UP 2008 Taxation Law (Taxation 2)

8/12/2019 UP 2008 Taxation Law (Taxation 2)

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TAXATION LAW 2

I. TRANSFER TAXES

- excise taxes imposed upon the privilege ofgratuitously transmitting ones property toanother.

Two Types of Transfer Taxes Donors Tax Estate TaxImposed upon theprivilege to give

Imposed upon theprivilege to transmitproperty to heirs

Transfer is betweenthe living

Transfer is from thedeceased, throughhis/her estate, to theliving

Transfer may takeplace betweennatural and juridicalpersons

Transfer takes placeonly between naturalpersons

A. ESTATE TAX

PRINCIPLES

Definition-a graduated tax imposed upon the privilege ofthe decedent to transmit property at death and isbased on the entire net estate.-not a direct tax on the property transmitted ortransferred although its amount is based thereon.

Applicable LawEstate taxation is governed by the statute in

force at the time of the death of the decedent.The estate tax accrues as of the death of thedecedent and the accrual of the tax is distinctfrom the obligation to pay the same. Upon thedeath of the decedent, succession takes placeand the right of the State to tax the privilege totransmit the estate vests instantly upon death.(Section 3, RR 2-2003)

Transfers Affected1. Transfers Mortis Causa - Gratuitous

transfers after death, either testate orintestate.

2. Transfers Inter Vivos Generally attractdonors tax. However, certain transfers intervivos are treated as testamentarydispositions and are accordingly included inthe computation of the gross estate in orderto arrive at the proper estate tax liability.

These transfers are the following:

a. Transfers in contemplation of death (Sec.85B)

Term does not refer to the general expectation ofdeath which all entertain. The transfers referredto are those impelled by the thought of death

(i.e., the motivating factor or controlling motiveis the thought of death), regardless of whetherthe transferor was near the possibility of death ornot.

b. Transfer with retention or reservation ofcertain rights (Sec. 85B)

It involves cases where the owner transfers hisproperty during life but still retains the economicbenefits the possession or enjoyment of theproperty, or the power to designate the persons

who may exercise such rights. By reason of therestriction the transferee is incapable of freelyenjoying or disposing of the property until thetransferors death. The transfer may be regardedas having been intended to take effect inpossession or enjoyment at the transferorsdeath.

ILLUSTRATION:X transfers his property to Y in naked ownershipand to Z in usufruct throughout Zs lifetimesubject to the condition that if Z predeceases X,the property shall return to X. If X dies during Zslife, the value of the reversionary interest of X atdeath is includible in his gross estate (see Articles756-757 of the Civil Code). The transfer istaxable as intended to take effect at or afterdeath because the possibility of reversion to Xmakes Zs interest conditional as long as X lives.NOTE: Transfer with retention or reservation ofcertain rights is grouped by the Tax Code under

transfer in contemplation of death.c. Revocable transfers (Sec. 85C) Transfers where the transferor has reserved theright to alter, amend or revoke such transfer,regardless of WON the power is actuallyexercised during his lifetime, and WON the powershould be exercised by him alone or inconjunction with someone else. The power toalter, amend or revoke shall be considered toexist on the date of the decedents death EVENTHOUGH: the exercise of the power is subject to a

precedent giving of notice, or the alteration, amendment or revocationtakes effect only on the expiration of a stated

period after the exercise of the power,whether or not on or before the date of thedecedents death notice has been given or thepower has been exercised. If notice has not been given or the power

has not been exercised before the date ofhis death, such notice shall be consideredto have been given, or the powerexercised, on the date of his death.

d. Transfers of property arising under ageneral power of appointment (Sec. 85D)

Gross estate shall include any property passed ortransferred under a general power of appointmentexercised by the decedent: by will, or by deed executed in contemplation of, or

intended to take effect in possession orenjoyment at, or after his death, or

by deed under which he has retained for hislife or any period not ascertainable withoutreference to his death or for any period whichdoes not in fact end before his death

o the possession or enjoyment of, or theright to the income from, the property, or

o the right, either alone or in conjunction

with any person, to designate the personswho shall possess or enjoy the property orthe income therefrom

Q: What is a power of appointment?The power or right to designate by will or bydeed the person(s) who shall succeed to,possess or enjoy the property, or the incometherefrom, received from the estate of theprior decedent. It involves the personcreating the power (donor) and the person to


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whom is given the right to exercise the power(donee).

Two Kinds of Appointment and their Effects:

Kind ofAppoint

ment

Nature TaxImplication

s

Effects

General DONEE haspower toappointany personhe chooseswho shallpossess orenjoy thepropertywithoutrestriction

Makesappointedproperty, forall legalintents, theproperty ofthe DONEE(includible inhis estate)

DONEEholds theappointedpropertywith alltheattributesofownership, undertheconceptof owner

Special DONEEmustappointsuccessorto thepropertyonly withina limitedgroup orclass ofpersons

Notincludible inthe grossestate of theDONEE whenhe dies

DONEEholds theappointedpropertyin trust,or undertheconceptof trustee

e. Transfers for insufficient consideration(Sec. 85G)

Transfers that are not bona fide sales of propertyfor an adequate and full consideration in moneyor moneys worth.

If bona fide sale no value shall be includedin the gross estate [Case B]

If not a bona fide sale - the excess of the fairmarket value at the time of death over thevalue of the consideration received by thedecedent shall form part of his gross estate.[Case A]

If inter vivos transfer is proven fictitious total value of the property at the time ofdeath included in the gross estate.[Case C]

Case A Case B Case CFMV, transfer 1,500 2,000 2,500FMV, death 2,000 2,500 2,000ConsiderationReceived

800 2,000 0

ValueIncluded inthe GrossEstate

1,200 0 2,000

Exempt Transfers [ MTTB] (Sec. 87)

a. Merger of the usufruct in the owner of thenaked title

b. Transmission or delivery of the inheritanceor legacy by the fiduciary heirs or legatee tothe fideicommisary

c. Transmission from the first heirs, legateesor donees in favor of another beneficiary inaccordance with the desire of the testator

d. All b equests, devises, legacies or transfersto social welfare, cultural and charitableinstitutions, no part of the income of which

inures to the benefit of any individual,provided that not more than 30% of the saidbequests, devises, legacies or transfers shallbe used for administrative purposes

Excluded Properties [DULUTS 200]1. PROCEEDS of:

a. Life insurance policy taken out- by the decedent upon his own life,- when beneficiary is OTHER THAN theestate, executor or administrator,- and designation is IRREVOCABLE(Sec. 85E)

Thus, proceeds are INCLUDED in thegross estate: When beneficiary is the estate,

executor or administrator, whetherdesignation is revocable or irrevocable

When beneficiary is other than theestate, executor or administrator, anddesignation is REVOCABLE

NOTE: According to the InsuranceCode, the designation is presumed tobe revocable, in case the designationof the beneficiary is not clear.

b. group life insurance policy taken out- by a company for its employees, (law

only speaks of policies taken out by thedecedent upon his own life)

c. life insurance policies-issued by the GSISto government officials or employees, asthey are exempt by law from taxes of allkinds (PD 1146, as amended)

2. Death benefits received from the SSS,

accruing by reason of death (RA 1161, asamended)

3. Amounts received from the Philippine and theU .S. Governments from the damages sufferedduring the last war (RA 227)

4. Benefits received by beneficiaries residing inthe Philippines under laws administered by theU .S. Veterans Administration (RA 360)

5. Properties held in Trust by the decedent6. Transfers by way of bona fide S ales

7. S eparate or exclusive property of the survivingspouse is not deemed part of the gross estate ofthe decedent spouse. (Sec. 85, NIRC)

8. Net estates which are not in excess ofP200 ,000 are exempt from estate tax. (Sec. 84,NIRC)

GROSS ESTATECompositionThe following properties and interest therein atthe time of decedents death: Citizens and Resident Aliens all properties,

real or personal, tangible or intangible,wherever situated

Non-resident Aliens only properties situatedin the Philippines provided that, with respectto intangible personal property, its inclusionin the gross estate is subject to the rule ofreciprocity provided for under Sect 104, NIRC

Q: What is residence for estate taxpurposes?


