The Philippines adopted the semi-global tax system, which means that: (2012 Bar Question)

a) All taxable incomes, regardless of the nature of income, are added together to arrive at gross
income, and all allowable deductions are deducted from the gross income to arrive at the taxable
income;
b) All incomes subject to final withholding taxes liable to income tax under the schedular tax
system, while all ordinary income as well as income not subject to final withholding tax under the
global tax system;
c) All taxable incomes are subject to final withholding taxes under the schedular tax system;
d) All taxable incomes from sources within and without the Philippines are liable to income tax.

SUGGESTED ANSWER:

b) All incomes subject to final withholding taxes liable to income tax under the schedular tax
system, while all ordinary income as well as income not subject to final withholding tax under the
global tax system

An example of a tax where the concept of progressivity finds application is the: (2011 Bar Question)

(A) income tax on individuals.

(B) excise tax on petroleum products.
(C) value-added tax on certain articles.
(D) amusement tax on boxing exhibitions.

SUGGESTED ANSWER:

(A) income tax on individuals.

Alain Descartes, a French citizen permanently residing in the Philippines, received several items
during the taxable year. Which among the following is NOT subject to Philippine income taxation?
(2011 Bar Question)

(A) Consultancy fees received for designing a computer program and installing the same in the
Shanghai facility of a Chinese firm.
(B) Interests from his deposits in a local bank of foreign currency earned abroad converted to
Philippine pesos.
(C) Dividends received from an American corporation which derived 60% of its annual gross receipts
from Philippine sources for the past 7 years.
(D) Gains derived from the sale of his condominium unit located in The Fort, Taguig City to another
resident alien.

SUGGESTED ANSWER:

(A) Consultancy fees received for designing a computer program and installing the same in the
Shanghai facility of a Chinese firm.

Income from the performance of services is treated as income from within the Philippines, if: (2012
Bar Question)

a) The payment of compensation for the service is made in the Philippines;

b) The contract calling for the performance of services is signed in the Philippines;
c) The service is actually performed in the Philippines;
 d) The recipient of service income is a resident of the Philippines.

SUGGESTED ANSWER:

c) The service is actually performed in the Philippines

Section 42, NIRC.

An individual taxpayer can adopt either the calendar or fiscal period for purposes of filing his
income tax return. (2010 Bar Question)

SUGGESTED ANSWER:

False. (Sec. 43, NIRC)

Which among the following taxpayers is required to use only the calendar year for tax purposes?
(2011 Bar Question)

(A) Partnership exclusively for the design of government infrastructure projects considered as
practice of civil engineering.
(B) Joint-stock company formed for the purpose of undertaking construction projects.
(C) Business partnership engaged in energy operations under a service contract with the
government.
(D) Joint account (cuentas en participacion) engaged in the trading of mineral ores.

SUGGESTED ANSWER:

(A) Partnership exclusively for the design of government infrastructure projects considered as
practice of civil engineering.

Pierre de Savigny, a Frenchman, arrived in the Philippines on January 1, 2010 and continued to
live and engage in business in the Philippines. He went on a tour of Southeast Asia from August 1 to
November 5, 2010. He returned to the Philippines on November 6, 2010 and stayed until April 15,
2011 when he returned to France. He earned during his stay in the Philippines a gross income of P3
million from his investments in the country. For the year 2010, Pierre’s taxable status is that of:
(2011 Bar Question)

(A) a non-resident alien not engaged in trade or business in the Philippines.

(B) a non-resident alien engaged in trade or business in the Philippines.
(C) a resident alien not engaged in trade or business in the Philippines.
(D) a resident alien engaged in trade or business in the Philippines.

SUGGESTED ANSWER:

(B) a non-resident alien engaged in trade or business in the Philippines.

A resident corporation is one that is: (2012 Bar Question)

 a) Organized under the laws of the Philippines that does business in another country;
b) Organized under the laws of a foreign country that sets up a regional headquarter in the
Philippines doing product promotion and information dissemination;
c) Organized under the laws of the Philippines that engages business in a special economic zone;
d) Organized under the laws of a foreign country that engages in business in Makati City,
Philippines.

