TAX2 2015 Edition SolMan

SOLUTIONS MANUAL

TRANSFER & BUSINESS TAXATION, 2015 Edition By: TABAG & GARCIA

CHAPTER 1 – SUCCESSION & TRANSFER TAXES TRUE OR FALSE 1. TRUE 6. TRUE 11. FALSE 16. 2. TRUE 7. FALSE 12. TRUE 17. 3. FALSE* 8. FALSE 13. TRUE 18. 4. FALSE 9. TRUE 14. TRUE 19. 5. FALSE 10. FALSE 15. FALSE 20. *The taxpayer for estate tax purposes is the estate as a juridical person. MULTIPLE CHOICE 1. D 12. C 23. D 34. 2. A 13. C 24. B 35. 3. D 14. B 25. D 36. 4. C 15. D 26. D 37. 5. C 16. C 27. B 38. 6. A 17. B 28. D 39. 7. B 18. D 29. A 40. 8. A 19. C 30. D 41. 9. B 20. B 31. B 42. 10. A 21. B 32. A 43. 11. D 22. B 33. D 44. **Inheritance and repudiation takes effect upon death of the decedent

TRUE FALSE TRUE TRUE TRUE D B B D B D D B D B B

45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.

B C D D A B A D** D D B

CHAPTER 2 – GROSS ESTATE

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Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

PROBLEM SOLVING (P2.1) (1) P19,300,000

(2) P19,300,000

Family home in the Philippines Parcel land of with vacation house in Malaysia Farm land in the Philippines Shares of stock of a domestic corporation deposited in a bank safety deposit box in Malaysia Shares of stock of a foreign corporation the entire business of which is in the Philippines, deposited in a bank safety deposit box in Malaysia Receivable from a friend who has no property whatsoever Receivables under insurance policies:  Life insurance policy, taken by the decedent on his own life, with his estate as revocable beneficiary  Life insurance policy, taken by the decedent, with his daughter as revocable beneficiary  Life insurance policy, taken by the decedent on his own life, with his son as irrevocable beneficiary  Life insurance (group) taken by the employer of the decedent, with the estate as revocable beneficiary  Property insurance, for a loss of property  Accident insurance, for injury sustained TOTAL GROSS ESTATE

(3) P11,800,000 Citizen/ Resident (# 1 & 2) P8,000,000 5,000,000 3,000,000 2,000,000

(4) P14,300,000 NRA with R

NRA w/o R

(# 3) P8,000,000

(# 4) P8,000,000

3,000,000

3,000,000 2,000,000

500,000

500,000

300,000

300,000

300,000

200,000

200,000

200,000

300,000

300,000

300,000

-

-

-

-

-

-

50,000 50,000 P19,300,000

50,000 50,000 P11,800,000

50,000 50,000 P14,300,000

(P2.2) To Juan To Pedro To Maria To Sisa Total Gross Estate

P25,000,000 18,000,000 15,000,000 20,000,000 P78,000,000

(P2.3) Shares of stock (Frozen Co.) [(P8M+3M)/800,000sh x 100,000 shares P1,375,000 Shares of stock (Divergent Co..) 100,000 shares x P15** 1,500,000 Shares of stock (Lenovo Co..) 100,000 shares x P12 1,200,000 Total Gross Estate P4,075,000 ***Mean value shall be used only if the quotation price at the date of death is not determinable (RR 2-2003)

(P2.4)

(1)P230,0000; (2)P1,100,000; (3)P0; (4)P5,000,000; (5)P1M + [1M x (1M x 10% x 1.5)] = P1,150,000

MODIFIED IDENTIFICATION EXERCISE A 1. Included 2. Included 3. Excluded 4. Included

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6. 7. 8. 9.

Excluded Excluded * Included ** Excluded

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

5. Excluded 10. Included*** *Designated by the prior decedent **Exclusions from the gross estate. Nonetheless, the tax code requires these items to be included first in the gross estate before deducting the same from the gross estate. *** Bequests to charitable institutions are considered exclusions from the gross estate only if the problem clearly states that not more than 30% were used for administrative purposes. However, even if not more than 30% of the bequests were used for administrative purposes, the tax code still require these items to be included first in the gross estate before deducting the same for estate tax purposes.

EXERCISE B

EXERCISE C 1. 2. 3. 4. 5.

TRUE OR FALSE 1. TRUE 2. TRUE 3. TRUE 4. FALSE 5. TRUE MULTIPLE CHOICE 1. A 2. B 3. D 4. B 5. C 6. C 7. A 8. B 9. A 10. A 11. A 12. B 13. D 14. A 15. C

P0; valid sale P0; valid sale P0; valid sale P4,000,000 P6,000,000

1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

FALSE FALSE FALSE TRUE TRUE

11. 12. 13. 14. 15.

FALSE TRUE TRUE FALSE FALSE

16. 17. 18. 19. 20.

TRUE TRUE FALSE TRUE FALSE

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

D C B D A D A B A C C C D B D

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45.

C B A B B D C B C C C B C B C

46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

D C C D D D C C C B D C C A A

Supporting Computations (Multiple Choice): (22) . Bank deposit in the foreign branch of a domestic bank Bank deposit in Makati branch of a foreign bank Shares of stock issued by a domestic corporation (certificate kept in Canada) Franchise exercised in Manila Receivable, debtor from Mindanao Total Exclusion from the gross estate (23) .

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P10M P20M P5M P10M P0

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.

A A C D B A C C D D D A D D B

P500,000 300,000 1,000,000 800,000 200,000 P2,800,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

House and lot, family home in Quezon City Bank deposit in Makati branch of a foreign bank Shares of stock issued by a domestic corporation (certificate kept in Canada) Franchise exercised in Manila Receivable, debtor from Mindanao Total Inclusion from the gross estate

P1,500,000 300,000 1,000,000 800,000 200,000 P3,800,000

(25) . Shares of stocks, domestic corp. (certificate kept in UK) Shares of stocks, domestic corp. (certificate kept in Phils.) Franchise exercised in the Phils. Receivables, debtor is from Phils. Intangibles subject to reciprocity

P250,000 100,000 200,000 50,000 P600,000

(26) . Land & building, Philippines House and lot, Philippines Shares of stocks, domestic corp. (certificate kept in UK) Shares of stocks, domestic corp. (certificate kept in Phils.) Franchise exercised in the Phils. Receivables, debtor is from Phils. Gross Estate (32). (33). (34). (35). (43) .

P2,000,000 3,500,000 250,000 100,000 200,000 50,000 P6,100,000

(P12M/100,000) x 1,000 shares = P120,000 P100 x 1,000 shares = P100,000; Par Value=P10M/100,000 = P100/share P110 x 1,000 shares = P120,000 (P140 + P80/2) x 1,000 shares = P110,000 Consideration FMV upon transfer received Land P1,500,000 P1,500,000 Shares of stock 100,000 50,000 Vintage car 50,000 80,000 Painting 250,000 400,000 INCLUSION IN THE GROSS ESTATE

FMV upon death P2,000,000 150,000 100,000 500,000

Gross Estate None. Valid sale None. Valid sale P50,000 250,000 P300,000

CHAPTER 3 – DEDUCTIONS FROM THE GROSS ESTATE PROBLEM SOLVING

(P3.1)

(P3.2)

(Funeral Expenses) Case A: P150,000 Case B: P200,000 Case C: P150,000 Case D: P150,000

P0 Mourning clothing (donated by the decedent’s employer) Expenses paid by relatives

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P-

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Telecommunication charges paid by the friends Cost of burial plot, coffin, interment fees and other funeral charges paid by an insurance company DEDUCTIBLE FUNERAL EXPENSE

(P3.3)

-nil-

P183,500 computed as follows:

Embalming charges P15,000 Burial apparel of the decedent 3,500 Cost of coffin 85,000 Mourning apparel of the surviving spouse during the burial 2,000 Mourning apparel of the minor child (P12,000/6) 2,000 Snacks and drinks during the wake 12,500 Honoraria of priest for daily masses before burial 4,000 Telecommunication charges to inform relatives 10,000 Charges for death notice published in a newspaper 1,500 Cost of video footage of the burial and interment 12,000 Funeral car service during interment 4,000 Honorarium of priest who celebrated the mass during interment 2,000 Cost of tombstone 30,000 ACTUAL FUNERAL EXPENSE P183,500 Vs. Limit (P5% of P10M) 500,000 ALLOWABLE FUNERAL EXPENSE P183,500 NOTE: Hospital bills for two months of confinement before decedent’s death should be charged to “medical expenses”

