TAMAYO_Reviewer In Taxation_Book 2_2012e.pdf

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2012 Edition

Asser S.Temayo

2012 Edition

Asser S. Tamayo

CFA KE_VIEWEK IN TAXATION:

500K2

5Y ASSE_K SAMSON TAMAYO BSC 1\ccounting, CPA l\IBA (candidate) CPA Rc,"iC\\Tr, The Rc,"icw School of Accountancy (RcSJ\), ::\Ianila Partner, Pellejera and Tamayo, Certified Public Accountants, l\Iarikina City

Philippine Copyrip-ht, 2009

~All rights resern~d. Printed in the Philippines.

No part of this book may be used or reproduced in any form and by any means, or stored in a data base or retrieYa! system, \Yithout prior written permission from the author . . \ny copy of this bouk without the signature of the author on this page shall be considered as coming from an illegal source.

To my father, Mr. Ruben Yanson Tamayo(+) and my mother, Mrs. Esperanza Samson-Tamayo (+) To my father-in-law, Col. Samuel Demeterio Paler (+) and my mother-in-law, Mrs. Felicisima Martinez-Paler (+)

"Honor your father and your mother, and you will live a long time in the land I am giving you." -Exodus 20:12 (Contemporary English Version)

PREFACE CPA Reviewer In Taxation: Book 2 (2012 Edition) is intended primarily to help reviewees who will take the CPA Licensure Examination. But it is also a good resource material for fellmv teachers handling taxation at the undergraduate level. The author backs each correct ans\ver with \\·ell-researched material to establish its technical basis. References used are taken from the .\'ational Internal Revenue Code of 1997, as amended, Revenue Regulations issued by the Bureau of Internal Revenue (BIR}, Civil Code of rhe Philippines, The Family Code of the Philippines and court rulings and decisions when applicable. Each test item deals \Yith the basic concepts, rules and principles vvhich the author believes should be \Yithin the competence level of candidates \\·ho will be taking the CPA licensure exam. As much as possible, he a\·oids giving pis personal view or opinion unless these are properly supported by laws and regulations. This review material adheres closely to the syllabus on Taxation issued by the Professional Board of Accountancy. It is the \\Titer's wish that Taxation reviewees and students will find \·aluable information and practical application of principles in this work. He has taken extra effort to make taxation challenging and hopefully less of an ordeal for them. The encouragement and positive feedback from his current and former students gave him the boost to finally come up with a reviewer. To them, he is ,·ery grateful. The author wishes to thank Ms. Janina S. Baquiran, CPA, for helping him organize the materials and giving him some insightful advice on the contents of the book. He also thanks Mr. Edilberto B. Bagnes, CP.A, for the cowr design. The author is indebted to Mrs. Lorna S. Roque, Office Manager of ReSA Review School, for gathering the reference materials for the book. Special mention goes to Mrs. Cynthia Paler-Tamayo for making this reviewer more readable and easily understood even by laymen.

This work would not have come into fruition, were it not for the encouragement of the author's fellow reviewers in ReSA Review School, namely: Mr. Antonio J. Dayag, Mr. Conrado 0. Uberita, Mr. Charlwin P. Lee, Dean Jose M. Ireneo, Mrs. Shirley Cordova-lreneo, Atty. Marceliano S. Bonafe, Mr. George R. James, Mr. Christopher T. Espenilla and Mr. Gorgonio D. Macariola. The author also expresses his gratitude to Atty. Conrado T. Valix for inspiring nevv· authors to come up with their own work which will help make the study of accounting and taxation easier. And above all, the greatest praise goes to his Lord and Savior Jesus Christ for the gift of writing. Feedback, comments and suggestions for improvement are most welcome and would contribute to a better future edition.

A.S.T

THE CPA LICENSURE EXAMINATION

SYLLABUS ON TAXATION (50% of Business Law and Taxation)

(Effective October 2006 Examination) This subject tests the candidates' conceptual knowledge and proficiency in the practical application of the basic principles of taxation as they relate to accounting practice. The emphasis is on the application of the theory and principles in solving tax problems. Candidates are expected to know, understand and be able to apply the laws on income tax, business taxes (value-added and percentage taxes), estate tax, donor's tax, as well as Revenue Regulations and Court of Tax Appeals and Supreme Court decisions. Candidates should know the tax rates for computing taxes, except for the follmYing vvhere the tax rates will be given: - schedular income tax rates for individuals - schedular estate tax rates; and - schedular donor's tax rates. Each examination will contain a minimum of 25 and maximum of 35 multiple choice questions allocated to the different subject areas, as indicated below. 1. 0

Principles of Taxation and its Remedies 1.1 Nature, scope, classification, and essential characteristics 1 . 2 Principles of sound tax system 1.3 Limitations of the power of taxation (inherent limitations and constitutional limitations) 1.4 Differences between taxation and police power 1.5 Differences between taxation and eminent domain 1.6 Similarities among taxation, police power and eminent domain 1.7 Tax evasion vs. tax avoidance 1.8 Sites/place of taxation 1.9 Double taxation (direct and indirect) 1.10 Taxes a. Essential characteristics b. Classification c. Tax vs. other charges (toll, special assessment, license fee, debt)

r

2.0

Povv'ers and Authority of the Commissioner of Internal Revenue under Section 4 to 7, Title 1 of the Tax Code

3.0

Authority of the Commissioner to Compromise Tax Payments, Abate or Cancel Tax Liability and Refund or Credit Taxes

4.0

Tax Remedies 4.1 Remedies of the government (State) a. Definition, scope, prescriptive period b. Administrative remedies (tax lien, compromise, levy and c. 4.2

i

I

distraint) Judicial actions (ci\·il or criminal)

Remedies of the taxpayer a. Prescriptive periods b. Administrative remedies 1. Against an assessment (protest, request for 2.

