Part I – Theories

On December 25, 2017, Contessa, a Filipino residing in the Philippines, made the following
donations in favor of Duke, a Japanese residing in Japan:

 10,000 ordinary shares of stocks in Coup Corporation, an unlisted domestic corporation

where 70% of its business is in Japan (Par value per share – 5.00; Book Value per share
– 4.00)
 5,000 sq. m. parcel of land in Tokaido, Japan (Fair market value per sq. m. – 2,000; zonal
value per sq. m. – 1,800)
1. The donation made by Contessa in favor of Duke, should be in public instrument to be
valid.
2. If the tax laws of Japan do not impose donor’s tax, both donations will be included in gross
gifts, because for taxation purposes, shares of stocks are not covered by reciprocity.
3. For the shares of stocks to be included in the gross gifts, it should be valued at book value.
4. Duke, being the recipient of the donation, is not liable for any tax.

Republic Act No. 10963 or The Tax Reform for Acceleration and Inclusion (TRAIN) Law took
effect on January 1, 2018.

5. Contessa’s donations will not be covered by the TRAIN Law, since the law is not yet effective
by the time the donations were made.

Catan Corporation is engaged in the business of providing management consultancy services.

It entered into a contract of services with Takenoko Development Corporation, wherein Catan
will provide management advisory services for Takenoko regarding its bamboo plantation.
However, due to liquidity issues, Takenoko offered to Catan certain parcels of land as payment
for the consultancy services, which Catan accepted. Since the parcels of land will not be of any
use to the business of Catan, it decided to transfer it to Voila Construction Company. At the
time of transfer, the fair market value of the land was 10,000,000. Catan received 7,000,000 as
consideration for the property.

6. A real estate dealer includes any person engaged in the business of buying, developing,
selling, exchanging real properties as principal and holding himself out as full or part-time
dealer in real estate.
7. The parcels of land transferred by Catan to Voila is a capital asset because Catan is a
management consultancy firm and it will not use the property in the ordinary course of its trade
or business.
8. Catan will be liable for income tax from the transfer of parcels of land received from
Takenoko.
9. Catan will be liable for capital gains tax from the transfer of parcels of land to Voila.
10. Takenoko’s sale of bamboo poles is subject to 12% value-added tax.

Kit Tens is a successful Certified Public Accountant. He has amassed a significant amount of
money from his practice and wants to use the same to put up his own businesses. Being a risk-
taker himself, Kit wants to enter into all sorts of business undertakings. The following is a list of
Kit’s proposed businesses and the corresponding projected annual gross sales/receipts:
 Projected Gross
Business Name Nature of Business
Sales/Receipts
Singko! Singko! Singko! (555) Dealership of canned sardines 700,00.00
Plantation and sale of roses,
Werfla Flower Shop orchids, and other ornamental 500,00.00
plants
Sundo’t Hatid School Service Operations 200,000.00
Plantation and Exportation of
Bulak Luck 500,00.00
Cotton Products
Grooming parlor for dogs,
Swswswswswsws 300,00.00
cats, and other pets
Manufacture and sale of home
Bamboo Kawayan 300,000.00
furniture made from bamboo

11. The importation of cotton seeds by Bulak Luck is subject to 12% value-added tax.
12. The threshold amount of 1,919,500 is one of the factors to be considered by Kit Tens to
determine whether or not he will be required to register, under the VAT system. However, Kit’s
school service operations ‘Sundo’t Hatid’ will not be considered in determining whether Kit
has already reached the threshold, because it is a domestic carrier transporting persons within
the Philippines, subject to 3% percentage tax.
13. In addition, Kit may not claim presumptive input tax on any of his businesses.

Presumptive input tax only applies to persons or firms engaged in the processing of sardines,
mackerel, and milk and in manufacturing refined sugar, cooking oil, and packed noodle (i.e.
based instant meals). The presumptive input tax is equivalent to 4% of the gross value in money
of their purchases of primary agricultural products which are used as inputs to their
production.

14. Under the TRAIN Law, the threshold amount for the value-added tax is increased to
3,000,000.

Oberon is reviewing for the CPA Board Examination and is currently enrolled at ReZA Review
School. He is also working part-time at SyCip Gorres Binaluyo & Co. earning minimum wage,
the reason he is enrolled in ReZA’s night class.

