Unit Test Activity

Case 1

The president of the Philippines and the prime minister of japan entered into an executive agreement in respect of a
loan facility to the Philippines from japan whereby it was stipulated that interest on loans granted by private
Japanese financial institution in the Philippines shall not be subject to Philippine income taxes. Is the exemption
valid?

Case 2

A law passed requiring all real property owners to pay real property taxes retroactive 50 years back. The government
is justification is that the power of taxation is unlimited, comprehensive, plenary and supreme. Is the justification
tenable?

Case 3

A law is passed requiring all Filipino income earners to pay an income tax of 80% of their gross income. Is the law
valid?

PRELIM ACTIVITY

Write T if the statement is true and F if the statement is false.

1. A Taxpayer who deliberately admits to declare all of his taxable income is guilty to evasion.

2. The power to tax can reach over into any jurisdiction to seize upon person or property.

3. Salaries of Supreme Court justices and judges of lower court are exempt from income tax.

4. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to a greater
than the tax being collected.

5. Taxes must only be imposed prospectively unless the law provides for its retroactivity.

6. Tax evasion in one year can be offset by paying excessive taxes in the following year.

7. The power of taxation cannot be exercise without a previous constitutional authority.

8. Tax laws should always be aimed at revenue collection.

9. A tax is voluntary donation to the government.

10. The salary of the president of the Philippines is not subject to income tax.

11. The salary of a priest as a chaplain in the Armed Forces of the Philippines is subject to income tax.

12. The income of a non-stock and non-profit educational institution is exempt from income tax.

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13. Non-delegation of the legislative power to tax is both a constitutional and inherent limitation on the power of
taxation.

14. The power to tax is limited to the territorial jurisdiction of the taxing government.

15. The power of tax may include the power to destroy.

16. The test for exemption from real property tax of private educational institutions is its use and not ownership.

17. As a general rule, a tax exemption is an act of liberality which can be revoked by the government.

18. Taxes are paid only by those who are directly benefiting from the government.

19. All revenue bills must originate from the Senate.

20. All laws granting tax exemption must be approved by two-thirds (2/3) votes of all the members of the Congress.

DISCUSSION QUESTION PROBLEM

1. Living quarter and meals. William and Kate, a wealthy couple, hired Yaya , a governess to take her of their only
child who is three (3) years old. Because they want to full attention should be given by Yaya to their child, the
couple required her to stay in their house with free meals and lodging. Is the value of the free meals and lodging
taxable to Yaya ?

2. Free living quarter. Kulas was hired by habang bata pa piggery farm as a caretaker with a monthly salary of
P6,000. To enable him to perform his duties well and will serve as guard at the same time, he was provided with a
small room which he could use as his residence inside the premises of the piggery farm. Is the equivalent value of
the living quarter subject to the 32% fringe benefits tax?

3. De minimis benefits. In your taxation class at the University of San Carlos, Cebu City, you were ask by your
teacher, atty. Chris Malaya, of the following situation case: “Punzalan Company gave its officials and rank-and-file
employees a monthly benefits of one sacks of rice (equivalent to P1,500) each as a means of promoting good well
contentment, an efficiency of its employees. Assuming you are the company accountant, will you subject said
benefit to creditable withholding tax? How about fringe benefits tax? What will be your answer to the question of
atty. Malaya?

MIDTERM ACTIVITY

TRUE OR FALSE

1. All passive incomes are subject to final withholding tax.

2. Husband and wife must file a joint income tax return.

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3. The cash prize received by Pia Wurtzbach as 2016 Miss Universe is subject to final withholding
tax.
4. The cash prize received by Osang Fostanes for winning in X-Factor talent show contest held in
Israel is taxable in the Philippines if she is caregiver in Israel but not registered with the
Philippines Overseas Employment Administrative POEA.
5. The cash prize received by Manny Pacquiao in a boxing fight held in the United States is exempt
from income tax in the Philippines if a tax had already been paid in U.S.
6. For purposes of basic personal exemption, all individual taxpayer have common classification
regardless of their civil status in life.
7. All income within of nonresident not citizens and not engaged in trade or business in the
Philippines are taxable at the rate of 25%.
8. Most of the time, optional standard deduction will yield favorable tax result to a professional
income earner.
9. A business income earner who failed to file quarterly income tax return shall be presumed to have
opted the itemized deduction instead of the optional standard deduction.
10. Optional standard deduction is not allowed on pure compensation income earner.
11. Overseas contract workers(OCWs) are taxable only on income derived from sources within the
Philippines because they are classified as nonresidents Filipinos.
12. Among all classes of individual taxpayer, only Filipino residing in the Philippines are taxable on
income without.
13. Nonresident not citizens who are not engaged in trade or business in the Philippines are subject to
income tax on income within but they do not file income tax on the Philippines.
14. A millionaire child but mentally impaired is a qualified dependent for purpose of additional
personal exemption.
15. A legitimate brother, 16 years old, living with taxpayer, not gainfully employed, unmarried,
dependent upon him for chief support is a qualified dependent for purposes of additional
exemption.s

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Mr. Alcanzo, 16 years old, widower and a retired government employee has the following data during the year:

benefits:

Amount of gratuity pay 500,000

Unutilized leave credits converted into cash 200,000

Length of service on employment 40 years

Mature life insurance : Retirement

Face value 300,000

Amount of premiums paid 120,000

Property acquired thru devise:

Nature of property Coconut land

Area 2 hectares

Market value 850,000

Income during the year 30, 000

Settlement fee received on account of culpa

aquiliana:
Doctor’s fees 5,000

X –ray, CT scan and other laboratory 9,000

Cost of medicine 6,500

Other hospital bills 4,500

Moral damages 30,000

For lost income 20,000

Other income :