4.3

reinvestigation) Request for refund or credit of taxes (recovery of erroneouslY or illegally collected taxes, forfeiture of

cash refund and tax credit) Expanded jurisdiction of the Court of Tax Appeals (limited to jurisdiction)

5.0

Income Tax (refer to Reviewer in TCL-x:ation Book 1)

6.0

Compliance Requirements (refer to Reviewer in TCLvltion Book 1)

7. 0

Transfer Taxes 7. 1 Estate taxes a. Gross estate b. Deductions allmncd to estate (ordinary and special deductions) c. Tax credit for estate tax paid to a foreign country d. Filing of estate tax returns, payment of estate tax requirements e. Attachments to the estate tax return, including CPA certificate 7.2 Donor's ta.'< a. Gross gift b. Exemption of certain gifts and other deductions from gross gift c. Tax rates in general and ·when the donee is a stranger d. Filing of donor's tax returns, pa\·ment and requirements

SC

\ alue Added T promissory note from the date of death to the date of maturity

p 50,000 60,000

2,000 500

How much were the deductions from the gross estate? a. Pl 12,500 c. PllO,OOO P1 12,0W1 d. p 62,500

25 ~--------------------------------------------------------

Chapter 2: Deductions from Gross Estate

Answer: A Real. property tax for the colendar year 2011 Notarized interest beanng promissory note Accrued interest on the promissory note m the time of death Interest to arcme on the promissory note from the date of death to the date of matunty

p

50,000 60.000

Total deductions

f_J~~~Q

2,000

. sou

Real property tax accrues at the start oftlte year which may be payable quarterly. Interest to accrue on the promissory note from the date of death to the date ofmatun'ty is part of a personal obligation of the deceased existing at the time of his death.

17. You were appointed by court as an administrator of the Estate of N.A. Mete. N.A. Mete died on March 15, 2011. The following unpaid taxes were presented to you: Unpaid real estate tax for the second, third p 90,000 and fourth quarters of 2011 Unpaid tax on the income received by the 20,000 estate of N .A. Mete Estate tax on the Estate of N.A. Mete 50,000 Unpaid tax on income received by N.A. Mete 3,000 for the period January 1 to March 14, 2011 Ho\\. much should be the deductible unpaid taxes? a. Pl63,000 c. P 90,000 b. P 93,000 d. None

Answer: B Unpwcl real estate tux for tile second, third andfourth quorters of20 11 Unpaid tax 011 income recei11ed by N.A. Mete for the period Jonuury 1 to March 14, 2011

p

90,000 3 000

Deductible unpnirl tcvces

18. Which a. b. c. d.

26

of the following taxes is not deductible from the gross estate? Income tax paid on income received before death Property tax accrued prior to death Estate tax paid to a foreign country Donor's tax accrued prior to death

'\.

Chapter 2: Deductions from Gross Estate

Answer: C Reference: Section 6 (A)(S}(b), Revenue Regulations No. 2-2003 The value of the net estate shall be determined by deducting from the value ofthe gross estate taxes which have accrued as ofthe death of the decedent which u;ere unpaid as of the time of death. This deduction will not include income tax upon income receiued after death, or property taxes not accrued before his death, or the estate tax due from the transmission of his estate.

~

9. Which of the following taxes shall be deductible from the gross estate of the decedent? a. Income tax for income received after death b. Income tax for income received before death c. Property taxes not accrued before his death d. Estate tax due from the transmission of his estate

s Answer: B Reference: Section 6 (A)(S)(b), Revenue Regulations No. 2-2003

20. Which of the follovYing statements is incorrect? A claim against an insolvent person, which is not collectible in full: a. is included in the gross estate. b. is not included in the taxable net estate. c. must be notarized if arising out of a debt instrument of the insolvent. d. needs no preliminary filing of a case against the insolvent. Answer: C References: Section 86 (A) (1) (d), NIRC, as amended Section 6 (A) (4), Revenl!_~~:g~_&!J.lations No. 2-2003 The value of the net estate shall be detemnned by deducting from the value ofthe gross estate claims ofthe deceased against insolvent persons where the value ofthe decedent's interest therein is included in the ualue ofthe gross estate.

