College of Immaculate Conception

Midterm Exam in Taxation 1

Name: Professor:
Year, Course & Block: Score:

I. True or False. (35 points)

1. If the assessed value is lower than the selling price, then the fair value of the property is the
zonal value.
2. Corporations are exempt on inter – corporate dividends.
3. Title to a property shall not be registered by the registry of the deeds unless the commissioner
or his representatives certified that the tax on the transfer has been paid.
4. A vacant and unused lot is an ordinary asset to a real estate developer.
5. Domestic corporations are exempt from capital gains tax on the sale exchange and other
disposition of real property.
6. Individuals are exempt on interest income on long term deposits.
7. The income of FCDU banks from fellow depository bank from the expanded foreign currency
deposit system is subject to 10% final tax.
8. Real and other properties acquired are ordinary assets to banks even if they are not engaged in
the realty business.
9. There are two types of regular income tax: proportional income tax for corporations and
progressive income for tax for individuals.
10. All taxpayers are subject to final tax.
11. Capital assets become ordinary assets when used in business.
12. Stock dividends are always exempt from final tax.
13. All taxpayer are subject to regular income tax.
14. NRA- NETBs and NRFCs are also subject to regular income tax.
15. The real properties used by exempt corporations in their exempt operations are capital assets.
16. Items of gross income subject to final tax and capital gains tax are excluded in gross income
subject to regular income tax.
17. The share in the net income of a business partnership is subject to a creditable withholding tax,
not to final tax.
18. The sale of real property capital assets may be subject to regular income tax.
19. Both active income and passive income requires active participation of the taxpayer in earning
income.
20. The basic pay of both rank and file employees and managerial or supervisory employees is
considered compensation income and is subject to regular income tax.
21. Employed taxpayers can claim expenses from their employment as deductions.
22. The tax due of individuals is determined by means of tax table.
23. Final tax generally covers passive income.
24. All foreigners are exempt on final tax on foreign currency deposits.
25. NRA – NETB and NRFC are subject to final tax on income from sources in the Philippines.
26. The tax due of the corporations is determining by multiplying tax income by 30%.
27. The deadline of the annual income tax return of corporation using the calendar years is similar
to the deadline of the individual taxpayers.
28. A government employee may claim tax informer’s reward.
29. PCSO or lotto winnings are exempt from all types of income tax.
30. Corporations are subject to final tax on prizes.
31. The income of the Philippine government from essential public functions is exempt from any
income tax.
32. The tax sparing rule is applicable to resident and non resident foreign corporation.
33. Items of passive income from abroad are subject to final tax.
34. Prizes paid to corporations are inclusion in gross income subject to final tax.
35. The final tax on winnings does not apply to corporations.

II. Multiple Choice. (10points)

1. Which is not subject to final tax?
a. Compensation to Non – resident alien not engaged in trade or business
b. Fringe benefits of supervisory and managerial employees
c. Fringe benefits of rank and file employees
d. Income of non resident foreign corporations

2. Which of the following is exempt from final tax?

 a. Interest income earned by a bank from lending activities
b. Interest income earned by a bank from deposits in another bank
c. Royalties from book
d. All of these
3. The tax informer’s reward may be granted to:
a. Officials of the BIR
b. Public officials or employees
c. Close relatives of public government employees
d. Relatives of government employees beyond 6 th degree of consanguinity
4. Which is not subject to 20% final tax?
a. Interest income from trust funds
b. Royalties from musical composition
c. 11,000 worth of prizes
d. Winnings
5. Which is covered by final tax?
a. Interest income from foreign banks
b. 10,000 taxable prizes from the Philippines
c. Share in the net income of a joint venture
d. Share in the net income of a General Professional Partnership
6. Which is not subject to 10% final tax?
a. Royalties from literary works
b. Dividends from a domestic corporation
c. Share in the net income of a business partnership
d. Royalties from a business trademark
7. Prizes from sources abroad is subject to final tax
a. If the amount of prizes exceed 10,000
b. If the amount of prizes do not exceed 10,000
c. If it is given to the taxpayer without effort
d. Under no circumstances
8. What is the final tax on interest income on 6 year deposit pre terminated less than 2 years
before maturity?
a. 20%
b. 12%
c. 5%
d. 0%
9. Which of the following recipients is exempt from final tax on dividends?
a. Resident Citizen
b. Non – resident Citizen
c. Domestic Corporation
d. Resident Alien
10. The interest income from ling term peso deposit made with foreign banks is
a. Subject to 20% final tax
b. Exempt from any tax
c. Subject to regular tax
d. None of these

