JURISTS BAR REVIEW CENTER ™ S UG G E S TE D A NS WE R S TO 2015 MOC K B A R E XA MIN A TI ON S IN TAXATION TAXATION LA W
I The Bureau of Customs issued a memorandum that all container vans stored and unclaimed in its warehouse for a period of at least four years, shall be destroyed and sold as scrap regardless of contents. XYZ an importer opposed the said memorandum on the ground that it is violative of due process clause under the constitution. The BOC on the other hand claims that it is within its powers as provided in the TCC. Decide.
Suggested Answer: I would decide in favor of XYZ. Under the Law on Taxation, the power of the Bureau of Customs’ power to forfeit and consequently destroy goods in its warehouse is limited to goods which are prohibited and illegal per se.
Here there is no proof that the goods contained in the vans are illegal per se or prohibited per se. Hence the Bureau of Customs cannot exercise such power of outright forfeiture and destruction. II The Caloocan City mayor wants to recover the costs of ren ovating the city hall’s elevators. He is thinking of issuing an order requiring a P5.00 usage fee from each person using the elevators during office hours. Before proceeding with his plan, he asks you as the city attorney for legal feedback. What would you say to him? If the Sangguniang Panglunsod issues a resolution in support of the order, would your advice be different? SUGGESTED ANSWER: I would advise the City Mayor that the order is not a valid imposition. Under the Local Government Code, the power to tax is legislative in nature and any imposition of a tax, fee or charge or the generation of revenue shall be exercised by the Sanggunian of the local government concerned through an appropriate ordinance. Here, the city mayor not being part of the Sanggunian has no authority to issue an order imposing a usage fee. If the Sanggunian issues a resolution in support of the order, my advice will still be the same. Under the Local Government Code, any imposition of tax, fee or charge or generation of revenue shall be exercised by the Sanggunian through an appropriate ordinance only. Hence my advice would still be the same.
III X just hurdled the bar examinations examinations and immediately engaged in the practice of law. In preparing his income tax return, he listed the following as deductible items: (a) fees paid to the Supreme Court to be able to take the bar examinations; (b) fees paid to a bar review center to enroll in its pre-bar review classes; (c) malpractice insurance; and (d) amount spent to entertain a judge who decided his first case. Which deductions are allowable? Reasons. SUGGESTED ANSWER: Only the malpractice insurance is allowable as a deduction. Jurists Suggested Answers to 2015 Mock Bar Examinations in Taxation Law. All rights reserved 2015 by Jurists Review Cente r Inc. Unauthorized reproduction, use, or dissemination is strictly prohibited and shall be prosecuted to the t he full extent of the law, including administrative complaints with the Office of the Bar Confidant, Supreme Court. Page 1 of 8
Under the National Internal Revenue Code (NIRC), ordinary and necessary expenses paid or incurred in carrying on any trade or business may be deducted as business or professional expenses. Here items (a) and (b) are not deductible as they were not incurred in the practice of the profession but to obtain a license to practice. Item (d) is not deductible as the Supreme Court has held that a business expense must not be against the law or public policy and the amount was spent to influence a judge in rendering his decision. The malpractice insurance may be deemed as necessary in carrying on the practice of law as the risk of incurring a huge liability while practicing law has to be guarded against. IV Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real property, the pieces must be placed by the owner of the land, and, in addition, must tend to directly meet the needs of the industry or works carried by the owner. Oil companies install underground tanks in gasoline stations located on the land leased by the oil companies from the owners of the land where the gasoline stations are located. Are those underground tanks, which were not placed there by the owner of the land but which were instead placed there by the lessee of the land, considered as real property for purposes of real property taxation under the Local Government Code? Explain. Suggested Answer: Yes, the underground tanks are considered as real property for purposes of real property taxation under the Local Government Code. The Supreme Court held that underground tanks of a gasoline station located on leased land are considered as real property under the Local Government Code for purposes of taxation.
V Gran Torino Co., a US business process outsourcing company, sent a team of language trainers for 3 months to its local subsidiary, GT Philippines, Inc. which operates call center operations in Cebu and Iloilo. The team trained the local staff to speak in English without their distinct Cebuano and Ilonggo accents. After the training, Gran Torino subsequently issued its bill. GT Philippines asks your advice on any Philippine tax consequences to the bill before it remits its payment. What would you advice? SUGGESTED ANSWER: I would advise GT Philippines that Gran Torino is liable for income tax. Under the NIRC, a non-resident foreign corporation is liable for income tax for labor or personal services performed in the Philippines. Here, the training was performed in the Philippines. Hence, Gran Torino is subject to income tax.