Bonus received as coach of football team 20,000

Reward as a tax informer (revenue recovered by the

government is P15 million)
Stock dividend received from a domestic corporation 20,000

Tax refund from income tax paid last year 5,500

Gratification received for returning P 300,000 ‘’lost 10,000

and found’’ cash
‘’Lagay ‘’ received as government employee 36,000

COMPUTE the income tax due

PRE-FINAL ACTIVITY

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TRUE OR FALSE

1. The Philippine Airline is classified as an international carrier because it travels from the Philippines to
other countries in Asia and America.
2. The bank deposit under the expanded foreign currency deposit system is protected by the Law on Secrecy
of Bank Deposits.
3. A non-resident foreign corporation which sells not listed and traded shares of stocks is subject also to the
same tax rate and tax base as a domestic corporation.
4. The penalty on improperly accumulated earnings is 10% of net income.
5. The money reserved by a corporation to pay its loan amortization is not an improperly accumulated
earning.
6. A resident foreign corporation is entitled also to claim 40% optional standard deduction.
7. Interest on peso bank deposit accounts not included in the gross income for purpose of computing 40%
optional standard deduction.
8. A proprietary educational institution is subject to an income tax rate of 10% while a non-stock school is
exempt from income tax.
9. A private educational institution may deduct as expense the cost of constructing a school-building in the
year of its completion instead of capitalizing it.
10. The Philippine Amusement and Gaming Corporation (PAGCOR) is subject to income tax.
11. In income taxation, a business partnership is taxable as a corporation.
12. The applicable tax rate on non-resident foreign corporations is generally the same with the tax rate on
domestic corporations.
13. A corporation is subject to a tax rate of 30% of taxable income but it may instead be subject to a rate of 2%
of gross income.
14. A corporation which has been registered with the BIR in 2012 shall be covered by the minimum corporate
income tax (MCIT) effective January 2015.
15. Proprietary hospitals are exempt from the coverage of the minimum corporate income tax.

COMPREHENSIVE PROBLEM

St. James Academy, Inc. a proprietary educational institution, had the following data in a year.

Income:

Income from tuition fees P 8,300,000

Miscellaneous fee 720,000
Canteen 200,000
Bookstore 140,000
Rent income (net of 5% withholding tax) 45,000
Income of school clinic (used as training ground for nursing students) 36,000
Dividend from a domestic corporation 6,000
Interest on bank deposit (net of tax) 3,200

Expenses:
Salaries of teachers and personnel 3,600,000
Share in the SSS, Philhealth and Pag-ibig contributions 104,000
Depreciation of rental properties 18,000
Rent expense on land 120,000
Depreciation of other facilities 66,000

During the year, the school spent P15 million for the construction of a school building (life is 50 years). The
construction was completed on September 30.

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 The land where the building was constructed is owned by Mr. Santiago, a third person, but being leased to
the school. The remaining term of the lease is 20 years. It is stipulated in the lease contract that at the expiration of
the lease, the ownership of the building will be turned-over to Mr. Santiago without cost to the lessor.

QUESTIONS:

1. How much is the income tax due during the year if the school will capitalize the cost for the construction of
the building?
2. How much is the tax due during the year if the school will claim as expense the entire cost for the
construction of the building?
3. May St. James Academy, Inc. avail of the optional standard deduction ibn computing the income tax?
4. Is St. James Academy, Inc. subject to minimum corporate income tax?
5. Is St. James Academy, Inc. subject to improperly accumulated earnings tax?

FINAL ACTIVITY TRUE OR FALSE

1. Dividends received by a non-resident foreign corporation from domestic corporation are subject to the 15%
final withholding tax, subject to the condition that the country which the non-resident foreign corporation is
domiciled, shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed
to have been paid in the Philippines.
2. Tips received by waiters in restaurant are not subject to income tax because they are actually donations
which are subject to donor’s tax on the customer.
3. Excess of cash advances on travel allowance of employees are taxable to them if not returned to their
employer.
4. The “tax benefit rule” is applicable on tax refund but not on recovery of bad debts previously claimed as
deduction from gross income.
5. The statutory taxpayer (not the person who shoulder the tax burden) is the proper person that has the
personality to claim tax refund of indirect taxes erroneously paid.
6. Representation and travel allowances (RATA) of government officials are subject to income tax.
7. Additional compensation allowance (ACA) given to officials and employees of the government are
considered part of taxable compensation income.
8. Employees of BIR are disqualified as tax informers.
9. First cousins of BIR employees are disqualified to become tax informers.
10. The maximum amount of tax that may be withheld by the BIR on tax informers is P100,000.
11. A revenue examiner of the BIR shall receive a tax informers reward if he discovers anomalous reporting of
business transactions which led to the filling of a tax evasion case ad conviction of the tax evader.
12. Persons cultivating a farm for pleasure, the result of which is continual loss from year to year are regarded
also as farmers.
13. A provision for bad debt which may be claimed as deduction from gross income for purposes of accounting
are deductible also for tax purposes.

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14. P200,000 received by a Filipina in transporting prohibited drugs from the Philippines to other countries as a
drug mule is taxable in the Philippines.
15. A general professional partnership is taxable also as a corporation.
16. Return of capital is not subject to income tax, while income is subject to tax.
17. Under the realization test, stock dividends are not income subject to income tax on the part of the stock
holder, because he merely holds more shares representing the same equity interest in the corporation that
declared the stick dividends.
18. Under the economic benefit test any economic benefit to the employee that increases his network is taxable,
whatever may have been the mode by which it is affected.
19. In a merchandising business, gross income means the total sales, less the cost of good sold, plus any
income from investments and from incidental or outside operations or sources.
20. As a general rule, stock dividends are not part of the gross income of the stock holders because they are
subject to final withholding tax.