'

The requirement for notarization of debt instrument is for the I deductibility ofthe "claims against the estate". __j -----

27

, Chapter 2: Deductions from Gross Estate

21. The following selected data were taken from the Estate of Ed Sados: Claim against an insolvent person (fully uncollectible) P 500,000 Claim against a person vvho absconded (fully uncollectible) 300,000 Claim against an insolvent person (20% collectible) 100,000 How much should be included in and deducted from the gross estate? , Amount to be included Amount to be deducted a. P900,000 P580,000 b. P900,000 P880,000 P400,000 PlOO,OOO c. p 80,000 d. PlOO,OOO Answer: A Amounts to be Included Deducted Claim against an insoluent person (fully uncollectible) Claims against a person who absconded (fully uncollectible) Claims against insoluent person (20% collectible)

Total

p

500,000

p

500.000

300,000 1 00 000

80 000

f:c=9/]~()Q_Q

[~ __58Q.J,IOJ2

The full value of the claims against insolvent persons are included in the gwss estate whether fully or partially uncollectible. The deduction allowedfrom the gross estate is the uncollectible amount. Claims against persons who absconded are also included in but cannot be deducted from the gross estate because the persons who absconded are not insolvent. The insolvency ofthe debtors must not be merely alleged but must be factual.

22. A piece of land was included in the gross estate at a value of P2,000,000. Upon closer examination, you found out that the value used was net of P500,000 unpaid mortgage on the same land. How much should have been included and deducted from the gross estate? Amount to be included Amount to be deducted a. P2,500,000 P500,000 b. P2,000,000 P500,000 c. P2,000,000 None d. Pl,500,000 None

28

Chapter 2: Deductions from Gross Estate

Answer: A References: Section 86 (A) (1) (e), NIRC, as amended Section 6 (A) (5) (a), Revenue Regulations No. 2-2003

23. A real property ovvned by the decedent was acquired for Pl ,000,000. Its fair market value was Pl,SOO,OOO at the time of the decedent's death. Said property was mortgaged for P300,000 which remained unpaid at the time of death. For estate tax purposes, what value would be included in the gross estate of the decedent? a. PI ,000,000 c. Pl,500,000 b. Pl ,200,000 d. None of the choices

Answer: C References: Section 86 (A) (1) (e), NIRC, as amended _~_____§_ection 6 (A) (5) (a), Revenl!_~Re ulations No. 2-2003 The value of the net estate shall be determined by deducting from the value ofthe gross estate unpaid mortgages upon, or any indebtedness in respect to, property where the value ofthe decedent's interest therein, undiminished by such mortgage or indebtedness, is i'1cluded in the value ofthe gross estate. r

The deduction herein allowed in case of claims against the estate, unpaid mortgage or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were . contracted bona [ide and [or an adequate and full consideration in iI money or money's worth. ' 1

1

24. First statement: In case unpaid mortgage payable is being claimed by the estate, verification must be made as to who was the beneficiary of the loan proceeds. Second statement: If the loan is found to be merely an accommodation loan where the loan proceeds went to another person. the value of the unpaid loan must be included as a receivable of the estate. a. Both statements are correct b. Both statements are incorrect c. Only the first statement is correct d. Only the second statement is correct

Answer: A Reference: Section 6 (A) (5), Revenue Regulations No. 2-2003

29

~----------------------------------------

Chapter 2: Deductions from Gross Estate

25. First statement: If there is a legal impediment to recognize the accommodation loan as receivable of the estate, the unpaid obligation or mortgage payable shall not be recognized as a deduction from the gross estate. Second statement: In all instances, the mortgaged property, to the extent of the decedent's interest therein, should always form part of the gross taxable estate. a. Both statements are correct b. Both statements are incorrect c. Only the first statement is correct d. Only the second statement is correct

Answer: A Reference: Section. 6 (A) (5), Revenue Regulations No. 2-2003

26. First statement: An oral transfer to the National Government exclusively for public purposes to take effect after the decedent's death is deductible from the gross estate. Second statement: In case of non-resident alien decedents, deduction for transfer for public purposes from the gross estate is allowed only when the property transferred is situated in the Philippines. a. True, True c. True, False b. False, False d. False, True

Answer: D References: Section 86 (A) (3), NIRC, as amended Section 86 (B) (3), NIRC, as amended

27. (Phil. CPA Modified) The following are the requisites for vanishing deduction to be allO\'-'·able, except one. a. The estate tax of the prior succession must have been finally determined and paid. b. The present decedent died within five (5) years from date of death of the prior decedent. c. The property with respect to which deduction is sought can be identified as having been received by the present decedent from the prior decedent. d. The property must have formed part of the gross estate situated outside the Philippines of the prior decedent.

Answer: D Reference: Section 86 (A) (2), NIRC, as amended

30

i

I

n

m

Chapter 2: Deductions from Gross Estate

.28. (Phil. CPA) Rudolfo, a citizen of the Philippines and resident of Bacolod City, died testate on May 10, 1991. Among his gross estate \\·ere properties inherited from his deceased father who died on April 4, 1988. What percentage of the deduction would be used in computing the amount of vanishing deduction? a. 80% b. 60% c. 40% d. 20%

Answer: C Reference: Section 86 (A) (2), NIRC, as amended Date of present decedent's death Date of prior decedent's death Distance between two (2) deaths More than 3 years but not more than 4 years

