BASIC PRINCIPLES OF TAXATION
1. Which theory in taxation states that without taxes, a government would be
paralyzed for lack of power to activate and operate it, resulting in its destruction?
a. Power to destroy theory
c. Sumptuary theory
b. Lifeblood theory
d. Symbiotic doctrine
2. Although the power of taxation is basically legislative in character, it is NOT the
function of Congress to
a. Fix with certainty the amount of
taxes.
b. Collect the tax levied under the
law.
c. Identify who should collect the tax.
d. Determine who should be subject to
the tax.
3. Ligaya Educational Foundation, Inc., a stock educational institution organized for
profit, decided to lease for commercial use a 1,500 sq. m. portion of its school. The
school actually, directly, and exclusively use the rents for the maintenance of its
school buildings, including payment of janitorial services. Is the leased portion
subject to real property tax?
a. Yes, since Lualhati is a stock and
for-profit educational institution.
c. No, but it may be subject to income
taxation on the rents it receives.
b. No, since the school actually,
directly, and exclusively used the
rents for educational purposes.
d. Yes, since the leased portion is
not actually, directly, and
exclusively used for educational
purposes.
INCOME TAXATION
4. C. Lee, Chinese national, arrived in the Philippines on January 1, 2012 to visit
his Filipina paramour. He planned to stay in the country until December 31, 2016,
by which time he would go back to his legal wife and family in China. C. Lee
derived income during his stay here in the Philippines. For the taxable year 2012,
C. Lee shall be classified as a:
a. Resident alien
b. Non-resident alien engaged in trade
or business in the Philippines
c. Non-resident alien not engaged in
trade or business in the Philippines
d. Special alien employee
5. C.Siw, Inc., a Philippine corporation, sold through the local stock exchange
10,000 PLDT shares that it bought 2 years ago. C. Siw sold the shares for P2 million
and realized a net gain of P200,000. How shall it pay tax on the transaction?
a. It shall declare a P2 million gross income in its income tax return, deducting its
cost of acquisition as an expense.
b. It shall report the P200,000 in its corporate income tax return adjusted by the
holding period.
c. It shall pay 5% tax on the first P100,000 of the P200,000 and 10% tax on the
remaining P100,000.
d. It shall pay a tax of one-half of 1% of the P2 million gross sales.
6. Winterfell, Inc., bought a parcel of land in 2015 for P7 million as part of its
inventory of real properties. In 2017, it sold the land for P12 million which was its
zonal valuation. In the same year, it incurred a loss of P6 million for selling another
parcel of land in its inventory. These were the only transactions it had in its real
estate business. Which of the following is the applicable tax treatment?
a. Winterfell shall be subject to a tax of 6% of P12 million.
b. Winterfell could deduct its P6 million loss from its P5 million gain.
c. Winterfell’s gain of P5 million shall be subject to the holding period.
d. Winterfell's P6 million loss could not be deducted from its P5 million gain.
7. In 2017, Alice, a single wife with 2 children, earned P500,000 as income from her
beauty parlor and received P250,000 as Christmas gift from her aunt. She had no
other receipts for the year. She spent P150,000 for the operation of her beauty
parlor. For tax purposes, her gross income for 2017 is
a.
P750,000
b.
P500,000
c.
P350,000
d. P600,000
8. Assuming the same facts in the immediately preceding number, except at the
year 2018, how much is the personal exemptions for income tax purposes may
Alice claim?
a. P 100,000
b. P 50,000
c. P 175,000
d. 0
9. Which of the following expenses may be deducted from gross compensation
income?
a. Depreciation of permanent assets
b. Premium payments on health and/or hospitalization insurance
c. Bad debts written off
d. Optional standard deduction
10. Which of the following taxes may be deducted from gross income?
a. Percentage tax on sale of listed stock
b. Business permit fee paid to the city government
c. Income tax
d. Tax on interest on bank deposit
11. Which of the following individual taxpayers may claim basic and additional
personal exemptions for income tax purposes?