(P3.4)

(Claim Against Insolvent Persons) Case A: P100,000 Case B: P333,333 computed as follows: Receivable Collectible portion (400/1,200) x 500,000 Deductible claim (Uncollectible portion)

P500,000 (166,667) P333,333

Case C: P0. Debtor is not insolvent CaseD: P0. Debtor is not insolvent Total Assets Taxes payable (Gov’t is a priority creditor) Assets after deducting unpaid taxes Receivable (CAIP) Collectible (400/800) x 500,000 Deductible Claim against Insolvent Persons

(P3.5)

P500,000 (250,000) P250,000

P133,333 computed as follows: Debtor’s Assets Taxes payable (Gov’t is a priority creditor) Assets after deducting unpaid taxes Receivable (CAIP) Collectible (200/600) x 200,000 Deductible Claim against Insolvent Persons

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P1,200,000 (800,000) P400,000

P400,000 (200,000) P200,000 P200,000 (66,667) P133,333

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

(P3.6)

P2,097,000 computed as follows: Ordinary Deductions: Claim against insolvent person (500,000-400,000) Unpaid taxes on the estate before death Unpaid mortgage on the estate Funeral expenses Actual = P182,000 + 37,500 = P219,500 Limit = P5M x 5% = P250,000 Maximum = P200,000 Judicial expenses Unpaid loans arising from debt instruments (notarized) Unpaid loans arising from debt instruments (not notarized). The debt instrument was issued by a financial institution not requiring notarizations for debt instruments issued Casualty loss Special Deductions: Standard deduction Medical expenses Total Allowable deduction from the gross estate

P100,000 150,000 200,000 200,000

100,000 125,000 75,000 65,000 1,000,000 82,000 P2,097,000

(P3.7) Question 1: P217,500 Question 2: P217,500 Same answer with question #1. Whether or not the estate was settled judicially is irrelevant in the determination of allowable deduction for judicial expenses.

Solution: Expenditures incurred for the collection of assets and payment of debts Attorney’s fees (1/2 were incurred after six months) P40,000 x 1/2 Accountant’s fees Executor’s commission Appraiser’s fees Court fees Cost of preserving and distributing the estate Cost of storing or maintaining the property of the estate Brokerage fees for selling property of the estate Total allowable judicial expenses

(P3.8)

P265,000 computed as follows: To the executor, for time and effort in executing the will To a lawyer, for legal advice in carrying out the will To an appraiser, for establishing property values To an accountant, for estate tax return preparation Court fees Cost of preserving and distributing the estate Cost of storing or maintaining the property of the estate Brokerage fees for selling property of the estate DEDUCTIBLE JUDICIAL EXPENSES

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P100,000 20,000 25,000 15,000 2,500 18,000 15,000 12,000 10,000 P217,500

P30,000 80,000 70,000 30,000 18,000 15,000 12,000 10,000 P265,00

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

0

(P3.9)

P2,500,000 computed as follows: Loss due to shipwreck, two (2) months after the decedent’s death. Robbery loss, seven (7) months after the decedent’s death. The decedent’s executor was allowed by the Bureau of Internal Revenue to extend the filing (within the period allowed by the Tax Code) of estate tax return due to a meritorious reason Allowable Deduction

(P3.10)

(P3.11)

STANDARD DEDUCTION Case A: P1,000,000 Case B: P1,000,000 Case C: P1,000,000 Case D: P0 Case E: P0

(P3.12)

MEDICAL EXPENSES Case A: P500,000 Case B: P500,000 Case C: P150,000 Case D: P500,000 Case E: P0

(P3.13)

FAMILY HOME Case A: P1,000,000 Case B: P500,000 Case C: P0 Case D: P500,000 Case E: P600,000 Case F: P750,000; [ (1M/2) + (500,000/2)]

P937,500 (187,500) P750,000 (93,750) P656,250 40% P262,500

P1,550,000 computed as follows: Funeral expenses Actual P300,000 – 120,000 = P180,000 Limit = P3M x 5% = P150,000 Standard deduction Medical expenses Total amount deductible from the gross estate

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P2,500,000

P262,500 computed as follows: Value to take 1st Deduction: Mortgage paid Initial basis 2nd Deduction: Proportionate deduction (750/4,500) x 562,500 Final Basis x Vanishing rate Vanishing Deduction

(P3.14)

P500,000 2,000,000

P150,000

1,000,000 400,000 P1,550,00 0

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

(P3.15) Question 1: P2,430,000 (Decedent: Resident Citizen) Question 2: P2,430,000 (Decedent: Resident Alien) (same computation with Q#1) . Domestic shares of 2,000 shares inherited 6 years ago P800,000 House and lot, family home, located in Europe, inherited 2 years ago 2,000,000 Jewelry items, in the Philippines at the time of death 400,000 Jewelry items kept in a vault abroad 200,000 Bank deposit in a Philippine branch of a U.S. bank 500,000 Transfer for Public Use 250,000 GROSS ESTATE ORDINARY DEDUCTIONS: Funeral expenses, Philippines (max.) 200,000 Judicial expenses, abroad 100,000 Judicial expenses, Philippines 50,000 Claims against the estate 120,000 Transfer for Public Use 250,000 Vanishing deductions SPECIAL DEDUCTIONS Standard Deduction 1,000,000 Family Home Medical Expenses RA 4917 NET TAXABLE ESTATE

(P3.16)

Question 1: P2,757,500 computed as follows: GROSS ESTATE: TFPU House & lot in Makati, F. Home Personal properties Farm lot Claim against an insolvent debtor Transfer in contemplation of death DEDUCTIONS: Funeral expenses Judicial expenses TFPU CAIP Unpaid mortgage on the farm lot Standard Medical expenses F.Home TAXABLE NET ESTATE

Question 2: P2,672,330 computed as follows: GROSS ESTATE: TFPU House & lot in Makati, F. Home Personal properties Farm lot Claim against an insolvent debtor Transfer in contemplation of death DEDUCTIONS:

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P300,000 1,500,000 1,500,000 825,000 225,000 1,500,000 200,000 67,500 300,000 225,0000 75,000 1,000,000 225,000 1,000,000

P300,000 1,500,000 1,500,000 825,000 225,000 1,500,000

P4,150,000

(720,000)

(1,000,000) P2,430,000

P5,850,000

(3,092,500) P2,757,50 0

P5,850,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Funeral expenses Judicial expenses TFPU CAIP Unpaid mortgage on the farm lot VANISHING DEDUCTIONS** Standard Medical expenses F.Home TAXABLE NET ESTATE

200,000 67,500 300,000 225,0000 75,000 (85,170) 1,000,000 225,000 1,000,000

Value to Take

P575,000

Less: Mortgage paid (150,000-75,000)

(75,000)

Initial Basis

P500,000

Less: Proportionate Deduction (500/5,850 x P867,500 Final Basis

(74,145) P425,855

x Vanishing Deduction Rate

20%

VANISHING DEDUCTION

(P3.17)

(3,177,670) P2,672,33 0

P85,170**

Question 1: P426,000 computed as follows: VTT Land Mortgage paid Initial Basis 2nd Deduction 1,200/8,000 x 900,000* Final Basis x Vanishing Deduction Rate Vanishing Deduction *1,200+100-100600+300=P900,000

P1,250,000 (50,000) 1,200,000 (135,000) 1,065,000 40% P426,000

Question 2: P4,174,000 computed as follows: GE P8,000,000 ELIT (600,000) TFU (300,000) VD (426,000) Stndrd (1,000,000) FHome (1,000,000) Med Exp (500,000) TNE P4,174,000 TRUE OR FALSE 1. TRUE 2. TRUE 3. TRUE 4. TRUE 5. TRUE 6. FALSE MULTIPLE CHOICE

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7. 8. 9. 10. 11. 12.

TRUE TRUE TRUE FALSE FALSE FALSE

13. 14. 15. 16. 17. 18.

FALSE FALSE TRUE FALSE TRUE TRUE

19. 20. 21. 22. 23. 24.

TRUE TRUE TRUE FALSE TRUE TRUE

25. 26. 27. 28. 29. 30.

