INCOME TAXATION

PRELIM EXAMINATION

1. The Bureau of Internal Revenue (BIR) imposes a 5% withholding tax on dividends paid to non-resident aliens based on a
tax treaty between the Philippines and a foreign country. What principle of international taxation is being applied here?
a. Reciprocity principle
b. Equal protection clause
c. Source-based taxation
d. Territoriality principle

2. Maria, a Filipino citizen, works for a company in Singapore and earns income there. She also owns a condominium in the
Philippines from which she earns rental income. What is Maria's tax treatment for her Singapore income and rental
income in the Philippines?
A. Both incomes are exempt from Philippine tax
B. Both incomes are subject to Philippine tax
C. Only her rental income is taxable in the Philippines
D. Only her Singapore income is taxable in the Philippines

3. An individual taxpayer decides to donate PHP 1,000,000 to an accredited charitable organization and claims it as a
deduction from his gross income. Under what condition can the donation be fully deductible?
A. The organization must be accredited by the BIR
B. The donation must be in the form of property
C. The donation must not exceed 10% of the taxpayer’s taxable income
D. The donation must be for a government project

4. Juan, a resident citizen, earned PHP 2,000,000 in income from his job in the Philippines and received PHP 500,000 from
dividends abroad. No taxes were paid on the dividends. How should Juan’s foreign income be treated for tax purposes?
A. Excluded from gross income
B. Subject to a 10% final tax
C. Included in gross income and subject to regular tax rates
D. Taxed only in the country where the income originated

5. A managerial employee receives the following benefits: a company car, free use of the company's beach resort, and an
entertainment allowance. Only the entertainment allowance is used strictly for business purposes. Which of the following
benefits is subject to Fringe Benefit Tax?
A. Company car
B. Entertainment allowance
C. Free use of the beach resort
D. Both A and C

6. A government contractor is claiming that the 5% final withholding tax imposed on government payments violates his right
to recover just compensation for services rendered. Which principle justifies the withholding tax?
A. The power to destroy principle
B. The lifeblood doctrine
C. The equal protection clause
D. The uniformity rule in taxation

7. Juan, a non-resident citizen of the Philippines, receives interest income from his bank deposits in a Philippine bank. How is
this income treated for tax purposes?
A. Subject to final tax at 20%
B. Exempt from tax because he is a non-resident citizen
C. Subject to regular tax rates
D. Subject to a 10% final tax

8. A managerial employee receives educational assistance for his dependents amounting to PHP 150,000. The employee uses
this benefit to pay for his child’s tuition in a private school. How should the educational assistance be treated for tax
purposes?
a. Fully exempt from Fringe Benefit Tax
b. Fully subject to Fringe Benefit Tax
c. Partially exempt if used for professional development
d. Exempt if the company pays directly to the school

9. A managerial employee is provided with free accommodation by the company, valued at PHP 800,000 annually. The
employee uses 30% of the accommodation for work-related purposes. How much is subject to Fringe Benefit Tax?
a. PHP 280,000
b. PHP 168,000
 c. PHP 560,000
d. PHP 336,000

10. A company provides a low-interest loan to its managerial employee, which is used entirely for personal purposes. The
prevailing interest rate is 10%, but the employee is charged only 3%. Question: How is the Fringe Benefit Tax on the
interest differential computed?
a. 35% of the total loan amount
b. 35% of the difference between market and charged interest
c. 10% of the loan amount
d. Exempt from tax

10. Which is TRUE? Assume all incomes are derived from within the Philippines
I. Nicanor, a resident citizen who is an employee has no other option but to use graduated tax rate on his
compensation
II. Nick Aynor, a Filipino contract worker in the USA has the option to use 8% taxation on his business income derived
from sources within the Philippines
III. Nica Knorr, a Filipino contract worker in the USA can use graduated tax rates in computing his income
IV. Nick Nore, a Filipino contract worker in the USA and with business in the Philippines is a mixed income earner

a. I and II only
b. I and IV only
c. I, II and IV only
d. All the above are true

11. Statement 1- Nicanor is selling fishballs earning Php 50,000 per year. He is classified as self-employed.
Statement 2 – Nicanor works as an assistant to the Mayor of a town. His position is not a plantilla position but a mere job
order subject to renewal every six months. His appointment has been renewed for the past three years. Nicanor is self-
employed.
Statement 3 – Nicanor is an operator of barbershop. He earns Php 300 per day. He is self-employed.
Statement 4 – Nicanor operates a carinderia. He is classified as self-employed.
Which statement is FALSE?
a. Statement 1
b. Statement 2
c. Statement 3
d. Statement 4
e. None

