Mamalateos Reviewer on Taxation: Bar Questions Compilation (Situational Questions Only-For Prefinal)CHAPTER III: INTRODUCTION

1. Juan, a Filipino citizen, has emigrated to the United States in 1997, where he is now a permanent resident. He owns certain income-earning property in the Philippines from which he continues to derive substantial income. He also receives income from his employment in the United States on which the US income tax is paid.On which of the above income is the taxable. If at all in the Philippines, and how, in general terms, would such income or incomes be taxed?-Income from sources within the Philippines of a non-resident citizen remains subject to Pihilippine income tax, but his income from sources outside the Philippines is exempt.2. Federico, a Filipino citizen, migrated to the United States some six years ago and got a permanent resident status or green card. Should he [ay hi Philippine income tax on the gains he derived from the sale in the New York Stock Exchange in PLDT, a Philippine corporate whose shares are listed thereat?- Yes. The gain from the sale of shares of stock in a domestic corporation shall be treated as derived entriely from sources within the Philippines, regardless of where the said shares are sold. By this provisio of law, the gain, if any, from the sale of shares of stocks of a domestic corporation by any person shall always be treated for income tax purposes as income from sources within the Philippines.3. Four Catholic parishes hired the services of Frank Binatra a foreign nonresident entertatiner, to perform for four nights at the Fold Arts Theatre. Binatra was paid P200,000.00 a night. The parishes earned P1,000,000.00, which they used for the support of the orphans in the city. Who are liable to pay taxes?- a. The four Catholic parishes because the income received by them, not being income earned as such in the performance of their religious functions and duties, is taxable income under the last paragraph of Section 26 of the Tax Code. In promoting and operating the Binatra Show, they engaged in an activity conducted for profit. b. The income of Frank Binatra, a non-resident alien under our law, is taxable at the rate of 25% final withholding tax based on the gross income from the show. Mr. Binatra is not engaged in any trade or business in the Philippines.4. Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint income tax return for 1997 on March 15, 1998. After an audit of return, the BIR issued on April 20, 2001 a deficiency income tax assessment for the su, of 250,000 pesos inclusive of interest and penalty. For failure of the two to pay the tax within the period stated in the notice of assessment, the BIR issued on August 19, 2001 warrants of distraint and levy to enforce collection of the tax.- Income from foreign sources of nonresident citizens is exempt from income taxes-I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from the last day prescribed by law for the filing of the income tax return, when the said return is filed on time. 5. Alain Descartes, a French citizen permanently residing in the Philippines, received several items of income during the taxable year, such as consultancy fees received for desining a computer program and installing the same in the Shanghai facility of a Chinese firm; interests from his deposits in a local bankk of foreign currency earned abroad converted to Philippine pesos; dividends received from an American corporation which derived 60% of its annual gross receipts from the Philippine sources for the past 7 years; and gains derived from the sale of his condominium unit located in Taguig City to another resident alien.-The consultancy feees are not subject to Philippine income tax. Being an alien, it is subject to income tax only on income from sources within the Philippines. Since the consultancy fees are received by him for designing a computer program and installing the same in China, the same shall be treated as income from sources outside the Philippines.6. Newtex International, Inc. Is an American frim duly authorized to engage in business in the Philippines as a branch office. In its activity of actingas a buying agent for foreign, buyers oshirts and dresses abroad and performing liaison work between its home office and the filipino garment manufacturers and exporters, Newtex does not generate an income. To finance its office expenses here, its head office abroad reularly remits to it the needed amount. To oversee its operation and mange its office hgere, which had been in operation for two years, the head office assigned three foreign personnel.Are the 3 foreign personnel subject to Philippine income tax? The 3 foreign personnel are subject to tax on the income that the receive for services rendered in the Philippines. Non-residen aliens are subject to tax on income from sources within the Philippines. Income is deemed derived from sources within the country when it is earned for services rendered in the Philippines.7. Mr. Cortez is a nonresident alien based in Hong Kong. During the calendar year 1999, he came to the Philippines several times ad stayed in the country for an aggregated period of more than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and from abroad?-Mr. Cortez being a nonresident alien idividual who has stayed for an aggregate period of more than 180 days during the calendar year 1999, shall for that taxable year be deemed to be a nonresident alien doing business in the Philippines.Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as a resident citizen on taxable income received from all sources within the Philippines.Thus, he is allowed to avail of the itemized deductions including the personal and additional exemptions, but subject to the rule on reciprocity on the personal exemptions.

