri-La for P300,000.
How much is the donor’s tax payable by Mayaman?
a. P75,000
b. P15,000
c. P45,000
d. P0

ANSWER: b

6. A VAT-registered company acquired one vehicle for land transport for the use of an official or
employee valued at P2,400,000. Which of the following statements is correct?
a. The input tax on the purchase of the vehicle for land transport as well as the input taxes on
maintenance expenses incurred on the said vehicle shall be allowed as input tax credit.
b. The input tax on the purchase of the vehicle for land transport as well as the input taxes on
maintenance expenses incurred on the said vehicle shall not be allowed as input, tax credit.
c. The input tax on the purchase of the vehicle for land transport shall be allowed as input tax
credit while the input taxes on maintenance expenses incurred on the said vehicle shall not
be allowed as input tax credit.
d. The input tax on the purchase of the vehicle for land transport shall not be allowed as input
tax credit while the input taxes on maintenance expenses incurred on the said vehicle shall
be allowed as input tax credit.

ANSWER: a

7. Mr. and Mrs. Tristan Robles, citizen and residents of the Philippines, with two qualified dependent
children, had the following data in 1998:
Gross compensation income (net of SSS, Medicare, and Pag-Ibig)
 contributions, and of labor union dues, but before withholding
income tax), Mrs. Robles P 80, 420
Gross income from profession, Mrs. Robles 258,730
Gain on sale of capital asset held for 6 months, Mrs. Robles 15,000
Prize won in an essay contest, Mrs. Robles 2,000
Expense in the practice of profession 135,000
Income tax withheld on the professional fees 25,873

Taxable income of Mrs. Robles is

a. P64,320
b. P47,420
c. P49,420
d. P65,420

ANSWER: a

8. Which of the following statement is wrong?

a. Gift-splitting is a form of tax avoidance.
b. The uncle who is a brother of the donor’s father-in-law is a stranger to the donor for
purposes of the donor’s tax.
c. A gift made to a relative in January 2017 is to be added to the gift made to the same relative
in December 2017 in determining donor’s tax
d. Renunciation by an heir including the surviving spouse of his share in the hereditary estate
left by the decedent Is exempt from donor’s tax even if done in favor of identified heir to the
exclusion or disadvantage of other co-heirs in the hereditary estate.

ANSWER: d

9. The gross sales of a seller of fresh mango exceeds P3,000,000. Total expenses exceeded P500,000.
To which of the following tax or taxes will he be subjected?
I. Income tax (for the net income)
II. Value-added tax
III. 3% Percentage tax for VAT-exempt persons
IV. Excise tax

ANSWER: I only

10. D’ Lion, Inc., a Philippine corporation, sold through the local stock exchange 10,000 PLDT shares
that it bought 2 years ago. D’ Lion sold the shares for P2 million and realized a net gain of P200,000.
How shall it pay tax on the transaction?
a. It shall declare a P2 million gross income in its income tax return, deducting its cost of
acquisition as an expense.
b. It shall report the P200,000 in its corporate income tax return adjusted by the holding
period.
c. It shall pay 5% tax on the first P100,000 of the P200,000 and 10% tax on the remaining
P100,000.
d. It shall pay a tax of one-half of 1% of the P2 million gross sales.

ANSWER: d
EXTRA QUESTIONS:

11. Which of the following items is not part of gross income to be reported in the income tax return?
a. Increase in value of land
b. Gambling winnings
c. Prize of P10,000
d. Gain from sale of store’s air conditioner

ANSWER: a

12. Which of the following items of interest expense may be deducted from gross income?
a. Interest on corporation’s preferred stock
b. Interest on loan for construction of a rest house
c. Interest for delinquency in the payment of percentage tax
d. Interest on bank loan to finance petroleum exploration