III. Problems. (30 points)

Kate has the following income in 2015:
 P10,000 interest income from a non-resident Japanese friend
 P40,000 interest income from Philippine residents
 P500,000 rent income from a commercial complex located in the USA leased to resident
Filipinos
 P200,000 rent income from a boarding house in Baguio City, Philippines
 P200,000 professional feed rendered to Chinese clients in Hong Kong
 P300,000 salary from a resident employer
 P100,000 gain from sale of merchandise imported and sold to Filipino resident
 P50,000 gain on sale of merchandise purchased locally and sold during his business travel in
Hong Kong
 P400,000 gain on sale of the boarding house located in Baguio City to a non-resident buyer.
Required:
 Compute the total income earned from sources
1. Within the Philippines (5points)
2. Outside the Philippines (5points)

3. Compute the total amount of income subject to final tax. (5points)

Yield from deposit substitute P 10,000
Interest income from bonds of a domestic corporation 23,000
Property dividend declared by a foreign corporation 40,000
Stock dividend declared by a domestic corporation 50,000
Compensation income, net of P10,000 withholding tax 80,000
Prize on “Search for Mr. Sexy Body” 15,000
Royalties from books 24,000
Interest income on personal loans granted to a friend 8,000
Salaries from a general professional partnership 30,000
Salaries from a business partnership 20,000

4. Grace Poe, non – resident alien, sold domestic stock directly to buyer at a net gain of 350,550.
Compute for the capital gains tax. (2points)

5. A concerned government employee furnished the BIR a statement detailing the improper tax
practices of a corporate taxpayer. The information was instrumental to the collection of 500,000
tax. How much tax informer’s reward after tax shall be released to informant? (2points)

6. Duterte won a gold medal and 50,000 cash prize for chess competition in the Palarong
Pambansa. How much final should be withheld from the prize? (2points)

7. Jejomar Binay submitted a sworn statement regarding the alleged tax evasion of Makati
Parking Lot Corporation. This led to the BIR to recover 20,000,000 unpaid taxes. How much net
tax informer’s reward shall be paid to Jejomar Binay? (3points)

8. Bongbong Marcos sold shares of resident foreign corporation directly to buyer. The shares
where purchased for 100,000 and were sold at a net selling price of 210,000. Compute the capital
gains tax. (2points)

9. Acer corporation is the ONLY corporate shareholder of Ten Star, Inc owning 60% of its
outstanding voting shares. During the year, Ten Star, Inc declared a 1,000,000 dividend. Compute
the final withholding tax on the transaction. (2points)

10. Mar Roxas published his book abroad for the international market. During the year, he
earned a gross royalty of 1,000,000. How much final tax will be withheld by the foreign
publisher? (2points)

IV. Comprehensive Problem. (25 points)

JELWIN is a Filipino in abroad imbued with super qualities. He stayed in New York and came back here in
the Philippines for good. Knowing the opportunities in the Philippines, he decided to spread his wealth
and live his life with his love here in the Philippines.

JELWIN is super rich, he invested his money on corporations, one of these corporations is the L. MEAN
CORP., manufacturer of luxury cars, incorporated under Philippine laws, the other one is the J.BEE
CORP., a resident corporation, a sister company of J.CO, manufacturer of high-quality honey, not
incorporated under Philippine laws. He received the following income from these corporations as
follows:

Corporation Interest Dividend Received

L.MEAN 20 % P 2,700,000

J.BEE 30 % P 3,000,00
Not contended with his investment, JELWIN deposited P10,000,000 to BANKO NI JHENICA, earning
9.5%p.a for 6-years because he knows that this is exempted from income tax. He also put his money in a
foreign currency denominated deposit under BBB ( Berly’s Bank of Banks), 15,000,000 Euros and earning
450,000 Euros p.a. The exchange rate is P1.95 = 1 Euro. Today (December 31), after 3.75 years, he
preterminated his deposit in BANKO NI JHENICA.

JELWIN, because of boredom, went to MALL OF EYSHA NI CLARISSA, and bought some groceries and got
ten raffle entries to win P500,000 each. Because JELWIN is super lucky on that day, won all the winnings
from his raffle entries. While in the mall, JELWIN is also super talented, joined in the singing and dancing
competition and received prizes of P15,000 and P9,999, respectively.

After going to the mall, he decided to go home. While on his way home, he saw some sort of documents
of MADUGA CORP., having knowledge in taxation, he found out that the corporation is evading from
paying its tax to the government. JELWIN proceeds to the BIR before going home. The BIR assessed
MADUGA CORP and ordered to pay its tax amounting to P900,000. JELWIN received the reward from the
BIR since he qualified for all the requirements of the BIR as tax informer and went home happily ever
after.

Requirements:

1. Total final tax on interest income of JELWIN?

2. Proceeds from the preterminated deposit in BANKO NI JHENICA?
3. Proceeds from tax informer’s reward from the BIR?
4. Total final tax of JELWIN on this situation?
5. Total income subject to regular income tax?