8. Johnny transferred a valuable 10-door commercial apartment to a designated trustee, Miriam, naming in the trust instrument Santino, Johnnys 10-year old son, as the sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to P720,000. The trustee consults you if she has to pay the annual income tax on the rentals received from the commercial apartment. (a) What a device will you give the trustee? (B) Will your advice be the same, if the trustee is directed to accumulate the rental income and distribute the same only when the beneficary reaches the age of majority. Why or why not?-it depends. Where the trust document transferring the property is revocable, the rental income shall be included in computing the taxable income of the grantor. On the other hand, if the trust document is irrevocable and the donors tax on the value of the transferred property was duly paid by the grantor at the time of the creation of trust, the rental income shall be reported by the trustee in the income tax return to be filed by her. Income tax shall apply to the income of the property held in trust, including income of the trust shall be computed by allowing as eduction the amount of the income of the trust for the taxable yeaer which is to be distributed currently by the fiductiary to the beneficiary, but the amount so allowed as a deduction shall be included in compuiting the taxable income of the beneficiary, whether distributed to them or not.No my advice will be different if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary reaces the age of majority. Income tax shall also apply to income accumulated or held for future distribution under the terms of the trust document. However, the trustee is allowed as an additional deduction in computing the taxable income of the trust the amount of the income in the trust for the taxable year, which is properly paid or credited during such year to any beneficiary, but the amount so allowed as deduction shall be included in computing the taxable income of the beneficiary.

9. Mr. Santos died intestate in 1989 leaving his spouse and five children as the only heirs. The estate consisted of a family home and a four-door apartment which was being rented to tenants. Within the year, an extrajudicial settlement of the estate was executed frin the the heirs, each of them receiving his/her due share. The surviving spouse assumed administration of the property. Each year, the net income from the rental property was distributed to all, proportionately, on which they paid respectively, the corresponding income tax. In 1994, the income tax returns of the heirs were examined and deficiency income tax assessments were issued against each of them for the years 1989 to 1993, inclusive, as having entered into an unregistered partnership. Were the assessments justified? Yes, the assessments were justified because for income tax purposes, te co-ownership of inherited property is automatically converted into an unregistered partnership from the moment the said properties are used as a common fund with intent to produce profits for the heirs in proportion to their shares in the inheritanceFrom the moment of such partition, he heirs are entitled already to their respective definite shares of the estate and the income thereof, for each of them to manage and dispose of as exclusively their own, without the inervention of the other heirs, and accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his hares to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose , for tax purposes, at least, an unregistered partnership is formed.

10. Noel Langit and his brother, Jovy, bought a parcel of land which they registered in their names as pro indiviso owners (Parcel A). Subsequently, they formed a partnership, duly registered with Securities and Exchange Commission, which bought another parcel of land (Parcel B). Both parcels of land were sold, realizing a net profit of P1,000,000.00 for parcel A and P500,000 for parcel B.1) The BIR claims that the sale of parcel A should be taxed as a sale by an unregistered partnership. 2) The BIR also claims that the sale of parcel B should be taxed asa sale by a corporation. Is the BIR correct?-1) The BIR is not correct, since there is no showing that the acquisition of the property by Noel and Jovy Langit as pro indiviso owners, and prior to the formation of the partnership, was used, intended for use, or bears any relation whatsoever to the pursuit or conduct of the partnership business. The sale if parcel A shall therefore not be treated as a sale by an unregistered partnership, but an ordinary sale of a capital asset and hence will be subject to the 6% capital gains tax and documentar stamp tax on transfers of real property, said taxes to be borne equally by the co-owners.2) The BIR is correct, since a corpoaration as deemed under tax code includes partnership, no matter how created or organized except general professional partnerships. The business partnership, in the instant case, shall therefore be taxed in the same manner as a corporation on the sale of parcel B. The sale shall thus be subject to the creditable withholding tax on the sale of parcel B and the partnership shall report the gain realized from the sale when it files its income tax return.11.Roberto Ruiz and Conrado Cruz bought three parcels of land from Rodrigo Sabado. Later on they bought 2 parcels of land from Miguel Sanchez. Later they sold the first 3 parcels of lant to Central Realty. Later they sold the 2 parcels to Jose Guerero. Ruiz and Cruz realized a net profit of 100 thousand for the sale. The corresponding capital gains taxes were individually paid by Ruiz and Cruz.- Roberto Ruiz and Conrado Cruz are not liable for corporate income tax. Evidently abandoning the Gatchalian ruling, later SC rule that isolated transactions by two or more persons do not warrant their being considered as an unregistered partnership. They will instead be considered as mere co-owners; no corporate income tax is due on mer co-ownership. It was, therefore correct for Ruiz and Cruz to merely pay their individual income tax liabilities on the gain from sale of real estate transactions.

