I.

FACTS: Pepper, Jon, Logan and Scott while having a drink decided to put up a concert. Pepper drew up the
agreement which they all signed. Under the agreement, they agreed to shell out P200,000 each. They agreed that
Pepper will take care of getting the artists. Jon will handle the promotions and advertisements. Logan will handle
the production crew and staff. Scott will handle the ticket sales. The agreement provided that after paying all the
expenses including the talent fees of the artists, the group will divide the net profits among themselves.

The group consulted you on the tax consequences of their agreement.

QUESTIONS:

a. Did the agreement give rise to a joint venture? State the particular elements that will support your answer.

Yes, it will give rise to a joint venture.

The elements of a joint venture are the following:
1. Contribution by each party;
2. Proprietary of interest and profits are shared among others;
3. A mutual control; and
4. Single business transaction rather than continuous.

In this case, there are contribution from each member, profits and losses will be shared, there’s a mutual
control and it is only for the purpose of putting up a concert.

b. Based on your answer above, what is the income tax exposure arising from the agreement.

The income tax exposure of a joint venture is same as a corporation subject to RCIT which is 30% of taxable
income or MCIT which is 2% of gross income because in this case the joint venture formed is not among the non-
taxable joint venture under Sec. 22 of the tax code.

II.

FACTS: A Corporation and B Corporation are both domestic corporations engaged in the construction business.
Both are licensed by the PCAB. C Corporation on the other hand is engaged in the production and sale of
construction materials. The three corporations want to form an unincorporated JV to do a construction project. As
co-venturers, A, B and C agreed to contribute all the necessary resources for the proper implementation of the
project, and to share in the JV’s profits and losses.

QUESTIONS:

a. Would the unincorporated JV among the three companies qualify as a JV for construction? Explain and support
you answer.

No, it will not qualify as a JV for construction because C corporation is not engaged in construction
business. The requirements for to be considered as JV for construction purposes as provided by RR No. 10-12 are
the following:

1. For undertaking of a construction project;

2. Should involve joining or pooling of resources by licensed local contractors, licensed by the PCAB;
3. The local contractors are engaged in construction business;
4. The JV itself must likewise duly licensed as such by the PCAB.

b. What would be the tax exposure of the joint venturers in a JV for construction?
 The members to a Joint Venture in a JV for construction shall each be responsible in reporting and paying
appropriate income taxes on their respective share to the joint ventures profit.

c. In the above JV what would be the tax exposure of the JV if any?

In this case, the JV will be taxed as a corporation since absence of one of the requirements in RR No. 10-12,
the joint venture formed for construction purposes shall be considered a taxable corporation. C corporation is not
engaged in construction business since suppliers of construction materials are not considered as engaged in
construction business.

III.

FACTS: Pepper trading corporation’s (PTC) primary business is trading of goods such as metal, aluminum, and other
scraps on wholesale basis. These scrap items consist of among others: aluminum scrap, copper brass, copper bronze
etc. PTC also buys and sells steel scrap, tin cans and tin plates scraps. Most of the materials that PTC sells are derived
from “junk” bought from marginal businesses, including “backyard” junkshops, households and ordinary individuals.
The suppliers of the “junk” are small-time junk suppliers, individuals not engaged in business, and ordinary
households so they are not able to issue duly-registered invoices and receipts, that since the sellers/suppliers of
materials are basically marginal businesses, they do not have invoices and receipts to document their sales
transaction.

PTC wants to make sure that it will be able to claim the cost of its purchases as expenses, specifically as part of its
cost of goods sold.

QUESTIONS:

a. What are the requirements that will enables PTC to claim the expenses? ON-PTY-Carry-Sup-Against-Re
OPCARS-
The requirements for deductibility of business expense are the following:
1. The expense must be ordinary and necessary;
2. Paid or incurred during the taxable year;
3. In carrying on the trade or business of the taxpayer;
4. It must be supported by adequate invoices and receipts;
5. Must not be against law, morals, public policy, or public order; and
6. It must be reasonable

b. What alternative documents can you suggest to PTC to support its expenses.

BIR Ruling 09-09 provides that purchase voucher may be used to substantiate purchases from people
conducting marginal economic activity.