TRUE TRUE FALSE TRUE FALSE TRUE

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

C D D C B B D C A B

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

C B A A A D D C D P650,000

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

A A B B B C A C D C

31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

C A C B B D A D D D

Supporting Computation (Multiple Choice): (6) . Mourning clothing of the decedent’s surviving spouse Mourning clothing of the decedent’s dependent children Expenses of the wake preceding the burial Publication charges for death notices Telecommunication expenses incurred in informing relatives of the deceased Cost of burial plot Interment fees and charges Expenses for the performance of the rites & ceremonies incident to interment Actual Funeral Expenses Limit: 5% of Gross Estate (P2M x 5%) ALLOWED (Lower Amount)

41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

C A A C D A A A B D

P1,500 3,200 40,000 5,000 3,000 20,000 12,000 5,000 P89,700 P100,000 P89,700

(14.) Real property tax for the year 2013 Notarized interest bearing promissory note Accrued interest on the promissory note at the time of death Income tax due for 2013 Allowable deductions

P100,000 100,000 20,000 200,000 P420,000

(20) . Income tax from practice of profession - 2013 Income tax from practice of profession for Jan.-June ‘14 Real property taxes for 2013 Business taxes for 2013 Deductible taxes

P300,000 100,000 150,000 100,000 P650,000

(37) . Value to take/Initial Basis Mortgage paid Initial basis 2nd Deduction: (850/1,000 x P100,000**) Final Basis X Vanishing rate VANISHING DEDUCTION ** Mortgage P150,000 – 50,000

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P900,000 (50,000) 850,000 (85,000) P765,000 40% P306,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

(49) . Shares, domestic corporation Tangible personal property Gross Estate ELIT (500,000 x 2,000/2,500) Taxable Estate TAX DUE 1st P500,000 In excess of P500,000 = (1,100,00 x 8%) Estate Tax Due

P500,000 1,500,000 2,000,000 (400,000) P1,600,000

P15,000 88,000 P103,000

(50) . Gross Estate (Tangible property Phils.) ELIT (1,200,000 x 6,000/10,000,000) Taxable Estate

P6,000,000 (720,000) P5,280,000

CHAPTER 4 – PROPERTY RELATIONS PROBLEM SOLVING

P4.1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

ACP C C C C E C E C E E

CPG E C E E E E E E E E

P4.2 Land inherited during marriage Other personal property owned before marriage Other personal property acquired during marriage Total Deductions: Funeral expenses Judicial expenses Vanishing deduction** Net estate before special deduction and share of the surviving spouse Standard deduction Medical expenses Share of the Surviving Spouse (1,800,000/2) NET TAXABLE ESTATE VANISHING DEDUCTION** Value to Take/Initial Basis

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Exclusive P2,400,000 P2,400,000

Common

Total

P1,600,000 500,000 P2,100,000

P4,500,000

(200,000) (100,000) (1,120,000) P1,280,000

P1,800,000

P3,080,000 (1,000,000) (500,000) (900,000) P680,000

P1,500,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Proportional Deduction (1,500/4,500 x P300,000) (100,000) Final Basis P1,400,000 x Vanishing Deduction % 80% Vanishing Deduction P1,120,000  Since the problem is silent as to the type of the marriage settlement but one of the requirements is to compute for “community property”, ACP should be used. The term “community” property is applicable to ACP.

P4.3 (a)P1,624,773 (b)P4,132,955

(c)P3,691,250

(d)P321,038

Exclusive P2,000,000

Common Total Exclusive properties Conjugal properties* P5,000,000 P7,000,000 ELIT** (867,045) Vanishing Deductions *** (175,227) Transfer for Public Use **** (200,000) Net Estate P1,624,773 P4,132,955 P5,757,728 Share of the Surviving Spouse (4,132,955/2) (2,066,478) Net Taxable Estate P3,691,250 1st P2,000,000 P135,000 In excess of P2,000,000 @ 11% 186,038 ESTATE TAX DUE P321,038 *The problem is silent as to reciprocity, hence, the gross estate should include tangible and intangible properties within the Philippines.

**ELIT: Funeral expenses Judicial expenses Claim against the estate TOTAL ELIT X ALLOWABLE ELIT

P200,000 800,000 1,725,000 P2,725,000 7,000/22,000 P867,045

**VANISHING DEDUCTIONS: Value to take P500,0 00 1st Deduction: Mortgage paid Initial basis P500,000 2nd Deduction: Proportionate deduction (500/7,000) x 867,045 (61,932) Final Basis P438,068 x Vanishing rate 40% Vanishing Deduction P175,227 **** Since the properties were already classified as exclusive and common, it should be assumed that the exclusive properties were already inclusive of transfer for public use.

P4.4 (Decedent: Resident Citizen) a) Vanishing deduction = P1,676,200 b) Net exclusive property of the decedent = P7,200,000 c) Net community property = P19,300,000 d) Net Taxable estate = P14,850,000 e) Estate tax due = P2,185,000

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Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Exclusive Exclusive properties

Conjugal

Total

P10,000,000

Ordinary Deductions: Conjugal properties

20,000,000

P30,000,000

Funeral expenses

(200,000)

(200,000)

Judicial expenses

(300,000)

(300,000)

Claims against conjugal properties

(200,000)

(200,000)

Claims against exclusive properties*

(400,000)

Legacy-local government (Tr. for Public Use) **

(723,800)

VANISHING DEDUCTION***

(1,676,200)

Net exclusive/conjugal

P7,200,000

(400,000) -

(723,800) (1,676,200)

P19,300,000

P26,500,000

Special Deductions: Standard deduction

(1,000,000)

Medical expenses

(500,000)

Amount received under RA4917

(1,500,000)

Share of the surviving spouse (P19.3M/2)

(9,650,000)

NET TAXABLE ESTATE

P14,850,000

ESTATE TAX DUE (Refer to the Tax Table)

P2,185,000

*From the information provided in the problem, the amount of P400,000 as “claim against exclusive property” should pertain to the unpaid mortgage on the land inherited. Therefore, the present decedent paid P100,000 on the original amount of the mortgage (P500,000). This should be taken into consideration in computing the vanishing deduction. ** LEGACY AGAINST EXCLUSIVE PROPERTIES Legacy means bequest or inheritance of personal properties. The deductible legacy/devised (bequests) under the tax code are:  Transfer for “public use” (Rule: Include both in the “Gross Estate” as well as in the “Deductions from the Gross Estate) ; and  Bequests to charitable institutions wherein not more than 30% of the bequest was used for administrative purposes (Rule: Same as transfer for public use) TRANSFER FOR PUBLIC USE Value to take Mortgage Paid (refer to explanation above) Initial basis 2nd Deduction: 2,900/30,000 x P1.1M

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P3,000,000 (100,000) P2,900,000 (106,333)

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Final Basis x rate Vanishing Deduction***

P2,793,667 60% P1,676,200

P4.5

(Decedent: Resident Alien) (a) Net Taxable estate = P3,570,000; (b)Estate tax due = P307,700 House and lot, USA * P2,000,000 Investment in stock, Philippines 800,000 Investment in stock, USA 1,000 000 Investment in bonds, USA 700,000 Cash in bank, Philippines 300,000 Cash on hand, Philippines 50,000 Accounts receivable (fully uncollectible) 200.000 Car, Philippines 800,000 Legacy in favor of Philippine National Red Cross** 50,000 Devise to Quezon City for children’s playground** 70,000 Total Gross Estate P5,970,000 Ordinary Deductions: Funeral expenses P150,000 Judicial expenses 300,000 Unpaid Philippine income tax for income in 2011 120,000 Loss on December 31, 2012 due to theft 10,000 Legacy in favor of Philippine National Red Cross 50,000 Devise to Quezon City for children’s playground 70,000 Accounts receivable (fully uncollectible) *** 200,000 (900,000) Special Deductions: Standard deduction (1,000,000) Medical expenses (500,000) Net Taxable Estate P3,570,000 Estate Tax Due (Refer to the Tax Table) P307,700  *Family home is not allowed as a deduction for single decedent **To be deductible, the legacy/devise should be included first in the decedent’s gross estate ***Assume the debtor is an insolvent person.