a. Non-resident aliens engaged in trade or business in the Philippines, in the
absence of reciprocity
b. Non-resident aliens not engaged in trade or business in the Philippines
c. Both (a) and (b)
d. Neither (a) nor (b)
12. William Sid works as financial consultant in an oil firm in Dubai. Aside from his
salary thereat, he also maintains a 10-door apartment in Manila which he inherited
from his parents when he was already married. On the other hand, Wilma, his wife,
is employed as a loan officer at a local bank. Data pertaining to their dependents
appear below for the taxable year 2017:
 Anton - Son who turned 23 on April 1, 2017; incapable of self-support due to loss
of both legs in an accident;
 Bunny - 21-year-old daughter who is taking up culinary arts in Paris, France;
 Charlie - 15-year old adulterous son of Harry living with the couple;
 Dina - 12-year old child who died from a vehicular accident on January 1, 2017;
and
 Evan - 80-year old father of Wilma, supported by her and living with the couple.
The basic and additional personal exemptions of Harry for the taxable year 2017
amounts to:
a.
P50,000
respectively
and
P100,000,
c. P50,000 and P0, respectively
d. P0 and P0, respectively
b. P50,000 and P75,000, respectively
13. Assuming the same facts above, the basic and additional personal exemptions
of Wilma for the taxable year 2019 amounts to:
a. P50,000 and P100,000, respectively
c. P50,000 and P0, respectively
b. P50,000 and P75,000, respectively
d. P0 and P0, respectively
14. Inday is a resident citizen of the Philippines. Data for a year:
Gross income from business
Royalty from books
Gain on direct sale to buyer of shares
of stock of a domestic corporation held
as capital asset
Loss on sale of land in the Philippines
held as capital asset with cost of
P1,500,000 when the
zonal
value is P1,200,000
Business Expenses
P 700,000
40,000
70,000
500,000
300,000
For the year 2017, how much is the total income tax expense for the year?
a.
P177,500
c. P159,500
b.
P80,000
d. P156,000
Gross Income from Business
700,000
Less: Business Expense
300,000
Personal Exemptions
50,000
Net Taxable income
350,000
350,000
Tabular Schedule:
1st 250,000 Tax is
50,000
Excess of 250,000 - 350,000 = 100,000 x 30%
30,000
Capital Gains Tax on Shares (70,000 x 5%)
3,500
Royalty Income
4,000
(40,000 x 10%)
Loss on Sale (Zonal Value 1.2 x 6%)
72,000
Total Income Tax Expense
159,500
15. Mercy is a citizen and resident of the Philippines. She had a compensation
income (net of exclusions) of P200,000 and a net income from business of
P700,000 for a year. She made quarterly income tax payments amounting to
P237,000 and her employer withheld P25,000 on her compensation income. The
income tax payable (refundable) for the year is:
a. (P25,000)
P237,000
c. (P42,000) b.
d. (P37,500)
Compensation Income
200,000
Net Income from Business
Total Income
700,000
900,000
Basic Exemptions
(50,000)
Taxable Income
1st 500,000 Tax
Excess of 500,000- 850,000 x 32%
Total Tax Due
850,000
125,000
112,000
237,000
Less: Taxes Payments
Quarterly Payments
237,000
Compensation CWT
25,000 262,000
Refundable /Creditable Tax
(25,000)
16. EMT has the following data on his passive income earned during the year 2016:
Philippines
Abroad
Interest income from bank deposits
45,000
Interest income from FCDU
25,000
50,000
Royalties from books
-0-
20,000
Royalties from computer programs
30,000
20,000
Dividend income from a domestic corporation
40,000
27,000
Dividend income from a foreign corporation
13,000
33,000
22,000
How much is the final withholding tax if the taxpayer is a resident citizen?
a.
P21,450
c. P17,700
b.