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It refers to the permanent home, the place towhich whenever absent, for business or pleasure,one intends to return, and depends on facts andcircumstances, in the sense that they discloseintent. (Corre v. Tan Corre, 100 Phil 321) It is,therefore, not necessarily the actual place ofresidence. The term residence and domicile

are synonymous and are used interchangeablywithout distinction. (Collector v. Lara, 102 Phil813; Velilla v. Posadas, 62 Phil 624).

Q: What is the situs of intangible personalproperty?GR: situs is at the domicile or residence of theowner. Exception: When it is inconsistent with the express

provisions of statute, or Justice does not demand that it should be, as

where the property has in fact a situs elsewhere.

CASE LAW: Collector v. Lara (102 Phil 813) When the owner of personal property, during hislifetime, extended his activities with respect tohis interests so as to avail himself of theprotection and benefits of the laws of thePhilippines, so as to bring his person or propertywithin the reach of the Philippines, the reason fora single place of taxation no longer obtains. Hisproperty in the Philippines enjoys the protectionof the government so that the right to collect theestate tax cannot be questioned.

Q: What are the intangible properties whichare considered by law as situated in the

Philippines? Franchise which must be exercised in thePhilippines

Obligations or bonds issued by anycorporation or sociedad anonima organized orconstituted in the Philippines

Shares, obligations or bonds issued by anyforeign corporation 85% of the business ofwhich is located in the Philippines

Shares, obligations or bonds issued by anyforeign corporation if such shares, obligationsor bonds have acquired a business situs inthe Philippines

Shares or rights in any partnership, business

or industry established in the PhilippinesQ: What is the reciprocity rule? (Sec. 104,NIRC)There is reciprocity if the foreign country of whichthe decedent was a citizen and resident at thetime of his death: did not impose a transfer tax of any

character, in respect of intangible personalproperty of citizens of the Philippines notresiding in that foreign country; or

allowed a similar exemption from transfer taxin respect of intangible personal propertyowned by citizens of the Philippines not

residing in that country[In sum, both states must exempt nonresidents(citizens of the other state) from transfer taxes inrespect of intangible personal property.]NOTE: For the reciprocity rule to apply, there must

be TOTAL reciprocity.[For instance,] in the Philippines, both estate

and inheritance taxes are imposed on theestate while in California only inheritance taxis imposed. The reciprocity rule may not be

availed of. Reciprocity has to be total. (CIR v.Fisher, 110 Phil 686)

Reciprocity in exemption does not require the foreign country to possess internationalpersonality in the traditional sense (i.e.,compliance with the requisites of statehood).Thus, Tangier, Morroco (Collector v. Campos-

Rueda, 42 SCRA 23) and California, a state inthe American Union (Collector v. de Lara, 102Phil 813) were held to be foreign countrieswithin the meaning of Section 104.

Valuation of the Gross Estate (88 of theNIRC and 5 of RR 2-2003)

GENERAL RULE: The properties comprising thegross estate shall be valued based on FAIRMARKET VALUE (FMV) as of the time of death.

Real property -FMV as determined by the

Commissioner OR FMV as shown in the scheduleof values fixed by the provincial and cityassessors, whichever is HIGHER.

Shares of Stocko Listed shares FMV is the arithmetic mean

between the highest and lowest quotation ata date of death, OR the date nearest the dateof death, if none is available on the date ofdeath itself

o Unlisted shares - COMMON shares arevalued based on BOOK VALUE; whilePREFERRED shares are valued at PAR VALUE

Right to usufruct, use or habitation

,annuity - the probable life of the beneficiaryin accordance with the latest basic standardmortality table is to be taken into account, tobe approved by the Secretary of Finance,upon recommendation of the InsuranceCommissioner.

Decedents interest Value to be included inthe gross estate is the extent of the interesttherein of the decedent at the time of his death

DEDUCTIONS [ELIT VTMSFH]

1. Expenses, Losses, Indebtedness andTaxes [ELIT] [fjc cult]

a. Funeral expenses (86-A1) (max.P2ook)Allowable deduction is whichever is lower of-the actual funeral expenses (WON paid)up to the time of interment, or-an amount equal to 5% of the grossestate, but in no case to exceed P200,000.

NOTE: The unpaid portion of the funeralexpenses incurred which is in excess of theP200,000 threshold is NOT allowed to beclaimed as a deduction under claims againstthe estate (see 1(c) below). (Sec. 6(A)(1) ofRR 02-2003)

Examples of funeral expenses(RR 2-2003, Sec. 6-A1)

o The MOURNING APPAREL of the survivingspouse and unmarried minor children ofthe deceased, bought and used on theoccasion of the burial


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The losseso were INCURRED DURING the

SETTLEMENT of the estateo arose from FIRES, STORMS,

SHIPWRECK or OTHER CASUALTIES,or from ROBBERY, THEFT orEMBEZZLEMENT

o

are NOT COMPENSATED BYINSURANCE or otherwiseo are not claimed as a deduction for

income tax purposes in an income taxreturn

o were incurred NOT LATER THAN THELAST DAY FOR PAYMENT OF THEESTATE TAX

TAXES Deductible from the gross estateIF:

o They have accrued as of the death ofthe decedent

o They were unpaid as of the time of

deathNOTE: This deduction DOES NOT includeincome tax upon income received afterdeath, or property taxes not accruedbefore his death, or the estate tax duefrom the transmission of his estate.

2. Property previously taxed (Vanishingdeductions) (86-A2)

Deduction allowed on the property left behindby the decedent which he had acquiredpreviously by inheritance or donation.

Previously, a transfer tax had already beenimposed on the property, either the estatetax (if property inherited) or the donors tax(if property donated). Now that the recipientof the inheritance or donation has died, thesame property will again be subjected to atransfer tax, the estate tax. Thus, tominimize the effects of a double tax on thesame property within a short period of time,i.e. five (5) years, the law allows a deductionto be claimed on the said property. Example: Mr. A died in December 2003. InMarch 2003, Mr. B (Mr. As father) died andleft Mr. A some properties as inheritance.

May vanishing deductions be claimed asdeductions in computing Mr. As net taxableestate? YES, vanishing deductions shall be allowed ifthe following conditions are met(REQUISITES FOR DEDUCTIBILITY): [ PINID ]

1) Death the present decedent (Mr. A)died within five years from the receipt ofthe property from a prior decedent (Mr.B) or donor;

2) I dentity of the property The propertywith respect to which deduction is soughtcan be identified as the one received

from the prior decedent or the donor, oras the property acquired in exchange forthe original property so received.

3) I nclusion of the property The propertymust have formed part of the grossestate situated in the Philippines of theprior decedent, or the total amount of thegifts of the donor

4) P revious taxation of the property thedonor's tax on the gift or estate tax on

the prior succession (Mr. Bs succession)was finally determined and paid

5) N o vanishing deduction on the propertywas allowed to the estate of the priordecedent . (Illustration of how thisrequirement may NOT be met: In theexample above, if Mr. B received the

same properties as a donation from Mr. Cin July 2002, a vanishing deduction onthe properties was claimed with respectto Mr. Bs estate. Thus, no morevanishing deduction may be claimed byMr. As estate)

Computation of vanishing deductionUsing the facts above, assume that Mr. Ainherited a car and a house from his fatherMr. B. The FMV of the car was P120,000and the FMV of the house was P800,000 atthe time of Mr. Bs death. At the time Mr. Ainherited the land, it was subject to a

mortgage of P80,000. Mr. A paid P70,000 ofthe mortgage during his lifetime (leaving abalance of P10,000). The FMV of theproperties at the time of Mr. As death wereP850,000 for the land and P70,000 for thecar. Mr. As gross estate amounted toP3,200,000 while total deductions (excludingmedical expenses, standard deductions,family home) amounted to P600,000.

