BASIC PRINCIPLES OF TAXATION

1. Which theory in taxation states that without taxes, a government would be

paralyzed for lack of power to activate and operate it, resulting in its destruction?
a. Power to destroy theory c. Sumptuary theory
b. Lifeblood theory d. Symbiotic doctrine

2. Although the power of taxation is basically legislative in character, it is NOT the

function of Congress to
a. Fix with certainty the amount of c. Identify who should collect the tax.
taxes.
d. Determine who should be subject to
b. Collect the tax levied under the
the tax.
law.

3. Ligaya Educational Foundation, Inc., a stock educational institution organized for

profit, decided to lease for commercial use a 1,500 sq. m. portion of its school. The
school actually, directly, and exclusively use the rents for the maintenance of its
school buildings, including payment of janitorial services. Is the leased portion
subject to real property tax?
a. Yes, since Lualhati is a stock and c. No, but it may be subject to income
for-profit educational institution. taxation on the rents it receives.
b. No, since the school actually, d. Yes, since the leased portion is
directly, and exclusively used the not actually, directly, and
rents for educational purposes. exclusively used for educational
purposes.

INCOME TAXATION
4. C. Lee, Chinese national, arrived in the Philippines on January 1, 2012 to visit
his Filipina paramour. He planned to stay in the country until December 31, 2016,
by which time he would go back to his legal wife and family in China. C. Lee
derived income during his stay here in the Philippines. For the taxable year 2012,
C. Lee shall be classified as a:

a. Resident alien
b. Non-resident alien engaged in trade c. Non-resident alien not engaged in
or business in the Philippines trade or business in the Philippines
d. Special alien employee

5. C.Siw, Inc., a Philippine corporation, sold through the local stock exchange
10,000 PLDT shares that it bought 2 years ago. C. Siw sold the shares for P2 million
and realized a net gain of P200,000. How shall it pay tax on the transaction?
a. It shall declare a P2 million gross income in its income tax return, deducting its
cost of acquisition as an expense.
b. It shall report the P200,000 in its corporate income tax return adjusted by the
holding period.
c. It shall pay 5% tax on the first P100,000 of the P200,000 and 10% tax on the
remaining P100,000.
d. It shall pay a tax of one-half of 1% of the P2 million gross sales.

6. Winterfell, Inc., bought a parcel of land in 2015 for P7 million as part of its
inventory of real properties. In 2017, it sold the land for P12 million which was its
zonal valuation. In the same year, it incurred a loss of P6 million for selling another
parcel of land in its inventory. These were the only transactions it had in its real
estate business. Which of the following is the applicable tax treatment?
a. Winterfell shall be subject to a tax of 6% of P12 million.
b. Winterfell could deduct its P6 million loss from its P5 million gain.
c. Winterfell’s gain of P5 million shall be subject to the holding period.
d. Winterfell's P6 million loss could not be deducted from its P5 million gain.

7. In 2017, Alice, a single wife with 2 children, earned P500,000 as income from her
beauty parlor and received P250,000 as Christmas gift from her aunt. She had no
other receipts for the year. She spent P150,000 for the operation of her beauty
parlor. For tax purposes, her gross income for 2017 is
a. P750,000 b. P500,000
c. P350,000 d. P600,000
8. Assuming the same facts in the immediately preceding number, except at the
year 2018, how much is the personal exemptions for income tax purposes may
Alice claim?
a. P 100,000 b. P 50,000 c. P 175,000 d. 0

9. Which of the following expenses may be deducted from gross compensation

income?

a. Depreciation of permanent assets

b. Premium payments on health and/or hospitalization insurance
c. Bad debts written off
d. Optional standard deduction