P4.6

(Decedent: Resident Alien) a) Vanishing deduction = P441,463 b) Net Taxable estate = P3,200,000 c) Estate tax due = P386,739 Land House and Lot, furniture and appliances Other tangible personal properties Amount received under RA4917 Claims against insolvent persons Ordinary deductions: Funeral expenses

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Exclusive P3,000,000

Conjugal P5,000,000 1,200,000 1,000,000 50,000

Total

P10,250,000

(200,000)

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Judicial expenses Other claims against conjugal properties Claims against insolvent persons Unpaid mortgage** VANISHING DEDUCTION* Net exclusive/conjugal Special deductions: Standard deduction Medical expenses Share of the surviving spouse TAXABLE ESTATE Estate Tax Due

(100,000) (500,000) (50,000) (350,000) (441,463) P2,208,537

P6,400,000

P8,608,537 (1,000,000) (120,000) (3,200,000) P4,288,537 P386,739

Value to take/Initial Basis*** P2,500,000 2nd Deduction: 2,500/10,250 x 1,200,000 (292,683) Final Basis P2,207,317 x rate 20% Vanishing Deduction* P441,463 ** P700,000 – 350,000 = P350,000 ***The amount paid on the mortgage should not be considered in computing the vanishing deduction because the amount pertains to a mortgage entered into by Pedro during his lifetime. To be deductible, the mortgage should have been assumed on the property at the time of inheritance. TRUE OR FALSE 1. TRUE 2. TRUE 3. TRUE 4. FALSE 5. FALSE MULTIPLE CHOICE 1. 2. 3. 4. 5. 6.

6. 7. 8. 9. 10.

FALSE FALSE TRUE TRUE FALSE

7. 8. 9. 10. 11. 12.

Supporting Computations (Multiple Choice) (No. 22 & 23) Gross Estate: Rest House in Batangas Car Commercial land Income from the commercial land Income from exclusive property of the spouse Jewelry owned before the marriage Other properties at the time of her death Gross Estate

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11. 12. 13. 14. 15. 13. 14. 15. 16. 17. 18.

FALSE TRUE TRUE FALSE TRUE 19. 20. 21. 22. 23. 24.

Exclusive P2,500,000 1,000,000 5,000,000

25. 26. 27. 28. 29. 30.

Conjugal

500,000 200,000 300,000 P8,800,000

1,000,000 P1,700,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

(No. 24 & 25) Gross Estate: Rest House in Batangas Car Commercial land Income from the commercial land Jewelry owned before the marriage Other properties at the time of her death Gross Estate

Exclusive P2,500,000

P2,500,000

(No. 26) Conjugal properties Conjugal Deductions: Funeral expenses Actual = P45,000 Limit = (P500,000 + 200,000) x 5% = 35,000 Judicial expenses Claim against the estate Net Conjugal properties Divide Share of the Surviving Spouse

Common 1,000,000 5,000,000 500,000 300,000 1,000,000 P7,800,000

P200,000 (35,000)

(20,000) (45,000) P100,000 2 P50,000

(No. 27) Real property, Philippines Real property, USA Funeral expenses Judicial expenses (200,000 – 50,000) Claim against insolvent persons Unpaid taxes Balance Standard Deductions Medical expenses (max.allowed) Family Home (P1,500,000/2) Share of the surviving spouse (P8,550,000/2) Net Taxable Estate

P4,000,000 5,000,000 (200,000) (150,000 (50,000) (50,000) P8,550,000 (1,000,000) (500,000) (750,000) (4,275,000) P2,025,000

(No. 28) Exclusive Conjugal real properties Conjugal family home

16 |

Common P5,000,000 1,500,000

Total

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Exclusive properties Total Ordinary Deductions: Funeral expenses Actual P300,000 x 25% = P75,000 Limit = 5% x P9M = P450,000 Casualty losses (from excl.property) Miscellaneous deductions (P1M x 75%) Net Special Deductions: Standard Deductions Medical expenses (P500,000 x 50%) Family Home (1,500,000/2) Share of the surviving spouse (5,675,000/2) Net Taxable Estate

P2,500,000 P2,500,000

P6,500,000

P9,000,000

(75,000) (100,000) P2,400,000

(750,000) P5,675,000

(825,000) P8,075,000 (1,000,000) (250,00) (750,000) (2,837,500) P3,275,000

(No. 29) ABSOLUTE COMMUNITY OF PROPERTY Properties-Land Other personal property owned before marriage Other personal property acquired during marriage Gross Estate Funeral expenses Judicial expenses Net conjugal before special deductions Share of surviving spouse (P1,800,000/2)

Exclusive P2,400,000 P2,400,000

Common 1,600,000 500,000 P2,100,000 (200,000) (100,000) P1,800,000 P900,000

(No. 30) CONJUGAL PARTNERSHIP OF GAINS Exclusive Common Total Properties-Land P2,400,000 Other personal property owned before marriage 1,600,000 Other personal property acquired during marriage**** P500,000 Gross Estate P4,000,000 P500,000 P4,500,000 Ordinary Deductions Funeral expenses (200,000) Judicial expenses (100,000) Vanishing Deductions***** (1,120,000) Net Estate Before Special Deductions P2,880,000 200,000 P3,080,000 Standard deductions (1,000,000) Medical expenses (500,000) Share of the surviving spouse (P200,000/2) (100,000) Share of surviving spouse (P1,800,000/2) P1,480,000 ****If silent and unless the problem clearly illustrate that it is exclusive, assume the property is common. Value to take 1st Deduction: Mortgage paid Initial basis 2nd Deduction: Proportionate deduction (1,500/4,500) x 300,000 Final Basis x Vanishing rate Vanishing Deduction

17 |

P1,500,0 00 P1,500,000 (100,000) P1,400,000 80% P262,500

*****

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

CHAPTER 5 – ESTATE TAX CREDIT AND ESTATE TAX DISTRIBUTABLE PROBLEM SOLVING P5.1 (1)P200,000

(2)P0; not allowed

Net Taxable Estate

P10,000,000

Estate Tax Due [P465,000 + (5M x 15%)] Estate tax credit (4/10 x P1,215,000) vs P200,000 Estate tax payable

P1,215,000 (200,000) P1,015,000

Net Taxable Estate

P2,000,000

P5.2 Estate Tax Due Estate tax credit Estate tax payable after tax credit

P135,000 (67,500) P67,500

Net Taxable Estate Limit 1: Canada: 500/2,000 x P135,000 USA: 500/2,000 x P135,000 Limit 2: 1,000/2,000 x P135,000 ALLOWED TAX CREDIT

P2,000,000 Limit P33,750 33,750

Actual P150,000 110,000

Allowed P33,750 33,750 P67,500

P67,500

260,000

67,500 P67,500

P5.3  ASSUME: ESTATE TAX PAID U.S.A. = P250,000 (a) Net Taxable estate = P3,570,000; (b)Estate tax due after tax credit = P142,770 (c ) Net Distributable Estate = P4,427,230

House and lot, USA * Investment in stock, Philippines Investment in stock, USA Investment in bonds, USA*** Cash in bank, Philippines Cash on hand, Philippines Accounts receivable Car, Philippines Legacy in favor of Philippine National Red Cross** Devise to Quezon City for children’s playground** Total Gross Estate Ordinary Deductions: Funeral expenses Judicial expenses

18 |

P2,000,000 800,000 1,000 000 700,000 300,000 50,000 200.000 800,000 50,000 70,000 P5,970,000 P150,000 300,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Unpaid Philippine income tax for income in 2011 120,000 Loss on December 31, 2012 due to theft 10,000 Legacy in favor of Philippine National Red Cross 50,000 Devise to Quezon City for children’s playground 70,000 Accounts receivable (fully uncollectible) 200,000 (900,000) Special Deductions: Standard deduction (1,000,000) Medical expenses (500,000) NET TAXABLE ESTATE P3,570,000 Estate Tax Due P307,700 Estate Tax Credit (164,930) Limit: [(3,200/5,970) x 307,700 = P164,930 Actual: P250,000 ESTATE TAX DUE AFTER ESTATE TAX CREDIT P142,770 NOTE:*Family home is not allowed as a deduction for single decedent **To be deductible, the legacy/devise should be included first in the decedent’s gross estate *** Considered as Estate “within” TOTAL GROSS ESTATE (Refer above) Ordinary Deductions: Funeral expenses Judicial expenses Unpaid Philippine income tax for income in 2011 Loss on December 31, 2012 due to theft Legacy in favor of Philippine National Red Cross Devise to Quezon City for children’s playground Accounts receivable (fully uncollectible) Special Deductions: Standard deduction Medical expenses Estate Tax Due after tax Credit NET DISTRIBUTABLE ESTATE

P5,970,000 P150,000 300,000 120,000 10,000 50,000 70,000 200,000

(900,000) (500,000) (142,770) P4,427,230

P5.4 Real property, Philippines Claim Against Insolvent Persons Real property, USA Real property, Japan Net estate, Malaysia Total Gross Estate (common) Funeral expenses (maximum) Judicial expenses (P200,000-100,000) Claim against insolvent persons Unpaid taxes Net estate before special deductions X (Share of the surviving spouse) Net estate of the decedent in the conjugal properties Standard Deduction Family Home Medical Expenses NET TAXABLE ESTATE TAX DUE: 1ST P500,000

19 |

P4,000,000 50,000 3,000,000 2,000,000 (1,000,000) P8,050,000 (200,000) (100,000) (50,000) (50,000) P7,650,000 1/2 P3,825,000 (1,000,000) (1,000,000) (500,000) P1,325,000

P15,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

In excess of P500,000 @ 8% ESTATE TAX DUE Estate Tax Credit (None; No Estate Tax Payments abroad) ESTATE TAX PAYABLE

66,000 P81,000 ---P81,000

Total Gross Estate (common; as computed above) Funeral expenses (actual) Judicial expenses (actual) Claim against insolvent persons Unpaid taxes Net estate before special deductions X (Share of the surviving spouse) Net estate of the decedent in the conjugal properties Standard Deduction Family Home Medical Expenses (actual) Estate Tax NET DISTRIBUTABLE ESTATE

MULTIPLE CHOICE 1. B 2. C 3. D 4. C 5. C 6. C 7. C

8. 9. 10. 11. 12. 13. 14.