YY-MM-DD 1991-05-10 1988-04-04 3-01-06 40%

Deduction for property previously taxed in an amount equal to: One hundred percent (1 00%) of the value, if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death o_fthe decedent, or if the property was transferred to him by gift within the same period prior to his death; Si:dy percent (60°6) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if·the property was transferred to him by gift within the same period prior to his death; Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more them five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;

31

Chapter 2: Deductions from Gross Estate

29. An unmarried decedent died leaving properties he inherited 4 Y2 years ago which had fair market value of P800,000 at the time of his death (P650,000 at the time of inheritance, and unpaid mortgage of P50,000 paid by the present decedent). Other properties in his gross estate had fair market value of P1 ,000,000. The total expenses, losses, indebtedness, taxes and transfer for public purpose amounted to P300,000. How much was the vanishing deduction? a. P 500,000 c. b. p 225,000 d.

p 200,000 p 100,000

Answer: D Value Less: Initial Less:

to take Mortgage paid basis Proportional deduction (P600,000/ PI ,800,000 X P300,000) Final basis Rate

p

650,000 50 000

600.000 100.000

500,000 20"o

Vanishing deduction

30. First statement: R.A. No. 4917 provides that retirement benefits given to employees of private firms shall not be subject to attachment, levy, execution, or any tax whatever. Second statement: Any amount received by the heirs from the decedent's employer as a consequence of the death of decedentemployee in accordance with R.A. No. 4917 is allowed as deduction provided that the amount of the separation benefit is included as part of the gross estate of the decedent. a. True, True c. True, False b. False, False d. False, True

Answer: A Reference: Section 86 (A) (7), NIRC, as amended

31. First statement: The value of the net estate shall be determined by deducting from the value of the gross estate an amount equivalent to the current fair market value of the decedent's family home, provided, that if the said current fair market value exceeds Pl,OOO,OOO, the excess shall be subject to estate tax. Second statement: As a sine qua non condition for the exemption or deduction, the family home must have been the decedent's family home as certified by the Barangay Captain of the locality. a. True, True c. True, False b. False, False d. False, True

32

Chapter 2: Deductions from Gross Estate

Answer: A Reference: Section 86 (A) (4), NIRC, as amended Section 6 (D), Revenue Regulations No. 2-2003

32 First statement: The family home is deemed constituted on the house and lot from the time it is actually occupied as a family residence and is considered as such for as long as any of its beneficiaries actually resides therein. Second statement: Actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or abandoned in such cases as the temporary absence from the constituted family home due to travel or studies or work abroad, etc. a. Both statements are correct b. Both statements are incorrect c. Only the first statement is correct d. Only the second statement is correct Answer: A Reference: Section 6 (D), Revenue Regulations No. 2-2003

33. For purposes of availing of a family home deduction to the extent allowable, a person may constitute: a. as many family homes as possible. b. only one family hnJ""· c. one family home fo; each spouse. d. one family for each child.

Answer: B Reference: Section 6 (D), Revenue Regulations No. 2-2003

34. The beneficiaries of a family home are: I - The husband and \Vife, or the head of a family. II -Their parents, ascendants, descendants including legally adopted children, brothers and sisters, whether the relationship be legitimate or illegitimate, who are living in the family home and who depend upon the head of the family for legal support. a. b.

Both I and II are correct Both I and II are incorrect

c. d.

Only I is correct Only II is correct

Answer: A Reference: Section 6 (D), Revenue Regulations No. 2-2003

33

Chapter 2: Deductions from Gross Estate

35. The following real properties were owned b.\ a decedent, he~d of family, who was a Filipino citizen at the time of his death: Vacation house, USA P 2,000,000 Beach house, Bohol 1,500,000 House and lot (family home), Masbate 900,000 House and lot (dwelling place \'~pecial p 4 500 000 p 1 775 000 deductions Less: Special deductions Family home (maximum) Standard deductions Medical expenses (P500,000- P200,000) Taxable net estate

Total p 9,500,000

.

(

1 450 ooo) p 8,050,000

(

1 775 000) p 6,275,000

1,000,000)* -" 1 ,000,000) 300 000)

P ~27'5~DOQ

5. The decedent is a married man with a surviving spouse with the following data: Conjugal real properties p 5,000,000 Conjugal family home 1,500,000 Exclusive properties 2,500,000 Conjugal ordinary deductions p Funeral expenses 200,000 Other deductions 1 000 000 1,200,000 Medical expenses 500,000 Additional information: a. 20 % of the funeral expenses were borne by the estate. b. Other deductions includes P200,000 judicial expenses incurred to settle the conflicting claims of the heirs. The taxable net estate is: a. P 3,400,000. b. p 3,200,000.

c. d.

p 3,080,000. p 2,750,000.

45

''"·;'

Chapter 3: Estate Tax

C'lSt'S ------------------------

Answer: C

---------------------------------------, l~xciusiue _ r.m ;unul ___ IsJjQ)__

Gross estak Less: Declue< ions Es[atc after deductions Ll:ss: Share of surviving spouse

P :2,500,000

P h,SUU.OOO

f' :?,SOO,OOO (

P 5_()()0,000

P~.?,S,lp_"Q_QQ

P 5,330.000

Ec3±0cB,Q,cP_QQ

*Cor;Jugal deductions F house 400,000 Exclusiw famil:-· lot 2,500,000 Other exclusiye properties Conjugal ordinary deductions p 2UO,OOO Funeral expenses 1,500,000 Other deductions 500,000 Medical expenses The taxable net estate is: a. P 4,750,000. b. p 3,750,000.