12. Five years ago, Marquez, Peneyra, Jayme, Posadas and Manguiat all lawyers, formed a parnership which they named Marquez and Peneyra Law Offices. - General professional partnerships remain to be a non-taxable entity. The partners comprising the same are taxable and they are obligated to report as income their share in the income of the heneral professional partnership during the taxable year, whether distributed or not.

13. Anchor Banking Corporation, which was organized in 2000 and existing under the laws of the Philippines and owned by the Sy Family of Makati City, set up in 2010 a branch office in Shanghai City, China, to take advantage of the presence of many Filipino workers in that area and its booming economy. During the year the bank management decided not to inclide 20M net income of the Shanghai Branch in the annual Philipine income tax return filed with the BIR, which showed a net taxable income of 30M because the Shanghai Branch is treated as a foreign corporation and is taxed only on income from sources within the Philippines, and since the loan and other business transactions were done in Shanghai, these incomes are taxable in the Philippines-A domestic corporation is taxable on all income derived from sources within and without the Phil. The income of the foreign branch and that of the Head Office will be summed up for income tax purposes, following the single entity concept and will all be included in the gross income of the domestic corporation in the annual Philippine income tax return.No. The branch profit remittance tax is imposed only on remittance by btaches of foreign corpration in the Philippines to their Head Office abroad. It is the outbound branch profits that is subject to the tax, not the inbound profits14. XYZ Law Offices, a law partnership in the Philippines and a VAT-registered taxpayer, received a query by e-mail from Gainsburg Corporation, a corporation organized under the laws of Delaware, USA, but the e-mail came from California, where Gainsburg has an office. Gainsburg has no office in the Philippines and does no business in the Philippines.XYZ Law Offices rendered its opinion on the query and billed Gainsburg 1K dollar for the opinion. Gainsburg remitted its payment through Citibank, which converted the remitted 1k dollar to pesos and deposited the converted amount in the XYZ Law Offices account. What are the tax implication of the payment to XYZ Law Offices in terms of VAT and income taxes.-The payment to XYZ Law Offices by Gainsburg Corporation is subject to income tax and VAT in the Philippines. For income tax purposes, the compensation for services is part of the gross income of the law partnership. From its total gross income within and without, it has to compute its net income in the same manner as a corporation. The net income of the partnership, whether distributed or not, will be declared by the partners based on their agreement as part of their gross income who are to pay the income tax thereon in their individual capacity.For VAT purposes, the transaction is a zero-rated sake if services, where the output tax is zero percent and XYZ is entitled to claim as refund or tax credit certificate the input taxes attributable to the zero-rated sale, if the same is not utilized by the partnership. The services were rendered to a nonresident person, engaged in business outside the Philippines which services are paid for in foreign currency inwardly remitted through the banking system, thereby making the ale of services subject to tax at zero-rated. 15. HK Co. is a Hong Kong company, which has a duly licensed Philippine branch engaged in trading activities in the Philippines. HK Co. also invested directly in 40% of the shares of stock of A Cp., a Philippine corporation, These shares are booked in the Head Office of HK Co. and are not reflected as assets of the Philippine branch. In 1998, A Co. declared dividends to its stockholders. Before remitting the dividends to HK Co., A Co. seeks you advice as to whether it will subject the remittance to withhlding tax.-I will advise A Co. to withhold and remit the withholding tax on the dividends. While the general rule is that a foreign corporation is the same juridical entity as its branch office in the Phil, when, however, the corporation transacts business in the Phil directly and independently of its brance, the taxpayer would be the foreign corporation itself and subject to the dividend tax similarly imposed on nonresident foreign corporation. The dividends attributable to the Home Office would not qualify as dividends earned by a resident foreign corporationm which is exempt from tax.