10. Which of the following taxes may be deducted from gross income?
a. Percentage tax on sale of listed stock
b. Business permit fee paid to the city government

c. Income tax

d. Tax on interest on bank deposit

11. Which of the following individual taxpayers may claim basic and additional
personal exemptions for income tax purposes?
a. Non-resident aliens engaged in trade or business in the Philippines, in the
absence of reciprocity
b. Non-resident aliens not engaged in trade or business in the Philippines
c. Both (a) and (b)
d. Neither (a) nor (b)

12. William Sid works as financial consultant in an oil firm in Dubai. Aside from his
salary thereat, he also maintains a 10-door apartment in Manila which he inherited
from his parents when he was already married. On the other hand, Wilma, his wife,
is employed as a loan officer at a local bank. Data pertaining to their dependents
appear below for the taxable year 2017:

 Anton - Son who turned 23 on April 1, 2017; incapable of self-support due to loss
of both legs in an accident;
 Bunny - 21-year-old daughter who is taking up culinary arts in Paris, France;
 Charlie - 15-year old adulterous son of Harry living with the couple;
 Dina - 12-year old child who died from a vehicular accident on January 1, 2017;
and
 Evan - 80-year old father of Wilma, supported by her and living with the couple.

The basic and additional personal exemptions of Harry for the taxable year 2017
amounts to:
a. P50,000 and P100,000, c. P50,000 and P0, respectively
respectively
d. P0 and P0, respectively
b. P50,000 and P75,000, respectively

13. Assuming the same facts above, the basic and additional personal exemptions
of Wilma for the taxable year 2019 amounts to:
a. P50,000 and P100,000, respectively c. P50,000 and P0, respectively
b. P50,000 and P75,000, respectively d. P0 and P0, respectively

14. Inday is a resident citizen of the Philippines. Data for a year:

Gross income from business P 700,000
Royalty from books 40,000
Gain on direct sale to buyer of shares 70,000
of stock of a domestic corporation held
as capital asset
Loss on sale of land in the Philippines 500,000
held as capital asset with cost of
P1,500,000 when the zonal
value is P1,200,000
Business Expenses 300,000
For the year 2017, how much is the total income tax expense for the year?
a. P177,500 c. P159,500
b. P80,000 d. P156,000

Gross Income from Business 700,000

Less: Business Expense 300,000
Personal Exemptions 50,000 350,000
Net Taxable income 350,000

Tabular Schedule:
1st 250,000 Tax is 50,000
Excess of 250,000 - 350,000 = 100,000 x 30% 30,000
Capital Gains Tax on Shares (70,000 x 5%) 3,500
Royalty Income (40,000 x 10%) 4,000
Loss on Sale (Zonal Value 1.2 x 6%) 72,000
Total Income Tax Expense 159,500

15. Mercy is a citizen and resident of the Philippines. She had a compensation
income (net of exclusions) of P200,000 and a net income from business of
P700,000 for a year. She made quarterly income tax payments amounting to
P237,000 and her employer withheld P25,000 on her compensation income. The
income tax payable (refundable) for the year is:
a. (P25,000) c. (P42,000) b.
P237,000 d. (P37,500)

Compensation Income 200,000

Net Income from Business 700,000
Total Income 900,000
Basic Exemptions (50,000)
Taxable Income 850,000
1st 500,000 Tax 125,000
Excess of 500,000- 850,000 x 32% 112,000
Total Tax Due 237,000
Less: Taxes Payments
Quarterly Payments 237,000
Compensation CWT 25,000 262,000
Refundable /Creditable Tax (25,000)

16. EMT has the following data on his passive income earned during the year 2016:
Philippines Abroad
Interest income from bank deposits 45,000 25,000
Interest income from FCDU 50,000 -0-
Royalties from books 20,000 30,000
Royalties from computer programs 20,000 40,000
Dividend income from a domestic corporation 27,000 13,000
Dividend income from a foreign corporation 33,000 22,000

How much is the final withholding tax if the taxpayer is a resident citizen?
a. P21,450 b. P20,400
c. P17,700 d. P36,250