1) First, compare the values of theproperty at the time of the priordecedents death and at the time ofthe present decedents death. The

lower amount shall be the initialbasis. in the example, the initial basis shall

be P800,000 for the land andP70,000 for the car, for a total ofP870,000NOTE: The value used as initial basisis significant only for purposes ofcomputing the amount of vanishingdeduction. The value included in thedecedents gross estate is ALWAYSthe fair market value at the time ofhis death.

2) Then, the value in (1) shall bereduced by any payment made bythe present decedent on anymortgage or lien on the property

Mr. A paid P70,000 of the mortgage.Thus, P870,000 less 70,000 isP800,000

3) The value as reduced in (2) shall befurther reduced by an amount equalto:

Value as reduced in (2) X Total amount ofGross Estate deductions *

* excluding family home, medicalexpenses, standard deduction andamounts received under RA 4917

800/3200 x 600,000 equals 150,000.This will be deducted from P800,000,which gives a balance of P650,000

4) Finally, the remaining balance shallbe multiplied by the correspondingpercentage:


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% If received by inheritance orgift:

100% within one (1) year prior to thedeath of the present decedent

80%More than one year but notmore than two years prior to

the death of the decedent

60%More than two years but notmore than three years prior tothe death of the decedent

40%More than three years but notmore than four years prior tothe death of the decedent

20%More than four years but notmore than five years prior tothe death of the decedent

Since Mr. A received the inheritance inMarch 2003 (within 1 year from his deathin December 2003), the balance of

P650,000 shall be multiplied by 100%.Thus, the allowable vanishing deduction isP650,000

3. Transfers for public purpose

The whole amount of all the BEQUESTS,LEGACIES, DEVISES or TRANSFERS to or for theuse of the Government of the Republic of thePhilippines, or any political subdivision thereof,for exclusively public purposes shall be deductiblefrom gross estate, provided such amount orvalue had been included in the gross estate.

4. Family home (maximum of P1m) It is the dwelling house, including the land

on which it is situated, where the husband andwife, or a head or the family, and members oftheir family reside, as certified to by theBarangay Captain of the locality.

It is deemed constituted on the house andlot from the time it is actually occupied as thefamily residence and considered as such for aslong as any of its beneficiaries actually residestherein. (Arts. 152 and 153, Family Code)Temporary absence from the constituted familyhome due to travel or studies or work abroad,etc. does not interrupt actual occupancy. The

family home is generally characterized bypermanency, that is, the place to which,whenever absent for business or pleasure, onestill intends to return. (RR 2-2003, Sec. 6D)

Requisites for Deductibility1) The family home must be the actual

residential home of the decedent and hisfamily at the time of his death, as certifiedby the barangay captain of the locality.

2) The total value of the family home mustbe included as part of the gross estate ofthe decedent

3) Allowable deduction must be in an amount

equivalent to the current FMV of thefamily home as declared or included in thegross estate but in no case shall thededuction exceed P1,000,000

5. Standard deduction (86-A5) (P1m) An amount equivalent to One million pesos(P1,000,000) shall be deducted from the grossestate without need of substantiation.

6. Medical expenses (86-A6) (max. ofP5ook)

All medical expenses (cost of medicine, hospitalbills, doctors fees, etc.) incurred (whether paidor unpaid)

Requisites for Deductibility :

- The expenses were incurred by the decedentwithin one (1) year prior to his death- The expenses are duly substantiated withreceiptsPROVIDED, that in no case shall the deductiblemedical expenses exceed Five Hundred ThousandPesos (P500,000).

NOTE: Any amount of medical expenses incurredwithin one year from death in excess of P500,000CANNOT be claimed as a deduction under Claimsagainst the estate. ( RR 2-2003, Sec. 6-F)

7. Amounts received by heirs under R.A.

4917 (86-A7) Any amount received by the heirs from thedecedents employer as a consequence of thedeath of the decedent-employee in accordancewith RA No. 4917 (this law provides thatretirement benefits of private employees shall notbe subject to attachment, levy execution or anytax) PROVIDED that such amount is included inthe gross estate of the decedent.

QUICK GLANCE:Resident orcitizen decedent

Non-resident aliendecedent

GROSS ESTATE all property at thetime of death,wherever situated

GROSS ESTATE includes only that partof gross estate locatedin the Philippines

DEDUCTIONS funeral

expenses judicial

expenses claims against

the estate claims against

insolvents unpaidmortgage anddebt

taxes and losses transfers for

public use vanishing

deductions family home standard

deduction medical

expenses

amountsreceived underR.A. 4917

share inconjugalproperty

DEDUCTIONS funeral expenses judicial expenses claims against the

estate claims against

insolvents unpaid mortgage

and debt taxes and losses transfers for public

use vanishing

deductions share in conjugal

property

NOTE: To compute fortotal allowabledeductions of the firstsix items above, thisformula is used:

Grossestate,Phils

XGrossestate,world

Worldexpenses,losses,indebtedness, taxes etc.

NOTE: No deduction shall be allowed in the caseof a non-resident decedent not a citizen of the


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Philippines, unless the executor, administrator, oranyone of the heirs, as the case may be, includesin the return required to be filed under Section90 of the Code the value at the time of thedecedents death of that part of his gross estatenot situated in the Philippines. (Section 86, NIRC)

Tax Rates Applicable:If the net estate is:

Tax Credit for Estate Taxes (86-E)

Q: What is a tax credit?It is a remedy against international doubletaxation. To minimize the onerous effect of taxingthe same property twice, tax credit againstPhilippine estate tax is allowed for estate taxespaid to foreign countries.

Q: Who may avail of tax credit?Only the estate of a decedent who was a citizenor a resident of the Philippines at the time of hisdeath can claim tax credit for any estate tax paidto a foreign country.

Q: What is the amount allowable as taxcredit?GENERAL RULE : The estate tax imposed by thePhilippines shall be credited with the amounts ofany estate tax imposed by the authority of aforeign country.LIMITATIONS :

a. The amount of the credit in respect to thetax paid to any country shall not exceedthe same proportion of the tax againstwhich such credit is taken, which thedecedent's net estate situated within suchcountry taxable under the NIRC bears tohis entire net estate; (PER COUNTRY

BASIS) andb. The total amount of the credit shall not

exceed the same proportion of the taxagainst which such credit is taken, whichthe decedent's net estate situated outsidethe Philippines taxable under the NIRCbears to his entire net estate. (OVERALLBASIS)

ILLUSTRATION:Assume:

Net Estate Philippines(reduced by all allowable

deductions, exceptstandard deduction)

P1,050,000

Country G Net Estate 300,000Country H Net Estate 150,000Tax paid/incurred:PhilippinesCountry GCountry H

15,0005,0001,400

Net taxable estate is P500,000(1,050,000 + 300,000 + 150,000

1,000,000 standard deduction). ThePhilippine estate tax on P500,000 isP15,000

Solution Limitation A:

To get tax credit per country under

Limitation A, this formula is followed:Net Estate in a Particular Country x Phil. estatetax = Tax credit

Net Estate Worldwide

The result after applying the formulaabove is compared to the tax actuallypaid for each foreign country. The lowerof the two amounts for each foreigncountry will be added to get the total taxcredit allowed under Limitation A.

Amount

Allowedwhicheveris Lower)

Country G (300/1500 x15,000)Actually paid toCountry G

3,0005,000

3,000

Country H (150/1500 x15,000)Actually paid toCountry H

1,5001,400

1,400

Tax credit allowedunder Limitation A

P 4,400

Solution Limitation B:

Net estate in all foreign countries. x Phil. estatetax = Tax credit

Net Estate Worldwide

The result after applying the formulaabove is compared to the tax actuallypaid in total to foreign countries. Thelower of the two amounts will be addedto get the total tax credit allowed underLimitation B.

Amount

Allowed(Lower)

450/1500 x 15,000 P 4,500Total foreign incometaxes paid

6,400

Tax credit allowedunder Limitation B

P 4,500

Compare the tax credit allowed under LimitationA and Limitation B. The lower of the twoamounts is the final allowable tax credit. In thiscase, the amount computed under Limitation A(4,400) is lower, thus it becomes the finalallowable tax credit.