In this case, PTC may use purchase voucher from the small-time individual junk suppliers from whom
they will purchase said items, subject to the condition that such purchase invoice shall indicate the name and
address of the supplier.

IV.

FACTS: Jon electronics inc. is engaged in import trading of carious gadgets and products. It imports mobile phones,
chargers, powerbanks, phone cases etc. Its suppliers are from China, Taiwan and Vietnam. In connection with its
business, it incurs expenses such as broker’s fees, storage fees, service fees of checkers at the warehouses, rental
fees for delivery vans, drivers’ salary, and facilitation fees. During the audit of its books by its external auditors, the
latter inquired as to the nature of the facilitation fees that are being claimed as deduction by the company. These
fees were unreceipted. According to the company’s accountant, the facilitation fees were “under the table”
payments to expedite the processing of release papers for the imported products. The external auditors also noted
that the company failed to subject the rental payments for the delivery vans, as well as the broker’s fees to
withholding taxes. The accountant could likewise not produce a copy of the rental agreement for the said vans. The
external auditor said that the expenses cannot be deducted.

QUESTION:

a. Is the external auditor correct that the subject expenses cannot be deducted? Explain and support your answer.

Yes, the subject expenses cannot be deducted. It is required that before business or professional expenses
are allowed as deductions from gross income, the taxpayer must satisfy the BIR that the deductions being claimed
are indeed ordinary and necessary expenses incurred during the taxable year carrying on any trade or business. The
taxpayer shall substantiate the expense being deducted with sufficient evidence such as official receipts or other
adequate records.

V.

FACTS: Pepper enterprises is engaged in the manufacture of various food products. Jon incorporated engaged
Pepper’s services to process and pack its products. Pepper spends on entertainment and representation to maintain
good public relations with its suppliers and customers. Pepper’s total net sales and net receipts are as follows:

Net sales from its sale of goods: Php 600,000

Net receipts from its processing activity: Php 400,000

For the quarter, its entertainment and representation (EAR) expenses amount Php8,000

QUESTIONS:

a. What conditions must be complied with and what information must be made available by Pepper to be able to
claim the EAR expenses as a deductible expense?

Sec. 4 of RR. No 10-02 provides the requisites of deductibility of EAR expenses:

1. Paid or incurred during the taxable year;
2. It must be:
a. Directly connected to the D, M and O of the trade, business or profession or the tax payer.
b. Directly related to or in furtherance of the conduct of his or its TBP
3. It must not be contrary to law, morals, good customs and public policy or public order;
4. It must have not been paid directly or indirectly to an official or employee of the national
government, local government unit or any GOCC or of a foreign government or to a private
individual or a corporation or GPP or of similar entity if it constitutes a bribe, kick back or other
similar payments.
5. It must be duly substantiated by adequate proof.
6. The appropriate amount of withholding tax, if applicable, should have been withheld therefrom
are paid to the BIR.

b. How much of the EAR expenses may be deducted by Pepper?

Ceiling on EAR Expenses: Apportionment Formula:

600,000 x 0.5% = 3,000 600,000/1,000,000 x 8,000 = 4,800

400,000 x 1% = 4,000 400,000/1,000,000 x 8,000 = 3,200
Claimable EAR: 3,000 + 3,200 = 6,200

VI.

FACTS: Logan Corporation produces paper products such as notebooks, pad paper, bond paper etc. Its sister
company, Bruce Corporation produces and sells cooking oil. Both companies are 80% owned by Ms. Jelly
Pokaprokarn. Logan Corp. incurred several loans for which it pays interest. The amount of interest payments are as
follows:

Interest on Bank Loans Php 120,000

Interest on loan a Supplier of raw materials Php 50,000
Interest on loan from Sister company, Bruce Php 150,000
Corporation

On the other hand, interest income (gross of tax) from money market placements, amounts to Php 20,000.

QUESTIONS:

a. What requirements must Logan comply with, to be able to claim the interest expense as a deduction?