12. Which is FALSE?

I. Nicanor, a sari-sari store owner, opted commuted tax of 8%. He is allowed to claim deduction of Php 250,000.00 on
his gross sales.
II. Nicanor, a social media influencer and apologist was paid Php 5,000,000. He is allowed to claim deduction of Php
250,000.00 on his gross receipts.
III. Nicanor, a VAT-registered taxpayer, whose gross sales is only Php 1,000,000.00 is allowed to claim deduction of Php
250,000.00 on his gross sales.

a. I, II, III
b. II, III
c. III
d. II

13. 8% preferential tax can be availed by the following taxpayers, except:

a. Nicanor who is engaged in merchandising business
b. Nicanor, a professional doctor who is purely engaged in practice of profession
c. Nicanor who is an employee of ABC Hospital and at the same time operates his own clinic
d. Estate or trust

14. Which is FALSE?

S1 – An individual employee has no choice but to use graduated tax table in computing his annual tax
S2 – An individual engaged in trade may opt to use either graduated tax or 8% tax
S3 – An individual purely engaged in practice of profession can only use 8% tax
a. S1
b. S2
c. S3
d. S1, S2, S3

15. Sale of real property is subject to:

 S1 – capital gains tax if property is classified as a capital asset.
S2 – creditable withholding tax if property is classified as ordinary asset.
Which is TRUE?
a. Only S1
b. Only S2
c. Both are true
d. Both are false

16. Michael sold his land worth P 10,000,000 to Georgia.

S1: Assuming Michael is engaged in the business of real estate, the sale of land is subject to capital gains tax.
S2: Assuming Michael is not engaged in the business of real estate but the land he sold is used in his business, the sale of
land is subject to capital gains tax.
S3: Assuming Michael is not engaged in the business of real estate, the sale of land is subject to capital gains tax.
a. Only S1 is true
b. Only S2 is true
c. Only S3 is true
d. All is false

17. S1 - Capital asset can be converted to ordinary asset if the same remained idle for more than two (2) years
S2 – Real properties owned by a real estate developer cannot be converted to capital asset even if the assets are
abandoned after two (2) years.
Which is TRUE?
a. Only S1 is true
b. Only S2 is true
c. Both are true
d. Both are false

18. Nicanor (Resident Citizen) bought shares of stocks in XYZ Corp., a domestic corporation in the United States of America
(USA) and doing business in the US at par value Php 1,000,000.00. He sold the shares to Inday for Php 2,000,000.00.
S1 - Nicanor needs to report the capital gain in the Philippines and pay the corresponding regular tax due thereon.
S2 - Nicanor is required to pay capital gains tax in the Philippines.
Which is TRUE?
a. S1 only
b. S2 only
c. Both are true
d. Both are false

19. S1 – Php 5,000.00 excess of the allowable uniform allowance where the employee’s actual 13th month pay and other
benefits amounted to Php 50,000.00.
S2 - Daily tricycle allowance of Php 50.00 to a rank-and-file employee.
S3 - Reimbursable monthly representation expense of Php 10,000.00 given to managerial employee.
S4 – Productivity incentive of Php 5,000.00.
Which is taxable?
a. S1 and S2 only
b. S2 and S3 only
c. S1, S2 and S3 on
d. All of the above

20. Which is TRUE? De minimis benefits are:

S1 – Exempt from income tax but subject to withholding tax.
S2 – Subject to fringe benefits tax or withholding tax on compensation if the threshold is exceeded.
a. Only S1 is true
b. Only S2 is true
c. Both are true
d. Both are false

21. Which is FALSE in fringe benefits tax?

S1 – Monetary value of fringe benefit less fringe benefits are equal to fringe benefits tax.
S2 – Grossed-up monetary value of fringe benefits less of monetary value of fringe benefits is equal to fringe benefits tax.
S3 – Fringe benefits tax plus monetary value of fringe benefits is equal to grossed-up monetary value of the fringe benefits.
a. S1
b. S2
c. S3
d. S2 and S3 are true