If there is only one foreign country involved, bothLimitations will yield the same answer. To getthe tax credit allowable, use the formula inLimitation A. The resulting amount will becompared to the actual tax paid to the foreigncountry. The lower amount will be the finalallowable tax credit.(Source: Reyes, Income Tax Law and

Accounting)

OVER BUT NOTOVER TAX ISPLUS

OF THEEXCESS OVER

200,000 ExemptP 200,000 500,000 0 5% 200,000500,000 2,000,000 15,000 8% 500,0002,000,000 5,000,000 135,000 11% 2million5,000,000 10million 465,000 15% 5million10,000,000 And Over 1,215,000 20% 10million


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COMPLIANCE REQUIREMENTS

ESTATE TAX

1. Person Liable for PaymentPrimarily, the estate, through the executor oradministrator. Payment shall be made before the

delivery of the distributive share in theinheritance to any heir or beneficiary. If thereare two or more executors or administrators, allof them are severally liable for the payment ofthe tax.The estate tax clearance issued by theCommissioner or the Revenue District Officer(RDO) having jurisdiction over the estate, willserve as the authority to distribute the remainingproperties/share in the inheritance to the heir orbeneficiary.

Subsidiarily, heirs or beneficiaries, for thepayment of that portion of the estate which his

distributive share bears to the value of the totalnet estate. The extent of his liability, however,shall in no case exceed the value of his share inthe inheritance.

2. Notice of Death

A written Notice of Death must be given to theBIR-within two (2) months after the death of thedecedent or-within a period after the executor oradministrator or executor qualifies as such:

1. In all cases of transfers subject to tax or

2. Where, though exempt from tax, the grossvalue of the estate exceeds P20,000.

ESTATE TAX RETURNI: When required1. When the estate is subject to estate tax, OR2. When, though exempt from tax, the gross

value of the estate exceeds Two hundredthousand pesos (P200,000), OR

3. Regardless of the gross value of the estate,when the said estate consists of registered orregistrable property such as real property,motor vehicle, shares of stock or other similarproperty for which a clearance from the

Bureau of Internal Revenue is required as acondition precedent for the transfer ofownership thereof in the name of thetransferee,

II: Contents The executor, or the administrator, or any of thelegal heirs, as the case may be, shall file a returnunder oath in duplicate, setting forth:1. The value of the gross estate of the decedent

at the time of his death, or in case of anonresident, not a citizen of the Philippines,of that part of his gross estate situated in thePhilippines;

2. The deductions allowed from gross estate indetermining the net taxable estate; and

3. Such part of such information as may at thetime be ascertainable and such supplementaldata as may be necessary to establish thecorrect taxes.

4. For estate tax returns showing a grossvalue exceeding Two million pesos(P2,000,000) there must be a statementduly certified to by a Certified PublicAccountant containing the following:

Itemized assets of the decedent with theircorresponding gross value at the time ofhis death, or in the case of a nonresident,not a citizen of the Philippines, of thatpart of his gross estate situated in thePhilippines;

Itemized deductions from gross estate

allowed in Section 86; and The amount of tax due whether paid orstill due and outstanding.

III: When filedGR : Filed within six (6) months from thedecedent's death.Exception : The Commissioner shall haveauthority to grant, in meritorious cases, areasonable extension not exceeding thirty (30)days for filing the return

IV: Where filed Except in cases where the Commissioner

otherwise permits, the return shall be filed with: an authorized agent bank (AAB), or Revenue District Officer (RDO), Collection Officer, or duly authorized Treasurer of the city or

municipality in which the decedent wasdomiciled at the time of his death, or

if there be no legal residence in thePhilippines, with the Office of theCommissioner.

Payment of Estate Tax

I: When paid

At the time the return is filed by the executor,administrator or the heirs.

Extension of PaymentThe Commissioner may allow an extension ofpayment, if he finds that the payment on the duedate of the estate tax or of any part thereofwould impose undue hardship upon the estate orany of the heirs

extension not to exceed five (5)years, in case the estate is settled judicially,

or two (2) years in case the estate issettled extrajudicially

Where the taxes are assessed by reason of

negligence, intentional disregard of rules andregulations, or fraud on the part of the taxpayer,no extension will be granted by theCommissioner.

If extension granted, the Commissionermay require the executor, or administrator,or beneficiary, as the case may be, tofurnish a BOND in such amount, notexceeding DOUBLE the amount of the taxand with such sureties as theCommissioner deems necessary,conditioned upon the payment of the saidtax in accordance with the terms of theextension.

Effects of granting an extension Payment of the amount in respect of which

the extension is granted on or before the dateof the expiration of the period of theextension

Suspension of the running of statute oflimitations for deficiency assessment for theperiod of any extension

Any amount paid after the statutory due dateof the tax, but within the extension period,


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shall be subject to interest but not tosurcharge.

Q: Can estate tax be paid ininstallments? Yes . In case the available cash of the estate isnot sufficient to pay its total estate tax liability,

the estate may be allowed to pay the tax byinstallment and a clearance shall be released onlywith respect to the property thecorresponding/computed tax on which has beenpaid. (RR 2-2003)

Government Collection of Unpaid Estate TaxDue

1. Filing of Action The Government may file anaction against all the heirs for the collectionfrom each one of them the amount of the taxproportionate to the inheritance received.Hereditary property consists only of that part

which remains after the settlement of alllawful claims against the estate for thesettlement of which the entire estate is firstliable. It achieves payment of the tax andadjustment of the shares of each heir in thedistributed estate as lessened by the tax.

2. Enforcement of Tax Lien Another remedy,pursuant to the lien created by Sec. 219 ofthe Tax Code upon all property and rights toproperty belonging to the taxpayer, is bysubjecting said property of the estate which isin the hands of an heir or transferee to thepayment of the tax due on the estate. This

remedy seeks only the payment of the tax. Asa holder of property belonging to the estate,an heir is liable for the tax up to the amountof the property in his hands. He is individuallyanswerable for the part of the taxproportionate to the share he received fromthe inheritance. His liability, however, cannotexceed the amount of his share. Afterpayment of the tax, he will have a right ofcontribution from his co-heirs, to achieve anadjustment of the proper share of each heir inthe distributable estate. (Commissioner v.Pineda, 21 SCRA 105)

OBLIGATIONS OF EXECUTOR,ADMINISTRATOR, OFFICERS, OTHERS

1. Executor or AdministratorWhen the gross estate is more than P20,000, theexecutor, administrator or any of the legal heirsshall: a) give a written notice of death to the BIR

within two months after the decedentsdeath OR after the executor or administratorshall have qualified

b) file the estate tax return within the timeprescribed by law

c) pay the estate tax within the time prescribedby lawIf the executor or administrator makes a writtenapplication to the Commissioner fordetermination of the amount of estate tax anddischarge from personal liability therefor, theCommissioner shall notify the executor oradministrator of the amount of the tax. Uponpayment of the tax, the executor or administratorshall be DISCHARGED from PERSONAL LIABILITYfor any deficiency in the tax thereafter found to

be due, and shall be entitled to a receipt orwriting showing such discharge. (92)

2. JudgeNo judge shall authorize the executor oradministrator to deliver a distributive share toany party interested in the estate, unless a

certification from the BIR that the estate tax hasbeen paid is shown. (94)

3. Register of DeedsThe Register of Deeds shall not register in theregistry of property any transfer of real propertyor real rights therein, or any mortgage, by way ofdonation or mortis causa or inheritance, withouta certification from the BIR of payment of theestate tax, and they shall immediately notify theBIR of non-payment of tax discovered by them.(95)

4. Bank

If a bank has knowledge of the death of a personwho maintained a joint account or deposit jointlywith another, it shall not allow any withdrawal bya surviving depositor from the said joint accountunless the Commissioner has certified that theestate tax has been paid.