SUGGESTED ANSWER:

d) Organized under the laws of a foreign country that engages in business in Makati City,
Philippines

Section 22 (H), NIRC.

Aplets Corporation is registered under the laws of the Virgin Islands. It has extensive operations in
Southeast Asia. In the Philippines, Its products are imported and sold at a mark-up by its exclusive
distributor, Kim's 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? (2011
Bar Question)

(A) Yes. Aplets is a non-resident foreign corporation engaged in trade or business in the
Philippines.
(B) No. The tax should have been computed on the basis of gross revenues and not net income.
(C) No. Aplets is a non-resident foreign corporation not engaged in trade or business in the
Philippines.
(D) Yes. Aplets is doing business in the Philippines through its exclusive distributor Kim's
Trading. Inc.

SUGGESTED ANSWER:

(C) No. Aplets is a non-resident foreign corporation not engaged in trade or business in the
Philippines.

A general professional partnership (GPP) is one: (2012 Bar Question)

a) That is registered as such with the Securities and Exchange Commission and the Bureau of
Internal Revenue;
b) That is composed of individuals who exercise a common profession;
c) That exclusively derives income from the practice of the common profession;
d) That derives professional income and rental income from property owned by it.

SUGGESTED ANSWER:

c) That exclusively derives income from the practice of the common profession

Section 26, NIRC.

[Note: The question is unfair because it gives an initial impression that the examiner is asking
the statement which best characterizes a GPP but the real question is found after the
enumeration of the choices which might not be not be noticed by the examinee.]
Income is considered realized for tax purposes when: (2011 Bar Question)

(A) it is recognized as revenue under accounting standards even if the law does not do so.
(B) the taxpayer retires from the business without approval from the BIR.
(C) the taxpayer has been paid and has received in cash or near cash the taxable income.
(D) the earning process is complete or virtually complete and an exchange has taken place.

SUGGESTED ANSWER:

(D) the earning process is complete or virtually complete and an exchange has taken place.

Aleta sued Boboy for breach of promise to marry. Boboy lost the case and duly paid the court's
award that included, among others, Pl00,000 as moral damages for the mental anguish Aleta
suffered.

Did Aleta earn a taxable income? (1%)(2013 Bar Question)

(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.
(C) She had taxable income since she made a profit.
(D) She had no taxable income since moral damages are compensatory.

SUGGESTED ANSWER:

(D) She had no taxable income since moral damages are compensatory.

Exemplary and moral damages awarded to a party-litigant are not considered taxable income
(America N.A.-Manila Branch vs. Commissioner of Internal Revenue, CTA Case No. 6144,
March 14, 2005).

Hopeful Corporation obtained a loan from Generous Bank and executed a mortgage on its real
property to secure the loan. When Hopeful Corporation failed to pay the loan, Generous Bank
extrajudicially foreclosed the mortgage on the property and acquired the same as the highest
bidder. A month after the foreclosure, Hopeful Corporation exercised its right of redemption and
was able to redeem the property. Is Generous Bank liable to pay capital gains tax as a result of the
foreclosure sale? Explain. (2014 Bar Question)

SUGGESTED ANSWER :
No. Since Hopeful Corporation exercised its right to redeem the property, Generous Bank is not
liable to pay capital gains tax on the foreclosure sale. As stated in the analogous case of Supreme
Transliner, Inc., v. BPI Family Savings Bank, Inc. (G.R. No. 165617, February 25, 2011, 644 SCRA 59),
Rev. Regs. No. 4-99 expressly provides that if a mortgagor exercises his right of redemption within one
year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no sale or
transfer of real property was realized. It is only in case of non-redemption by Hopeful Corporation that
the obligation to pay capital gains tax arises, which shall be based on the bid price of the highest bidder.
The tax will be imposed only upon the expiration of the one-year period of redemption. Furthermore, the
obligation to pay the capital gains tax would primarily fall on the mortgagor, Hopeful Corporation, and
not on Generous Bank.
Mr. A was preparing his income tax return and had some doubt on whether a commission he
earned should be declared for the current year or for the succeeding year. He sought the opinion of
his lawyer who advised him to report the commission in the succeeding year. He heeded his
lawyer's advice and reported the commission in the succeeding year. The lawyer's advice turned
out to be wrong; in Mr. A's petition against the BIR assessment, the court ruled against Mr. A.