IITC- PWD-3436-FPO-CE

Sec. 3 of RR No. 31-09 The requisites for deductibility of interest expense are the following:
1. There must be an indebtedness;
2. There should be an interest expense paid or incurred upon such indebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the TBP;
5. The interest expenses must be have been paid or incurred during the taxable year;
6. The interest must have been stipulated in writing;
7. The interest must be legally due;
8. The interest payment arrangement must not be between related tax payers as mandated in sec.
34 (b) in relation to sec. 36(b) both of the tax code.
9. The interest must not be incurred to finance petroleum operations; and
10. In case of interest incurred to acquire property use in TBP, the same must not be treated as a
capital expenditure.

b. How much is the total interest that may be allowed as a deduction from gross income?

Interest income: 20,000

Interest expense: 170,000

170,000
20,000 x 33% = - 6,600
163,400 Deductible Interest Expense

VII.
FACTS: Pepper Manufacturing inc. operates a chain of restaurants under a franchise. The ingredients for the food
products are all sourced from its commissary located in QC. When an inventory was done in the commissary, it was
discovered that there was a discrepancy between the number of products recorded in the books against the actual
count of the products. The internal audit group of the Company concluded that there was a pilferage being carried
out in the commissary. In the evening of April 5, the security guards caught 5 of the staff at the commissary carting
out the products. The pilferage and theft resulted in the loss of products amounting to Php 500,000.

A week later, the restaurant in Pasay City totally burned down due to faulty electrical wiring. The loss was estimated
at Php 3.5 million. However, the Company is anticipating to recover from the insurance company the amount of
Php 2million.

QUESTIONS:

a. What requirements should be observed in order for the company to be able to claim a deduction for the losses it
suffered.

Generally, under RR 12 - 77, the substantiation requirements to claim a deduction for casual losses are:

1. A declaration of loss filed with the CIR or his deputies within a certain period as prescribed in the RR after
the occurrence of the casualty, robbery, theft, or embezzlement.
2. Proof of the elements of the loss claimed.

In addition, RMO 31 - 09 provides for policies and guidelines for the reporting of casualty losses.

b. What is the effect if any of the receipt of insurance proceeds?

VIII.

FACTS: The tax code allows a tax payers to carry over the net operating loss to succeeding years.

First Order Philippines inc, Mercury Philippines, and Snow manufacturing inc are all domestic corporations. They
are all engaged in the manufacture and distribution of personal care, health care and consumer products. These
corporations adopt a calendar year-end and do not enjoy any tax exemption. The stockholders of the three
companies are as follows:

Corporations Stockholders Percentage of Ownership

First Order Ph Pepper 100%

Mercury Ph Pepper 80%

Jon 20%

Starwars Manufacturing Pepper 80%

Snow manufacturing 20%

Mercury Ph and Starwars will be merged into First Order Ph whereby First Order Ph will be the surviving
corporation. Mercury has NOLCO of Php 12,275,000. Starwars has NOLCO of Php 9,265,000.

QUESTIONS:
a. Define NOLCO and discuss the basic rules on the deductibility of NOLCO

Net Operating loss refers to the excess of allowable deduction over gross income o f a business for any
taxable year.

The requisites for the deductibility of NOLCO are the following:

1. The net operating loss of the business or enterprise
2. for any taxable year immediately preceding the current taxable year
3. which had not been previously offset as deduction from gross income
4. shall be carried over a s a deduction from gross income
5. for the next 3 consecutive taxable years immediately following the year of such loss
6. Provided, any net loss incurred in a taxable year during which the taxpayer was exempt from income tax
shall not be allowed as a deduction
7. Provided, further, a net operating loss carry - over shall be allowed only if there has been no substantial
change in the ownership of the business or enterprise.

b. Based on your answer to the question above, discuss whether the surviving corporation, First Order Ph can avail
itself of the NOLCO of the absorbed corporations.

Yes, First Order Ph can avail itself of the NOLCO of the absorbed corporation because the absorption of
the two corporations did not constitute a substantial change in the ownership because Pepper owns 80% of the two
corporations which is not less than 75% of the nominal value of the outstanding issued shares.
IX.