EXCEPTION: the administrator or any heir may,with the authorization of the Commissioner,withdraw an amount NOT EXCEEDING P20,000.(95)

5. Lawyer, Notary Public or anyGovernment Officer

Any lawyer, notary public, or any governmentofficer who, by reason of his official duties,intervenes in the preparation or acknowledgmentof documents regarding partition or disposal ofdonations mortis causa, legacy or inheritance,shall furnish the BIR with copies of suchdocuments and any information whatsoeverwhich may facilitate the collection of estate tax.(95)

6. DebtorA debtor shall not pay his debts to the heirs,legatees, executor or administrator of hiscreditor-decedent without a certification from the

BIR that the estate tax has been paid.EXCEPTION: if the credit is included in theinventory of estate of the decedent. (95)

7. Corporate Secretary of otherresponsible officer

No transfer to any new owner in the books of anycorporation, sociedad anonima, partnership,business or industry organized or established inthe Philippines, of any shares, obligations, bondsor rights by way of donations mortis causa,legacy or inheritance shall be made, UNLESS acertification from the BIR that the estate tax has

been paid is shown. (97)


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ILLUSTRATIONS

o Decedent is an unmarried head of a family

a. Real and personal properties 5,000,000family home 2,000,000

Gross estate 7,000,000Less: DeductionsOrdinary deductions

Funeral expenses 200,000Other deductions 1,300,000

(1,500,000)Special deductions

Family Home 1,000,000Standard deduction 1,000,000Medical expenses 500,000

(2,500,000)Net taxable estate 3,000,000

NOTE:Although the family home is valued at P2 million,the maximum allowable deduction for the familyhome is P1million only.Medical expenses are not included in thedeductions referred under Section 86(A)(1) of theCode but are treated as a special item ofdeduction under Section 86(A)(6) of the sameCode.

o Decedent is a married man with asurviving spouse Family home is exclusive property

Conjugal Exclusive TotalReal&personalproperties 5,000,000 5,000,000Family home 2,000,000 2,000,000Otherexclusiveprop 2,500,000 2,500,000Gross estate 5,000,000 4,500,000 9,500,000Less:OrdinaryDeductions

Funeralexpenses 200,000Otherdeductions 1,300,000TotalConjugal

deductions (1,500,000) (1,500,000)Net estate b4share ofspouse 3,500,000 4,500,000 8,000,000Less Share of survivingspouse `

1/2 of 3,500,000 (1,750,000)Net Estate b4 special ded'ns 6,250,000Less: Special Deductions

Family Home (1,000,000)Standard Deduction (1,000,000)Medical Expenses (500,000)

Net Taxable Estate 3,750,000

Family home is conjugal orcommunity property

Conjugal Exclusive TotalReal andpersonalproperties 5,000,000 5,000,000Family home 2000000 2,000,000Other exclusive

properties 2,000,000 2,000,000Gross estate 7,000,000 2,000,000 9,000,000Less: OrdinaryDeductions

Funeralexpenses 200,000Other dedns 1,300,000TotalConjugaldeductions (1,500,000) (1,500,000)

Net estate b4share of spouse 5,500,000 2,000,000 7,500,000Less Share of surviving spouse `


Family Home (1,000,000)Standard Deduction (1,000,000)Medical Expenses (500,000)

Net Taxable Estate 2,250,000

Family home is conjugal property,valued at P1,500,000

Conjugal Exclusive TotalReal and personalproperties 5,000,000 5,000,000Family home 1,500,000 1,500,000Other exclusiveproperties 2,000,000 2,000,000Gross estate 6,500,000 2,000,000 8,500,000Less: OrdinaryDeductions

Funeralexpenses 200,000Otherdeductions 1,300,000Total Conjugaldeductions (1,500,000) (1,500,000)

Net estate b4share of spouse 5,000,000 2,000,000 7,000,000Less Share of surviving spouse `


Family Home (750,000)Standard Deduction (1,000,000)

Medical Expenses (500,000)Net Taxable Estate 2,250,000

NOTE: Only 750,000 is allowed as a deduction forthe family home, considering that it was conjugalproperty valued at P1,500,000. This value issubdivided into P750,000, which belonged to thedecedent, and P750,000, which belonged to thesurviving spouse. The part owned by thedecedent (P750,000) is compared with theP1,000,000 maximum deduction, the lower of thetwo amounts being the allowable deduction.


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B. Donors Tax

PRINCIPLES

DefinitionNot defined under the Tax Reform Act of 1997 . A

gift is merely subjected to donors tax.

GIFT or DONATION - an act of liberalitywhereby a person disposes gratuitously of a thingor right in favor of another who accepts it. (Art725, Civil Code)

REQUISITES for a gift to be subject todonors tax : [ ACID ]1. The donor must have CAPACITY 2. There must be an INTENT TO DONATE 3. There must be DELIVERY , either actual or

constructive4. The donee must ACCEPT the donation

Kinds of Donations1. Donations inter vivos a donation made

between living persons, which is perfected themoment the donor knows of the acceptanceof the gift by the donee 21 ; subject to donorstax

2. Donations mortis causa a donation whichtakes effect upon the death of the donor;subject to estate tax

Q: What are considered donations for taxpurposes?1. Sales, exchanges and other transfers of

property for less than an adequate and fullconsideration in money or moneys worth

2. Condonation or remission of debt where thedebtor did not render service in favor of thecreditor

Noteworthy, the element of donative intent isconclusively presumed in transfers of property forless than an adequate or full consideration inmoney or moneys worth. However, realproperty considered capital assets under the TaxCode are excepted from this rule. (Sec 100 inrelation to Sec 24(d)) Under Section 24(d), thefair market value itself, if higher than the grossselling price, is the base for computing the capitalgains tax imposed upon the sale of such capitalassets. Thus, what the seller avoids in thepayment of the donors tax, it pays for in thecapital gains tax.

Applicable LawThe law in force at the time of the perfection/completion of the donation (Sec 11, RR 2-2003)NOTE: Any contribution in cash or in kind to anycandidate, political party or coalition of parties forcampaign purposes shall be governed by theElection Code, as amended. (Sec. 99(C), NIRC)

CASE LAW: Abello v. CIR (Feb. 23, 2005) Thecontributions of the ACCRA partners to thecampaign funds of Sen. Angara during the 1987

21 In the case of donations of immovable property,they must be made in a public document specifyingtherein the property donated. The acceptance may bemade in the same Deed of Donation or in a separate publicdocument, but it shall not take effect unless it is doneduring the lifetime of the donor. If the acceptance is madein a separate instrument, the donor shall be notifiedthereof in an authentic form, and this step shall be notedin both instruments.

national elections constitutes a donation, thus,subject to gift taxes. However , the SC notedthat succeeding cases shall be governed by RA7166 enacted by Congress on Nov. 25, 1991.The RA provides in Sec 13 that political/electoralcontributions, duly reported to the Commissionon Elections, are NOT subject to the payment of

any gift tax.PROPERTIES INCLUDED

Classes of Donors and their Gross Gift

1. Citizens or Residents of the Philippines allproperties located not only within thePhilippines but also in foreign countries

2. Nonresident Alien all real and tangibleproperties within the Philippines, andintangible personal property, unless there isreciprocity, in which case it is not taxable

Q: What are the intangible properties whichare considered by law as situated in thePhilippines?1. Franchise which must be exercised in the

Philippines2. Obligations or bonds issued by any

corporation or sociedad anonima organized orconstituted in the Philippines

3. Shares, obligations or bonds issued by anyforeign corporation 85% of the business ofwhich is located in the Philippines

4. Shares, obligations or bonds issued by anyforeign corporation if such shares, obligations

or bonds have acquired a business situs inthe Philippines5. Shares or rights in any partnership, business

or industry established in the Philippines

Rule on Reciprocity (Sec 104, NIRC)There is reciprocity if the foreign country of whichthe decedent was a citizen and resident at thetime of his death:1. did not impose a transfer tax of any

character, in respect of intangible personalproperty of citizens of the Philippines notresiding in that foreign country; or

2. allowed a similar exemption from transfer tax

in respect of intangible personal propertyowned by citizens of the Philippines notresiding in that country

This rule applies to the transmission by gift ofintangible personal property located or with asitus within the Philippines of a nonresident alien.