46

) .830 UOO)

750,000) l ,000.000) 500 0001

Taxable net estr:tc

7.

P 8.160,000

)i')JU 000) (

)(

EstHtt' bdon· spt•cin_l deductions P_2~~0Q"O_Qi) Less: Spcci.,

Total

p

102,500 200,000 133 795

E

4_36.22_~

p

100,000 300,000 500 000 900 000

29. Answer: C Schedule of Conjugal Deductions Funeral expenses (actual) Judicial expenses Claims against the estate Total ELITE

p

Deductible ELITE (P4,100,000/Pl0,000,000) X P900,000

30. Answer: A Gross estate Less: Deductions Estate after deductions Less: Share of surviving spouse

Exclusive

Conjugal

Total

p 2,000,000

p 2,100,000

p 4,100,000

(

436 295) (

p 1,563,705

369 000) ( p 1,731,000

805,295) p 3,294,705

865 500)

31. Answer: A p 2,000,000 424,205 X 11 '%

p

135,000 47 213

Tax due and payable

57

Chapter 3: Estate Tax Cases -lou, Cho,~

i.l.

1\:i:'·\t;.Ci•Y:

!).~'

32. to 36. are based on the following: Mr. E. Cruz died intestate on September 30, 2011. He was survived by his wife and his two children. He and his wife were under conjugal partnership of gains. He left the following properties: Land (900 sq. m.) inherited form the decedent's father who died on June 15, 2006; FMV per tax declaration, P1,900,000; Zonal value, P3,000 per sq. m.; Car inherited from the decedent's father, FMV, P500,000; Cost, P700,000; House and lot acquired during the marriage (family home), Zonal value, P4, 100,000; assessed value, P3,300,000; Household furniture and appliances acquired during the marriage, FMV, P500,000; ~~' Other tangible personal properties (mode of acquisition unknown), FMV, P1 ,800,000. The following were considered as deductions from the gross estate: Actual funeral expenses P 480,000 Judicial expenses 100,000 Other claims against the conjugal properties 500,000 Claims against insolvent persons 50,000 Medical expenses 120,000 The estate of the decedent's father paid the estate on the land at the fair market value of P2,500,000 and on the car, P700,000. During the marriage, Mr. E. Cruz mortgaged the inherited land for P700,000 for the benefit of the family. He paid P350,000 before he died. 32. How much was the total exclusive property? a. P 3,400,000 c. P 3,000,000 b. P 3,200,000 d. None of the choices 33. How much was the total conjugal property? a. P 6,450,000 c. P 5,650,000 b. P 6,400,000 d. None of the choices 34. How much was the total exclusive deductions? a. P 595,404 c. P 525,389 b. P 560,415 d. None of the choices 35. How much was the total conjugal deductions? a. P 1,725,389 c. P 850,000 b. P 1,200,000 d. None of the choices 36. How much was the taxable net estate? a. P 3,309,596 b. p 3,179,611

58

c. d.

p 3,144,585 None of the choices

Chapter 3: Estate Tax Cases

32. Answer: B Land (900 sq.m.x P3,000) inherited from the father Car inherited from the father ·

p 2,700,000 500 000

Total exclusive property

.E_.Q.,200,0QQ

33. Answer: A

*

House and lot acquired during the marriage (family home) Other tangible personal properties (q~gde (E acquisition unknown) House"fioldfurniture ~nd appliances acquired during the marriage Claims against insolvent persons

p 4,100,000

1,800,000 500,000 50 000

Total conjugal property ~

34. Answer: C 35. Answer: B Schedule of deductions Exclusive p Funereal expenses (maximum) Judicial expenses Claims against the estate Claims against insolvent t estate, Philippines ..... rhi:: i~ ~()X~i.lt ··~t ~J'"'';r Net esillte, Country A (PlSR,OOO + Pl2.000) Net estate, Country B Total (world) nt·t estate

1

'0"

p 1,200,000

200,000 100.000 P 1 :=iOO 000

Estate tax due Linnt (a) -By country A- P200.000;P1.500,000 X P95,000 B- Pl 00,000; P1.500,000 X P95,000

e:r

_F>_

p

Limit 12,66 ( 6.333

-~-~2~JbO_Q

_t.ctual_ p

12.000 8.000

Total

Allowed p

12,000

___lic333 ~J33

Limit (b) -BY total

p:wo,ooo IPJ.soo,ooo x P95.ooo

Allom:'cl (lower)

19,000

20,000

p

19 000

p

18,333

63

Chapter 4: Tax Credit for Foreign Estate Tax

8. to 15. are based on the following: Mr. E. Cruz died intestate on September 30, 2011. He was survived by his wife and two children. He and his wife were under conjugal partnership of gains. He left the following properties situated in the Philippines: a. Land (900 sq. m.) inherited from the decedent's father who died on June 15, 2006; FMV per tax declaration, P1, 900,000; zonal value, P3,000 per sq. m.; b. Car inherited from the decedent's father, FMV, P500,000; Cost, P700,000; c. House and lot acquired during the marriage (family home), Zonal value, P4, 100,000; assessed value, P3,300,000; d. Household furniture and appliances acquired during the marriage, FMV, P500,000; e. Other tangible personal properties (mode of acquisition unknown), FMV, P1,800,000. His wife also owned a real property in USA valued at P1,500,000. It had an unpaid mortgage of P300,000 at the time of his death.