16. F Corprations (FC) is a Singapore-based foreign corporation engaged in construction and installation projects. In 2010, Global Oil Corporation (GOC), a domestic corporation engaged in the refinery of petroleum products, awarded an anti-pollution project to FC, whereby FC shall design, supply machinery and equipment, and install an anti-pollution device for GPCs refinery in the Philippines, provided that the istallation part of the project may be sub-contracted to a local construction company. Pursuant to the contract, the design and supply contracts were done in Singapore by FC, whhile the installation works were sub contracted by FC with Philippine Construction Corporation (PCC), a domestic corporation. The project with a total cost of 100 million was completed in 2011.-FC is not liable to Philippine income tax. The revenues from the design and supply contracts, having been all done in Singapore, are income from without the Philippines;hence, not taxable to a foreign corporation in the Philippines. With respect to the installation works which was sub-contracted by FC to PCC a domestic corporation, it is PCC not FC that does the work in the Phil. That should report the income thereon.PCC is liable to VAT is seller of services done in the Philippines for a fee. However, the sale of services to FC is subject to VAT at zero percent. Services rendered by a VAT registered local contractor ro a non-resident foreign corporation who is outside the Philippin es, oaid for in foreign currency inwardly remitted through the Philippine banking system are zero rated sales of services.17. Aplets Corporation is registered under the laws of the British Virgin Islands. It has extensive operations in southeast Asia. In the Phil,its products are imported and sold at a mark-up by its exclusive distributor, Kims trading, Inc. The BIR compiled a record of all the imports of Kim from Aplets and imposed a tax on Aplets net income derived from its exports to Kim. Is the BIR correct?-No. Aplets Corp is a non-resident foreign corporation not engaged in trade or business in the Phil and its sourceof income is from outside the Phil. As a foreign corporation it is subject to Philippine income tax only on income from sources within the Phil. Gains, profits and income from the sale of personal property outside the Phil shall be treated as income from sources outside the Phil.

CHAPTER IV: GROSS INCOME

1. Mr. Francisco borrowed 10K from his friend, Mr. Gutierrez, payable in one year without interest. When the loan became due, Francisco to gutierrez that he was unable to pay because of business reverses. Mr. Gutierrez took pity on Francisco and condoned the loan. Mr. Francisco was solvent at the time he borrowed the 10k and at the time the loan was condoned.

-No, Francisco did not derive any income from the cancellation or condonation of his indebtedness. Since it is obvious that the creditor merely desired to benefit the debor in view of the absence of consderation of he cancellation, the amount of the debt is considered as a gift from the creditor to the debtor and nedd not be inclded in the latters gross income. The gift may, however, be subject to donors tax at 30% since Francisco and Gutierrez are not members of the family.

2. Bates Advertising Company is a non resident corporation duly organized and existing under the laws of singapore. It is not doing business and has no office in the Philippines. Pilipinas Garment Inc., a domestic corporation, retained the services of Bates to do all the advertising of its products abroad. For said services, Bates fees are paid through outward remittances. Are the fees received by Bates subject to any withholding tax?

The fees paid to Bates Advertixing Company, a non-resident foreign corporation are not subject to withholding tax, since they are not subject to Philippine iincome tax. They are exempt because they do not constitute income from Philippine sources, the same being compensation for labor or personal services performed outside the Philippines

3. Caledonia Aircargo is an offline international carrier without any flight operations in the Philippines. It has however a liaison office in the Phil which is duly licensed with the Sec, established for the purpose of providing passeger and flight information, reservation and ticketing services.

-The revenues in the Phil of Caledonia Aircargo as an offline airline from ticket reservation services are taxable income from whatever source. The income received in the Phil from the sale of tickets by an offline airline is taxable as income from whatever source

4. An international airline with no landing rights in the Philippines sold tickets in the Phil for air transportation. Is income derived from such sales of tickets considered taxable income of the said international air carrier from Phil sources under the Tax Code?

No. While the tickets are sold here by the inernational airline, this is for carriage of persons, excess baggage, cargo and mail not originating from the Phil, because the airline has no landing rights in the Philippines. The income from the sale of tickets is actually the gross revenue derived from the carriage of persons, excess baggage, cargo and mail and these revenues are consideres as income fom Phil sources only if the flight originates from the Phil in a continuous and uninterrupted flioght, irrespective of the place of payment of the ticket or passage document. Accordingly the income mentioned is not derived from Phil sources.