P20,400
d. P36,250
Philippines
Interest income from bank deposits
Interest income from FCDU
45,000
50,000
x 20%
x 7.5%
=
=
9,000
3,750
Royalties from books
20,000
x 10%
=
2,000
Royalties from computer programs
20,000
x 20%
=
4,000
Dividend income from a domestic corporation
27,000
x 10%
Total Withholding Taxes
=
2,700
21,450
17. How much is the final withholding tax if the taxpayer is a nonresident citizen?
a. P21,450
c. P17,700
b.
P20,400
d. P36,250
Philippines
Interest income from bank deposits
45,000
x 20%
=
9,000
Royalties from books
20,000
x 10%
=
2,000
Royalties from computer programs
20,000
x 20%
=
4,000
Dividend income from a domestic corporation
27,000
x 10%
=
Total Withholding Taxes
2,700
17,700
18. Doging is an employee of a firm in Quezon City. He is supporting his 4-year-old
brother who is living with him. Data on his compensation income for the year
shows:
Regular Salary
P 240,000
Thirteenth month pay
20,000
Quarterly bonus
40,000
Payroll Deductions: SSS Premiums
3,000
Philhealth contributions
1,200
Pagibig contributions
4,000
Labor union dues
1,000
Premium payments on hospitalization insurance
3,000
Payment of loan
5,000
How much is the taxable income?
a.
P218,000
b.
P207,800
Regular Salary
c. P208,400
d. P260,800
P 240,000
Total Income
240,000
Less: Basic Exemption
(50,000)
SSS Premiums
Philhealth contributions
Pagibig contributions
Labor union dues
Net Taxable Income
(3,000)
(1,200)
(4,000)
(1,000)
180,800 +30,000 if old laws =
218,000
19. The Improperly Accumulated Earnings Tax (IAET) is imposed on improperly
accumulated taxable income earned starting January 1, 1998 by domestic
corporations as defined under the Tax Code and which are classified as closely-held
corporations at the rate of:
a.
b.
twenty percent (20%). c. ten percent (10%).
fifteen percent (15%). d. five percent (5%).
20.
First statement: Once the profits have been subjected to improperly accumulated
earnings tax, the same shall no longer be subject to the same tax in later years even
if not declared as dividends.
Second statement: Profits which have been subjected to improperly accumulated
earnings tax when finally declared as dividends shall be subject to tax on dividends.
a. Both statements are true
b. Both statements are false
c. Only the first statement is true
d. Only the second statement is true
21. Mistah, single and sales executive of a leading pharmaceutical firm (RiteMed),
received in 2016 the following from his employer:
Salary, net of P267,000 withholding tax
Allowances and benefits received:
P 683,000
Rent paid by RiteMed on the house
which
Mistah
occupies
for
residential purposes, net of 5%
withholding
Entertainment allowance subject to
liquidation (P75,000 was duly
receipted in the name of RiteMed
and used to entertain RiteMed’s
customers and the balance of
P25,000 was used to purchase a
late model mobile phone for the
personal use of Mistah)
Reimbursement of entertainment
expenses paid by Mistah (P17,500
was used to entertain Mistah’s
boyhood pals and the balance of
P22,500 was used to promote
RiteMed’s businesses.)
Fixed
yearly
allowance
for
entertainment
129,200
100,000
40,000
85,000
The fringe benefit tax is:
a. P50,400
b. P52,000
c. P84,000
Gross Rent on Housing 129,200/95%
d. P92,000
= 136,000 x 50% =
68,000
Expense Account (CP & Pal Exp) 25,000 + 17500
42,500
Total
110,500
110,500/68%
162,500
162,500 x 32%
52,000
22. Continuing number 21, the income tax payable by Mistah is:
a. P13,200
b. P27,760
c. P29,200
Compensation (683,000 + 267,000)
d. P43,360
950,000
Fixed Year Allowance
85,000
Personal Exemptions
(50,000)
Taxable Income
985,000
Income Tax per Tabular (OLD LAW)
up to 500,000
125,000
Excess (485,000 x 32%)
155,200
Withholding Tax
(267,000)
Income Tax Payable
13,200
23. The following fringe benefits were given by an employer to its employees for the
quarter ending September 30, 2016:
De minimis benefits (not exceeding
the maximum)
Reimbursed expense of rank and file
employees
Housing benefits to managers and
supervisors (Representing total rents)
The fringe benefit tax payable for the quarter is:
a. P160, 000
b. P320, 000
c. P442, 353
d. P502, 353
P 200,000
400,000
680,000
Housing Benefits to Manager
680,000 x 50% = 340,000 / 68% x 32% = 160,000
24. The employer shall file a remittance return of the final tax on fringe
benefit and pay the tax withheld within:
a. 5 days from the close of each month.
