OUR LADY OF FATIMA UNIVERSITY Dela Paz Norte, City of San Fernando (P) COLLEGE OF BUSINESS AND ACCOUNTANCY
Preliminary Exam in TAX 1A Income Taxation
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GENERAL INSTRUCTIONS: Shade the letter that corresponds to your answer. STRICTLY NO CHEATING.
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Which of the following is not a scheme of shifting the incidence of taxation? a. A manufacturer transfer tax to the consumer by adding tax to the selling price of the goods sold. b. A tax forms part of the purchase price. c. Changing the terms of the sale like FOB shipping point in the Philippines to FOB destination abroad, so that the title passes abroad instead of in the Philippines. d. The manufacturer transfers the sales tax to the distributor, then in turn to the wholesaler, in turn to the retailer, and finally to the consumer. In case of conflict between the tax code and generally accepted accounting principles (GAAP): a. Both tax code and GAAP shall be enforced. b. GAAP shall prevail over tax code. c. Tax code shall prevail over GAAP. d. The issue shall be resolved by the courts. What is required to make a BIR ruling first impression a valid one, except? a. Must be reasonable and within the authority conferred. b. Must be germane to the purpose of the law. c. Must be published. d. Must be prospective in application. Which of the following powers of the Commissioner of the Bureau of Internal Revenue may be delegated? a. Enforcement of all forfeitures, penalties, and fines in connection with the collection of national internal revenue taxes. b. The power to recommend the promulgation of rules and regulations by the Secretary of Finance. c. The power to issue rulings of first impression of to reverse, revoke, of modify any existing ruling of the bureau. d. The power to assign or reassign internal revenue officers to establishments where the articles
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subject to excise tax are produced or kept. Which of the following statements is wrong? A revenue bill: a. May be recommended by the President to Congress. b. May have a House version and a Senate version approved separately and then consolidated with both houses approving the consolidated version. c. May originate from the Senate and on which same bill the House of Representatives may propose amendments. d. May originate from the House of Representatives and on which same bill the Senate may propose amendments. This rule is not applicable on the construction of tax laws. a. If the law is repealed, taxes assessed before repeal of the law may no longer be collected. b. If the intent of the tax is not clear as to whether the taxpayer is covered by the tax obligation, the law shall be construed against the government. c. Where the intent to tax is clear and the taxpayer claims he is exempt from the tax obligation, the tax shall be construed against the taxpayer. d. Provisions intended for the security of the taxpayer of to insure equality or uniformity of taxation are mandatory. Which of the following is not a purpose of taxation? a. To reduce inequalities of wealth. b. As protective tariff on imported goods to protect local producers against foreign competitions. c. To encourage the growth of home industries through the proper use of tax incentives. d. To expropriate property for the promotion of general welfare. The following reasons may be given by a taxpayer in refusing to pay his tax liability. Which is not acceptable for legally refusing to pay the tax? a. That he has been deprived of due process of law. b. That there is lack in territorial jurisdiction. c. That the prescription period for the collection of tax has lapsed. d. That he will derive no benefit from the tax. The power to interpret the provisions of NIRC and other tax laws shall be under the exclusive and original jurisdiction of the: a. The Commissioner of Internal Revenue, subject to the review by the Secretary of Finance.
