Income Taxation - Answer key (6th Edition by Valencia)- Chapter 2

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)SUGGESTED ANSWERS

Chapter 2: Tax Administration

CHAPTER 2

TAX ADMINISTRATIONProblem 2 – 1 TRUE OR FALSE

1. True 2. False – not the BIR, but the Department of Finance3. False – the BIR is responsible to collect national taxes only.4. False – The review shall be made by the Court of Justice.5. True6. True7. False – The Secretary of Justice and the Courts also interprets the provisions of the

Tax Code.8. False – the fact that taxes are self-assessing the BIR assessment is necessary to

ensure the reliability of the ITR.9. False – the BIR or the Government is not allowed by law to appeal to the CTA. (Acting

Collector of customs vs. Court of Appeals, Oct. 31, 1957)

10. True11. False – Appeal to the SC shall be made within 15 days from the receipt of the decision

of the CTA.12. False – the CIR can conduct a jeopardy assessment when there are no accounting

records.13. True14. False – the taxpayer needs to waive first his right on the secrecy of bank deposits

before BIR can inquire into his bank deposits.15. True

Problem 2 – 2 TRUE OR FALSE1. False – there must be a Letter of Authority.2. False – the supporting documents must be submitted to the BIR within 60 days from

the date a protest is filed.3. True4. True5. False – destraint as a tax collection method is applicable only to personal property.6. False – criminal violations already filed in court are not subject to compromise.7. True8. False, collection must be within 5 years 9. True10. False-redemption period is within 1 year from date of auction sale.11. True12. True

Problem 2 – 3 TRUE OR FALSE1. False – there is no need to pay additional registration fee for transfer of business

registration.2. True3. False – the initial bond required for manufacturers and importers of articles subject to

excise tax is P100,000.4. False – informer’s reward is subject to 10% final withholding tax.5. True6. True7. True8. True9. False – Seizure10. False – Forfeiture

3



11. False – not allowed because the second cousin is within the 6th degree of relative by consanguinity.

12. False – collection tax cases filed in courts are subject to compromise.13. True

Problem 2 – 4 Problem 2 – 5 Problem 2 – 61. C 1. B 1. B2. B 2. A 2. A3. B 3. D 3. A4. D 4. C 4. B5. C 5. D 5. D6. C 6. D 6. C7. B 7. C 7. B8. B 8. C 8. A9. C 9. A 9. C10. D 10. A 10. A11. A 11. A12. D 12. A

Problem 2 – 7

Case A: April 15, 2014 - The return, statement or declaration can be modified, changed or amended from within three years from the date of filing as long as no tax investigation has been served to the taxpayer. (Sec. 6(A), NIRC)

Case B: October 20, 2015 - If the tax deficiency is due to simple neglect, the prescriptive period of tax assessment is within 3 years starting from the date of filing the return (Sec. 203, NIRC), or its amendment.

Case C: April 15, 2025 - If the ITR is fraudulent or no tax return was filed, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment at any time within ten (10) years after the discovery of the falsity, fraud or omission. (Sec. 222 (a), NIRC)

Case D: April 15, 2022 - If the ITR is fraudulent or no tax return was filed, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment at any time within ten (10) years after the discovery of the falsity, fraud or omission. (Sec. 222 (a), NIRC)

Case E: No need to appeal. The prescribed period of filing for the refund is already expired. The filing of refund should have been made within two years after the payment of tax or penalty. It was filed within 2 years, one month, and 5 days after the date of erroneous payment, hence, not appealable anymore.

Case F: May 5, 2013. The filing of refund was appropriately made within the 2 year prescribed period. The denial was received on April 5, 2013. The filing of appeal to CTA should be made within 30 days from the receipt of denial from the BIR.

Case G: August 2, 2017. The date of grant for refund was received on August 1, 2012. The refund check (dated July 15, 2012) should be encashed within 5 years from the date the grant for refund was delivered (August 1, 2012). The check should be encashed from August 1, 2012 to August 1, 2017. It will be forfeited on August 2, 2017.

4



Case H: July 31, 2017. For tax credit, the five year prescriptive period should start from the date of issuance. In this case, the date of issuance should be the date of tax credit certificate. The expiry date would therefore start on July 31, 2017.

Case I: August 20, 2011. If the BIR has no response after the submission of supporting documents to serve as evidence for the protest, the last day to appeal to the CTA should be made within 30 days from the lapse of the 180 day period from the submission of the supporting documents.