A D A D D A D

15. 16. 17. 18. 19. 20. 21.

A C C A D A C

P8,050,000 (300,000) (200,000) (50,000) (50,000) P7,450,000 1/2 P3,725,000 ----------(650,000) (81,000) P2,994,000

22. 23. 24. 25. 26. 27. 28.

C A C D C A B

29. 30. 31. 32.

C D A B

Supporting Computations:

No.5 Estate tax due (for P4M) Estate tax credit (3/4 x P355,000) vs P80,000 Estate tax payable

P355,000 (80,000) P275,000

No. 6 Estate tax due (for P500,000) Less: Estate tax credit Estate tax payable Limit 1: Singapore: 300/1,000 x P55,000 USA: 100/1,000 x P55,000 Limit 2: 400/1,000 x P55,000

20 |

P55,000 (20,500) P34,500 Limit P16,500 5,500

Actual P30,000 4,000

Allowed P16,500 4,000 P20,500

P22,000

34,000

22,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

ALLOWED TAX CREDIT (LOWER AMOUNT)

P20,500

No. 7 Gross Estate P10,000,000 Deductions (5,000,000) Share of the surviving spouse (5,000,000 x 60% x 50%) (1,500,000) Net taxable estate P3,500,000 Tax Due P300,000 Estate tax credit (2.8/3.5 x P300,000) vs P124,500 (124,500) Estate tax payable P175,500 Net estate France = [(6M -2M) x 0.6 x 1/2] + (6M-2M) x 0.4 = P2,800,000 Net estate R.P. = [(4M-3M) x 0.6 x 1/2] + (4M-3M) x 0.4 = P700,000 No. 8 Estate tax due (for P500,000) Less: Estate tax credit Estate tax payable

P71,000 (41,417) P29,583

Limit 1: Japan: 300/1,200 x P71,000 USA: Exclude for purposes of computing Limit 1 HK: 450/1,200 x P71,000

Limit P17,750 26,625

Actual P20,000 45,000

Allowed P17,750 26,625 P44,375

Limit 2: (Include USA) 700/1,200 x P71,000 ALLOWED TAX CREDIT (LOWER AMOUNT)

P41,417

65,000

41,417 P41,417

No. 9 and 10 Property inherited Property acquired through own labor Funeral expenses Judicial expenses Claims against the estate Notarized Not notarized Standard deduction Net Taxable/Distributable estate

Net Taxable P1,400,000 3,600,000 (200,000) (200,000)

Net Distributable P1,400,000 3,600,000 (240,000) (200,000)

(40,000) (1,000,000) P3,560,000

(40,000) (20,000) P4,500,000

CHAPTER 6 – DONOR’S TAX PROBLEM SOLVING

P6.1 ITEM A B C

21 |

Q#1 P800,000 3,000,000 250,000

Q#2 P800,000 3,000,000 250,000

Q#3 P800,000 3,000,000 250,000

Q#4 P800,000

Q#5 P800,000 250,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

D E* F G H I Land 1** Land 2*** Land 3**** Car GROSS GIFT

100,000 5,000,000 1,500,000 100,000 100,000 500,000 5,000,000 200,000 P16,550,000

100,000 5,000,000 1,500,000 100,000 100,000 500,000 5,000,000 200,000 P16,550,000

100,000 5,000,000 1,500,000 100,000 100,000 500,000 5,000,000 200,000 P16,550,000

-

100,000

1,500,000 500,000 200,000 P3,000,000

1,500,000 100,000 500,000 200,000 P3,450,000

*The question is “gross gifts”, hence, disregard the mortgage. **Sale of Land #1 is a transfer with insufficient consideration. However, unlike in Estate Taxation, Transfer with insufficient consideration for donor’s tax purposes is not taxable if the property donated is a real property classified as capital asset subject to capital gains tax. *** Sale of Land # 2 is considered bonafide or valid sale. ****Sale of Land #3 is a transfer with insufficient consideration. Nonetheless, the sale is subject to donor’s tax because the property was not subjected to capital gains tax. Capital gains tax on real properties are applicable only on sale of real properties classified as capital assets located in the Philippines.

P6.2 ITEM A B C D E F Car, Alabang Car, Malaysia Land Cebu GROSS GIFT

Q#1 P4,500,00 1,000,000 1,500,000 2,000,000 3,000,000 500,000 200,000 200,000 P12,900,000

Q#2 P4,500,00 3,000,000 200,000 P7,700,000

P6.3 1.P0

2.P5,000

3.P10,000

43,000

P6.4 Donation-Red Cross (exempt under a special law)* P100,000 Donation to Manila City Hall * 300,000 Mortgage on the land (400,000 x ¼) 100,000 Total deductions from the gross gifts P500,000 *Exempt donations which partake the nature of deductions and are, therefore , deductible from the gross gifts to arrive at taxable net gifts.

P6.5 Cash to his son on account of marriage Cash to PPCRV for 2013 election

22 |

Relative P50,000 -

Stranger -

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Jewelry to his auntie 46,000 Shoes and bags to his girlfriend 30,000 Books to the City of Makati 20,000 Second hand car to his first cousin 500,000 Brand new SUV to his second cousin (subject to revocation) Shares of stocks of a domestic corp. to his best friend 150,000 Car to his daughter (a donation mortis causa) Forgiven a loan due from his brother(50,000-25,000) 25,000 Sports equipment to his brother in law 75,000 Parcel of land to the Philippine government for public use 1,000,000 Gross Gifts P621,000 P1,275,000 NOTE:  Cash to PPCRV. Not considered as donation under the tax code. It is subject to the rules and regulations of the COMELEC under the election code of the Philippines.  Books for the City of Makati AND Land for Public Use. Although the donations are exempt, should be considered in the determination of “gross gifts”  Gift subject to revocation is not a gift.  Donation mortis causa is a donation subject to estate tax, not donor’s tax.

P6.6 a) b) c) d) e)

March 1 = P2,000 May 30 = P18,000 June 30 = P90,000 July 31 = P0 September 30 = P447,200

Solution Gross Gifts Dowry Net taxable gift Donor’s Tax Due/ Payable – March 1

P200,000 P200,000 P2,000

Gross gift Less: Mortgage assumed by the donee Add: Prior net gift Taxable gift – May 30

P500,000 (100,000) 200,000 P600,000

Donor’s Tax Due Less: Tax paid Donor’s tax payable-May 30

P20,000 (2,000) P18,000

Donor’s tax payable-June 30 (P300,000 x 30%)

P90,000

Donor’s tax payable-July 31 (Bantay Bata)

Gross Gift Dowry Mortgage assumed Prior net gift Taxable gift

23 |

September 30 Relative P1,500,000 (10,000) (300,000) 600,000 P1,790,000

 1 year after celebration

P0

Stranger P1,500,000 (300,000)

Total

P1,200,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Tax Due Less: Tax Payments Tax Payable

@30% P360,000

P107,200 (20,000) P87,200

360,000

P447,200

P6.7 1) 2) 3) 4) 5)

January 15, 2012 = P32,000 April 1, 2012 = P6,000 December 25, 2012 = P0 March 30, 2013 = P30,000 May 25, 2013 = P0

Solution Gross Gifts-Jan. 1, 2014 Less: Encumbrance Taxable gift Donor’s tax due/payable-Jan. 1, 2014

P1,000,000 (200,000) P800,000 P32,000

Gross gift – April 1, 2014 Add: Prior net gift Taxable gift Donor’s Tax Due Less: Tax paid Donor’s tax payable-Apr. 1, 2014

P100,000 800,000 P900,000 P38,000 (32,000) P6,000

December 25, 2014

March 30, 2015 P100,000 x 30% May 25, 2015 Gross gift Deductions Taxable gift Tax Due

P0

P30,000

The rule that gift of not more than P100,000 is exempt is applicable only to donations made to relatives.