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The Commissioner of Internal Revenue, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. c. The Court of Tax Appeals, subject to the exclusive appellate jurisdiction of the Court of Appeals. d. The Regular Courts, subject to the review by the Court of Tax Appeals. What is the rule on taxability of income that a government educational institution derives from its school operations? Such income is: a. Subject to 10% tax on its net taxable income as if it is a proprietary educational institution. b. Exempt from income taxation if it is actually, directly, and exclusively used for educational purposes. c. Subject to the ordinary income tax rates with respect to incomes derived from educational activities. d. Exempt from income taxation in the same manner as government-owned and controlled corporations. Which statement below expresses the lifeblood theory? a. The assessed taxes must be enforced by the government. b. The underlying basis of taxation is government necessity for without taxation, a government can neither exist nor endure. c. Taxation is an aribitrary method of exaction by those who are in the seat of power. d. The power of taxation is an inherent power of the sovereign to impose burdens upon subjects and objects “within its jurisdiction for the purpose of raising revenues?. Which among the following concepts of taxation is the basis for the situs of income taxation? a. Lifeblood doctrine of taxation b. Symbiotic relation in taxation purpose of c. Compensatory taxation d. Sumptuary purpose of taxation Which statement is wrong? a. The power of taxation may be exercised by the government, its political subdivision, and public utilities. b. Generally, there is no limit on the amount of tax that may be imposed. c. The money contributed as tax becomes part of the public funds. d. The power of tax is subject to certain constitutional limitations. Taxation is equitable in all of the following, except:
Its burden falls on those better to pay. b. It is based on ability to pay. c. It is based on benefits received. d. It is based on uniformity rule. One of the characteristics of internal revenue laws is that they are: a. Criminal in nature b. Penal in nature c. Political in nature prospective in d. Generally application. Persons or things belonging to the same class shall be taxed at the same rate. a. Simplicity in taxation b. Reciprocity in taxation c. Equality in taxation d. Uniformity in taxation The tax should be proportional to the relative value of the property to be taxed. a. Simplicity in taxation b. Reciprocity in taxation c. Equality in taxation d. Uniformity in taxation The tax imposed should be proportionate to the taxpayer’s ability to pay. a. Fiscal adequacy b. Equality or theoretical justice c. Administrative feasibility d. Economic consisitency The sources of revenue as a whole, should be sufficient to meet the demands of public expenditures. a. Fiscal adequacy b. Equality or theoretical justice c. Administrative feasibility d. Revenue generation The tax laws must be capable of convenient, just and effective administration. a. Fiscal adequacy b. Equality or theoretical justice c. Administrative feasibility d. Internal acceptability A law granting tax exemption requires concurrence of: a. Majority vote of the members of the Congress b. 2/3 vote of members of Congress c. ¾ vote of members of Congress d. Unanimous vote of members of Congress Money collected from taxation shall not be paid to any religious dignitary EXCEPT when: a. The religious dignitary is assigned to the Philippine Army. b. It is paid by a local government unit. c. The payment is passed in audit by the COA. d. It is part of a lawmaker’s pork barrel. a.
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23. An escape from taxation where the tax burden is transferred by the one on whom the tax is imposed or assessed to another. a. Shifting b. Exemption c. Transformation d. Capitalization 24. An escape from taxation where the producer or manufacturer pays the tax and endeavors to recoup such payment by improving his process of production thereby turning out his units of products at a lower cost. a. Shifting b. Exemption c. Transformation d. Capitalization 25. An escape from taxation where there is areduction in the price of the taxed object equal to the capitalized value of future taxes which the taxpayer expects to be called upon to pay. a. Shifting b. Exemption c. Transformation d. Capitalization 26. A use of illegal or fraudulent means to avoid of defeat the payment of tax. a. Shifting b. Exemption c. Avoidance d. Evasion 27. The use of legal or permissible means to minimize or avoid taxes. a. Shifting b. Exemption c. Avoidance d. Evasion 28. Tax based on a fixed percentage of the amount of property, income or other basis to be taxed. a. Proportional b. Regressive c. Progressive d. Indirect 29. Tax where the rate decreases as the tax base increases. a. Proportional b. Regressive c. Progressive d. Indirect 30. Tax where the rate increases as the tax base increases. a. Proportional b. Regressive c. Progressive d. Indirect SITUATIONAL PROBLEM ANALYSIS:
31-32. A store in the Umasa market in Paasa City was discovered by the BIR agents selling luxury items worth P500,000.00 suspected to have been smuggled into the country by the storeowner. May the Commissioner of