The estate of Mr. E. Cruz paid P120,000 estate tax to the US Government. The following were considered as deductions from the gross estate in the Philippines: a. Actual funeral expenses, P480,000; b. Judicial expenses, Pl 00,000; c. Other claims against the conjugal properties, P500,000; d. Claims against insolvent persons, P50,000; e. Medical expenses, P120,000. The estate of the decedent's father paid the estate on the land at fair market value of P2,500,000 and on the car, P700,000. During the marriage, Mr. E. Cruz mortgaged the inherited land for P700,000 for the benefit of the family. He paid P350,000 before he died.

*

8.

How much is the total exclusive properties? a. P 3,400,000 c. P 2,600,000 b. p 3,200,000 d. p 2,400,000

9.

How much is the total conjugal properties? a. P 7,950,000 c. P 6,450,000 b. p 7,900,000 d. p 6,150,000

10. How much is the vanishing deduction? c. a. P 519,283 b. p 458,700 d.

64

p 415,426 None of the above

Chapter 4: Tax Credit for Foreign Estate Tax

-t

11. How much is the total exclusive deductions? a. P 519,283 c. P 415,426 b. P 458,700 d. None of the above

t 12. How much is the total conjugal deductions?

a.

b.

)3.

~

P 1,780,000 P 1,500,000

c.

d.

P 850,000 None of the above

How much is the total special deductions? a. P 2,770,000 c. P 1,770,000 b. P 2,120,000 d. Noneoftheabove

14. How much is the allowable tax credit? a. P 105,057 b. p 20,000

c. d.

p 0

15. How much is the estate tax payable? · a. P 331,280 b. p 322,853

c. d.

p 226,372 None of the above

None of the above

8. Answer: B Land (900 sq. m. x P3,000) inherited from the decedent's fathe1' Car inherited from the decedent's father

p 2,700,000 500 000

Total exclusive properties

p 3,200,000

9. Answer: A House and lot acquired during the marriage (family home) Household furniture and appliances acquired during the marriage Other tangible personal properties (mode of acquisition unknown) Real property in USA Claims against insolvent persons

p 4,100,000

500,000 1,800,000 1,500,000 50 000

Total conjugal properties

65

Chapter 4: Tax Credit for Foreign Estate Tax

10. Answer: A Value to take Land p 2,500,000 500 000 p 3,000,000 Car Less: Mortgage paid ( ) p 3,000,000 Initial basis ( 403,587) Less: f(P3,000,000/Pll,l50,000) X P1,500,000] Final basis 2,596,413 20"!(, Rate

*

Vanishing deduction

11. Answer: A

I

Total Exclusive Deduction

p

519_,?8_3

p

200,000* 100,000 500,000 50,000 650 000

12. Answer: B Schedule of deductions Funeral expenses (maximum) Judicial expenses Claims against the estate Claims against insolvent Unpaid mortgage [(P700,000-P350,000)+P300,000]

p__L~()Q,Q,QQ

Total "'

,; !

'\

,~

~

' , .....

13. Answer: B Special deductions Family home (maximum) Standard deduction Medical expenses

p 1,000,000 i,OOO,OOO 120 000

Total

~2"1_20~QDO

14. Answer: A Tax credit for foreign estate tax Actual foreign estate tax Limit(P1,200,000*/P3,785,717) X P331,429

66

120.000

p

105 057

~-__1_05

Lower (Actual) *Net estate. USA (Pl,SOO,OOO- P300,000) ,,

p

=

Pl.200,000

osz

Chapter 4: Tax Credit for Foreign Estate Tax

15. Answer: C Exclusiue

Gross estate P 3,200,_()00 P Less: Deductions ( 519 283) ( p 2,680,717 p Estate after deductions Less: Share of surviving )( spouse Est8 te before spt·cial deductions P 2 oso 717 P Less: Spec~] deductions Family home (maximum) Standard deductions Medical t•xpenses

____

Conjugal

Total

7,9.')0,000 Pll,l50,000 1 500 000) ( 2.019 283) 6,450.000 p 9,130,717 3 225,000) ( 3.225,000) 3 225,ooo

p 5.90.5,717

1 ,000,000) 1,000,000) 120 000)

Taxable net estate

f __3, 'l§i? ,1-LZ

Tax due Less: Tax credit for foreign estate tax p 1.20.000 Actual Limit -o]d; I

I (4) Retirement from or cessation of business with respect to all

,

goods on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation, I ·~l whether or not the business is continued by the new owner or I ._ {"·o· successor. The following circumstances shall, among others, I . 1 give rise to transactions "deemed sale" for purposes of this · .9(_,,v I' Section; _ u, 1 ,.~·!:f!'j't /i rJ L Jf 4: i. Change of ownership ofthe business. There is a change in , - ·~ ; . .' the ownership of the business when a single proprietorship incorporates; or the proprietor of a smgle proprietorshzp sells his entzre business. I ii. Dissolution of a partnership and creatwn of a new __partnership which takes over the busmess. __j

' j

·,. 1

J1'r· '

1

\! l '

; ..