Philippines
Interest income from bank deposits 45,000 x 20% = 9,000
Interest income from FCDU 50,000 x 7.5% = 3,750
Royalties from books 20,000 x 10% = 2,000
Royalties from computer programs 20,000 x 20% = 4,000
Dividend income from a domestic corporation 27,000 x 10% = 2,700
Total Withholding Taxes 21,450

17. How much is the final withholding tax if the taxpayer is a nonresident citizen?
a. P21,450 c. P17,700
b. P20,400 d. P36,250

Philippines
Interest income from bank deposits 45,000 x 20% = 9,000
Royalties from books 20,000 x 10% = 2,000
Royalties from computer programs 20,000 x 20% = 4,000
Dividend income from a domestic corporation 27,000 x 10% = 2,700
Total Withholding Taxes 17,700

18. Doging is an employee of a firm in Quezon City. He is supporting his 4-year-old

brother who is living with him. Data on his compensation income for the year
shows:
Regular Salary P 240,000
Thirteenth month pay 20,000
Quarterly bonus 40,000
Payroll Deductions: SSS Premiums 3,000
Philhealth contributions 1,200
Pagibig contributions 4,000
Labor union dues 1,000
Premium payments on hospitalization insurance 3,000
Payment of loan 5,000
How much is the taxable income?
a. P218,000 c. P208,400
b. P207,800 d. P260,800

Regular Salary P 240,000

Total Income 240,000
Less: Basic Exemption (50,000)
SSS Premiums (3,000)
Philhealth contributions (1,200)
Pagibig contributions (4,000)
Labor union dues (1,000)
Net Taxable Income 180,800 +30,000 if old laws =
218,000

19. The Improperly Accumulated Earnings Tax (IAET) is imposed on improperly

accumulated taxable income earned starting January 1, 1998 by domestic
corporations as defined under the Tax Code and which are classified as closely-held
corporations at the rate of:
a. twenty percent (20%). c. ten percent (10%).
b. fifteen percent (15%). d. five percent (5%).

20.
First statement: Once the profits have been subjected to improperly accumulated
earnings tax, the same shall no longer be subject to the same tax in later years even
if not declared as dividends.
Second statement: Profits which have been subjected to improperly accumulated
earnings tax when finally declared as dividends shall be subject to tax on dividends.
a. Both statements are true
b. Both statements are false
c. Only the first statement is true
d. Only the second statement is true
21. Mistah, single and sales executive of a leading pharmaceutical firm (RiteMed),
received in 2016 the following from his employer:

Salary, net of P267,000 withholding tax P 683,000

Allowances and benefits received:
Rent paid by RiteMed on the house 129,200
which Mistah occupies for
residential purposes, net of 5%
withholding
Entertainment allowance subject to 100,000
liquidation (P75,000 was duly
receipted in the name of RiteMed
and used to entertain RiteMed’s
customers and the balance of
P25,000 was used to purchase a
late model mobile phone for the
personal use of Mistah)
Reimbursement of entertainment 40,000
expenses paid by Mistah (P17,500
was used to entertain Mistah’s
boyhood pals and the balance of
P22,500 was used to promote
RiteMed’s businesses.)
Fixed yearly allowance for 85,000
entertainment

The fringe benefit tax is:

a. P50,400 b. P52,000 c. P84,000 d. P92,000

Gross Rent on Housing 129,200/95% = 136,000 x 50% = 68,000

Expense Account (CP & Pal Exp) 25,000 + 17500 42,500
Total 110,500
110,500/68% 162,500
162,500 x 32% 52,000

22. Continuing number 21, the income tax payable by Mistah is:
a. P13,200 b. P27,760 c. P29,200 d. P43,360

Compensation (683,000 + 267,000) 950,000

Fixed Year Allowance 85,000
Personal Exemptions (50,000)
Taxable Income 985,000

Income Tax per Tabular (OLD LAW)

up to 500,000 125,000
Excess (485,000 x 32%) 155,200
Withholding Tax (267,000)
Income Tax Payable 13,200