Computation of days:After January 22, 2011 Days January 9February 28March 31April 30May 31June 30July 21Total number of days as of July 21 180Plus 30 days after the 180 daysJuly 10August 20Total day on August 20 30

Case J: May 4, 2011. The last day to appeal to the CTA should be made within 30 days from the receipt of the denial of the BIR. The 30 days is determined as follows:

Days First denial of the BIR – March 22, 2011 to 2nd request for reconsideration – March 30, 2011 82nd denial of the BIR – April 12, 2011 to May 4, 2011 to complete the 30 day period 22Total days as of May 4, 2011 30

Case K: June 25, 2011. The appeal to CTA should be made within 15 days from date of unfavorable decision from CTA was received (June 10 plus 15 days).

Case L: July 10, 2011. The appeal to SC should be made within 15 days from date of receipts of the unfavorable decision of CTA (June 25 plus 15 days).

Case M: March 1, 2011. Within 1 year from the date of sale.

Problem 2 – 8 BOriginal business registration and renewal of business registration are subject to P500 each. The transfer of registration requires no additional registration fee to be paid by the taxpayer. (Sec. 243, NIRC)

Problem 2 – 9 DAll criminal violation may be compromised except: (a) those already filed in court, or (2) those involving fraud. (Sec. 204 (B), NIRC)

Problem 2 – 10 DIncome tax payable P1,000,000Multiplied by minimum compromise rate due bankruptcy 20%Minimum amount of compromise P 200,000

5



Problem 2 – 11 DAmount of tax liability P150,000Surcharges 25,000Interest 20,000Advertising cost 5,000Price if purchase by the Government P200,000

Problem 2 – 12 D1. Letter C

Actual excise tax on the first 6 months P200,000Multiplied by statutory increase in rate 2Required bonds on the last 6 months P400,000

If after 6 months of operation, the amount of initial bond is less than the amount of the total excise tax paid during the period, the amount of the bond shall be adjusted to twice the tax actually paid for the period. [Sec. 160 (A), NIRC]

2. Not in the choices, P400,000Actual excise tax on the first year applicable to the second year (P200,000 + P250,000) P450,000Less: Excess of bonds over actual excise tax Bonds paid first year (P100,000 + P400,000) P500,000 Actual excise tax first year (450,000) 50,000Net actual amount of bond for the second year P400,000

The bond for the succeeding years of operation shall be based on the actual total excise tax paid during the year immediately preceding the year of operation. [Sec. 160 (B), NIRC]

Problem 2 – 13 CX is not entitled to receive the informer’s reward because being a first cousin, he is B’s (an RDO) relative within the 6th degree of consanguinity.

A public official or government employee or his relative within the 6th degree of consanguinity shall not be entitled to the informer’s reward of 10% based on the tax revenue recovered or P1,000,000. whichever is lower. This informer’s reward, once awarded shall be subject to a final withholding tax of 10%. (Sec. 282, NIRC)

Problem 2 – 14 1. Letter D

Sales price P4,000,000Less: Total amount per assessment P2,500,000

Surcharge (P2,500,000 x 25%) 625,000Interest (P2,500,000 x 20% x 3/12) 125,000 3,250,000

Net amount after public taxes, penalties and interest P 750,000Less: Capital gains tax (P4,000,000 x 6%) P 240,000

DST (P4,000,000 x 1.5%) 60,000Cost of advertising 20,000 320,000

Excess amount to be returned to X P 430,000

2. Letter C

6



Purchase price P4,000,000Add: Interest (P4,000,000 x 15% x 9/12) 450,000Redemption price P4,450,000

The redemption price is comprised of the purchase price plus 15% interest per annum from the date of purchase to the date redemption. (Sec. 214, NIRC)

3. Letter CTotal rent income (P60,000 x 9 months) P540,000Less: Interest expense to redeem the property 450,000Excess income P 90,000

The owner shall not, however, be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption. (Sec. 214, NIRC)

Problem 2 – 15 CStatutory fine (P250,000 x 2) P500,000

Any taxpayer whose property has been placed under constructive distraint, and disposed the same without the knowledge and consent of the Commissioner shall be punished by a fine of not less than twice the value of the property sold, encumbered or disposed of, but not less than P5,000 or suffer imprisonment of not less than 2 years and 1 day but not more than 4 years or both. (Sec. 206, NIRC)

The P5,000 fine is applicable only when the computed amount (selling price x 2) is lower than P5,000.