_1,

1-+3

Chapter 11: VAT-Subject Transactions

32. In what cases shall the Commissioner of Internal Revenue determine the appropriate tax base? a. In cases where a transaction is deemed a sale, barter or exchange of goods or properties b. Where the gross selling price is unreasonably lower than the actual market value (lower by more than 30% of the actual market value) c. Both a and b d. Neither a nor b

Answer: C Reference: Section 4.106-7 (b), Revenue Regulations No. 16-2005 r---T_h_e_C_o_n__l_m_r_·s-s-io_r_w_r of Internal Revenue shall det-e-rn_l_in-e-th-.e-

l

. appropriate tax base in cases where a transaction is deemed a sale, barter or exchange of goods or properties under Sec. 4.106-7 I paragraph (a) of R.R. No. 16-2005, or where the gross selling price is unreasonably lower than the actual market value. The gross I selling price is unreasonably lower than the actual market value if it is lower by more than 30'?(, of the actual market value of the I same goods of the same quantity and quality sold in the immediate I locality on or nearest the date of sale. J 1 !I

1

33. For deemed sale transactions, other than retirement or cessation of ;. business, the output tax shall be based on the: a. selling price of the goods deemed sold as of the time of the occurrence of the transactions. b. market value of the goods deemed sold as of the time of the occurrence of the transactions. c. acquisition cost of the goods deemed sold. d. acquisition cost -or the current market price of the goods whichever is lower.

l(l

Answer: B Reference: Section 4.106-7 (b), Revenue Regulations No. 16-2005 ,-F-o_r_t-ra_n_s_a--c-tz-.o-n-s deemed sale. the output tax shall be based-;~?.the-l market value ofthe goods deemed sold as ofthe time ofthe occurrence of the transactions enumerated in Sec. 4.1 06-7(a)(1 ).(2), and (3) ofR.R. No. 16·2005. However, in the case ofretirement or rnw'fu,t. cessation of business, the tax base shall be the acquisition cost or ·"' 4;~, ;.. the current market price of the goods or properties, whichever is

~

"·'C'-i.:c.'-.J'"

r-';

42. First state~nt: In the case of goods imported into the Philippines by VAT-exempt persons, entities or agencies \Yhich are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the latter shall be considered the importer thereof and shall be liable for VAT due on such importation. Second statement: The tax on such importation (first statement above) shall constitute a lien on the goods, superior to all charges or liens, irrespective of the possessor of said goods. a. Both statements are correct b. Both statements are incorrect c. Only the first statement is correct d. Only the second statement is correct

Answer: A Reference: Section 4.107-1 (c), Revenue Regulations No. 16-2005

43. Ms. Consuelo Dimagulo receives a package of goods from her sister who lives in California, United States of America. Ms. Consuelo will use the goods for personal purposes. She is not VAT-registered. Which of the following statements is correct in connection with the receipt of a package? a. Ms. Consuelo shall be subject to VAT on importation. b. Ms. Consuelo shall not be subject to VAT on importation because she is not VAT-registered. c. Ms. Consuelo shall not be subject to VAT on importation but shall be subject to VAT on safes. d. None of the choices.

44. In determining the tax base one of the following is excluded from other charges prior to release of goods from Bureau of Customs. a. Wharfage dues c. Brokerage fees b. Arrastre charges d. Facilitation fees .,.

Answer: D 45. An importer enjoys 90% exemption from customs duties. The total customs duties of the imported goods is P500,000. For VAT purposes, how much shall be the customs duty that shall be included in the computation of the tax base? a. P500,000 c. P 50,000 b. P450,000 d. None

Answer: C I

150

Psoo,ooo x 1o% =----=-cP=5=D=,o=o""o-=-··____________

_____j

Chapter 11: VAT-Subject Transactions

46. Bigay Gabay, Inc. enjoys tax exemption for its importations. During a particular month, it imported goods from Japan. After the release from Customs custody, Bigay Gabay, Inc. transferred the imported goods to Todo Bigay Trading, a VAT-registered entity. ForVAT purposes, the VAT on importation shall be paid by: a. hath Bigay Gabay, Inc, and Todo Bigay Trading. b. neither Bigay. Gabay, Inc, nor Todo Bigay Trading. c. Bigay Gabay only. d. Todo Bigay only.

Answer: D

>-,

47. Mr. Jaime Jayme, VAT-registered, imported goods from South Korea. After the release from Customs custody, he sold them to LBT Importt>rs, Inc. Mr. Jayme would be liable to: a. b.oth VAT on importation and VATon sale of goods. b. neither VAT on importation nor VAT on sale of goods. c. VAT on importation only. d. VAT on sale of goods only.

Answer: A

48. The VAT on importation of goods which are sold in the course of trade or business by a shall be treated as: c. a. expense. d. b. inventoriable cost.

subsequently used or VAT -registered importer tax credit. none of the choices.