On his way home after attending a night review session in Taxation, Oberon was accidentally
hit by the car driven by Percival. Percival immediately brought Oberon to the nearest hospital,
Our Lady of the Lake General Hospital, a non-profit hospital.

Percival reimbursed all of Oberon’s hospital and medical expenses, including the professional
fee for Oberon’s attending physician, Dr. Pan Demic. Percival, likewise, paid the unearned
salaries of Oberon the one-week period that Oberon spent in the hospital.

15. ReZA Review School of Accountancy is subject to 12% value-added tax and 30%
corporate income tax.
16. The payments received by Oberon from SGB & CO. is exempt from both value-added tax
and income tax.
17. Our Lady of the Lake General Hospital is exempt from value-added tax, but subject to 10%
income tax.
18. The payment made to Dr. Pan Demic is subject to 12% value-added tax and basic income
tax.
Under the expanded definition, the performance of all kinds of services in the Philippines for
others for a fee, remuneration, or consideration is subject to VAT.

19. The reimbursement of the hospital and medical expenses and the unearned salaries of
Oberon is exempt from both value-added tax and income tax.

Mordred, a Filipino residing in Manila, is a freelance architect. He offers his services to clients
within and without the Philippines.

In 2017. Mordred received a quotation from Mr. Black, a resident and a citizen of Madagascar,
for the architectural design of Mr. Black’s house to be built in Madagascar. Mordred will be paid
$10,000.00 for his professional services.

Mordred made his sketches and drawings of Mr. Black’s house electronically in his office in
Manila. After finishing the final design, he sent the same electronically to Mr. Black. Mr. Black,
in return, satisfied with the final outputs of Mordred, transferred the money representing
payment for the professional fees to Mordred’s bank account in Madagascar.

20. For income tax purposes, the professional fees received by Mordred is considered as income
from sources within the Philippines.
21. For business tax purposes, the professional fees received by Mordred is zero-rated. Services
rendered to a person engaged in business conducted outside the Philippines, or to a non-
resident person not engaged in business who is outside the Philippines when the services are
performed, the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
is zero-rated.
22. The interest income earned by the dollar account of Mordred is subject to basic income tax.
23. Under the TRAIN Law, interest income earned from deposits covered by the expanded foreign
currency deposit system is increased to 15% final tax from 7.5%.

Jenga Corporation, a VAT-registered taxpayer, is engaged in the construction business. It

entered into a long-term construction-contract with Spyfall Corporation, a corporation engaged
in warehousing business, to build one of its high-rise administrative buildings. Spyfall is also a
VAT registered taxpayer.

The construction contract, which was for a consideration amounting to 30,000,000.00 lasted for
three (3) years. Over this period, billings were made by Jenga as the construction progresses,
which Spyfall promptly paid.

At the end of the 3-year period, Spyfall transferred to Jenga 50,000 shares of Uno Corporation
as performance bonus for being able to finish the project on time. Jenga, in return, gave the
50,000 Uno Corporation shares to Engr. D. Last, the Project Manager who principally handled
and supervised the Spyfall construction.

24. Spyfall should recognize the input tax on the building as the progress payments were made.
25. The transfer of the Uno Corporation shares from Spyfall to Jenga is subject to value-added
tax, since it formed part of the consideration of the construction project.
26. The transfer of the Uno Corporation shares from Jenga to Engr. D. Last is subject to income
tax only.
27. If Engr. D. Last would decide to transfer the Uno Corporation shares to his friend Mr. B. Dog
as a consideration which is lower than the Uno Corporation shares’ fair market value, other
 than documentary stamps tax, the transaction would be subject to capital gains tax and
donor’s tax.
28. The BIR may pursue both summary and judicial proceedings simultaneously in the discretion
of the authorities charged with the collection of such taxes.
29. The power to impose a tax, fee or a charge or to generate revenue under the Local
Government Code shall be exercised by the Sanggunian of the local government unit
concerned through an appropriate ordinance.
30. If a BOI-registered enterprise has a “registered” and “unregistered” activities, the Minimum
Corporate Income Tax (MCIT) shall apply to unregistered activity only.
Part II – Problems