VI When Ato, a Filipino OFW based in Greece, went home for a vacation in Mindoro, he sold his farm, which had a current market value of P1 million, to his friend, Peng, for only P500,000 as a gesture of friendship even if many years ago, he bought the farm for P500,000 also. Ato is being assessed income tax on the sale by the BIR in the amount of P60,000. Ato protested on two grounds: a) he is an OFW exempt from taxes; and b) he derived no gain from the sale. How would you decide on his protest? Explain your answer. SUGGESTED ANSWER: The protest should be dismissed. Jurists Suggested Answers to 2015 Mock Bar Examinations in Taxation Law. All rights reserved 2015 by Jurists Review Center Inc. Unauthorized reproduction, use, or dissemination is strictly prohibited and shall be prosecuted to the full extent of the law, including administrative complaints with the Office of the Bar Confidant, Supreme Court. Page 2 of 8
a) The ground that an OFW is exempt from taxes is without merit. Under the NIRC, a citizen who is working and deriving income from abroad as an overseas contract worker is taxable on income from sources within the Philippines. Here, the property is located in the Philippines and the income was derived from sources within the Philippines. Hence, Ato is not exempt from paying the tax. b) The ground that he derived no gain from the sale is without merit. Under the NIRC, capital gains presumed to have been realized from the sale of real property classified as capital asset is subject to a final tax of six percent (6%) based on the gross selling price or current fair market value, whichever is higher.[Sec. 24 (D) (1), NIRC] Here the farm was a capital asset. Hence there is a presumed capital gains is which subject to the tax even though no actual gain was realized.
VII Mr. Fermin, a resident of Quezon City, is a CPA-Lawyer engaged in the practice of his two professions. He has his main office in Makati City and maintains a branch office in Pasig City. Mr. Fermin pays his professional tax as a CPA in Makati City and his professional tax as a lawyer in Pasig City. a) b)
May Makati City, where he has his main office, require him to pay his professional tax as a lawyer? Explain. May Quezon City, where he has his residence and where he also practices his two professions, go after him for the payment of his professional tax as a CPA and a lawyer? Explain.
ANSWER a) No, Makati City may not require Mr. Fermin to pay his professional tax as a lawyer. Under the Law on Local Taxation, a professional has the option of paying his professional tax where he practices his profession or where he maintains his principal office. Here Mr. Fermin practices his legal profession in Pasig City where he has a branch office. Hence Mr. Fermin has the option of paying his professional tax as a lawyer in Pasig City and he cannot be compelled to pay it in Makati City. b) No, Quezon City where Mr. Fermin resides may not go after him for the payment of his professional tax. Under the Law on Local Taxation, the situs of the professional tax is the city where the professional practices his profession or where he maintains his principal office in case he practices his profession in several places. Here Mr. Fermin neither practices his profession nor maintains a principal office in Quezon City. Hence Quezon City may not go after Mr. Fermin for the payment of his professional tax. VIII X Corporation, a domestic corporation, is a wholly owned subsidiary of Y Corporation, which is based in France. They entered into a Royalty Agreement that would allow X Corporation to use in the Philippines certain property rights of Y Corporation in exchange for a royalty fee.
Jurists Suggested Answers to 2015 Mock Bar Examinations in Taxation Law. All rights reserved 2015 by Jurists Review Center Inc. Unauthorized reproduction, use, or dissemination is strictly prohibited and shall be prosecuted to the full extent of the law, including administrative complaints with the Office of the Bar Confidant, Supreme Court. Page 3 of 8
a) Are the royalty fees payable by X Corporation to Y Corporation taxable in the Philippines? b) If no tax is paid on account of the above royalty fee payment, what are the consequences insofar as X Corporation is concerned? SUGGESTED ANSWER: a) Yes the royalty fees payable by X Corporation to Y Corporation are taxable in the Philippines. Under the NIRC, a nonresident foreign corporation is taxable on its income from sources within the Philippines. Here the royalty fees were derived from properties located or used in the Philippines and are thus considered as income from sources within the Philippines. Hence, the royalty fees payable to Y Corporation are subject to income tax. b) If no tax is paid on the royalty fee payment, the following are the tax consequence insofar as X Corporation is concerned pursuant to the NIRC. X Corporation cannot claim as allowable deductions the royalty fees paid to Y Corporation. Furthermore, X Corporation will be required to pay the tax not withheld, together with the corresponding surcharge and interest.