P200,000 (200,000) P0 P0

P6.8 1) 2)

October 8, 2015 = P9,800 November 4, 2015 = P1,200 Gross Gift Dowry

24 |

June 6, 2015 Husband P240,000 (10,000)

Wife P240,000 (10,000)

Total

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Mortgage assumed Taxable gift Donor’s Tax Payable

Gross Gifts (strangers) Exempt Prior Net Gift Taxable gift Donor’s Tax Payable

(2)P2,600

P3,120

Wife P30,000 (10,000) 228,000 P248,000 P3,920 (3,120) P800

P9,0000 November 4, 2015 Husband P7,000 (5,000) P2,000 @30 P600

(3)P69,800

Gross Gifts Dowry (beyond 1 year) Mortgage assumed Taxable gift Donor’s Tax Payable

Gross Gifts Prior net gift Taxable gift Donor’s Tax Donor’s tax paid Donor’s Tax Payable

March 30, 2015 Mr.Macariola P200,000 150,000 P350,000 8,000 (1,000) P7,000 June 1, 2015 Mr.Macariola P-

Wife P7,000 (5,000) P2,000 @30 P600

P6,240

Total

P9,800

Total

P1,200

(4)P30,000

Feb. 15, 2015 Mr.Macariola P200,000 (50,000) P150,000 P1,000

Gross Gifts Dowry Prior net gift Taxable gift Donor’s Tax Donor’s tax paid Donor’s Tax Payable

25 |

P3,120

P228,000 @30

Donor’s Tax (Tax Table) Tax Paid-June 6 Donor’s Tax Payable

(1)P7,000

(2,000) P228,000

October 8, 2015 Husband P30,000 ---

Gross Gift Dowry Prior Net Gift Taxable gift

P6.9

(2,000) P228,000

Mrs.Macariola P200,000 (50,000) P150,000 P1,000

Total

Mrs.Macariola P-

Total

P2,000

P7,000

Mrs.Macariola P100,000 (10,000) 150,000 240,000 P3,600 (1,000) 2,600

Total

P2,600

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

October 12, 2015 Mr.Macariola Donation to Donation to a Stranger Relative Gross Gifts P200,000 P200,000 Dowry (claimed June 1) Mortgage assumed (50,000) Prior net gift 350,000 Taxable gift 150,000 550,000 @30% Donor’s Tax P17,000 Donor’s tax paid (8,000) Donor’s Tax Payable P45,000 P9,000 Total P54,000 Gift Tax of Clifford P100k@30% = P30,000

Mrs.Macariola Donation to a Relative P400,000 (50,000) 240,000 590,000

Total

P19,400 (3,600) P15,800

P69,800

P6.10 ------ (For Estate Tax)

TRUE OR FALSE 1. TRUE 2. TRUE 3. FALSE 4. TRUE 5. TRUE 6. TRUE MULTIPLE CHOICE 1. A 2. A 3. C 4. C 5. B 6. D 7. D 8. D 9. D 10. C

7. 8. 9. 10. 11. 12.

FALSE TRUE FALSE FALSE TRUE FALSE

13. 14. 15. 16. 17. 18.

FALSE FALSE FALSE FALSE FALSE FALSE

19. 20. 21. 22. 23. 24.

FALSE FALSE FALSE FALSE FALSE TRUE

25. 26. 27. 28. 29. 30.

TRUE TRUE FALSE TRUE FALSE FALSE

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

D B C D B D A B C D

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

C A D C C D C D B B

31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

C D A B D C B D D A

41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

B A A C B B D D A C

Supporting computation: No. 18. If the sale is considered fictitious, the entire value at the date of sale is subject to donor’s tax. No. 21. Letter “a” – onerous transfer Letter “b” - To be considered valid donation, the renunciation should be specifically and categorically done in favor of identified heir(s) to the exclusion or disadvantage of the other co-heir(s) in the hereditary estate. Letter “c” – gratuitous transfer, subject to donor’s tax No. 24 . Donation to Gross Gifts (2M/2) /2 Less Dowry Net taxable gift

26 |

Pedro P500,000 (10,000) P490,000

Clara P500,000 P500,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

No. 27 .

Gross Gifts (5M/2) Less Dowry Net taxable gift

DONEE Son D. in Law P2,500,000 (10,000) P2,490,000 -

No. 31-33 . NG (3/1) Tax Due (P25,000 x 2%)

Husband 125,000 P500

Wife 125,000 P500

GG (5/1) Dowry PNG 3/1 NG

P100,000 (10,000) 125,000 P215,000

P100,000 (10,000) 125,000 P215,000

P2,600 (500) P2,100

P2,600 (500) P2,100

Tax Due Tax Paid 3/1 D.T. Payable GG (7/1) PNG 3/1 and 5/1 TNG Tax Due Total Taxes Paid 7/1

100,000 100,000 215,000 215,000 P315,000 P315,000 6,600 6,600 P13,200

No. 38 . Taxable gift Tax Due Tax Credit P4,500 vs. (200/300 x P6,000=P4,000) D.T.Pyable

P300,000 P6,000 (4,000) P2,000

CHAPTER 7 – BUSINESS TAXES MULTIPLE CHOICE 1. A 7. B 13. D 19. C 25. A* 2. D 8. C 14. C 20. D 26. D 3. D 9. D 15. B 21. D 27. C** 4. D 10. C 16. C 22. A 28. A 5. D 11. A 17. A 23. D 29. A 6. C 12. C 18. D 24. C 30. C * The end-useR (person using the communication facility is the one liable for OCT, not the communication company.

27 |

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

**3% CCT is applicable only to domestic carriers transporting passengers by land, not by air or sea.

CHAPTER 8 – VALUE ADDED TAX ERRATUM:  Page 257, Question#2 of Illustration 18 Case B. Change the following Question2: 

Answer: P108,000

change to P372,000. INPUT VAT Transfer costs (From BOC to the importer’s warehouse in Isabela)(P6,000,000 x 5%) x 12%

(300,000) (36,000)

Page 258, Case B of Illustration 19 . Change the following data:



Freshko, a manufacturer of sardines has the following data for the month of June: Sales, sardines, (net)

P12,000,000

Change to P10,000,000

PROBLEM SOLVING P8.1 Case A Case B Case C Case D

E E E V

P8.2 Case A Case B Case C Case D

X X V V

Case E Case F Case G Case H

V X V (0%) V

Case I Case J

V X

P8.3 a) b) c) d)

nil Vat Payable = P134,400 x 3/28 = P14,400 Vat Payable = OV P201,600 x 3/28 – Input Vat P14,400 = P7,200 nil

P8.4 Cash Sales Sales on account Transactions deemed sale (22,400+16,800+19,040+8,960) Total sales subject to vat x Output Vat Less: Input vat (P291,200 x 3/28) Vat Payable

P660,800 246,400 67,200 P974,400 3/28 P104,400 (31,200) P73,200

P8.5 OUTPUT:

28 |

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Sales (P8M – 400,000) x 12% Sales from consignment (March and Feb.) (20+10) x P10,000 x 12% Transactions deemed sales January 8 consignment (20 x P10,000) x 12% Goods withdrawn Goods taken as payment to creditors INPUT VAT Purchase of goods, supplies, freight/insurance) Capital goods (P1,100,000 x 12%) / 48 mos. VAT PAYABLE

P912,000 36,000 24,000 6,000 3,600

P981,600

82,080 2,750

(84,830) P896,770

P8.6 Sale of school supplies P1,680,000 Sale of gift items 1,008,000 Sales subject to output vat x Output Vat Less:  Input vat on purchases directly attributable to vatable sales (Purchase of school supplies and gift items) P1,344,000 x 3/28 P144,000  Input vat on purchases attributable to vatable and nonvatable sales (Purchase of computers) P448,000 x 3/28 x (2,400/3,600)** P32,000  Purchase of office supplies used in vatable and nonvatable transactions from non-vat registered suppliers nil Vat Payable **Total Vatable Sales net of vat = P2,400,000 Non-vatable sales = P1,200,000 Total Sales, net (vatable and non-vatable) = P3,600,000