23. The following fringe benefits were given by an employer to its employees for the
quarter ending September 30, 2016:
De minimis benefits (not exceeding P 200,000
the maximum)
Reimbursed expense of rank and file 400,000
employees
Housing benefits to managers and 680,000
supervisors (Representing total rents)

The fringe benefit tax payable for the quarter is:

a. P160, 000 c. P442, 353
b. P320, 000 d. P502, 353
Housing Benefits to Manager
680,000 x 50% = 340,000 / 68% x 32% = 160,000

24. The employer shall file a remittance return of the final tax on fringe benefit
and pay the tax withheld within:
a. 5 days from the close of each month.
b. 10 days from the close of each month.
c. 10 days from the close of each fiscal quarter.
d. 10 days from the close of each calendar quarter

25. Which of the following income earners is required to file income tax return?
a. Minimum wage earners
b. Non-resident alien not engaged in business
c. An individual with respect to pure compensation income deriving from such
sources within the Philippines, the income tax on which has been correctly
withheld and that an individual deriving compensation from one employer at any
time during the taxable year
d. General professional partnership

26. Which of the following fringe benefit is not subject to fringe benefit tax?
a. Housing benefit c. De minimis benefit
b. Expense account d. Vehicle benefit

27. In the case of a taxpayer, only the following percentages of the gain or loss
recognized upon the sale or exchange of a capital asset shall be taken into
account in computing net capital gain, net capital loss and net income.
I. Statement 1 One hundred percent (100%) if the capital asset has been held for
not more than twelve (12) months by a taxpayer.
II. Statement 2 Fifty percent (50%) if the capital asset has been held for more than
twelve (12) months by a taxpayer.
a. True, true c. False, false
b. True, false d. False, true

28. A, worked for a manufacturing firm but due to business reverses, the firm
offered a voluntary redundancy program in order to reduce overhead expenses.
Under the program, an employee who offered to resign would be given separation
pay equivalent to his 3 months basic salary for every year of service. A accepted
the offer and received P800,000 as separation pay under the program. After all
employees who accepted the offer were paid, the firm found its overhead still
excessive. Hence, it adopted another program, where various unprofitable
departments were closed. As a result, B was separated from the service. B also
received P800,000 as separation pay. At the time of separation both A and B have
rendered at least 10 years of service but A was 55 years old while B was only 45
years old. As a result,
a. Both amounts are exempt from income tax
b. Both amounts are subject to income tax
c. Only Mr. A is subject to income tax
d. Only Mr. B is subject to income tax

29. Passive income includes income derived from an activity in which the earner
does not have any substantial participation. This type of income is
a. Usually subject to a final tax.
b. Exempt from income taxation.
c. Taxable only if earned by a citizen.
d. Included in the income tax return
30. Which of the following items is not part of gross income to be reported in the
income tax return?
a. Increase in value of land
b. Gambling winnings
c. Prize of P10,000
d. Gain from sale of store’s air conditioner

31. Mr. Yu leased his lot to Mr. Uy. The contract calls for Mr. Uy to construct a
house which would serve as the residence of the latter, the ownership thereof to
be vested in Mr. Yu after the expiration of the lease. When the house was
completely constructed, the remaining term of the lease was 10 years. The
residential house had an estimated useful life of 15 years. What is the tax
implication of the leasehold improvement?
a. Mr. Yu derives taxable income on the improvement; Mr. Uy can claim
depreciation expense as a deduction from gross income.
b. Mr. Yu derives taxable income on the improvement; Mr. Uy cannot
claim depreciation expense as a deduction from gross income.
c. Mr. Yu does not derive taxable income on the improvement; Mr. Uy cannot claim
depreciation expense as a deduction from gross income.
d. Mr. Yu does not derive taxable income on the improvement; Mr. Uy can claim
depreciation expense as a deduction from gross income.