Internal Revenue put under “preventive embargo” said luxury items? a. Yes, it is like constructive distraint. b. Yes, because of anti-smuggling law. c. No, violative of search and seizure clause of the Constitution. d. No, violative of the due process clause of the Constitution. 33-34. The President of the Philippines and the Prime Minister of Japan entered into an executive agreement of a loan facility to the Philippines from Japan whereby it is stipulated that interest on loans granted by private Japanese financial institutions to private institutions in the Philippines shall not be subject to Philippine income taxes. Is the tax exemption valid? a. Yes, based on international comity. b. Yes, based on executive agreements and treaties. c. No, it is a violation of essential characteristics of taxation. d. No, based on the doctrine of territoriality. 35-36. In a loan agreement between the Bangko Sentral ng Pilipinas (as borrower) and private international banks (as lenders), it is stipulated that all payments of interest by the Central Bank to the lenders shall be made free and clear from all Philippine taxes which may be imposed thereon. Is the stipulation valid? a. Yes, based on international comity. b. Yes, based on the doctrine of nontaxability of the government. c. No, violative of the inherent limitations. d. No, violative of the constitutional limitations. 37-38. An internal revenue officer (IRO), having been reliably informed from unimpeachable source that articles subject to excise taxes were kept in the house of Aasa entered said house to look for and to seize the aforementioned articles over the objection of Aasa. Since said officer was not armed with a search warrant, Aasa invoked the sanctity of his home. Is the IRO’s actuation described above sanctioned by law or not? a. Yes, because of primary jurisdiction of the BIR over excisable goods pursuant to the lifeblood doctrine. b. Yes, the IRO is exempted from obtaining a search and seizure warrant. c. No, violative of search and seizure clause of the Constitution. d. No, violative of the right to privacy and abode. 39-40. XXX Corporation, an export oriented company, was able to secure a BIR ruling in June 2005 that exempts from tax the importation of some of its raw materials. The ruling is of first impression, which means the interpretation made by the Commissioner of
Internal Revenue is one without established precedents. Subsequently, however, the BIR issued another ruling which in effect would subject to tax such kind of importation. XXX Corporation is concerned that said ruling may have a retroactive effect, which means that all their importations done before the issuance of the second ruling could be subject to tax. May the BIR rulings be given retroactive effect? a. No, BIR rulings are prospective in nature. b. No, BIR rulings are not retroactive if they are prejudicial to the taxpayer. c. Yes, tax exemptions should be interpreted strictly against the taxpayer. d. Yes, tax must favor the government’s power to collect its revenues. 41-42. The Local Government Code took effect on January 1, 1002. PLDT’s legislative franchise was granted sometime before 1992. Its franchise provides that PLDT will only pay3% franchise tax in lieu of all taxes. The legislative franchises of Smart and Globe Telecoms were granted in1998. Their legislative franchise state that they will pay only 5% franchise tax in lieu of all taxes. The Province of Zamboanga del Norte passed an ordinance in 1997 that imposes a local franchise tax on all telecommunication companies operating within the province. The tax is 50% of 1% of the gross annual receipts of the preceding calendar year based on the incoming receipts, or receipts realized, within its territorial jurisdiction. Is the ordinance valid? a. No, the ordinance in effect resulted into double taxation. b. No, the Local Government Code prevails over ordinances. c. Yes, the local government units are empowered by the Constitution to raise its own revenues. d. Yes, autonomy of Zamboanga del Norte. 43-44. Congress passed a law which granted tax amnesty to those who have not paid their income taxes in 2010 but did not provide for the refund to those who paid. Is the law valid? a. No, this will encourage taxpayers not to pay their taxes. b. Yes, Congress has the sole discretion of determining whom to tax. c. No, the grant of amnesty is the ive of the President. d. Yes, Congress provided for valid classification. 45-46. Congress passed a law imposing taxes on income earned out of particular activity that was not previously taxed. The law, however, taxed incomes already earned within the fiscal year when the law took effect. Is the law valid?
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No, because laws are intended to be prospective, not retroactive. b. No, the law is arbitrary in that it taxes income that has already been spent. c. Yes, since tax laws are the lifeblood of the nation. d. Yes, tax laws are an exception; they can be given retroactive effect. 47-48. The municipality of San Isidro passed an ordinance imposing a tax on installation managers. At the time, there was only one installation manager in the municipality, thus, only he would be liable for the tax. Is the law constitutional? a. It is unconstitutional because it clearly discriminates against this person. b. It is unconstitutional for lack of legal basis. c. It is constitutional as it applies to all persons in that class. d. It is constitutional because the power to tax is the power to destroy. 