Problem 2 – 16 CProceeds from sale P 350,000Less: Basic tax assessed P300,000 Accrued interest from April 15, 200x to July 15, 200x (P300,000 x 20% x 3/12) 15,000 Documentary stamp tax 1,500 Advertisement 1,000 317,500Amount to be refunded to Mr. Poe P 32,500

Problem 2 – 17 DProceeds from sale (P1,500/0.005) P 300,000Less: Basic tax assessed P275,000 Accrued interest from April 15, 200x to July 15, 200x (P275,000 x 20% x 3/12) 13,750 Documentary stamp tax 1,125 Advertisement 1,000 290,875Amount to be refunded to Mr. Ligot P 9,125

Problem 2 – 18 CTotal surcharge (P10,000 x 25%) P2,500

25% surcharge shall be imposed for late filing of the return and late payment of the tax. (Sec. 5, Rev. Regs. No. 12-99)

7



Problem 2 – 19 CInterest (P10,000 x 20% x 2.5/12) P416.67

The computation of interest is based on unpaid basic tax. (RMC No. 46–99)

Problem 2 – 20 CBasic tax P10,000Surcharges: For late filing and payment (25%) P2,500 For filing in wrong RDO (25%) 2,500 5,000Interest (P10,000 x 20% x 2.5/12) 417Total amount due P15,417

Problem 2 – 21 DIncome tax due per return P100,000Add: Surcharge for willful neglect to file the and late payment (P100,000 x 50%) P50,000 Interest from April 15, 200B to June 30, 200C (P100,000 x 20% x 14.5/12) 24,167 74,167Total amount due, June 30, 200C P174,167

Late filing and late payment of tax is a taxpayer’s willful neglect if the payment is made only after the notification of the BIR. Such violation is subject to 50% surcharge plus 20% interest per annum computed from the due date of the tax until the date of payment. (Rev. Regs. No. 12-99, Sec. 5.3)

Problem 2 – 22 BIncome tax due per return P100,000Add: Surcharge for late filing and late payment - simple neglect (P100,000 x 25%) P25,000 Interest from April 15, 200B to June 30, 200B (P100,000 x 20% x 2.5/12) 4,167 29,167Total amount due (excluding compromise penalty) P129,167

If the violation is late filing and late payment of tax, only one 25% surcharge shall be imposed for late filing of the return and late payment of the tax plus 20% interest per annum computed from the due date of the tax until the date of payment. (RMC No. 46-99; Sec. 5, Rev. Regs. No. 12-99)

Problem 2 – 23 AUnpaid tax due P1,000,000Additions to tax: Surcharge (P1,000,000 x 50%) P500,000 Interest from April 15, 200B to December 31, 200C (P1,000,000 x 20% x 1 year & 6.5 mos.) 341,666 841,667Total amount due as of December 31, 200C P1,841,667Add: Excess amount 158,333Total selling price P2,000,000

Add: Statutory interest rate to redeem (P2,000,000 x 15%) 300,000Total amount needed to redeem the real property P2,300,000

8



The redemption of the property sold through public auction shall be made within one year from the date of sale subject to a statutory redemption interest rate of 15% per annum. (Sec. 214, NIRC)

Problem 2 – 24 BBasic amount due per assessmentAdd: Surcharge for simple neglect to pay on time (P80,000 x 25%) Interest (P80,000 x 20% x 45/360 days)Total required payment on June 30, 200A

P 20,000 2,000

P 80,000

22,000P102,000

[Sec. 248(A)(3) and Sec. 249(B)(3), Rev. Regs. No. 12-99, Sept. 6, 1999]

Problem 2 – 25 CUnpaid income tax due (P3,000,000 – P1,000,000) P2,000,000Additions to tax: Surcharge (P2,000,000 x 50%) P1,000,000 Interest (P2,000,000 x 20% x 3/12) 100,000 1,100,000Total amount due as of August 15, 200B P3,100,000

Concealment of income is a form of fraud. A false or fraudulent return is subject to a surcharge of 50% based on the unpaid tax or the deficiency tax. [Sec. 248 (B), NIRC]

Problem 2 – 26 DIncome tax due per ITR P8,000Divided by installments allowed 2Tax due on 1st installment P4,000Less: Tax credit 3,000Tax payable 1st installment P1,000

When the tax due is in excess of P2,000, the taxpayer other than a corporation may elect to pay the tax in two equal installments (Sec. 56(A)(2), NIRC).

Problem 2 – 27 1. Letter A

Income tax due per return, April 15, 200B P1,000,000Less: 1st installment, April 15, 200B 250,000Balance as of April 15, 200B P 750,000Add: Interest from April 15, 200B to May 15, 200B (P750,000 x 20% x 1/12) 12,500Total amount due, May 15, 200B P 762,500

2. Letter CBalance as of May 15, 200B P 500,000Add: Interest from May 15, 200B to June 15, 200B (P500,000 x 20% x 1/12) 8,333Total amount due, June 15, 200B P 508,333

9



Less: 3rd installment, June 15, 200B (P250,000 + P8,333) 258,333Balance as of June 15, 200B P 250,000Add: Interest from June 15, 200B to July 15, 200B (P250,000 x 20% x 1/12) 4,1674th and final installment P 254,167

Problem 2 – 28Yes, because the prescriptive period of filing the written protest is within 30 days from receipt of assessment. Pay the related tax. Compromise is not a remedy because tax fraud is not subject to compromise.