Morgana, the owner of Avalon General Merchandising, a non-VAT registered proprietress, sold
various items to Merlin, all of which will be for his personal use. As proof of the transaction,
Morgana issued in favor of Merlin a sales invoice as follows:

S.I. No. 00023123

AVALON GENERAL MERCHANDISING
2nd Floor 270 Teresa St., Sta. Mesa, Manila
(in front of 7-Eleven)
Morgana Villascano – Prop.
TIN 168-999-000 NON-VAT

SALES INVOICE

Date: June 1, 2017

Sold to: Merline Lascareal
Address: 143 Excalibur St. Loyal Servants Ave,
Brgy. Round Table, Manila
Qty Item Unit Price Selling Price
2 Jenga 900.00 1,800.00
4 Organ ATTACK! 1,200.00 4,800.00
1 Takenoko 2,200.00 2,200.00
TOTAL 8,800.00

Price, net of VAT 8,000.00

Add: 12% VAT 800.00
TOTAL 8,800.00

31. The output tax Morgana should recognize in this transaction should be PHP 942.86.

Total Price, inclusive of VAT 8,800

Divided by 112
Multiplied by 12
Output VAT 942.86

32. Merlin cannot claim any input tax on this purchase.

33. Even if Merlin is a senior citizen, Morgana cannot claim any input tax on this transaction.

A married resident alien decedent who was under absolute community of properties died on
March 1, 2017. His estate provided the following information:

Real Properties
Family lot inherited by the decedent before marriage 3 years before
he died, FMV at the time of inheritance, 1,200,000.00 with
500,000.00 unpaid mortgage assumed by the present decedent with
FMV at the time of death 1,500,000.00
Family house built using the salary earned by the surviving spouse
during marriage, FMV 3,900,000.00
Coconut farm inherited by the surviving spouse during the marriage,
FMV 1,000,000.00
Mango Orchard 1,800,000.00
Personal Properties
 Bank deposit under the name of the decedent representing salary
earned before marriage 2,150,000.00
Gold necklace inherited by the surviving spouse during marriage 120,000.00
Several pieces of jewelry acquired during marriage using exclusive
money of the decedent 300,000.00

34. The total community properties to be reported in the gross estate is 9,770,000.00.

FMV of family lot inherited 1,500,000

Family house earned 3,900,000
Mango Orchard 1,800,000
Bank deposit 2,150,000
Gold Necklace 120,000
Pieces of jewelry 300,000
Output VAT 9,770,000

Personal effects if jewelry acquired before or during the marriage are considered as community
properties in the ACOP regime.

35. The total exclusive properties to be reported in the gross estate should be none.
36. The family deduction should be PHP 1,000,000.
37. Under the TRAIN Law, the standard deduction must be PHP 5,000,000.00.

Forbidden Dessert Corporation provided you with the following financial operation regarding its
operations:

Gross Sales 5,000,000.00

Sales returns and allowances 100,000.00
Sales discounts 400,000.00
Cost of sales (including purchase of VAT-subject merchandise
amounting to 300,000.00) 1,500,000.00
Office equipment purchased on January 1, 2017 with 6 years
estimated useful life 1,100,000.00
Purchase of goods for sale (300,000.00 included in the cost of sales
above, the rest were unsold for more than 60 days) 500,000.00
Operating expenses (40% of which is related to paid purchases from
VAT-registered service providers) 500,000.00
Office supplies purchased (all of which were consumed by the end
of the quarter) 90,000.00
VAT paid for January and February 2017 40,000.00

38. The output tax is 540,000.00

Gross Sales 5,000,000

Sales Returns and Allowances (100,000)
Sales Discounts (400,000)
Taxable Amount 4,500,000
VAT Rate 12%
Output VAT 540,000
39. The input tax is 101,400.00.