IX Your balikbayan cousin, who works as a nurse in Canada, came to visit you for 6 months to do the following: a) to sell her house in Manila and with the proceeds, purchase a farm lot in your province where she plans to retire in 2010; b) to check on her dollar remittances to her savings account with Banco de Oro which she opened when she left the country more than 5 years ago. Your cousin subsequently found a buyer for her house, the actress Angel Locsin, and they immediately executed a deed of absolute sale duly notarized. A few weeks after, your cousin told you about the unfortunate confrontation she had with Angel Locsin who demanded for the return of her money because the Register of Deeds refused to transfer title to the house to her name unless proof of payment of taxes from the sale was presented. Your cousin was also distraught to find out that her savings account was being subjected to withholding tax. “Akala ko ba exempt fr om tax kaming mga OFW?”, she asked you. What would be your reply? Answer: I would tell her that while OFW’s are not taxable on their income from sources without or outside the Philippines, they are still taxable on their income from sources within the Philippines. The sale of her house, being located in the Philippines, would bring about Philippine-sourced income which is subject to the 6% capital gains tax on the sale or exchange of real property located in the Philippines, based on the gross selling price or fair market value, whichever is higher. Likewise, since the savings account is maintained within the Philippines with a local bank, the interest income she earns from it is Philippine sourced passive income subject to the 20% final withholding tax. X For failure of Oceanic Company, Inc. (OCEANIC) to pay deficiency taxes of P20 Million, the Commissioner of Internal Revenue issued warrants of distraint on OCEANIC’s personal properties and Jurists Suggested Answers to 2015 Mock Bar Examinations in Taxation Law. All rights reserved 2015 by Jurists Review Center Inc. Unauthorized reproduction, use, or dissemination is strictly prohibited and shall be prosecuted to the full extent of the law, including administrative complaints with the Office of the Bar Confidant, Supreme Court. Page 4 of 8
levied on its real properties. Meanwhile, the Department of Labor through the Labor Arbiter rendered a decision ordering OCEANIC to pay unpaid wages and other benefits to its employees. Four barges belonging to OCEANIC were levied upon by the sheriff and later sold at public auction. The Commissioner of Internal Revenue filed a motion with the Labor Arbiter to annul the sale and enjoin the sheriff from disposing of the proceeds thereof. The employees of OCEANIC opposed the motion contending that Art. 110 of the Labor Code gives first preference to claims for unpaid wages. Resolve the motion. Explain. SUGGESTED ANSWER:
The motion to annul the sale and enjoin the sheriff from disposing of the proceeds thereof should be granted. The Supreme Court has held that unpaid taxes which are specific preferred claims and which confer a lien upon specific real and personal property should prevail over unpaid wages which are merely ordinary preferred claims. Here the unpaid income taxes conferred upon the government a lien over the property of the taxpayer. Hence the sale of the barges should be annulled. [Republic v. Peralta, 20 May 1987]. XI Ambo took out a life insurance policy with a face value of P 100,000 designating his wife Bebang as the beneficiary. Under the terms of the policy, the insurer will pay Ambo the amount of P100,000 after the 20th year of the policy, or if Ambo dies before the 20 th year, the P100,000 would be paid to Bebang. a) Ambo outlived the policy and received P100,000. The premiums paid on the policy amounted to P85,000. Is the P100,000 received by Ambo subject to income tax? b) Assume that Ambo died during the 18 th year of the policy and thus Bebang received P100,000. Is this subject to income tax? Answer: a)
The P100,000 insurance proceeds received by Ambo are subject in part to income tax.
Under the NIRC, amounts received by the insured as return of premiums paid under life insurance are not subject to income tax. Here to the extent of P85,000 there was a mere return of premium. Hence the recovery thereof is not taxable. The excess, however, of P15,000 would be subject to income tax. b) The P100,000 proceeds are not subject to income tax. Under the NIRC, life insurance proceeds payable upon the death of the insured are not subject to income tax. Here the life insurance proceeds P100,000 were payable upon the death of the insured Ambo. Hence these are not subject to income tax.