49-50. In 2010, Mr. Paasa sent his sister Erika $1,000 via telegraphic transfer through the Bank of PI. The bank’s remittance clerk mad e a mistake and credited Erika with $1,000,000 which she promptly withdrew. The bank demanded the return of the mistakenly credited excess, but Erika refused. The BIR entered the picture and investigated Erika. Would the BIR be correct if it determines that Erika earned taxable income under these facts? a. No, she had no income because she has no right to the mistakenly credited funds. b. Yes, income is income regardless of the source. c. No, it was not her fault that the funds in excess of $1,000 were credited to her. d. No, the funds in excess of $1,000 were in effect donated to her. 51-52. Congress passed a sin tax law that increased the tax rates on cigarettes by 1,000%. The law was thought to be sufficient to drive many cigarette companies out of business, and was questioned in court by a cigarette company that would go out of business because it would not be able to pay the increased tax. The cigarette company is: a. Wrong because taxes are the lifeblood of the government. b. Wrong because the law recognizes that the power to tax is the power to destroy. c. Correct because no government can deprive a person of his livelihood. d. Correct because Congress, in this case, exceeded its power to tax. 53-54. Mr. Malas sells shoes in Makati through a retail store. He pays VAT on his gross sales to the BIR and the municipal license tax based on the same gross sales to the City of Makati. He comes to you for advice because b ecause he thinks
he is being subjected to double taxation. What advice will you give him? a. Yes, there is double taxation and it is oppressive. b. The City of Makati does not have this power c. Yes, there is double taxation and this is illegal in the Philippines. d. Double taxation is allowed where one is imposed by the national government and the other by the local government. 55-56. Pheleco is a power generation and distribution company operating mainly from the City of Taguig. It owns electric poles which it rents out to other companies that use pole such as telephone and cable companies. Taguig passed an ordinance imposing a fee equivalent to 1% of the annual rental for these poles. Pheleco questioned the legality of the ordinance on the ground that it imposes an income tax which local government units are prohibited from imposing. Rule on validity of the ordinance: a. The ordinance is void; the fee is based on rental income and is therefore a tax on income. b. The ordinance is valid as a legitimate exercise of police power to regulate electric poles. c. The ordinance is void; 1% of annual rental is excessive and oppressive. d. The ordinance is valid; an LGU may impose tax on income. 57-58. RAF Corporation secured an income tax holiday for 5 years as a pioneer industry. On the fourth year of the tax holiday, RAF Corporation declared and paid cash dividends to its stockholders, all of whom ar e individuals. Are the dividends taxable? a. The dividends are taxable, the tax exemption of RAF Corporation does not extend to its stockholders. b. The dividends are tax-exempt because of RAF Corporation’s income tax holiday. c. The dividends are taxable if they exceeded 50% of RAF Corporation’s retained earnings. d. The dividends are exempt if paid before the end of RAF Corporation fiscal year. 59-60. Dina Gaganda sued Dino Titino for breach of promise to marry. Dino lost the case and duly paid the court’s award th at included among others, Php100,000 as moral damages for mental anguish Dina suffered. Did Dina earn a taxable income? a. She had a taxable income of P100,000 since income is income from whatever source. b. She had no taxable income because it was a donation.
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She had taxable income since she made a profit. She had no taxable income since moral damages are compensatory.
For items 61-90: Choose your answers from the following:
Shade A if both statements are false. Shade B if statement 1 is false and statement 2 is true. Shade C if statement 1 is true and statement 2 is false. Shade D if both statements are true. 61. I. Taxation without representation is not tyranny. II. In the exercise of taxation, the state can tax anything at anytime and at any amount. 62. I. Taxation and power of eminent domain may be exercised simultaneously. II. Taxation and police power may be exercised simultaneously. 63. I. Estate tax is a proportional tax. II. A progressive tax is a tax, the rate of which is directly proportional to tax base. 64. I. All of our tax laws are statutory laws. II. The non-impairment clause is a statutory law on taxation. 65. I. An excise tax is also called privilege tax. II. A tax which is neither personal nor property, is an excise tax. 66. I. Non-payment of tax makes the business illegal. II. The non-payment of license fee makes the business illegal. 67. I. Provisions in the Philippine Constitution on taxation are grants of power. II. Due process of law in taxation in the Constitution is a grant of power. 68. I. Margin fee is a tax. II. Custom’s duty is a tax. 69. I. The RDO is known as the alter ego of the BIR Commissioner. II. The BIR Commissioner is directly under the President’s Office. 70. I. Territoriality is one of the constitutional limitations on the power of taxation. II. International comity is an inherent limitation in taxation. 71. I. A person cannot be imprisoned for non-payment of property tax. II. A law may be passed violating uniformity of taxation. 72. I. Taxes may be used for sectarian purposes if allowed by an ordinance. II. The President can refuse to implement a tax law if it appears to be unconstitutional. 73. I. A tax is based on law while debt is based on contract.