Purchases of Goods 500,000

Operating Expenses (40%) 200,000
Office Supplies 90,000
Total 790,000
VAT Rate 12% 94,800.00

Office Equipment 1,100,000

VAT Rate 12%
Creditable Input Tax 132,000
Divided by: Months Covered 3/60 6,600.00
Output VAT 101,400.00

40. The taxable net income is 2,364,166.67.

Gross Sales 5,000,000

Sales Returns and Allowances (100,000)
Sales Discounts (400,000)
Net Sales 4,500,000
Cost of Sales 1,500,000
Gross Profit 3,000,000
Operating Expenses (500,000)
Supplies Expense (90,000)
Depreciation Expense (45,833)
Taxable Net Income 2,364,167

A stockholder of a closely held corporation owns 100,000 shares before the IPO. The cost of
the share is 1,000,000.00. During the 2017 IPO, the shares are selling at 12.00 per share. His
broker-friend advises him not to sell his shares during the IPO but instead wait until after the
IPO. After the IPO, the outstanding shares of the closely held corporation are 1,000,000 shares
are now selling at 14.00 per share at the local stock exchange.

The stockholder of the closely held corporation approaches you to seek your advice because
he is also planning to sell the shares directly to his friend and, therefore, not traded through the
local stock exchange at 15.00 per share.

41. If he sold his shares during the IPO, the percentage tax due is 48,000.00.

A. Determine the ratio: 100,000/1,000,000 = 10% ≈ 4% rate

B. Computation

Gross Sales Price 1,200,000

Tax Rate 4%
Percentage Tax Due 48,000

42. If he sold his shares after the IPO, the percentage tax due is 7,000.00.

Gross Sales Price 1,400,000

Tax Rate .05%
Percentage Tax Due 7,000
43. The capital gains tax, if he sells the shares directly to his friend, is PHP 45,000.00
 Gross Sales Price 1,500,000
Cost of Shares Sold 1,000,000
Capital Gain 500,000
Subject to 5% (100,000) 5,000
Subject to 10% 400,000 40,000
Capital Gains Tax Due 45,000

Patchwork’s (a Philippine Domestic Corporation) Board of Directors approved the issuance of

30,000 treasury shares to certain employees who have qualified based on the terms and
conditions of the Company’s Employee Stock Option Plan.

The terms and conditions include, among others, tenure of 1 year, at least a satisfactory rating
during the last performance appraisal, no suspension in the last year, and no absences without
official leave or more than 30 days of leave without pay in the past year.

The shares have been credited already to the qualified employees at without any subscription
price and the related stock certificates were already distributed to the qualified employees (50%
of the total qualified employees were handling managerial and/or supervisory position).

Fair value of the stock option at the date of grant is 400,000,000.00.

44. The fringe benefits tax is 94,117,647.06

Fair Value of Stock Option 400,000,000

Qualified Employees 50%
Monetary Value 200,000,000
Grossed Up Rate 68%
Grossed Up Monetary Value 294,117,647
Tax Rate 32%
Fringe Benefit Tax 94,117,647

45. Under the TRAIN Law, the fringe benefits tax due is 107,692,307.69.

Fair Value of Stock Option 400,000,000

Qualified Employees 50%
Monetary Value 200,000,000
Grossed Up Rate 65%
Grossed Up Monetary Value 307,692,307
Tax Rate 35%
Fringe Benefit Tax 107,692,307

A taxpayer engaged in the production of refined sugar has just transition to being a VAT
taxpayer on December 1. He provided you with the following data:

Sales 3,000,000.00
Purchases
Supplies from VAT-registered suppliers 390,000.00
Packaging material from non-VAT suppliers 400,000.00
Sugar cane from planters 1,500,000.00
Water Bill 1,100,000.00
Salaries of officials and employees 500,000.00
Inventories at December 1, at recorded value
Packaging materials 90,000.00
Supplies purchased from VAT registered persons 44,800.00
 Supplies purchased from non-VAT registered persons 20,000.00

46. The transitional input tax is 4,800.00.

Packaging Materials 90,000

Supplies from VAT registered 40,000
Gross Value of Inventory 130,000
Transitional Input Tax Rate 2%
Transitional Input Vat 2,600

Supplies from VAT registered 44,800

Divided by 112
Multiplied by 12
Input VAT 4,800

The transitional input tax allowed shall be the higher of actual value-added tax paid on goods,
materials, and supplies, or 2% of beginning inventory (excluding VAT-exempt goods).