Problem 2 – 291.

Taxable income P1,000,000

Add: Discrepancies per investigation:Undeclared rental income P450,000Nondeductible interest expenses 300,000Nondeductible bad debt expense 200,000Undocumented representation expenses 150,000 1,100,000

Taxable income per investigation P2,100,000Multiplied by income tax rate 30%Income tax due P 630,000Less: Income tax paid per return 300,000Balance P 330,000Add: 50% Surcharge for filing a fraudulent return

(P330,000 x 50%) P165,00020% interest per annum from April 15, 2010 to April 15, 2011 (P330,000 x 20%) 66,000 231,000

Total amount due P 561,000

2.

Total amount due P561,000

Add: 25% Surcharge for late payment (P561,000 x 25%) P140,250

20% Interest per annum from April 15, 2011 to June 15, 2011 (P561,000 x 20% x 2/12) 18,700 158,950

Total amount due (excluding suggested compromise penalty for late payment) P719,950

Problem 2 – 30a. The cash reward of Miss Wan as tax informer would be P1,000,000, the maximum amount

of reward.

b. The informer’s reward remains payable, hence, Miss Wan will received the maximum reward of P1,000,000.

c. The final income tax to be withheld from the reward of Miss Wan would be 10% of P1,000,000 or P100,000.

Problem 2 – 31a. The tax violations of Miss San Tago are the following:

1. Unregistered business (Sec. 236 [A], NIRC.)

10



2. Non-issuance of commercial invoice (Sec. 237, NIRC.)3. Ignoring the summon (Sec. 5, NIRC.)

b. Miss San Tago’s minimum financial penalties if convicted:1. For operating an unregistered business2. For not issuing commercial invoices3. Failure to obey summonTotal minimum

P 5,0001,000

5,000P11,000

Problem 2 – 32None. There is no surcharge to be imposed to Orville Corporation because the error was corrected before payment and the payment was made on time.

The income tax due is computed as follows:

Corrected gross receipts (P2,000,000/75%)Corrected allowable deductions (P1,500,000/1.35)Taxable income per auditMultiply by percent of tax for 201BIncome tax due

P 2,666,667 1,111,111P 1,555,556 30%P 466,667

Problem 2 – 331. Principal factory P 500

Warehouses (P500 x 9) 4,500Branches (P500 x 30) 15,000Total annual registration fee – January 31, 200B P20,000

2. Total annual registration fee – January 31, 200B P20,000Surcharges (20,000 x 25%) 5,000Interest (P20,000 x 20% x 6/12) 2,000Total amount due – July 30, 200B P27,000

Problem 2 – 34Amount of tax liability P100,000Surcharges 25,000Interest 20,000Advertising cost 5,000Price if purchase by the Government P150,000

Problem 2 – 35Case 1 – Financial incapability due to corporate insolvency.Delinquent accounts P 500,000Pending cases under administrative protest 900,000Criminal violation not filed in courts 1,000,000Total basic tax P2,400,000Multiplied by applicable compromise rate 20%Amount of compromise P 480,000

Case 2 – Financial incapability due to surplus deficit resulting to impairment in original capital by at least 50%.

Delinquent accounts P 500,000

11



Pending cases under administrative protest 900,000Criminal violation not filed in courts 1,000,000Total basic tax P2,400,000Multiplied by applicable compromise rate 40%Amount of compromise P 960,000

Case 3 – Doubtful validity of assessment.Delinquent accounts P 500,000Pending cases under administrative protest 900,000Criminal violation not filed in courts 1,000,000Total basic tax P2,400,000Multiplied by applicable compromise rate 40%Amount of compromise P 960,000

Problem 2 – 36a. Yes, because the offered compromise amount of P100,000 exceeds the required minimum

amount of P25,000, (P250,000 x 10%).

b. Since distraint is imposed only on personal property, the personal property with a value of P100,000 shall be subjected to distraint.

c. Yes, levy of real property and distraint of personal property can be done simultaneously (Sec. 207B of the Tax Code). See also Section 205 of NIRC.

d. No, the unpaid portion will remain as tax liability of Lugui because Miss Lugui did not avail of the compromise tax settlement. The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, is collected (Sec. 217, NIRC).

12

Income Taxation - Answer key (6th Edition by Valencia)- Chapter 2

Economy & Finance

Transcript of Income Taxation - Answer key (6th Edition by Valencia)- Chapter 2