b. 10 days from the close of each month.
c. 10 days from the close of each fiscal quarter.
d. 10 days from the close of each calendar quarter
25. Which of the following income earners is required to file income tax
return?
a. Minimum wage earners
b. Non-resident alien not engaged in business
c. An individual with respect to pure compensation income deriving from
such sources within the Philippines, the income tax on which has been
correctly withheld and that an individual deriving compensation from one
employer at any time during the taxable year
d. General professional partnership
26. Which of the following fringe benefit is not subject to fringe benefit tax?
a. Housing benefit
b. Expense account
c. De minimis benefit
d. Vehicle benefit
27. In the case of a taxpayer, only the following percentages of the gain or
loss recognized upon the sale or exchange of a capital asset shall be taken
into account in computing net capital gain, net capital loss and net income.
I. Statement 1 One hundred percent (100%) if the capital asset has been
held for not more than twelve (12) months by a taxpayer.
II. Statement 2 Fifty percent (50%) if the capital asset has been held for
more than twelve (12) months by a taxpayer.
a. True, true
c. False, false
b. True, false
d. False, true
28. A, worked for a manufacturing firm but due to business reverses, the
firm offered a voluntary redundancy program in order to reduce overhead
expenses. Under the program, an employee who offered to resign would be
given separation pay equivalent to his 3 months basic salary for every year
of service. A accepted the offer and received P800,000 as separation pay
under the program. After all employees who accepted the offer were paid,
the firm found its overhead still excessive. Hence, it adopted another
program, where various unprofitable departments were closed. As a result, B
was separated from the service. B also received P800,000 as separation pay.
At the time of separation both A and B have rendered at least 10 years of
service but A was 55 years old while B was only 45 years old. As a result,
a. Both amounts are exempt from income tax
b. Both amounts are subject to income tax
c. Only Mr. A is subject to income tax
d. Only Mr. B is subject to income tax
29. Passive income includes income derived from an activity in which the
earner does not have any substantial participation. This type of income is
a. Usually subject to a final tax.
b. Exempt from income taxation.
c. Taxable only if earned by a citizen.
d. Included in the income tax return
30. Which of the following items is not part of gross income to be reported in
the income tax return?
a. Increase in value of land
b. Gambling winnings
c. Prize of P10,000
d. Gain from sale of store’s air conditioner
31. Mr. Yu leased his lot to Mr. Uy. The contract calls for Mr. Uy to construct a
house which would serve as the residence of the latter, the ownership
thereof to be vested in Mr. Yu after the expiration of the lease. When the
house was completely constructed, the remaining term of the lease was 10
years. The residential house had an estimated useful life of 15 years. What
is the tax implication of the leasehold improvement?
a. Mr. Yu derives taxable income on the improvement; Mr. Uy can claim
depreciation expense as a deduction from gross income.
b. Mr. Yu derives taxable income on the improvement; Mr. Uy
cannot claim depreciation expense as a deduction from gross
income.
c. Mr. Yu does not derive taxable income on the improvement; Mr. Uy cannot
claim depreciation expense as a deduction from gross income.
d. Mr. Yu does not derive taxable income on the improvement; Mr. Uy can
claim depreciation expense as a deduction from gross income.