II. A tax is also a custom’s duty. 74. I. There can be double taxation in the Philippines. II. Double taxation is illegal if it violates the uniformity of taxation. 75. I. There can only be a tax if there is a law imposing the tax. II. The power to tax is inherent. 76. I. A progressive system of taxation means a tax structure where the tax base increases as the tax rate increases. II. Tax exemption is a grant of immunity to a particular taxpayer from where others are obliged to pay. 77. I. A state has the power to tax even ev en if not granted by the Constitution. II. A state cannot exercise police power if not granted by the Constitution. 78. I. Tax avoidance is a form of tax escape. II. Tax evasion is not punishable. 79. I. Imposition of taxes is a legislative act. II. Collection of taxes is an administrative act. 80. I. A tax may include the power to destroy. II. A tax may be imposed violating uniformity of taxation. 81. I. A license fee is a charged imposed under the police power of the state. II. Penalty is imposed by the state only. 82. I. A tax may be subjected to set-off or compensation. II. A tax ordinarily includes interest. 83. I. One of the essential characteristics of a tax is it is unlimited in amount. II. A tax is generally unlimited because it is based on the needs of the state. 84. I. A tax bill may embrace more than one subject. II. Non-payment of a tax cannot result to criminal liability on the part of the taxpayer, only civil liability. 85. I. A person may refuse to pay a tax on the ground that he receives no personal benefit from it. II. A taxpayer has a right to question illegal expenditures of public funds. 86. I. The power of taxation is inherent in sovereignty being essential to the existence of every government. Hence, even if not mentioned in the Constitution the state can still exercise the power. II. It is essentially a legislative function. Even in the absence of any constitutional provision, taxation power falls to Congress as part of the general power of lawmaking. 87. I. Tax exemptions are strictly construed against the government. II. When the law is not clear and there is doubt whether he is taxable or not, the doubt shall be settled against the government.
88. I. To be exempt from taxation under the Constitution land and buildings must be exclusively and actually used for religious, educational, or charitable purpose, even if not directly. II. Exemptions of non-profit schools are only limited to revenue and assets derived from strictly school operations. 89. I. Real property is subject to taxation in the place in which it is situated regardless of whether the owner is a resident or a non-resident therein. II. As far as personal property is concerned. The ancient rule of mobilia sequntur personam applies. This means that the thing follows the law of the owner thereof. 90. I. The property taken in police power is destroyed while the property taken under the power of eminent domain and power of taxation are not destroyed. II. In power of taxation, the compensation received is the protection afforded to the citizens; in police power the compensation received is the altruistic feeling that somehow you contributed to the promotion of the general welfare; in power of eminent domain, the compensation received is the just compensation paid for the property taken. IDENTIFICATION: For items 91 – 95: A. Basis of taxation B. Theory of taxation C. Scope of taxation D. Situs of taxation E. Aspects of taxation 91. The levying or imposition of tax, and the collection of the tax are processes which constitute the taxation system. 92. It literally means “place of taxation”; the country that has the power and jurisdiction to levy and collect the tax. 93. The reciprocal duties of support and protection between the people and the government. 94. Subject to inherent and constitutional limitations, the power of taxation is regarded as supreme, plenary, unlimited, and comprehensive. 95. The existence of the government is a necessity and that the state has the right to compel all individuals and property within its limits to contribute. For items 96 – 100: A. Direct tax B. Capitation tax C. Excise tax D. Indirect tax E. Property tax
96. Tax which is demanded from one person from one person in the expectation and intention that he shall indemnify himself at the expense of another. 97. Tax imposed upon the performance of an act, the enjoyment of privilege, or the engaging in an occupation. 98. Tax imposed on personal or real property in proportion to its value or on some other reasonable method of apportionment. 99. Tax which is demanded from the person whom the law intends to pay it. 100. Tax of a fixed amount imposed upon all persons residing within a specified territory without regard to their property or occupation they may be engaged in. For items 101 – 105: A. National tax D. Local tax 101. 102. 103. 104. 105.
Real property tax Income tax Donor’s tax Occupation tax Estate tax
For items 106 – 120: A. Tax B. License C. Special Assessment D. Debt E. Toll 106. Not assignable Compensation charged by the 107. owner for the voluntary use of the property or improvements 108. May be based on income or on the value of the property Based wholly on benefits 109. 110. Not subject to the limitations on taxation 111. Based on contract 112. Demand of ownership or proprietorship Exceptional both as to time and 113. locality 114. Payable in money, property, or services Subject to constitutional and 115. inherent limitations Limited to the cost of regulation 116. 117. Imposed only on property which benefit from the improvement 118. Interest is enforced if stipulated or if the payment is in delay Largely based on the cost of the 119. property used, or on the cost of the improvement used 120. Due to the government in its sovereign capacity
Prepared by:
FRANCESCO RAFIEL A. MALLARI, CPA FACULTY, Department of Accountancy OLFU – Pampanga
Reviewed and Checked by:
ALEND KERSEY Q. SAMPANG, CPA OIC – Department of Accountancy OLFU – Pampanga
Approved by:
Dr. IGNACIO C. CORDOVA Jr. Dean – College of Business and Accountancy OLFU