22. Which is TRUE in fringe benefits tax?

 S1 - Supervisory employees are those who, in the interest of the employer, effectively recommend such managerial actions
or the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment
S2 - Managerial employees are ones who are vested with powers or prerogatives to lay down and execute management
policies and/or hire, suspend, lay-off, recall, discharge, assign or discipline employees
S3 – Rank-and-File employees are employees who are holding neither managerial nor supervisory position
a. S1
b. S2
c. S3
d. All of the above

23. Pedro is a Filipino seaman employed by a foreign shipping company. He earned a total of ₱1,200,000 in 2023 from his
employment while working abroad. Is this income subject to Philippine tax?
a. Yes, as it was earned by a resident citizen
b. No, as it was earned abroad by a seafarer
c. Yes, as all income of a citizen is taxable
d. No, as seafarers are automatically exempt from income tax

24. S1 – Nicanor, an NRC based in Canada opened a bank account in ABC Bank, a DC. The source of the interest income of
Nicanor is derived from within the Philippines.
S2 – Nicanor, an RA, opened a bank account in ABC Bank, a DC. The source of the interest income of Nicanor is derived
from within the Philippines.
S3 – Nicanor, an NRAETB opened a bank account in ABC Bank, a DC. The source of the interest income of Nicanor is
derived from within the Philippines.
S4 – Nicanor, an NRANETB opened a bank account in ABC Bank, a DC. The source of the interest income of Nicanor is
derived from within the Philippines.

Which is FALSE?
a. S1

b. S2
c. S3
d. S4
e. None

25. A Filipino citizen who is a resident of the United States receives dividends from a U.S. corporation and interest income
from a Philippine bank. He argues that his foreign-sourced income should not be taxable in the Philippines. Question: What
is the correct tax treatment of his income?
 A. Interest income is taxable, but foreign dividends are exempt.
 B. Both the interest income and foreign dividends are taxable.
 C. Only the foreign dividends are taxable, the interest income is exempt.
 D. All foreign-sourced income is exempt from Philippine tax.

PROBLEM 26
A taxpayer’s financial records for the taxable year 2022 are as follows:
Source: Philippines Canada* (translated to peso)
Gross income 5,000,000 10,000,000
Allowable deductions 3,000,000 5,000,000
Interest income from lending 1,000,000 1,000,000
Interest income from bank deposits 1,000,000 1,000,000
Dividends 1,000,000 1,000,000
Passive Royalty 1,000,000 1,000,000

26. Assuming the taxpayer is a resident citizen, how much is the taxable income subject to regular tax?

PROBLEM 27-28
Nicanor is a professional Architect and at the same time an employee of ABC Corp. He made available the following information
for 2023:

Gross receipts Php 4,000,000

Cost of service Php 2,000,000
Other valid expenses Php 1,000,000
Gross compensation Php 1,000,000

27. Compute the annual income tax due if Nicanor will opt for graduated tax rate.

28. Compute the annual income tax due if Nicanor will opt for 8% preferential tax rate.
29. In 2023, Inday sold her rest house in Bicol for Php 8,000,000. The fair market value of the rest house at the time of sale is
Php 10,000,000. Inday utilized Php 6,000,000 of the proceeds of the sale in acquiring a new principal residence, the capital
gains tax due is?

PROBLEM 30-32
The following cash benefits were given to Nicanor, a government employee during December 2023:
• Monetized vacation leave credits (20 days at Php 1,000 per day) – Php 20,000
• Monetized sick leave credits (20 days at Php 1,000 per day) – Php 20,000
• Uniform allowance – Php 10,000
• Christmas cash gift – Php 10,000
• Employee achievement award (Cash) – Php 10,000
• Annual medical assistance – Php 10,000

30. You were preparing the alpha list of employees; how much is the total de minimis benefits that should be reported?

31. You were preparing the Certificate of Compensation Payment / Tax Withheld (BIR Form 2316) of Nicanor. How much is the
total excess de minimis benefits that should form part of the Php 90,000 threshold?

32. You were preparing the Certificate of Compensation Payment / Tax Withheld (BIR Form 2316) of Nicanor. How much is the
total excess de minimis benefits that should form part of the Php 90,000 threshold if Nicanor is a private employee?

33. ABC Corp. and Chief Financial Officer Nicanor negotiated for the purchase of a motor vehicle amounting to Php 5 million to
be used by the latter. Both agreed to share half of the purchase price. What is the monetary value to be used in computing
the fringe benefit tax?