5. Pacific, Inc.is engaged in overseas shipping. It time chartered one its ships to a Japanese company on a 5 year term. The charter was consummated through the efforts of Kamino Moto, a Tokyo based broker. The negotiation took place in Tokyo. The agreement calls for Pacific, Inc. To pay Kamino Moto 50k Your opinion is sought whether Pacific Inc, should withhold the tax before sending the compensation of Kamino Moto.

The compensation of Kamino Moto is not subject to withholding tax. Compensation for labor or personal services performed outside the Phil are considered as income from sources without the phil. Kamino Motos effort in consummating the Charter is a form of labor or services.Considering further that Kamino Moto is a Tokyo based broker presumably a non resident foreign corporation it is taxable only on income within the Philippines.

6. ABC, a domestic corporation, entered into a software license agreement with XYZ a non resident foreign corporation based in the US under the agreement which the pparties forged in the US. XYZ granted ABC the right to use a computer system program and to avail of technical know how relative to such program. In consideration for such rights, ABC agreed to pay 5% of the revenues it receives from the customers who will use and apply the program in the Phil. - The royalty received by XYZ from ABC will be subject to Philippine income tax, because the source of the royalty income is from the Phil. Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties therefrom shall be treated as income from sources within the Phil. Considering that XYZ is a non resident foreign corp such royalty income is subject to the 30% final withholding income tax, such tax to be withheld by ABC and paid in the same manner does not have to file a Phil icome tax return on the royalty income. For VAT purposes ABC must withhold and assume the payment of the 12% VAT on the royalty icome, which input tax can be credited against ABC outpput tax for taxable income.

7. Mr. Jose Castillo is a resident Filipino citizen.He purchased a parcel of land in Makati City in 1970 at a consideration of 1M. In 2011, the land, which remained undeveloped and idle, had a fair market valuie of 20M. Ayala, another Fiipino citizen is vey much interested in the property and he offered to buy the same for 20M.

Mt. Castillo is not liable for income tax in 2011 because no income is realized by him during that year. Tax liability for income tax attaches only if there is a gain realized resulting from a closed and complete transaction.He shall be liable to pay the 6% capital gains tax based on the gross selling price of the property of 20M plus the capital gains tax assumed by the buyer. He should file the return within 30days from the date of sale and pay the tax as he files the return8. ABC Computer Corp. purchased some years ago Membership Cert. No 7 from the Calabar Gold Club., Inc. For 300k. In 4 Sep 1985, it transferred the same to Mr. Ohnson, its american computer consultant to enable him to avail of the facilitties of the Club during his stay here. The consultany agreement expired 2 years later in the meantime, the value of the Club share appreciated and what was purchased by the corporation at 300k commanded a market value of 800k in 1987. Before he returned home a few days after his tenure ended, Mr. Johnson transferred the subject share to Mr. Rober James, the new consultant of the firm and the newly designated plaing representative, under a Deed of Declaration of Trust and Assignment of Shares wherein the former acknowledged the absolute ownership of ABC Computer Corp. over the share, that the assignment was without any consideration and that the share was placed in his name because the Club required it to be done.

The assignment or transfer of shares from Johnson to James is not subject to income tax. There had been no real change of ownership that took place. There having been no actual sale or exchange, no income tax incidence can be sad to have occurred. In addition there was really no income realized or received considering that in the deed of Declaration of Trust and Assignment of Shares, the absolute ownership of ABC Computer Corporation was explicitly recognized.

8.1 Is the said assignment a gift and, therefore, subject to gift tax?

The assignment can neither be held to be a gift. To be considered a gift within the context of the NIRC, there must be a transfer of ownershi[ pr a quantifiable interest. More importantly the transfer of the memberhship certificate was merly a designation of the consultant to be the playing representative of ABC Computer Corporation in the Calabar Gold Club

9. X, a multinational corporation doing business in the Philippines donated 100 shares of stock of said corporation to Mr. Y its resident manager in the Phil.

Foreign corporations effecting a donation are subject to donors tax only if the property donated is located in the Philippines. Accordingly, donation of a forein corporation of its own shares of stocks in favor of resident employeees is not subject to donors tax. However if 85%of the business of the foreign corporation is located in the Phil or the shares donated have acquired business situs in the Phil the donation may be taxed in the Philippines subject to the rule of reciprocity If the shares of stocks were given to Mr. Y in consideration of his services to the corporation, the same shall constitute taxable compensation income to the recipient because it is a compensation for services rendered under an employer-employee relationship, hence, subject to income tax.