P2,688,000 3/28 P288,000

(176,000) P112,000

P8.7

P8.8

Output Vat (P896,000 x 3/28) Less: Input vat

P96,000

 P224,000 x 3/28  P112,000 x 3/28 x 80%  P2,240 x 3/28 x 80% Vat Payable

(24,000) (9,600) (192) P62,208

Note: The input vat on capital goods is not amortized because the acquisition cost is not more than P1M. The ratio of vatable sales to total sales = 80%

Assume amounts are vat inclusive (a) Total Input Vat (P374,000 + 69,848 + 154,000 + 55,000) x 3/28 =

P69,948

(b) Output vat (P330,000 + P274,996) x 3/28 Less: Input vat (P374,000 + 69,848 + 154,000) x 3/28 Vat Payable

29 |

P64,821 (64,055) P766

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Note: Sale to export oriented enterprise is considered export sale subject to 0% vat only if more than 70% of its annual production is actually exported

P8.9 (a) P28,800 (b) P12,600 Output Vat (P350,000 x 12%) Less:  Input vat on importation: CIF (cost, insurance, freight) value Charges/expenses incurred in claiming the goods: Wharfage Arrastre Customs duty Brokerage fee and documentary stamps Facilitation expense Marine cargo insurance Total x  Input vat on Freight from customs to warehouse Vat Payable

P42,000 P229,195 1,540 2,295 4,090 330 2,550 P240,000 12%

(28,800) (600) P12,600

P8.10 (a) 1st Quarter

Output Vat (P3M x 12%) INPUT VAT: Purchases (P1.2M x 12%) Purchase of machinery (P2.5M x 12%) / 36 x 3mos. Unused input vat as of end of 2014 Vat Payable

P360,000 (144,000) (24,500) (125,000) P66,500

(b) 2nd Quarter

Output Vat (4.8M x 12%) Input Vat Purchases (P3M x 12%) Unused input vat on capital goods (P2.5M x 12%-24,500) Excess Input vat

P576,000 (360,000) (275,500) (P59,50 0)

P 8.11 Output vat (P336,000 x 12%) Input vat: On purchases (P112,000 x 3/28) Transitional input vat: Higher between 2% of beg. Invty vs. P10,000 Vat Payable

P40,320 (12,000) (10,000) P18,320

P8.12 (a) P3,400 (b) P80,000 Output vat (P800,000 x 12%)

30 |

P96,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Less: Input Vat Presumptive I.V (P85,000 x 4%) Purchased of olive oil (P67,200 x 3/28) Purchased of can containers (P25,000 x 12%)) Payments for paper labels (P12,000 x 12%) Purchased of cardboard for boxes (P8,960 x 3/28) Payments for hauling services Vat Payable

(3,400) (7,200) (3,000) (1,440) (960) nil P80,000

P 8.13 Output vat (672,000 x 3/28) Less: Input Vat Pres. Input vat on purchased of fruits from farmers @ 4% Purchased of bottles (P22,400 x 3/28) Purchased of can containers (P50,000 x 12%) Payments for paper labels (P5,600 x 3/28) Purchased of cardboard for boxes (P3,360 x 3/28) Payments for hauling services (P60,000 x 12%) Vat Payable

P72,000 (8,000) (2,400) (6,000) (600) (360) (7,200) P47,440

P 8.14 Subject to Value Added Tax Hotel rooms (P1.8M x 12%) Dining Hall: Sale of food and refreshments (P2.2M x 12%) Sale of wine, beer and liquor (P950,000 x 12%) Other revenues (P700,000 x 12%) Subject to Percentage Tax (Amusement Tax) Disco: Sale of food and refreshments (P1.6M x 18%) Sale of wine, beer and liquor (P1.2M x 18%) TOTAL BUSINESS TAXES

P216,000 264,000 114,000 84,000

288,000 216,000 P1,182,00 0

P 8.15 OUTPUT VAT based on collections (15M + 10M + 5M) INPUT VAT on purchases from: Alpha (P12M – 1.2M) x 12% Bravo (non-vat reg.)

Charlie (P4M – 1M) x 12% Delta (P2M x 12%) Vat Payable

31 |

P3,600,000 (1,296,000) (360,000) (240,000) P1,704,00

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

0

P 8.16 Output vat ((P4M – 2.5M) x 12% Less: input vat (P800,000 x 12%) Vat Payable

P180,000 (96,000) P84,000

P8.17 Ratio of Initial Payment over Selling Price: Lot A = 50/250 = 20% ; Installment Sale Lot B = 70/200 = 35%; Deferred Sale; Treated as Cash Sale Lot C = 60/300 = 20%; Installment Sale Nov. 2015 Lot A: P25,000 x 12%; P25,000 x 12% P3,000 Lot B: P200,000 x 12% 24,000 Lot C: P40,000 x 12%; P20,000 x 12% 4,800 Vat Payable P31,800

Dec. 2015 P3,000 2,400 P5,400

P8.18 a) b)

Output vat September 2015 = P3M x 12% = P360,000 The sale is a Deferred sale. Ratio of initial payments over SP is 30%. Output vat January 2016 = P0

P 8.19 Room charges Laundry services Food and beverages Corkage Handling charges for providing telephone, telex, cable or fax services Cake shop sales Total Vat rate Output Vat for the month TRUE OR FALSE SET A 1. T 2. F 3. F 4. T 5. T SET B 1. T 2. T 3. T 4. F 5. F MULTIPLE CHOICE 1. D 2. C 3. A

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P1,000,000 25,000 1,500,000 15,000 4,500 80,000 P2,624,500 12% P314,940

6. 7. 8. 9. 10.

F F F T T

11. 12. 13. 14. 15.

F F F F F

16. 17. 18. 19. 20.

T F F T T

21. 22. 23. 24. 25

F F T F F

6. 7. 8. 9. 10.

F F F T F

11. 12. 13. 14. 15.

F F T F T

16. 17. 18. 19. 20.

T T T F F

21. 22. 23. 24. 25

T T T T F

21. 22. 23.

C A C

41. 42. 43.

B C D

61. 62. 63.

B B C

81. 82. 83.

D A B

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

D D D D D A C C A A D C C A D D D

24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

C D C D B C B A D A B B B B B C A

44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

D B D D C C D B C B D D C A B C A

64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

D A C B D A D D A D B C D C D C B

84. 85. 86. 87. 88. 89. 90.

D D B C D C D

Supporting Computations/explanations: No. 12 “III” is exempt only if contribution per member is not more than P15,000. No. 20 Output Vat (P2,805,500 +P1,524,000) x 12% P519,540 Input vat (P1,102,200+P1,012,500) x 12% (253,746) Vat Payable P265,780 No. 21 Output Vat, 3rd quarter (P150,000 x 12%) Input vat, 3rd quarter (P120,000 x 12%) Deferred input vat – previous quarter Vat Payable (Carry-over)

P18,000 (14,400) (6,000) (P2,400)

No. 37 AR, July 1 Billings, July-Sept. AR, Sept. 30 Collections Output vat @ 12% Input vat on purchases @ 12% Vat Payable

P180,000 850,000 (120,000) P910,000 109,200 (57,600) P51,600

Output vat (P5.5M x 12%) Input vat on materials Vat Payable September 2014

P660,000 (180,000) P480,000

No. 38

No. 39 Output vat (P10M x 12%) Input vat on materials Input vat on capital goods (P3Mx12%) /60 mos. Vat Payable June 30, 2014

P1,200,000 (480,000) (36,000) P684,000

No. 41

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Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Sales, shares held as inventory Cos of shares, held as inventory Gross income Vat rate Output vat Les: Input vat Supplies expense Rent expense Vat payable

P5,000,000 (2,000,000) 3,000,000 12% P360,000 12,000 24,000

(36,000) P324,000

No. 49 Domestic sales (P600,000 x 12%) Add: Transaction deemed sales Jan. 4 consignment (P200,000 x 12%) Goods consumed on Fe. 27 (P50,000 x 12%) Property dividends (P150,000 x 12%) Total Output Vat

P72,000 24,000 6,000 18,000 P120,000

No. 66 & 67 Output vat (P592,480 x 3/28) Less: Input Vat Purchases of goods (P100,000 x 12%) Purchases of services (P20,000 x 12%) Transitional input vat VAT Payable

P63,480 P12,000 2,400 4,800

(19,200) P44,280

No. 72 Output Vat for October 2014 = P3M x 12 = P360,000  Ratio of Initial Pay’t over Gross S.P. = P900,000/P3,000,000 = 30%  If initial payment is more than 25% of Selling Price, the sale is classified as Deferred Sale which is treated as Cash Sale. Therefore, the entire output vat is due on the month of sale. No. 73 Output Vat for 2015 = P0;