47. The presumptive input tax 60,000.00.

Sugar cane from planters 1,500,000

Presumptive Input Tax Rate 4%
Presumptive Input Tax 60,000

48. The total creditable input vat is 243,600.00.

Supplies from VAT registered 390,000

Water Bill 1,100,000
Total 1,490,000
Tax Rate 12
Input VAT 178,800
Presumptive Input Tax 60,000
Transitional Input Vat 4,800
Total Input VAT 243,600

49. The VAT Payable is

Sales 3,000,000
Tax Rate 12%
Output VAT 360,000
Input VAT 243,600
VAT Payable 116,400
A resident rank-and-file private employee has two (2) qualified dependent children at the
beginning of 2017. He also supports his father-in-law who is a PWD and his uncle who is a
senior citizen.

Salaries and wages, net of 73,443.00 withholding tax and SSS,

PhilHealth, Pag-IBIG contributions of 14,776.00 511,781.00
13th month pay 100,000.00
Rice subsidy (1,500.00 x 12 months) 18,000.00
Uniform and clothing allowance 5,000.00
Monetized unused vacation leave credits (12 days) 28,800.00
Actual medical benefits 15,000.00
Christmas gift from employer 10,000.00
Laundry allowance (400.00 x 12 months) 4,800.00
Employee achievement award (amount of cash given) 10,000.00
Benefits received from a Collective Bargaining Agreement (CBA) 10,000.00
Interest from EFCDU deposit (in its peso equivalent) 40,000.00
Dividend from a domestic corporation 10,000.00
Gain on sale of personal jewelry (700,000.00 – 400,000.00) 300,000.00
Gain on sale of shares of stocks not traded or listed in the local
stocks exchange (400,000.00 – 100,000.00) 300,000.00
Gain on sale of old vacation house (1,000,000.00 – 600,000.00) 400,000.00
PCSO Lotto Winnings 100,000.00

50. The total exempt de minimis benefits is 75,600.00.

Exempt Basic
Vacation leave
Monetized unused leave 28,800.00
Divided by: Unused Days 12
Multiply: Exempt Days 10
Exempt vacation leave 24,000.00 4,800.00
Actual Medical Benefits 10,000.00 5,000.00
Rice Subsidy 18,000.00
Uniform and Clothing Allowance 5,000.00
Laundry Allowance 3,600.00 1,200.00
Employee Achievement Award 10,000.00
Gifts given 5,000.00 5,000.00
Total 75,600.00 16,000.00

51. The total exclusions/exemptions is 272,376.00.

De Minimis Benefits 75,600.00

13th month pay 82,000.00
PCSO Lotto Winnings 100,000.00
Contributions 14,776.00
Total Exclusions/Exemptions 272,376.00
52. The final tax on passive income is 4,000.00.

Interest from EFCD (7.5%) 40,000.00 3,000.00

Dividend from Domestic (10%) 10,000.00 1,000.00
Final Tax on Passive Income 4,000.00

53. The final tax on capital gains is 85,000.00

Capital Gains from Stocks 300,000

Subject to 5% (100,000) 5,000.00
Subject to 10% 200,000 20,000.00

Sales Price Vacation House 1,000,000

Capital Gains Tax Rate 6% 60,000.00
Capital Gains Tax Due 85,000.00

54. The taxable net income subject to basic income tax is 804,224.00.

Salaries and Wages 600,000.00

Benefits from CBA 10,000.00
Gain on sale of personal jewelry 300,000.00
Excess of 13th month 18,000.00
Excess of de minimis benefits 16,000.00
Gross Income 944,000.00
Contributions (14,776.00)
BAPE (50,000.00)
AAPE (75,000.00)
Taxable Net Income 804,224.00

Mr. D owned an idle land that is no longer used in connection with his farming business for five
(5) years already. Mr. D sold the said land to a close friend at a friendly price of PHP 200,000.00,
although its fair market value was 1,000,000.00.