FACTS: Nermal Production inc. manufactures schoolbags. It sources its materials from companies and individuals
who are in the trading business. In 2014, claimed as a bad debts deduction the amount of Php 500,000. This amount
was owed to the company by their supplier, Mr. Vader, The Latter borrowed the money on the pretext that he will
buy the materials that he will supply to Nermal, but he failed to deliver the said materials. The debt has not been
paid since 2001. In that year, the accountant decided to claim the bad debt deduction because Mr. Vader was shot
dead by police authorities in a drug bust operation. The accountant specifically write off in the books, the said
amount. Nermal also discovered that the store of Mr. Vader in Divisoria has been closed. Mr. Vader has no known
relatives in the Philippines. The computation of the income tax liability of Nernal for 2014 is as follows:

Gross Income 10,000,000

Less: Deductions
Salaries 500,000
Rentals 1,000,000
Transportations 1,000,000
Supplies 250,000
Professional fees 750,000
Bad debts 500,000
Total Deductions: 4,000,000 (4,000,000)
Taxable Income: 6,000,000
Multiply by tax rate 30% X 30%
Income tax paid to the BIR 1,800,000

However, in 2018, Mr. Vader resurfaced, alive and well, and a very rich man. It turned out that the person who was
killed in 2014 was his identical twin. Mr. Vader decided to pay all his debts including the money he owed to Nermal.

QUESTIONS:
a. Was the deduction of the bad debts in 2014 appropriate? Discuss the requirements for deductibility.

Yes, the deduction of the bad debts in 2014 is appropriate because Nermal inc. thought Mr. Vader is already
dead thus the debt will be impossible to collect.

The requirements for deductibility of bad debts are the following: IConSCoWU

1. There must be an existing indebtedness due to the taxpayer which must be valid and legally
demandable
2. The same must be connected with the taxpayer’s trade, business or practice of profession
3. The same must not be sustained in a transaction entered into between related parties
4. The same must actually be charged - off within the taxable year
5. The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable
year.
6. The debts are uncollectible despite diligent efforts exerted by the taxpayer.

b. is the “tax benefit rule” applicable in 2018? How much is the tax benefit if any.

150k

X.

FACTS: Apple manufacturing corp (AMC) is engaged in the food business. It has an agri-food division and a
beverage division. For the calendar year 2016. Its combined gross sales from both divisions amount to Php
50,000,000. It has no sales returns and allowances or discounts. It has no other income, Its total cost of goods
amount to Php 20,000,000. AMC has the following financial information:

GROSS SALES 50,000,000

Cost of Goods Sold 20,000,000
Deductible Expenses
Salaries & Benefits 5,000,000
Rentals 2,000,000
Management Fees 2,000,000
Professional Fess 1,000,000
Royalties 1,000,000
Interest 800,000
Charitable Contribution to PNRC 200,000
AMC requested you for advice on the following:

QUESTIONS:
a. Which deduction should the company avail itself of? To arrive your recommended show your computation

In this case, either because the income after tax using itemized deduction and OSD are the same.
OSD: Itemized Deduction:
30million x (40%) = 12million 30million – 12million (all deductions)= 18million
30million – 12million = 18million (Taxable Income)

b. How much is the MCIT exposure? Show your computation. What tax should the company pay? MCIT or RCIT?

c. Can the company carry-over the difference between the RCIT and the MCIT? If yes, for how long?
IX.
Indicate for each item if the statement is true or false

1. Gross Philippine sourced income of a nonresident foreign corporation is subject to a flat tax rate of 15%
2. Nonresident foreign cinematographic film owner, lessor, distributor is taxable at 25% on net income
3. Nonresident Owner or lessor of vessels chartered by Philippine nationals is taxable at 4.5% on gross
rentals.
4. Nonresident owner or lessor of aircrafts, machineries and other equipment is taxable at 7.5% on gross
rental.
5. An international air carrier is subject to tax on gross Philippine billings at the rate of 1.5%
6. A regional headquarters is subjects to tax on Philippine sources income at 15%
7. A nonresident foreign corporation is subject to tax on the sale of shares in a Philippines company at the
rate of 0.05% of the gross selling
8. The past service cost contribution to a retirement fund is deductible in full in the year the contribution was
made
9. A resident foreign corporation is not subject to MCIT

6-6-6-6-8-8-8-10-10-16-10