The entire output vat was paid in 2014

No. 74 Downpayment 1st installment payment Total (vat inclusive) Less: VAT (P224,000 x 3/28) Initial Payment (exclusive of vat) Divide by contract Price (P1,120,000 x 3/28) Ratio of Initial Payment over SP Output vat for 2014 (P200,000 x 12%)

P112,000 112,000 224,000 (24,000) P200,000 1,000,000 20% P24,000

No. 75

VAT ON CASH SALE: (ZV is higher than SP) (P600,000 x 12%) VAT ON DEFERRED SALE: (Ratio of Initial payment over SP  25% (Not qualifying under installment method) (Treated as cash sale; SP is higher than FMV)

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P72,000 36,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

[(P336,000/1.12) x 12%] TOTAL OUTPUT VAT

P108,000

No. 78 and 79 Output vat (P336,000 x 3/28) Input vat (56,000 + 11,200) x 3/28 x 300/500 Vat Payable

P36,000 (4,320) P31,680

No. 80 OUTPUT VAT (P896,000 x 3/28) INPUT VAT Purchases of goods, vat business, vat included (P224,000 x 3/28) MIXED Transactions: Purchases of supplies, for vat & non vat business [(112,000 x 3/28) x (800,000/1,000,000)] Purchase of depreciable asset, for use in vat and non vat business [(P2,240 x 3/28) x (800,000/1,000,000)] VAT PAYABLE

P96,000 (24,000)

(9,792)

P62,208

No. 81 and 82 OUTPUT VAT Domestic sales (P330,000 + P274,996) x 3/28 Export sales (zero rated) INPUT VAT Purchases of goods, supplies and services for domestic sales and for export (374,000 + 69,848 + 154,000 + 55,000) x 3/28 Vat Payable

P64,821 0 (69,948) (P5,127)

No. 83 Raw Materials (P560,000 x 3/28) x 400,000/1M Supplies (P448,000 x 3/28) x 400,000/1M Equipment (P300,000 x 12% x 400,000/1M) INPUT VAT ATTRIBUTED TO EXPORT SALES

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P24,000 19,200 14,400 P57,600

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

CHAPTER 9 – OTHER PERCENTAGE TAXES TRUE OR FALSE-SET A 1. F 6. F 2. T 7. F 3. T 8. T 4. F 9. T 5. F 10. F TRUE OR FALSE-SET B 1. T 6. F 2. T 7. F 3. F 8. T 4. T 9. F 5. T 10. F MODIFIED IDENTIFICATION 1. A 6. C 2. A 7. A 3. E 8. A 4. C 9. C 5. C 10. C MULTIPLE CHOICE 1. C 21. -----2. D 22. A 3. D 23. B 4. C 24. D 5. A 25. B 6. A 26. C 7. D 27. B 8. A 28. C 9. A 29. C 10. C 30. A 11. D 31. B 12. A 32. D 13. B 33. D 14. C 34. D 15. D 35. D 16. B 36. A 17. B 37. A 18. D 38. A 19. A 39. D 20. B 40. A

11. 12. 13. 14. 15.

T F F T T

16. 17. 18. 19. 20.

T F (False, should be 20 days) F T F

11. 12. 13. 14. 15.

T F F T T

16. 17. 18. 19. 20.

T T T T T

11. 12. 13. 14. 15.

C A A A A

16. 17. 18. 19. 20.

A C C C C

21. 22. 23. 24. 25.

C A A A B

41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

D C A D D C B C B B A C C C A A ----C C A

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

A D D B C D A A B C** A C C C C D D D C A

81. 82. 83. 84. 85. 86. 87. 88. 89. 90.

C B D D B B A D D D

Supporting Computations: No. 5 (P280,000 + P220,000) x 3% = P15,000

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Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

No. 6

(P50,000 + 100,000 – 75,000) x 3% = P2,250

No. 7 Gross receipts (refer to #6) x vat rate Output vat Input vat (P11,200 x 3/28) Vat Payable No. 16 No. 17 No. 18 No. 22 No. 22 No. 26 No. 27 No. 30 No. 34

P75,000 12% P9,000 (1,200) P7,800

P6.5M x 12% = P780,000 P660,00 x 3% = P19,800 (P400,000 + P100,000) x 12% = P60,000 P10M x 2.5% = P250,000 P10M x 1.5% = P150,000 (P10M x 40%) 3% = P120,000 (P10M – P6M) X 30% = P1,800,000 Subject to vat, not franchise tax AR, beg. Revenues (P4M + P1M) AR, end Gross receipts Vat rate Business tax due

P600,000 5,000,000 (960,000) P4,640,000 12% P556,800

No. 35 Covered by the Franchise AR, beg. Revenues AR, end Gross receipts Franchise tax rate Business tax due Total Business Taxes

P600,000 4,000,000 (800,000) P3,800,000 2% P76,000 P176,800

NOT Covered by the Franchise AR, beg. Revenues AR, end Gross receipts Franchise tax rate Business tax due

P---1,000,000 (160,000) P840,000 12% P100,800

No. 42 P3M x 10% = P300,000 No. 34 Output vat (P5M x 12%) Input Vat  P300,000 x 12%  P800,000 x 12% x 5/8 Vat Payable

P600,000 (36,000) (60,000) P504,000

No. 48 OPT% Interest income from lending activities from inst1uments with remaining terms of: Five years and less More than five years

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5,000,000 3,000,000

5% 1%

GRT P250,000 30,000

Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

Dividends & equity shares from subsidiaries Rental income Net trading gains Total Gross Receipts Tax

1,000,000 500,000 300,000

0% 7% 7%

0 35,000 21,000 P336,000

Rentals from safety deposit boxes Net foreign exchange gains Net trading gains from trading of securities Trust fees Dividends from domestic corporations Other service fees Interest income from lending activities from inst1uments with remaining terms of: Five years and less More than five years Total Gross Receipts Tax

P880,000 220,000 660,000 110,000 30,000 220,000

OPT% 7% 7% 7% 7% 0% 7%

GRT P61,600 15,400 46,200 7,700 0 15,400

700,000 800,000

5% 1%

35,000 8,000 P189,300

No. 49

No. 50 Interest income with maturity of less than 5 years (P500,000 x 5%) Rentals (P500,000 x 7%) Net trading loss = none; if net trading gain, tax is 7% Gross receipt tax (GRT)

P25,000 35,000 P60,000

No. 51 Interest income with maturity of less than 5 years (P1M x 5%) Rentals (P500,000 x 7%) Net trading gain [200,000 – (100,000 net trading loss previous month) x 7%] Gross receipt tax (GRT)

P50,000 35,000 7,000 P92,000

No. 52 Interest withheld and paid (P100,000 x 5 years x 1%) Adjusted amount of tax due to pretermination (P100,000 x 5 years x 5%) Tax Payable

P5,000 25,000 P20,000

No. 55 P2M x 10% = P200,000 No. 56 [(P500,000 x 12%)-(300,000x12%)] = P24,000 No. 58 P2M x 2% = P40,000 No. 64 P7.5M x 18% = P1,350,000 No. 65 P5M x 18% = P900,000 No. 66 Not subject to OPT. Gross Receipts > 1,919,500, therefore, JC is subject to vat, not OPT No. 70** WHICH OF THE FOLLOWING IS SUBJECT TO PERCENTAGE TAX? “a” - not subject to percentage tax or any business tax…… Overseas communication into the Philippines. “b” and “d” - subject to vat

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Transfer & Business Taxation(2015 Edition) by Tabag and Garcia

“c” – not world or oriental championship. Subject to 10% OPT No. 75 No. 77 No. 79 No. 80 No. 81

P350,000 x .005 = P1,750 [(P1,500,000 - P1,000,000) x 12] = P60,000 (120,000 – 30,000) x ½ x P30 x 1% = P13,500; Ratio = 45/75 = 60%; IPO rate = 1% (2,000 x P25 x 4% = P2,000; Ratio = 2/75 = 2.67%; IPO rate = 4% (6,000 x P40 x .005% = P1,200

PROBLEM SOLVING Problem I: Gross receipts-passenger operations (P8,000,000 x 3% CCT) Gross receipts cargo operations (P5M x 75% x 12%vat) Rentals (P2M x 12%vat) Total business taxes

P240,000 450,000 240,000 P930,000

Problem II: 1) 3% OPT on vat exempt sales (GR