XII A Canadian Citizen died in June 2010, while domiciled in Manila. He left three (3) savings deposits in Land Bank of the Philippines, a local bank, in the amounts of P750,000.00, P250,000.00 and P100,000.00. Is the estate left by the decedent exempt from the payment of estate tax? Explain. Jurists Suggested Answers to 2015 Mock Bar Examinations in Taxation Law. All rights reserved 2015 by Jurists Review Center Inc. Unauthorized reproduction, use, or dissemination is strictly prohibited and shall be prosecuted to the full extent of the law, including administrative complaints with the Office of the Bar Confidant, Supreme Court. Page 5 of 8
Suggested Answer: Yes, the estate left by the decedent is exempt from the payment of the estate tax. Under the Law on Taxation, only the amount of the net estate in excess of P200,000 is taxable. Here applying the standard deduction of P1 million against the gross estate of P1.1 milion, the net estate would be only P100,000 which is not in excess of P200,000. Hence the estate left by the decedent is exempt from the payment of estate tax. XIII Yesterday, your client received summons in a collection suit filed by the BIR before the regular trial court in connection with an assessment for deficiency income tax issued in 2007. It appears that upon receipt from the BIR of the pre-assessment notice (PAN), your client sent to the BIR protest letters asking for the conduct of another investigation. The BIR ignored the protest letters and instead sent a final assessment notice (FAN). No action, however, was taken by the taxpayer after receiving the FAN. What course of action will you take in order to protect your client? Explain. Suggested Answers: I will move for dismissal before the regular trial court on the ground of prescription. Under the NIRC, proceedings for the collection of the tax prescribe after five years from the assessment. Here the assessment was made in 2007 and more than five years have elapsed since then. Hence the collection suit is barred by prescription. XIV For its fiscal year ending July 31, 2005, the Bamboo Corporation, which is engaged in the manufacture of bamboo home accessories for export, and which is wholly family-owned, registered handsome earnings that would exceed the company’s outstanding capital stock by more than 200%. In spite of its good earnings position, the company had no immediate plans to expand its factory because its capacity could still accommodate any increase in production and exports for the next year three years. During its last regular board meeting, the company president proposed the declaration of cash dividends in view of the healthy profits the company had earned. However, the company treasurer argued against such move because the rest of the family did not want to pay any taxes on their dividend income if there was to be a distribution of profits. Both officers now turn to you as their corporate counsel for your opinion. What would you tell them? Explain. SUGGESTED ANSWER: I would tell them that w hile it is true that the dividend incomes of the company’s stockholders would be subjected to the 10% final withholding tax on cash dividends if the company proceeded to make such a declaration, on the other hand, if the company would not, it would itself be subjected to the 10% improperly accumulated earnings tax under the NIRC, which is imposed on a company whenever its retained earnings are in excess of 100% of its outstanding capital stock for a given tax year. The only exemptions to the tax would be if there reasonable business needs of the company such as actual expansion plans for the immediate future which must be reasonably meet by retaining such excess earnings within the company or when the company is a bank or financial institution, an insurance company. XV Jurists Suggested Answers to 2015 Mock Bar Examinations in Taxation Law. All rights reserved 2015 by Jurists Review Center Inc. Unauthorized reproduction, use, or dissemination is strictly prohibited and shall be prosecuted to the full extent of the law, including administrative complaints with the Office of the Bar Confidant, Supreme Court. Page 6 of 8
In January 2013, Abet opened a stock trading account with BPI Trade, a licensed Philippine Stock Exchange stockbroker, and bought, through BPI Trade, 10,000 Bank of the Philippine Islands (BPI) shares at P80 per share or a total of P800,000. BPI shares are listed and traded at the Philippine Stock Exchange (PSE). In February 2015, the price of BPI shares at the PSE had risen to P100 per share. a) Abet sold the 10,000 BPI shares at the PSE and received P1,000,000. Is Abet subject to income tax on the sale of his BPI shares? Is he liable for any other tax and if so for how much? b) What if instead of selling the 10,000 BPI shares at the PSE, Abet sold them directly to his friend Binny and received P1,000,000. Is Abet subject to income tax on the sale? If so for how much? SUGGESTED ANSWERS: a) Abet is not subject to the income tax but to the percentage tax. Under the NIRC, sale of shares of stock listed and traded through a local stock exchange is subject to the percentage tax of ½ of 1% of the gross selling price. Here the BPI shares are listed and traded at the PSE, a local stock exchange. Hence the sale thereof is subject to the percentage tax of ½ of 1% of the gross selling price of P1,000,000 or P5,000. b) Yes is subject to income tax at 10% of the capital gain of P200,000 or P20,000. Under the NIRC, sale of shares not sold through the stock exchange are subject to income tax of 10% of the capital gain where such capital gain exceeds P100,000. Here the BPI shares were sold not through the stock exchange but directly to the buyer Binny and the capital gain exceeded P100,000. Hence the capital gain is subject to income tax of 10% of P200,000 or P20,000.