EXEMPTIONS Deductible from gross gifts in order to arrive at

the taxable net gifts. Not to be treated as exclusions from the gross

gifts of the donor.

1. Dowries or donations made on account ofmarriage before its celebration or within oneyear thereafter by parents to each of theirlegitimate, recognized natural, or adoptedchildren to the extent of the first P10,000.However, this exemption may not be availedof by a non-resident not a citizen of thePhilippines.Q: Can both parents making a donationto a child in consideration of marriageavail of the P10,000 deduction?


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Yes. If both spouses made the gift, then thegift is taxable one-half to each donor spouse.Separate donors tax returns must be filed;husband and wife are considered as separateand distinct taxpayers for purposes of donorstax. (Section 12, RR 2-2003) However, wherethere is failure to prove that the donation was

actually made by both spouses, the donationis taxable as an exclusive act of the husband(Tang Ho v. BTA, 97 Phil 890), withoutprejudice to the right of the wife to questionthe validity of the donation without herconsent pursuant to the provisions of the CivilCode and the Family Code. (Section 12,supra)

2. Gifts made to or for the use of the NationalGovernment or any entity created by any ofits agencies which is not conducted for profit,or to any political subdivision of the saidGovernment

3. Gifts in favor of an educational and/orcharitable, religious, cultural or social welfarecorporation, institution, accredited non-government organization, trust orphilanthropic organization or researchinstitution or organization, provided not morethan 30% of said gifts will be used by suchdonee for administration purposes

Q: What is a non-profit educationaland/or charitable corporation, etc?It is a school, college or university and/orcharitable corporation, accredited NGO, trust

or philanthropic organization and/or researchinstitution or organization: Incorporated as a non-stock entity, Paying no dividends, Governed by trustees who receive no

compensation, and Devoting all its income, whether students

fees or gifts, donations, subsidies or otherforms of philanthropy, to theaccomplishment and promotion of thepurposes enumerated in its Articles ofIncorporation

4. Encumbrances on the property donated if

assumed by the donee in the deed ofdonation

5. Donations made to entities exempted underspecial laws, e.g.:

o Aquaculture Department of the SoutheastAsian Fisheries Development Center of thePhilippines

o Development Academy of the Philippineso Integrated Bar of the Philippineso International Rice Research Instituteo National Museumo National Libraryo National Social Action Councilo

Ramon Magsaysay Foundationo Philippine Inventors Commissiono Philippine American Cultural Foundationo Task Force on Human Settlement on the

donation of equipment, materials andservices

6. Donations to persons not strangers where thetotal of such net gifts for the calendar year isnot more than P100,000.00

Net Gifts Net Gift is the net economic benefit from thetransfer that accrues to the donee.Accordingly, if a mortgaged property istransferred as a gift, but imposing upon thedonee the obligation to pay the mortgageliability, then the net gift is measured by

deducting from the fair market value of theproperty the amount of the mortgage assumed.(Section 11, RR 2-2003)

COMPUTATIONHow is donors tax computed?This general formula shall be followed:

Gross gifts madeLess: Deductions from the gross giftsNet gifts madeMultiplied by applicable rateDonors tax on the net gifts

If there were several gifts made during the year,this formula is followed:

Gross gifts made on this dateLess: Deductions from the gross giftsNet gifts made on this dateAdd: all prior net gifts during the yearAggregate net giftsMultiplied by applicable rateDonors tax on the aggregate net giftsLess: donors tax paid on prior net giftsDonors tax due on the net gifts to date

RATES OF TAXThe applicable donors tax rate is dependentupon the relationship between the donor and thedonee.

1. If the donee is a stranger to the donor ,the tax rate is equivalent to 30 % of the netgifts.

A stranger for purposes of the donorstaxa. a person who is not a brother, sister

(whether by whole or half-blood), spouse,ancestor or lineal descendant, or

b. a person who is not a relative byconsanguinity in the collateral line withinthe fourth degree of relationship. (Sec.99(B))

Note that donations made betweenbusiness organizations and those madebetween an individual and a businessorganization shall be considered asdonations made to a stranger (RR 2-2003)

2. If the donee is not a stranger to thedonor , the tax for each calendar year shallbe computed on the basis of the total net

gifts made during the calendar year:


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Over But notOver

Tax Is Plus Of theExcessOver

0 100,000 Exempt

100,000 200,000 0 2% 100,000

200,000 500,000 2,000 4% 200,000

500,000 1 million 14,000 6% 500,0001 million 3 million 44,000 8% 1 million

3 million 5 million 204,000 10% 3 million

5 million 10 M 404,000 12% 5 million

10 M 1,004,000 15% 10 million

Note: A legally adopted child is entitled to all therights and obligations provided by law tolegitimate children, and therefore, a donation tohim shall not be considered as a donation madeto a stranger.

OBJECT OF TAXATION Donors tax shall be imposed whether the

transfer is in trust or otherwise, whether thegift is direct or indirect and whether theproperty is real or personal, tangible orintangible.

The computation of the donors tax is on acumulative basis over a period of onecalendar year

Illustrations:1. Donation to son by parents on account of

marriage (P100,000): HusbandNet Taxable Gift = P50,000 10,000 =P40,000Tax Due = None, since P40,000 is below theP100,000 threshold Wife same as above

2. Donation to son and daughter-in-law byparents on account of marriage (P100,000): Husband

o Gift pertaining to the sonNet Taxable Gift = P25,000 10,000 =

P15,000Tax Due = None, since P15,000 is belowthe P100,000 threshold

o Gift pertaining to the daughter-in-lawNet Taxable Gift = P25,000Tax Due = P25,000 x 30% = P7,500

Wife same as above

3. Donations to donees not considered strangersfor tax purposes were made on:January 30, 2002 P 2,000,000March 30, 2002 -- 1,000,000August 15, 2002 -- 500,000

After thefirstdonation

After theseconddonation

After thethirddonation

NetTaxableGift

2,000,000 JanuaryDonation -P2,000,000

JanuaryDonation -P2,000,000

MarchDonation -1,000,000

MarchDonation -1,000,000

TotalP3,000,000

AugustDonation -500,000TotalP3,500,000

CorrespondingDonorsTax (refertoschedule)

124,000 P 204,000 P254,000

Tax Due /Payable

124,000 Donors TaxP 204,000

Donors TaxP 254,000

Less: TaxPreviouslyPaid124,000

Less: TaxPreviouslypaid(124k+80k)204,000

Tax DueP80,000

Tax DueP50,000

VALUATION

If the gift is made in property, the fairmarket value at that time will be

considered the amount of gift. Real Propertytaxable base = FMV as determined by the

Commissioner of BIR (Zonal Value) or FMV asshown in the latest schedule of values of theprovincial and city assessor (Market Valueper Tax Declaration), whichever is higher.

If there is no zonal value, the taxablebase is the FMV that appears in the latest taxdeclaration

Improvementvalue of improvement is the construction

cost per building permit and/or occupancy permitplus 10% per year after year of construction, or

the FMV per latest tax declaration.

TAX CREDIT

A situation may arise when the property given asa gift is located in a foreign country and thedonor may be subject to donors tax twice on thesame property: first, by the Philippinegovernment and second, by the foreigngovernment where the property is situated. Theremedy of claiming a tax credit is, therefore,aimed at minimizing the burdensome effect ofdouble taxation by allowing the taxpayer todeduct his foreign tax from his Philippine tax,

subject to the limitations provided by law.

Q: Who may claim tax credit?Tax credit for donors tax may be claimed only bya resident citizen, non-resident citizen andresident alien.