ANSWER: c

Difficult Round 5 points each Theory – 20 seconds

Problem – 60 seconds

1. Enron received from the Commissioner of Internal Revenue a formal assessment notice requiring it
to pay the alleged deficiency income tax. Enron protested the deficiency tax assessment. It argued
that it does not provide the legal and factual basis of the assessment. In return, the Commissioner
alleged that substantial compliance had been made when it apprised Enron of its tax deficiency.
During the pre-assessment stage, the Commissioner of Internal Revenue advised Enron’s
representative of tax deficiency, informed it of the proposed tax deficiency assessment through a
preliminary letter and furnished Enron a copy of the audit working paper allegedly showing in
detail the legal and factual bases of the assessment. The Commissioner argues that these steps
sufficed to inform Enron of the laws and facts on which the deficiency assessment was based. Which
is correct? Choose the best answer.
a. Just because the CIR issued an advice, a preliminary letter during the pre-assessment stage
and a final notice in the order required by law, doesn’t necessarily means that Enron was
informed of the law and fact on which the deficiency tax assessments were made.
b. Just because the CIR issued an advice, a preliminary letter during the pre-assessment stage
and a final notice, in the order required by law, does not necessarily mean that Enron was
informed of the law and facts on which the deficiency tax assessment was made.
c. The alleged “factual bases” in the advice, preliminary letter and “audit working papers” is a
sufficient compliance of the legal requirement that the assessed notice must state the law
and the facts on which it is based.
d. The alleged factual bases in the advice, preliminary letter and audit working papers, is a
sufficient compliance of the legal requirement that the assessed notice must state the law
and the fact on which it was based.

ANSWER: b

2. Losses from wash sales of stock or securities shall be deductible if

a. The taxpayer is a dealer of securities or stock and made in the course of business of such
dealer.
 b. The shares of stock sold and then reacquired or repurchased are identical stock or
securities.
c. The shares of stock sold and then reacquired within a period beginning thirty (30) days
before the date of such sale or disposition.
d. The shares of stock sold and then reacquired within a period ending thirty (30) days after
such sale or disposition.

ANSWER: a

3. The administrator of the Estate of John Smith, a resident alien, contended that the property of the
late John Smith situated outside the Philippines should no longer be included in the decedent’s
Gross Estate for Philippine estate tax purposes. The reason posited was that the properties were
already subjected to foreign estate tax. To include them in the Philippine gross estate would result
to double taxation. Was the contention of the administrator correct?
a. Yes, because truly, subjecting the same properties to the same tax twice would result to
double taxation.
b. No, because the gross estate of a resident alien should include properties wherever situated.
c. Yes, because it would not be just to include the properties outside the Philippines as they do
not enjoy protection from the Philippine government.
d. No, because the gross estate of a resident alien should include properties wherever situated
and the foreign estate tax paid could be claimed as estate tax credit.

ANSWER: d

4. The President of the Philippines and the Prime Minister of Japan entered into executive agreement
in respect of a loan facility to the Philippines from Japan whereby it was stipulated that interest on
loans granted by private Japanese financial institutions to private financial institutions in the
Philippines should not be subject to Philippine income taxes. Is the tax exemption valid?
a. Yes, non-taxability of the government
b. Yes, based on international comity
c. Yes, based on international treaties and agreement
d. No, violation of the essential characteristics of taxation

ANSWER: d

5. Magdalene, single but head of family, died, testate on April 1, 2015. Her properties and obligations
consist of the following:
Properties:
Family home ₱1,200,000
Real properties in Manila 1,300,000
Car 250,000
Other personal properties 515,000
Obligations:
Cost of burial plot and tombstone 40,000
Cost of transporting the body to Manila 10,000
Judicial expenses 30,000
Debts contracted 10 days before death, not notarized 10,000
Receivable from an insolvent debtor 25,000
Donations to the City of Manila 50,000
Real property tax for 2015, ¼ of the amount was paid during the 1st quarter 10,000
 A memorial plan was contracted by the decedent long before her death. Relative to her death, the
cost of the coffin was ₱60,000, cremation expenses, ₱30,000 while the cost of other services by the
funeral parlor has reached to ₱120,000. All of these expenses were charged to the memorial plan.

The gross estate of Magdalene is

a. ₱3,275,000
b. ₱3,050,000
c. ₱3,500,000
d. ₱3,475,000

ANSWER: c

6. Mr. Yu leased his lot to Mr. Uy. The contract calls for Mr. Uy to construct a house which would serve
as the residence of the latter, the ownership thereof to be vested in Mr. Yu after the expiration of
the lease. When the house was completely constructed, the remaining term of the lease was 10
years. The residential house had an estimated useful life of 15 years. What is the tax implication of
the leasehold improvement?
a. Mr. Yu derives taxable income on the improvement; Mr. Uy can claim depreciation expense
as a deduction from gross income.
b. b. Mr. Yu derives taxable income on the improvement; Mr. Uy cannot claim depreciation
expense as a deduction from gross income.
c. c. Mr. Yu does not derive taxable income on the improvement; Mr. Uy cannot claim
depreciation expense as a deduction from gross income.
d. d. Mr. Yu does not derive taxable income on the improvement; Mr. Uy can claim
depreciation expense as a deduction from gross income.