32. Assume the same facts in the immediately preceding number, except
that at the time of the completion of the residential house, the remaining
term of the lease was 15 years while the useful life of the house was 10
years. What is the tax implication of the leasehold improvement?
a. Mr. Yu derives taxable income on the improvement; Mr. Uy can claim
depreciation expense as a deduction from gross income.
b. Mr. Yu derives taxable income on the improvement; Mr. Uy cannot claim
depreciation expense as a deduction from gross income.
c. Mr. Yu does not derive taxable income on the improvement; Mr.
Uy cannot claim depreciation expense as a deduction from gross
income.
d. Mr. Yu does not derive taxable income on the improvement; Mr. Uy can
claim depreciation expense as a deduction from gross income.
33. Which of the following items of interest expense may be deducted from
gross income?
a. Interest on corporation’s preferred stock
b. Interest on loan for construction of a rest house
c. Interest for delinquency in the payment of percentage tax
d. Interest on bank loan to finance petroleum exploration
34. Who among the following taxpayers may not claim a tax credit or
deduction on income tax paid to foreign countries?
a. Resident citizens
b. Resident aliens
c. Domestic corporations
d. General Co-Partnerships
35. Which of the following transactions is exempt from capital gains tax?
a. The sale of the principal residence of the taxpayer where the entire
proceeds is used to purchase a vacation lot at Tagaytay
b. The sale of a beach lot of the taxpayer where the entire proceeds is used
to construct his principal residence
c. The sale of the principal residence of the taxpayer for the second time in
ten (10) years to purchase another principal residence
d. None of the choices
36. Which of the following transactions is treated as a capital asset
transaction for income tax purposes?
a. Sale of a residential lot by a subdivision developer
b. Sale of a used delivery truck by a retailing company
c. Liquidation of partnership business
d. Sale of shares of stock by a dealer in securities
37. Which of the following is not an attribute of a deferred-payment sale?
a. The initial payments exceed 25% of the selling price in the year of sale.
b. The obligations or promissory notes received by the vendor from the
vendee are considered as equivalent to cash.
c. The tax may be paid in installments.
d. The sale involves both real and personal property.
38. Determine which of the following trusts shall the taxable income be
consolidated and the income tax thereon computed on the basis of such
consolidated income?
a. Trust No. 1 and Trust No. 2 have the same grantor and with different
beneficiaries.
b. Trust No. 1 and Trust No. 2 have the same grantor and the same
beneficiary.
c. Trust No. 1 and Trust No. 2 have different grantors and the same
beneficiary.
d. Trust No. 1 and Trust No. 2 have different grantors and the same fiduciary
and beneficiary.
39. The Improperly Accumulated Earnings Tax shall not apply to which of the
following corporations?
a. Banks and other non-bank financial intermediaries
b. Insurance companies
c. Publicly-held corporation
d. All of the choices
TAX REMEDIES
40. Rosalie, a compensation income earner, filed her income tax return for
the taxable year 2013 on March 30, 2014. On May 20, 2017, Rosalie received
an assessment notice and letter of demand covering the taxable year 2013
but the postmark on the envelope shows April 10, 2017. Her return is not a
false and fraudulent return. Can Rosalie raise the defense of prescription?
a. No. The 3 year prescriptive period started to run on April 15,
2014, hence, it has not yet expired on April 10, 2017.
b. Yes. The 3 year prescriptive period started to run on April 15, 2014, hence,
it had already expired by May 20, 2017.
c. No. The prescriptive period started to run on March 30, 2014, hence, the 3
year period expired on April 10, 2017.
d. Yes. Since the 3-year prescriptive period started to run on March 30, 2014,
it already expired by May 20, 2017.
41. On March 30, 2012 Emmett Foods, Inc. received a notice of assessment
and a letter of demand on its April 15, 2009 final adjustment return from the
BIR. Emmett Foods then filed a request for reinvestigation together with the
requisite supporting documents on April 25, 2012. On June 2, 2012, the BIR
issued a final assessment reducing the amount of the tax demanded.