Q: What are the limitations on the taxcredit?1. NET GIFT (foreign country) X PHIL DONORS

ENTIRE NET GIFTS TAX

2. NET GIFT(all foreign countries)X PHILDONORSENTIRE NET GIFTS TAX

NOTE: The computation of the donors tax creditis the same as the computation for estate taxcredit.

COMPLIANCE REQUIREMENTS

DONORS TAX RETURN

I. Who Files


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Every person, whether natural or juridical,resident or non-resident, who transfers or causesto transfer property by gift, whether in trust orotherwise, whether the gift is direct or indirectand whether the property is real or personal,tangible or intangible.

Contents of the Donors Tax Return1. Each gift made during the calendar yearwhich is to be included in computing net gifts;

2. The deductions claimed and allowable;3. Any previous net gifts made during the same

calendar year;4. The name of the donee;5. Relationship of the donor to the donee; and6. Such further information as the Commissioner

may require.

When FiledFiled within thirty (30) days after the date thegift is made or completed and the tax due

thereon shall be paid at the same time that thereturn is filed.

Where Filed and PaidUnless the Commissioner otherwise permits, itshall be filed and the tax paid to an authorizedagent bank, the Revenue District Officer,Revenue Collection Officer or duly authorizedTreasurer of the city or municipality where thedonor was domiciled at the time of the transfer,or if there be no legal residence in thePhilippines, with the Office of the Commissioner.In the case of gifts made by a non-resident, thereturn may be filed with the Philippine Embassy

or Consulate in the country where he is domiciledat the time of the transfer, or directly with theOffice of the Commissioner.

II.II.II.II. VALUEVALUEVALUEVALUE- ---ADDED TAXADDED TAXADDED TAXADDED TAX 22222222

I. CONCEPT

VAT is a percentage tax imposed at everystage of the distribution process on the sale,barter, or exchange, or lease of goods orproperties, and on the performance of service inthe course of trade or business, or on theimportation of goods, whether for business ornon-business purposes.

It is a business tax levied on certaintransactions involving a wide range of goods,properties, and services, such tax being payableby the seller, lessor, or transferor. The tax is so-called because it is imposed on the value notpreviously subjected to VAT (De Leon, TheNational Internal Revenue Code Annotated,2000 edition)

It is also an excise tax , or a tax on the privilegeof engaging in the business of selling goods orservices, or in the importation of goods.

The taxpayer (seller) determines his tax liabilityby computing the tax on the gross selling price orgross receipt ( output tax ), and subtracting orcrediting the earlier VAT on the purchase orimportation of goods or on the sale of service( input tax ) against the tax due on his own sale.

VAT payable to BIR = OUTPUT TAX INPUT TAX

Computation of the VAT Payable :

II. NATURE & CHARACTERISTICS

It is an indirect tax, the amount of which maybe shifted to or passed on the buyer,transferee, or lessee of the goods, propertiesor services. (Sec. 105)

This rule shall likewise apply to existingcontracts of sale or lease of goods, propertiesor services at the time of the effectivity of RANo. 9337. RR 16-2005 23

22 Credits: 2008 AD, C200523 Revenue Regulations (RR) No. 4-2007 dated February 7,2007 introduced changes to RR No. 16-2005. SUCH as: SEC.4.106-1. VAT on Sale of Goods or Properties. VAT is imposedand collected on every sale, barter or exchange, or transactions

deemed sale of taxable goods or properties at the rate oftwelve percent (12%) (starting February 1, 2006) of the grossselling price or gross value in money of the goods or propertiessold, bartered, or exchanged, or deemed sold in thePhilippines.

Gross taxable sales/receipts xxxLess: Sales returns xxx

Sales allowances xxxSales discounts xxx (xxx)

Net sales xxxMultiply with the VAT rate 12%Output tax (12% of Net sales) xxx

Input tax carried over from previous period xxxDomestic purchases xxxImportations xxx

Total xxxInput tax (12% of Total) xxx

Total Input tax (xxx)

VAT payable (Output tax less input tax) xxx(All amounts in the formula must be NET of VAT)


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Constitutionality of VAT

ABAKADA Guro Party List, et. al. v Ermita

The validity of raising the VAT rate from 10% to12% by the President was upheld by SC.

The assailed provisions of RA 9337 are those thatsay that the President, upon the recommendationof the Sec. of Finance, shall raise the rate of VATto 12% when VAT as a percentage of the GDP ofthe previous year exceeds 2 4/5% and when thedeficit as a percentage of the previous years GDPexceeds 1 %.

This is NOT an undue delegation of legislativepower. It is simply a delegation of ascertainmentof facts upon which enforcement andadministration of the increased rate under thelaw is contingent. It is the ministerial duty ofthe President to immediately impose the 12%

rate upon the existence of any of the conditionsspecified by Congress. 24

Another assailed provision is Sec. 8 amendingSec. 110(B), which imposes a limitation on theamount of input tax (70% of the output tax) thatmay be credited against the output tax. TheCourt says this does not violate due process. Theexcess input tax, if any, is retained in a businessbooks of accounts and remains creditable in thesucceeding quarter/s. In addition, Sec. 112(B)allows a VAT-registered person to apply for theissuance of a tax credit certificate or refund forany unused input taxes, to the extent that such

input taxes have not been applied against theoutput taxes. Such unused input tax may beused in payment of his other internal revenuetaxes. 25 The input tax is NOT a property or a propertyright within the constitutional purview of the dueprocess clause. A VAT-registered personsentitlement to the creditable input tax is a merestatutory privilege. The right to credit input taxas against the output tax is clearly a privilegecreated by law, a privilege that also the law canremove, or in this case, limit.

[Note: This limitation of creditable input tax has

been eliminated by RA 9361, effective December2006. Pls refer to the discussion on input taxeson page30.]

With respect to Sec. 8, amending Sec. 110 (A),which provides for 60-month amortization of theinput tax on capital goods purchased: It is notoppressive, arbitrary, and confiscatory . Thetaxpayer is not permanently deprived of hisprivilege to credit the input tax. For whatever isthe purpose, it involves executive economicpolicy and legislative wisdom in which the Courtcannot intervene.

The tax law is uniform : it provides a standardrate of 0% or 10% (or 12% now) on all goods orservices. The law does not make any distinctionas to the type of industry or trade that will bear

24 The rate was indeed increased to 12%, effective Feb. 1,2006, as per Revenue Memorandum (RMC) No. 7-06, dated

January 31, 200625 This, however, is not accurate. The option to apply for taxcredit certificate or refund is available to the VAT taxpayer onlyin case his VAT registration is cancelled, unless he is subject toVAT zero-rate.

the 70% limitation on the creditable input tax, 5-year amortization of input tax on purchase ofcapital goods, or the 5% final withholding tax bythe government.

It is equitable : The law is equipped with athreshold margin (P1.5M). Also, basic marine

and agricultural products in their original stateare still not subject to tax. Congress alsoprovided for mitigating measures to cushion theimpact of the imposition of the tax on thosepreviously exempt. Excise taxes on petroleumproducts and natural gas were reduced.Percentage tax on domestic carriers wasremoved. Power producers are now exempt frompaying franchise tax.

VAT, by its very nature, is regressive . BUT theConstitution does not really prohibit theimposition of indirect taxes (which is essentiallyregressive). What it simply provides is that

Congress shall evolve a progressive system oftaxation. In Tolentino v. Sec. of Finance , theCourt said that direct taxes are to be preferred,and as much as possible, indirect taxes should beminimized but not avoided entirely because it isdifficult, if not impossible, to avoid them.

Tolentino v. Guingona

Regressivity is not a negative standard forcourts to enforce. What Congress is required bythe Consti to do is to evolve a progressivesystem of taxation. This provision is placed inthe Consti as moral incentives to legislation, not

as judicially enforceable rights.The Consti mandate to evolve a progressivesystem of taxation simply means that directtaxes are to be preferred as much as possible,and indirect taxes should be minimized. Resortto indirect taxes should be minimized butnot avoided entirely. Also, the regressiveeffects are corrected by the zero rating of certaintransactions and through the exemptions. Thetransactions which are subject to VAT are thosewhich involve goods and services which are usedor availed of mainly by higher income groups (real properties held primarily for sale to

customers, right or privilege to use patent,copyright...)