ANSWER: b

7. Rosalie, a compensation income earner, filed her income tax return for the taxable year 2013 on
March 30, 2014. On May 20, 2017, Rosalie received an assessment notice and letter of demand
covering the taxable year 2013 but the postmark on the envelope shows April 10, 2017. Her return
is not a false and fraudulent return. Can Rosalie raise the defense of prescription?
a. No. The 3 year prescriptive period started to run on April 15, 2014, hence, it has not yet
expired on April 10, 2017.
b. Yes. The 3 year prescriptive period started to run on April 15, 2014, hence, it had already
expired by May 20, 2017.
c. No. The prescriptive period started to run on March 30, 2014, hence, the 3 year period
expired on April 10, 2017.
d. Yes. Since the 3-year prescriptive period started to run on March 30, 2014, it already
expired by May 20, 2017.

ANSWER: a

8. On March 30, 2012, XXX, Inc., received a notice of assessment and a letter of demand on its April 15,
2009 final adjustment return from the BIR. XXX, Inc., then filed a request for reinvestigation
together with the requisite supporting documents on April 25, 2012. On June 2, 2012, the BIR
issued a final assessment reducing the amount of the tax demand. Since XXX, Inc., was satisfied with
the reduction, it did not do anything anymore. On April 15, 2017 the BIR garnished the
corporation’s bank deposits to answer the liability. Was the BIR action proper?
a. No, the taxpayer did not apply for the compromise.
b. Yes, the BIR has 5years from the filing within which to collect.
c. No, without the taxpayer’s prior authority, the BIR action violated the Bank Deposit Secrecy
Law.
 d. Yes, the BIR has 5 years from the issuance if the final assessment within which to collect.

ANSWER: d

9. A VAT-registered realty company sells real property in the course of its business. On April 30, 2016,
it has sold a lot under the following items (VAT excluded).
Selling Price P4,000,000
Down payment, 4/30/16 400,000
1st Installment, 4/30/17 600,000
2nd Installment, 4/30/18 1,000,000
3rd Installment, 4/30/19 1,000,000
4th Installment, 4/30/20 1,000,000
Interest and other charges of 10% on unpaid balance per installment

The zonal value of the lot at the time of sale is P4, 800,000. The output VAT for the installment
received on April 30, 2017, is:
a. P43,200
b. P86,400
c. P115,200
d. P129,600

ANSWER: d

10. Ayala Land, Inc. (ALI) bought a parcel of land in 2014 for P7 million as part of its inventory of real
properties. In 2016, it sold the land for P12 million which was its zonal valuation. In the same year,
it suffered a loss of P6 million for selling another parcel of land from its inventory. These were the
only transactions ALI had in its real estate business. Which of the following is the applicable tax
treatment?
a. ALI shall be subject to a tax of 6% of P12 million.
b. ALI’s gain of P5 million shall be subject to holding period.
c. ALI could deduct its P6 million loss from its P5 million gain.
d. ALI’s P6 million loss could not be deducted from its P5 million gain.

ANSWER: c

EXTRA QUESTION:

11. X took a life insurance policy of P5 million where the monthly premium is P10, 000. The proceeds
will be paid to X after 25 years to the X’s estate should X die before completing the equivalent of 25
years payment. If the X outlived the policy, which of the following is correct?
a. The proceeds will be part of X’s gross estate.
b. The proceeds will be part of X’s taxable income.
c. The proceeds will be party taxable estate and partly exempt.
d. The proceeds will be party taxable income and partly exempt.

ANSWER: d

Clincher Round Theory – 10 seconds

Problem – 30 seconds

1. Which of the following items is not considered as a “special deduction” in computing the taxable net
estate of the decedent?
a. Vanishing deduction
 b. Medical expenses
c. Standard deduction
d. Family home allowance

ANSWER: a

2. Which of the following is exempt from VAT?

a. Common carriers transporting passengers by air within the Philippines
b. Common carriers transporting passengers by sea within the Philippines
c. Common carriers transporting passengers by land within the Philippines
d. Common carriers transporting cargoes by air within the Philippines

ANSWER: c

3. C. Lee, Chinese national, arrived in the Philippines on January 1, 2012 to visit his Filipina paramour.
He planned to stay in the country until December 31, 2016, by which time he would go back to his
legal wife and family in China. C. Lee derived income during his stay here in the Philippines. For the
taxable year 2012, C. Lee shall be classified as a
a. Resident alien
b. Non-resident alien engaged in trade or business in the Philippines
c. Non-resident alien not engaged in trade or business in the Philippines
d. Special alien employee

ANSWER: a