PROBLEM 34-35
An employee of a private corporation received the following de minimis benefits during
the taxable year 2022:
Monetized unused vacation leaves (10 days x P500) P5,000
Uniform allowance for the year 8,000
Laundry allowance (12 x P300) 3,600
Rice subsidy (12 x 2,500) 30,000
Actual medical benefits 12,000
Benefits received by an employee by virtue of a
collective bargaining (CBA) and productivity
incentive schemes 15,000

Payroll record also revealed the following:

Basic salary (P40,000 x 12) 480,000
13th month pay 40,000
Christmas bonus 30,000

34. How much is the taxable 13th month and other benefits?

35. How much is the tax payable?

36. Nathan Chen, General manager of Pampam Hotel in Makati City, is required by the owners of the hotel to live in one of the
hotel suites that located nearby its rooftop. This is to make sure that Nathan will be able to oversee the operations of the
hotel with more energy and efficiency, as he would be avoiding the early commute to work due to heavy traffic. If the hotel
typically charges P16,500 per night for a hotel suite, how much is the monthly FBT due from Pampam Hotel?

37. Mr. Dionisio sold domestic stocks directly to a buyer at a mark-up on cot of 200,000. He paid 5,000 brokers commission
and 8,000 documentary stamp tax on the sale. Compute the capital gains tax.
38. A non-resident alien not engage in trade or business derived 50,000 interest income from his long-term bank deposit here
in the Philippines. How much is the income tax due of the said alien?

39. A non-resident alien derived income only in his bank deposit here in the Philippines under the FCDU system of a domestic
bank. The interest amounted to $500. How much is the income tax due of the said alien? ($1 = Php 50)

40. A taxpayer received during the taxable year the following passive income derived from within the Philippines:
Interest on bank deposit under FCDU 231, 250
Royalty on a software application 95,000
Dividend income from Resident foreign Corp. 150,000

If the taxpayer is a non-resident alien engaged in business, the final tax on the above passive income would amount to?

41. On January 1, 2018, Loma invested 1,000,000 to BDOs 5-year, tax free deposit. The long-term deposit pays 10% annual
interest every January 1. In need of cash, Loma pre-terminated her investment on July 1, 2021. How much is the final tax
due in 2021?

PROBLEM 42-43
Ana, a resident citizen, provided the following data for year current taxable year:
Gross income from business (gross of 12,000 CWT) 700,000
Business Expense 300,000
Royalty from books 40,000
Gain on direct sale to buyer of shares of stock of a domestic
Corporation held as capital asset 70,000
Loss on sale of land in the Philippines held as capital asset with
Cost of 1,500,000 when the zonal value is 1,200,000 500,000

42. How much is the income tax payable of Ana?

43. How much is the total capital gains tax?

PROBLEM 44-46
Vincent sold a residential house and lot for 10,000,000 to his friend. Its Fair market value when he inherited it from his father
was 12,000,000 although its present FMV is 15,000,000.

44. The tax on the above transaction is:

a. 720,000 capital gains tax

b. 900,000 capital gains tax
c. 30% donor’s tax
d. Value added tax

45. Assuming the house and lot was Vincents principal residence and he used ½ of the proceeds to buy a new principal within
eighteen (18) months after the above sale. Assume further that Vincent properly informed the BIR about the sale. It shall
be:

a. Exempt from Capital Gains tax

b. Subject to 300,000 capital gains tax
c. Subject to 450,000 capital gains tax
d. Subject to 600,000 capital gains tax

46. Based on the above problem, but assuming the residential house is located abroad, the capital gains tax is:
47. Pedro, single, is a minimum wage earner of Makibaka Corporation. In addition to his basic minimum wage of 180,000 for
the year, he also received the following benefits:
 Holiday pay, 32,000
 Overtime pay, 25,000
 Night shift differential, 18,000
The income subject to tax should be.

48. Delta Corporation bought a condominium unit fir 6,000,000. The fair market value of the property per tax declaration is
6,800,000 while the zonal value is 6,500,000. It was transferred in the name of Pedro, one of its executives, for a lower
consideration amounting to 5,800,000. How much is the fringe benefit tax?

EMT has the following data on his passive income earned during the year 2023:
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

49. How much is the final withholding tax if the taxpayer is a resident citizen?

50. A resident citizen earned ₱1,200,000 from his employment in 2023. He also sold a vacant lot for ₱3,000,000, realizing a
capital gain of ₱1,000,000. What is his total tax liability for the year?