XVI Mr. Mariano, who inherited a well-preserved ancestral house in Pila, Laguna, accepted the offer of Sister Imaculada, Head of the Congregation of Blue Nuns for the latter to rent the house as temporary refuge for destitute unwed mothers. Mr. Mariano religiously received rental payments from the congregation as the house and the congregation’s mission caught the attention and response from generous philanthropists all over the world. Mr. Mariano felt blessed for having agreed to have such use for the house until one day, he was dismayed to receive a notice from the BIR Laguna Regional District Office (RDO) that he was deficient in his payment of taxes. He immediately consulted with his friend, Atty. Braguda who advised him not to worry about the assessment because the source of his rental income was property used for religious purposes which the Constitution exempted from taxation. Unsure of the advice, he obtained a second opinion from another friend, Atty. Bulalo who told him that he should have donated the property to the religious order as that was what the Constitution exempts to avoid being taxed. Totally confused, Mr. Mariano decides to get your opinion about the two lawyers’ opinions. What would you say? Suggested Answer: I would say that Atty. Braguda is wrong because even if Mr. Mariano’s property is being used by a religious order for charitable purposes, the Constitutional exemption covers only real property taxes, not income taxes. Hence, the rental income Mr. Mariano receives as landlord of the property is subject to income tax and the BIR RDO may assess him if he was deficient in his payment of the corresponding income taxes on his rental income. On the other hand, Atty. Bulalo is also wrong because the constitutional exemption on donations pertains only to educational, not religious nor charitable purposes. However, should Mr. Mariano donate his property to the religious order to be used for the latter’s charitable purposes, even if the Constitution does not provide donor’s tax exemption for the such purpose, the NIRC provides exemption from the donor’s tax for such donations Jurists Suggested Answers to 2015 Mock Bar Examinations in Taxation Law. All rights reserved 2015 by Jurists Review Center Inc. Unauthorized reproduction, use, or dissemination is strictly prohibited and shall be prosecuted to the full extent of the law, including administrative complaints with the Office of the Bar Confidant, Supreme Court. Page 7 of 8
XVII Chalap Food Corporation (CFC) incurred substantial advertising expenses in order to protect its brand franchise for Chalap Ketchup, one of its main products. In its income tax return, CFC included the advertising expenses as deduction from gross income, claiming it as an ordinary business expense. Is CFC correct? SUGGESTED ANSWER: No, CFC’s claim that the advertising expense is an ordinary business expense is no t correct. Under the Law on Income Taxation, advertising expenses the purpose of which is the protection of the taxpayer’s brand franchise is analogous to the maintenance of goodwill or title to one’s property which is in the nature of a capital expenditure. An advertising expense, of such nature does not qualify as an ordinary business expense, because the benefit to be enjoyed by the taxpayer goes beyond one taxable year. [CIR v. General Foods Inc., 401 SCRA 545 (2003)]. Here the purpose of the advertising expenses incurred by CFC is the protection of its brand franchise for Chalap Ketchup. Hence CFC’s claim is not correct. XVIII Pietrus died leaving as his heirs Arky, Brankov, and Cromwell. Since Pietrus died intestate and without debts, his three heirs executed an extrajudicial settlement in which Cromwell renounced his onethird share in favor of Arky and Brankov. The BIR assessed donor’s tax against Cromwell, characterizing his renunciation as a donation. a) Was the assessment proper? Explain. b) Would your answer be the same if Cromwell renounced his share in favor of Arky only? SUGGESTED ANSWERS: a) The assessment of donor’s tax against Cromwell was not proper. Under the Law on Gift Taxes, a renunciation of hereditary share in favor of a co-heir is not a donation subject to donor’s tax since the title to the property is not deemed to have vested in favor of the repudiating share. Here Cromwell renounced his hereditary share in favor of his co-heirs Arky and Brankov. Hence the renunciation is not a donation and thus the assessment of donor’s tax against Cromwell is improper. b) No, my answer would not be the same if Cromwell renounced his share in favor of Arky only. In that case, the assessment of donor’ s tax would be proper. Under the Law on Gift Taxes, a renunciation of hereditary share in favor of one or some but not all of the co-heirs is a donation subject to donor’s tax since the title to the property is deemed to have vested in favor of the repudiating share. [Art. 1050(2), Civil Code] Here Cromwell renounced his hereditary share in favor of his co-heirs Arky only but not in favor of the other co-heir Brankov. Hence the renunciation is a donation and thus the assessment of donor’s tax agai nst Cromwell is proper.
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Jurists Suggested Answers to 2015 Mock Bar Examinations in Taxation Law. All rights reserved 2015 by Jurists Review Center Inc. Unauthorized reproduction, use, or dissemination is strictly prohibited and shall be prosecuted to the full extent of the law, including administrative complaints with the Office of the Bar Confidant, Supreme Court. Page 8 of 8