55. The donor’s tax on the transaction is none.

56. The value-added tax on this transaction is none.

Amba Sador, a resident alien donor, donated to Kuh, a Philippine domestic corporation, a
property located abroad valued at 500,000.00. The foreign donor’s tax on the donation was
100,000.00. A donation earlier within the same calendar year was donated to Amba Sadres, a
legitimate daughter, a property valued at 300,000.00

57. The donor’s tax payable is 52,500.00.

Relative
Donation to Amba Sadres 300,000.00
(200,000.00) 2,000.00
Rated at 4% 100,000.00 4,000.00
6,000.00
Stranger
Donation to Kuh 500,000.00
30% Tax Rate 150,000.00 156,000.00
Net Gift Abroad 500,000.00
 Divide: Taxable Net Gift World 800,000.00
Multiply: Gift Tax Due 156,000.00
Allowed Tax Credit 97,500.00

Donor’s Tax Due 156,000.00

Less: Donor’s Tax Paid (6,000.00)
Allowed Tax Credit (97,500.00)
Donor’s Tax Payable 52,500.00

The following data (net of VAT) of Blockassassination Corpo. are available for a particular
calendar year:

Third Quarter
Sales 3,500,000.00
Purchases 800,000.00
Purchase of machinery during the first month of the quarter with 3
years estimated useful life 2,000,000.00
Unutilized input tax as of the end of the second quarter 10,000.00
VAT payments for the first two months of the quarter 50,000.00

Fourth Quarter
Sales 4,000,000.00
Purchases 1,000,000.00
Proceeds from the sale of the machinery purchased in the 3rd quarter
made at the end of this quarter 1,500,000.00
VAT payments for the first two months of the quarter 100,000.00

58. The VAT payable for the third quarter is 244,000.00.

Output Tax 420,000.00

Creditable Input Tax (96,000.00)
Unutilized input tax (10,000.00)
Other VAT Credit (20,000.00)
VAT Payments (50,000.00)
VAT Payable 244,000.00

59. The VAT payable for the fourth quarter is

Output Tax 1,080,000.00

Creditable Input Tax (216,000.00)
Unutilized VAT Input (180,000.00)
Previous VAT Payable (244,000.00)
VAT Payable 420,000.00

Foreign Aid Transport Co. is a domestic common carrier by land and by sea within the Philippine
and by air and by air and by sea for its international transportation originating from the
Philippines. It had the following data for the month:
 Domestic transportation – land carriers
Gross receipts from cargoes 700,000.00
Gross receipts from passengers 800,000.00

Domestic transportation – sea carriers

Gross receipts from cargoes 600,000.00
Gross receipts from passengers 400,000.00

International transportation – air carriers

Gross receipts from cargoes 500,000.00
Gross receipts from passengers 900,000.00

International transportation – sea carriers

Gross receipts from cargoes 900,000.00

60. The percentage tax is 24,000.00

Gross receipts on domestic land 800,000.00

transport of passengers
Percentage Tax Rate 3%
Percentage Tax 24,000.00

61. The gross receipts subject to 12% VAT is 1,700,000.00.

Gross receipts on domestic 1,300,000.00

transport of cargoes
Gross receipts on domestic
transport of passengers 400,000.00
Percentage Tax 1,700,000.00

62. The gross receipts subject to 0% VAT is 2,300,000.00

Gross receipts from international

services 2,300,000.00

Sheriffofnothingham Financial Institution has the following data in a month:

Rentals from safety deposit boxes and real property acquired

through mortgage foreclosures 800,000.00
Service fees 500,000.00
Dividends and equity share in the net income of subsidiaries 400,000.00
Amounts received from lending activities on instruments with
maturities
Seven years 700,000.00
Five years 500,000.00
Three years 200,000.00

63. If Sheriffnottingham is a bank, the percentage tax is 133,000.00.

7% Rate
 Rentals 800,000.00
Service Fees 500,000.00
Percentage Tax 1,300,000.00 91,000.00
Seven-year instrument (1%) 7,000.00
Short-term instruments 35,000.00
Percentage Tax Due 133,000.00

64. If Seriffofnottingham is a non-bank financial intermediary without quasi-banking function, the

percentage tax is 127,000.00.

Dividend and Equity Shares 400,000.00

Rentals 800,000.00
Service Fees 500,000.00
7% Rate 1,700,000.00 85,000.00
Seven-year instrument (1%) 7,000.00
Short-term instruments 35,000.00
Percentage Tax Due 127,000.00