32. Assume the same facts in the immediately preceding number, except that at
the time of the completion of the residential house, the remaining term of the
lease was 15 years while the useful life of the house was 10 years. What is the
tax implication of the leasehold improvement?
a. Mr. Yu derives taxable income on the improvement; Mr. Uy can claim
depreciation expense as a deduction from gross income.
b. Mr. Yu derives taxable income on the improvement; Mr. Uy cannot claim
depreciation expense as a deduction from gross income.
c. Mr. Yu does not derive taxable income on the improvement; Mr. Uy
cannot claim depreciation expense as a deduction from gross income.
d. Mr. Yu does not derive taxable income on the improvement; Mr. Uy can claim
depreciation expense as a deduction from gross income.

33. Which of the following items of interest expense may be deducted from gross
income?
a. Interest on corporation’s preferred stock
b. Interest on loan for construction of a rest house
c. Interest for delinquency in the payment of percentage tax
d. Interest on bank loan to finance petroleum exploration
34. Who among the following taxpayers may not claim a tax credit or deduction
on income tax paid to foreign countries?
a. Resident citizens
b. Resident aliens
c. Domestic corporations
d. General Co-Partnerships

35. Which of the following transactions is exempt from capital gains tax?
a. The sale of the principal residence of the taxpayer where the entire proceeds is
used to purchase a vacation lot at Tagaytay
b. The sale of a beach lot of the taxpayer where the entire proceeds is used to
construct his principal residence
c. The sale of the principal residence of the taxpayer for the second time in ten
(10) years to purchase another principal residence
d. None of the choices

36. Which of the following transactions is treated as a capital asset transaction for
income tax purposes?
a. Sale of a residential lot by a subdivision developer
b. Sale of a used delivery truck by a retailing company
c. Liquidation of partnership business
d. Sale of shares of stock by a dealer in securities

37. Which of the following is not an attribute of a deferred-payment sale?

a. The initial payments exceed 25% of the selling price in the year of sale.
b. The obligations or promissory notes received by the vendor from the vendee
are considered as equivalent to cash.
c. The tax may be paid in installments.
d. The sale involves both real and personal property.
38. Determine which of the following trusts shall the taxable income be
consolidated and the income tax thereon computed on the basis of such
consolidated income?
a. Trust No. 1 and Trust No. 2 have the same grantor and with different
beneficiaries.
b. Trust No. 1 and Trust No. 2 have the same grantor and the same
beneficiary.
c. Trust No. 1 and Trust No. 2 have different grantors and the same beneficiary.
d. Trust No. 1 and Trust No. 2 have different grantors and the same fiduciary and
beneficiary.

39. The Improperly Accumulated Earnings Tax shall not apply to which of the
following corporations?
a. Banks and other non-bank financial intermediaries
b. Insurance companies
c. Publicly-held corporation
d. All of the choices

TAX REMEDIES

40. Rosalie, a compensation income earner, filed her income tax return for the
taxable year 2013 on March 30, 2014. On May 20, 2017, Rosalie received an
assessment notice and letter of demand covering the taxable year 2013 but the
postmark on the envelope shows April 10, 2017. Her return is not a false and
fraudulent return. Can Rosalie raise the defense of prescription?
a. No. The 3 year prescriptive period started to run on April 15, 2014,
hence, it has not yet expired on April 10, 2017.
b. Yes. The 3 year prescriptive period started to run on April 15, 2014, hence, it had
already expired by May 20, 2017.
c. No. The prescriptive period started to run on March 30, 2014, hence, the 3 year
period expired on April 10, 2017.
d. Yes. Since the 3-year prescriptive period started to run on March 30, 2014, it
already expired by May 20, 2017.