Is Mr. A guilty of fraud? (1%)(2013 Bar Question)

(A) Mr. A is not guilty of fraud as he simply followed the advice of his lawyer.
(B) Mr. A is guilty of fraud; he deliberately did not report the commission in the current year
when he should have done so.
(C) Mr. A's lawyer should pay the tax for giving the wrong advice.
(D) Mr. A is guilty for failing to consult his accountant.

SUGGESTED ANSWER:

(A) Mr. A is not guilty of fraud as he simply followed the advice of his lawyer.

In Santos v. People of the Philippines and BIR, the Court of Tax Appeals (CTA) acquitted Santos
from the criminal case of tax evasion and ruled that failure to supply correct and accurate
information must be fully established as a positive act or state of mind; it cannot be presumed nor
attributed to mere inadvertent or negligent acts. Moreover, the CTA reiterated the doctrine in
Yulivo Sons hardware v. Court of Tax Appeals (G.R. No. L- 13203), January 28, 1961, 1 SCRA
169) that mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion.

In the present case, Mr. A relied in good faith on the expertise of his lawyer in not declaring his
income for that year. Therefore, he is not guilty of fraud.

A corporation may change its taxable year to calendar or fiscal year in filing its annual income tax
return, provided: (2011 Bar Question)

(A) it seeks prior BIR approval of its proposed change in accounting period.
(B) it simultaneously seeks BIR approval of its new accounting period.
(C) it should change its accounting period two years prior to changing its taxable year.
(D) its constitution and by-laws authorizes the change.

SUGGESTED ANSWER:

(A) it seeks prior BIR approval of its proposed change in accounting period.

The appropriate method of accounting for a contractor on his long-term construction contract (i.e.,
it takes more than a year to finish) is: (2012 Bar Question)

a) Cash method;
b) Accrual method;
c) Installment sale method;
d) Percentage of completion method.

SUGGESTED ANSWER:

d) Percentage of completion method

 Section 127, NIRC.

What is the "all events test"? Explain briefly. (2010 Bar Question)

SUGGESTED ANSWER:

The “all events test” is a test applied in the realization of income and expense by an accrual-basis
taxpayer. The test requires (a) the fixing of a right to the income or liability to pay, and (b) the
availability of reasonably accurate determination of such income or deduction during the taxable year.

The "all events test" refers to: (2012 Bar Question)

a) A person who uses the cash method where all sales have been fully paid by the buyers thereof;
b) A person who uses the installment sales method, where the full amount of consideration is paid
in full by the buyer thereof within the year of sale;
c) A person who uses the accrual method, whereby an expense is deductible for the taxable year
in which all the events had occurred which determined the fact of the liability and the amount
thereof could be determined with reasonable accuracy;
d) A person who uses the completed method, whereby the construction project has been
completed during the year the contract was signed.

SUGGESTED ANSWER:

c) A person who uses the accrual method, whereby an expense is deductible for the taxable year
in which all the events had occurred which determined the fact of the liability and the amount
thereof could be determined with reasonable accuracy.

The accrual of income and expense is permitted when the all-events test has been met. This test
requires: (1) fixing of a right to income or liability to pay; (2) the availability of the reasonable
accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not demand
that the amount of income or liability be known absolutely, only that a taxpayer has at his
disposal the information necessary to compute the amount with reasonable accuracy. The all-
events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test
is satisfied where a computation may be unknown, but is not as much as unknowable, within the
taxable year. “The amount of liability does not have to be determined exactly; it must be
determined with reasonable accuracy.” (Commissioner of Internal Revenue vs. Isabela Cultural
Corporation, G.R. No. 172231, February 12, 200)