Emmett Foods was satisfied with the reduction, it did not do anything
anymore. On April 15, 2017 the BIR garnished the corporation's bank
deposits to answer for the tax liability. Was the BIR action proper?
a. Yes. The BIR has 5 years from the filing of the protest within which to
collect.
b. Yes. The BIR has 5 years from the issuance of the final
assessment within which to collect.
c. No. The taxpayer did not apply for a compromise.
d. No. Without the taxpayer’s prior authority, the BIR action violated the
Bank Deposit Secrecy Law.
42. Renesmee, Inc. received a notice of assessment and a letter from the
BIR demanding the payment of P3 million pesos in deficiency income taxes
for the taxable year 2015. The financial statements of the company show
that it has been suffering financial reverses from the year 2016 up to the
present. Its asset position shows that it could pay only P500,000.00 which it
offered as a compromise to the BIR. Which among the following may the BIR
require to enable it to enter into a compromise with Renesmee, Inc.?
a. Renesmee must show it has faithfully paid taxes before 2016.
b. Renesmee must promise to pay its deficiency when financially able.
c. Renesmee must waive its right to the secrecy of its bank
deposits.
d. Renesmee must immediately deposit the P500,000 with the BIR.
43. As a rule, within what period must a taxpayer elevate to the Court of Tax
Appeals a denial of his application for refund of income tax overpayment?
a. Within 30 days from receipt of the Commissioner’s denial of his
application for refund.
b. Within 30 days from receipt of the denial which must not exceed
2 years from payment of income tax.
c. Within 2 years from payment of the income taxes sought to be refunded.
d. Within 30 days from receipt of the denial or within two years from
payment.
44. What is the effect on the tax liability of a taxpayer who does not protest
an assessment for deficiency taxes?
a. The taxpayer may appeal his liability to the CTA since the assessment is a
final decision of the Commissioner on the matter.
b. The BIR could already enforce the collection of the taxpayer's liability if it
could secure authority from the CTA.
c. The taxpayer's liability becomes fixed and subject to collection as
the assessment becomes final and collectible.
d. The taxpayer's liability remains suspended for 180 days from the
expiration of the period to protest
45. The taxpayer seasonably filed his protest together with all the
supporting documents. It is already July 31, 2017, or 180 days from
submission of the protest but the BIR Commissioner has not yet decided his
protest. Desirous of an early resolution of his protested assessment, the
taxpayer should file his appeal to the Court of Tax Appeals not later than
a. August 31, 2017. b. August 30, 2017. c. August 15, 2017. d. August 1,
2017.
46. Where a return was filed, as a general rule, the prescriptive period for
assessment after the date the return was due or was filed, whichever is later,
is within
A. 3 years
C. 7 years
B. 5 years
D. 10 years
47. A compromise for a tax liability on the ground of financial incapacity to
pay shall still involve a payment of tax from the taxpayer at a minimum
compromise rate of
A.
B.
C.
D.
10% of the basic assessed tax
20% of the basic assessed tax
30% of the basic assessed tax
40% of the basic assessed tax
48. For filing a false and fraudulent return, a surcharge is imposed at:
A. 25% as criminal penalty
B.b25% as administrative penalty
C. 50% as criminal penalty
D. 50% as administrative penalty
49. This is not an administrative remedy available to a taxpayer in
connection with collection of taxes.
A. Filing a petition for reconsideration or reinvestigation
B. Filing a claim for tax refund or credit
C. Entering into a compromise
D. Filing a criminal complaint against erring BIR officials or
employees.
50.
Date of payment of tax erroneously paid
April 15, 2009
Date of claim for refund was filed
January 15, 2010
Date decision of denial by the BIR was received
September 15, 2010
Last day to appeal to the CTA is
A. April 15, 2011
2010
C. November 15,
B.January 15, 2011
2010
D.
October 15,