41. On March 30, 2012 Emmett Foods, Inc. received a notice of assessment and a
letter of demand on its April 15, 2009 final adjustment return from the BIR.
Emmett Foods then filed a request for reinvestigation together with the requisite
supporting documents on April 25, 2012. On June 2, 2012, the BIR issued a final
assessment reducing the amount of the tax demanded. Emmett Foods was
satisfied with the reduction, it did not do anything anymore. On April 15, 2017 the
BIR garnished the corporation's bank deposits to answer for the tax liability. Was
the BIR action proper?
a. Yes. The BIR has 5 years from the filing of the protest within which to collect.
b. Yes. The BIR has 5 years from the issuance of the final assessment
within which to collect.
c. No. The taxpayer did not apply for a compromise.
d. No. Without the taxpayer’s prior authority, the BIR action violated the Bank
Deposit Secrecy Law.

42. Renesmee, Inc. received a notice of assessment and a letter from the BIR
demanding the payment of P3 million pesos in deficiency income taxes for the
taxable year 2015. The financial statements of the company show that it has been
suffering financial reverses from the year 2016 up to the present. Its asset
position shows that it could pay only P500,000.00 which it offered as a
compromise to the BIR. Which among the following may the BIR
require to enable it to enter into a compromise with Renesmee, Inc.?
a. Renesmee must show it has faithfully paid taxes before 2016.
b. Renesmee must promise to pay its deficiency when financially able.
c. Renesmee must waive its right to the secrecy of its bank deposits.
d. Renesmee must immediately deposit the P500,000 with the BIR.

43. As a rule, within what period must a taxpayer elevate to the Court of Tax
Appeals a denial of his application for refund of income tax overpayment?
a. Within 30 days from receipt of the Commissioner’s denial of his application for
refund.
b. Within 30 days from receipt of the denial which must not exceed 2
years from payment of income tax.
c. Within 2 years from payment of the income taxes sought to be refunded.
d. Within 30 days from receipt of the denial or within two years from payment.

44. What is the effect on the tax liability of a taxpayer who does not protest an
assessment for deficiency taxes?

a. The taxpayer may appeal his liability to the CTA since the assessment is a final
decision of the Commissioner on the matter.
b. The BIR could already enforce the collection of the taxpayer's liability if it could
secure authority from the CTA.
c. The taxpayer's liability becomes fixed and subject to collection as the
assessment becomes final and collectible.
d. The taxpayer's liability remains suspended for 180 days from the expiration of
the period to protest

45. The taxpayer seasonably filed his protest together with all the supporting
documents. It is already July 31, 2017, or 180 days from submission of the protest
but the BIR Commissioner has not yet decided his protest. Desirous of an early
resolution of his protested assessment, the taxpayer should file his appeal to the
Court of Tax Appeals not later than
a. August 31, 2017. b. August 30, 2017. c. August 15, 2017. d. August 1, 2017.

46. Where a return was filed, as a general rule, the prescriptive period for
assessment after the date the return was due or was filed, whichever is later, is
within
A. 3 years C. 7 years
B. 5 years D. 10 years

47. A compromise for a tax liability on the ground of financial incapacity to pay
shall still involve a payment of tax from the taxpayer at a minimum compromise
rate of

A. 10% of the basic assessed tax

B. 20% of the basic assessed tax
C. 30% of the basic assessed tax
D. 40% of the basic assessed tax

48. For filing a false and fraudulent return, a surcharge is imposed at:

A. 25% as criminal penalty

B.b25% as administrative penalty
C. 50% as criminal penalty
D. 50% as administrative penalty

49. This is not an administrative remedy available to a taxpayer in connection

with collection of taxes.

A. Filing a petition for reconsideration or reinvestigation

B. Filing a claim for tax refund or credit
C. Entering into a compromise
D. Filing a criminal complaint against erring BIR officials or employees.
50.
Date of payment of tax erroneously paid April 15, 2009
Date of claim for refund was filed January 15, 2010
Date decision of denial by the BIR was received September 15, 2010
Last day to appeal to the CTA is

A. April 15, 2011 C. November 15, 2010

B.January 15, 2011 D. October 15, 2010