Answer: C

4·9. Which a. b. c. d.

statement is incorrect? VAT on importation of goods: is imposed on an importation for sale or for use in business. is imposed on an importation for personal use. shall be paid prior to removal from customs custody. may not be available as input tax.

Answer: D

151

Chapter 11: VAT-Subject Transactions

50. Which of the following shall be subject to Value-Added Tax? I - Sale or exchange of services II - Use or lease of properties a. b.

I only II only

c. d.

Both I and II Neither I nor II

Answer: C Reference: Section 4.108-1, Revenue Regulations No. 16-2005

SEC. 4. 108-1. VAT on the Sale of Services and Use or Lease of Properties - Sale or exchange of services, as well as the use or lease of properties, as defined in Sec. 108 (A) of the Tax Code shall be subject to VAT, equivalent to 12% ofthe gross receipts (excluding VAT).

51. Which of the following shall be subject to Value-Added Tax on sale or exchange of services? a. Construction and service contractors b. Stock, real estate, commercial, customs and immigration brokers c. Lessors of property, whether personal or real d. All of the choices

Answer: D Reference: Section 4.108-2, Revenue Regulations No. 16-2005 'I

SEC. 4.108-2. Meaning of "Sale or Exchange of Services". -- Th~e term "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash, II including those performed or rendered by the following: I (1) construction and service contractors; (2) stock, real estate, commercial, customs and immigration I brokers·, I' (3) lessors of property, whether personal or real; (4) persons engaged in warehousing services; (5) lessors or distributors of cinematographic films; I (6) persons engaged in milling, processing, manufacturing or repacking goods for others; (7) proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theaters, and movie houses; (8) proprietors or operators of restaurants, refreshment parlors, . cafes and other eating places, including clubs and caterers; (9) dealers in securities; (1 0) lending investors; 1 1

'

_j

1 1

152

Chapter 11: VAT-Subject Transactions

1

(1 1) transportation contractors on their transp~rt of goods or

cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; ( 12) cornmon carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines; (13) sales of electricity by generation, transmission, and/ or distribution companies; (14) franchise grantees of electric utilities, telephone and telegraph, radio and/ or television broadcasting and all other franchise grantees. except franchise grantees of radio and/ or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P 1 0, 000, 000. 00), and franchise grantees of gas and water utilities; ~ . (1 5) non-life insurance companies (except their crop inszg:EJJ..fes), including surety, fidelity, indemnity and bonding companies; and (16) similar services regardless of whether or not the performance thereof calls for the Pxercise or use of the physical or mental faculties ..

'--~->L-

52. Which of the following common carriers shall not be subject to ValueAdded Tax? a. Transportation contractors on their transport of goods or cargoes b. Common carriers by land relative to their transport of goods or cargoes c. Common carriers by land relative to their transport of passengers d. Common carriers by air and sea relative to their transport of passengers, goods or cargoes

Answer: C Reference: Section 4.108-2, Revenue Regulations No. 16-2005

53. Which of the follov.ing franchise grantees shall not be subject to Value-Added Tax? a. Franchise grantees of electric utilities ~'\OFT:'~ r, '.Pi b. Franchise grantees of gas and water c. Franchise grantees of telephone and telegraph d. Franchise grantees of radio and/ or television broadcasting

3~ :j1~ o. -.:A-

Answer: B Reference: Section 4.108-2, Revenue Regulations No. 16-2005

153

Chapter 11: VAT -Subject Transactions

-t 54. Which of the following non-life insurance companies shall not be

subject to Value-Added Tax? a. Crop insurance companies b. Surety companies

c. d.

Fidelity companies Bonding companies

Answer: A Reference: Section 4.108-2, Revenue Regulations No. 16-2005

55. The phrase "sale or exchange of services" shalilikevvise include which of the following? a. The lease or the use of or the right or privilege to use any copyright, patent, design, or model plan, secret formula or process, goodwill, trademark, trade brand or other like property or right b. The lease or the use of, or the right to use any industrial, commercial or scientific equipment c. The supply of scientific, technical, industrial or commercial knowledge or information d. All of the choices

Answer: D Reference: Section 4.108-2, Revenue Regulations No. 16-2005 The phrase "sale or exchange of services" sllall likewise include: (1) The lease or the use of or the right or privilege to use any copyright. patent, design or model, plan, secret fomlUla or process, goodwill, trademark, trade brand or other like property or right; (2) The lease or the use of, or the right to use any industrial, commercial or scientific equipment; (3) The supply of scientific, technical, industrial or commercial knowledge or information; {4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) hereof or any such knowledge or infomwtion as is mentioned in subparagraph (3) hereof,· (5) The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (6) The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; {7) The lease of motion picture films, films, tapes, and discs; and (8) The lease or the use of, or the right to use, radio, television, satellite transmission and cable television time. ~~~

\i

L---~------------------------------------------------------

154

Chapter 11: VAT-Subject Transactions

56. Which of the following statements is incorrect? a. Lease of property shall be subject to VAT regardless of the place where the contract of lease or licensing agreement was executed if the property leased or used is located in the Philippines. b. VAT on rental and/or royalties payable to non-resident foreign 'j)r"