III. TRANSACTIONS SUBJECT TO VATA. Any sale, barter or exchange of goods and

properties, or similar transactions in thecourse of trade or business

B. Any sale of services, or similar transactions,in the course of trade or business

C. Any lease of goods and properties or similartransactions, in the course of trade orbusiness

D. Any importation of goods, whether in the

course of trade or business or notRMC 9-2006: Reimbursable expenses

Transactions and amounts that are subject toVAT:1. If the reimbursable expenses and/or

advanced payments for certain expenses(e.g. arrastre, wharfage, documentation,trucking, handling charges, storage fees,duties and taxes, etc.) made by brokers on


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Gross Selling Price (GSP)- The total amount ofmoney or its equivalent which the purchaser paysor is obligated to pay to the seller inconsideration of the sale, barter or exchange ofthe goods or properties, excluding the value-added tax. The excise tax, if any, on such goods

or properties shall form part of the gross sellingpricexxx.

1) The consideration stated in the salesdocument, or

2) The fair market value (FMV),Whichever is HIGHER

FMV- whichever is the HIGHER of:a) FMV as determined by the

Commissioner (zonal value), orb) FMV as shown in schedule of

values of the Provincial & Cityassessors (real property taxdeclaration)

If GSP is based on the zonal value ormarket value of the property, the zonalor market value shall be deemedINCLUSIVE of VAT.If the VAT is not billed separately, theselling price stated in the sales documentshall be deemed to be INCLUSIVE of VAT.

RR 16-2005 : Sale of Real Property on installment plan

Sale of real property by a real estate dealer,the initial payments of which in the year of sale(down payment + all payments actually or

constructively received during the year of sale)do not exceed 25% of the gross selling price.However, in the case of sale of real properties onthe deferred-payment basis, not on theinstallment plan, (meaning the initial payments inthe year of sale exceed 25% of the gross sellingprice), the transaction shall be treated as cashsale which makes the entire selling price taxablein the month of sale.

The real estate dealer shall be subject to VAT onthe installment payments, including interest andpenalties, actually and/or constructively receivedby the seller.

Sale of residential lot exceeding P1.5M,residential house and lot or other residentialdwellings exceeding P2.5M, where the instrumentof sale is executed on or after July 1, 2005, shallbe subject to [12%] VAT. Where the instrumentof sale was executed prior to July 1, 2005, theprice needs only to exceed P1M for theinstallment sale of residential house and lot orother residential dwellings to be subject to 10%VAT.

Transmission of property to a trustee shall NOTbe subject to VAT IF the property is to be merely

held in trust for the trustor and/or beneficiary.However, IF the property transferred is one forsale, lease or use in the ordinary course of tradeor business AND the transfer constitutes acompleted gift, the transfer is subject to VAT as adeemed sale transaction. The transfer is acompleted gift if the transferor divests himselfabsolutely of control over the property, i.e.,irrevocable transfer of corpus and/or irrevocabledesignation of beneficiary.

TRANSACTIONS DEEMED SALE (subject to12% VAT) ( 106, B) [ DR TC ]

(1) Transfer, use or consumption not in thecourse of business of goods propertiesoriginally intended for sale or for use in thecourse of business

(e.g. when a VAT-registered personwithdraws goods from his business for hispersonal use.- RR 16-2005 )

(2) D istribution or transfer to:(a) Shareholders or investors as share inthe profits of the VAT-registered persons;or(b)Creditors in payment of debt;(NOTE: Property dividends whichconstitute stocks in trade or propertiesprimarily held for sale or lease declaredout of retained earnings on or after Jan.1, 1996 and distributed by the company

to its shareholders shall be subject toVAT based on the zonal value or FMV atthe time of the distribution, whichever isapplicable. - RR 16-2005 )

(3) Consignment of goods if actual sale is notmade within 60 days following the datesuch goods were consigned; and(NOTE: Consigned goods returned by theconsignee within the 60-day period are notdeemed sold. - RR 16-2005 )

(4) R etirement from or cessation of business,with respect to inventories of taxable goods

existing as of such retirement or cessation.(with respect to ALL goods on hand,whether capital goods, stock-in-trade,supplies or materials, as of the date of suchretirement or cessation, whether or not thebusiness is continued by the new owner orsuccessor. Examples are change ofownership of the business (e.g. when a soleproprietorship incorporates, or theproprietor sells his entire business) anddissolution of a partnership and creation ofa new partnership which takes over thebusiness. - RR 16-2005 )

TAX BASE on transactions deemed saleOutput tax = market value of the goods deemedsold as of the time of the occurrence of thetransactions.

CHANGES IN OR CESSATION OF STATUS OFA VAT-REGISTERED PERSON (12% VAT) (106, C)

VAT shall apply to goods disposed of or existingas of a certain date if under the circumstances tobe prescribed in rules and regulations to bepromulgated by the Secretary of Finance, uponrecommendation of the Commissioner, the status

of a person as a VAT-registered person changesor is terminatedxxx.

RR 16-2005 :

1) Subject to output tax applicable togoods/properties originally intended for saleor use in business and capital goods whichare existing as of the occurrence of thefollowing:


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a) Change of business activity from VATtaxable status to VAT-exempt status.

b) Approval of a request for cancellation ofregistration due to reversion to exemptstatus

c) Approval of a request for cancellation ofregistration due to a desire to revert to

exempt status AFTER the lapse of 3consecutive years from the time ofregistration by a person who voluntarilyregistered despite being exempt underSec. 109 (2)

d) Approval of request for cancellation ofregistration of one who commencedbusiness with the expectation of grosssales/receipts exceeding P1.5M but whofailed to exceed this amount during thefirst 12 months of operation

2) NOT subject to output taxa) Change of control of a corporation by the

acquisition of the controlling interest ofsuch corporation by another stockholderor group of stockholders.

b) Change in the trade or corporate name ofthe business

c) Merger or consolidation of corporations.The unused input tax of the dissolvedcorporation, as of the date of merger orconsolidation, shall be absorbed thesurviving or new corp.

TAX BASE in case of retirement/cessation ofbusinessTax Base= acquisition cost or current market

price of the goods or properties, whichever islower.

ii. IMPORTATION OF GOODS (107, A) On every importation of goods (WON goods

are for use in business)

Rate: 12% (as amended)

Basis: total value used by the Bureau ofCustoms in determining tariff and customsduties, plus customs duties, excise taxes, if any,and other charges,

Where the customs duties are determinedon the basis of the quantity or volume of thegoods, the value-added tax shall be based on thelanded cost plus excise taxes, if any.

PROVIDED, That the President, upon therecommendation of the Sec. of Finance, shall,effective January 1, 2006, raise the rate of value-added tax to 12%, after any of the followingconditions has been satisfied:1. Value-added tax collection as a percentage ofGross Domestic Product (GDP) of the previousyear exceeds 2 4/5%; or2. National government deficit as a percentage of

GP of the previous year exceeds 1 %.Who Pays: Paid by the importer prior to therelease of such goods from customs custody

Transfer of Goods by Tax-Exempt Persons(107, B)If importer is tax-exempt, the subsequentpurchasers, transferees or recipients of suchimported goods shall be considered as importerswho shall be liable for the tax on importation.

The tax due on such importation shall constitutea lien on the goods superior to all charges orliens on the goods, irrespective of the possessorthereof. (as amended by RA 9337)

iii. SALE OF SERVICES & USE/LEASEOF PROPERTIES ( 108, A)

On sale or exchange of services, use of leaseproperties

Rate: 12% (as amended)

Basis: gross receipts derived from the sale orexchange of services, including the use of leaseof properties.

PROVIDED, That the President, upon therecommendation of the Sec. of Finance, shall,effective January 1, 2006, raise the rate of value-added tax to 12%, after any of the following

conditions has been satisfied:1. