Midterm Examination - PCMA 412 Tax Management

Test I: True or False (25 Items): Tax avoidance is the legal use of tax laws to minimize tax liability, while tax evasion involves illegal actions. Tax management is the process of complying with tax laws.
TRUE 1: Tax avoidance is the legal use of tax laws to minimize tax liability.
FALSE 2: Tax evasion implies the illegal use of benefits of the law
TRUE 3: Tax Management aims to comply with legal formalities.
FALSE 4: Claiming personal expenses as business expenses is tax evasion, not avoidance.
TRUE 5: Tax planning involves legally planning income to maximize exemptions and deductions.
TRUE 6: Keeping two sets of books and making false entries is an example of tax evasion.
TRUE 7: Investing in a Public Provident Fund to reduce tax payable is an example of tax planning.
FALSE 8: Installing an air conditioner in a director's residence (treating it as factory equipment for depreciation purposes) is a form of tax avoidance.
TRUE 9: Maintaining accurate business records is crucial for tax compliance.
TRUE 10: Local government codes in the Philippines are not self-executing.
FALSE 11: National taxes are collected by the Bureau of Internal Revenue (BIR), not local governments.
FALSE 12: Real property tax is collected by the local, not the national government.
TRUE 13: Net losses can't be carried forward or backward for financial reporting purposes.
FALSE 14: Net losses can't be carried forward for tax purposes.

Question 1: Gift Tax is a transfer of property not related to business.
Question 2: Capital losses can be carried back 3 years and forward 5 years if they exceed capital gains.
Question 3: The entity and ability-to-pay principles relate to tax implications for corporations.
Question 4: The principles of entity, pay-as-you-go, all-inclusive income, and ability-to-pay are involved in taxation.
Question 5: Managing tax implications related to new machinery acquisition or replacement in advance is a strategy.

Item 1: Basic Community Tax for corporations in the Philippines is P500.00.
Item 2: The TRAIN Law increased exempt benefits ceiling to P90,000.00
Item 3: Gifts above P250,000 are taxed.
Item 4: Compensation is a systematic approach to providing monetary value for work.
Item 5 & 6: Two mandatory benefits for employees in the Philippines, likely in relation to labor laws, are missing.
Item 7-10: Employer-employee relationships, including the power to select, hire, pay wages, dismiss, and control, are missing.

Problem 1: Calculate annual interest expense and its impact on a company's income considering a loan of $500,000 at 8% per year with a 30% corporation tax rate.
Problem 2: Calculate the total tax credit for R&D expenses and effect on taxable income when $200,000 in R&D is incurred, with $50,000 in regular expenses, given a 20% R&D credit and 25% corporate tax rate.
Problem 3: Calculate post-money valuation and percentage of ownership dilution for existing shareholders. Then, calculate the tax liability on a $1.5 million taxable income with a 21% tax rate.
Problem 4: Calculate annual depreciation ($300,000 investment, straight-line method, 5-year useful life; corporate tax rate = 25%). Also determine total tax shield over 5 years.
Problem 5: Calculate intrinsic value of stock options, ordinary income at exercise, total cost, capital gain, and capital gains tax for 1500 stock options at $40, with market value increasing to $85 over 2 years, and sale at $95 after a year.
Problem 6: Calculate the current year employee and employer contributions to the pension fund (monthly salary PHP 60,000, employee contribution = 5%, employer contribution = 10%) in the Philippines.
Problem 7: Consider investment options for machinery and new product development: calculate annual depreciation, annual net income before tax, tax liability and net income after tax.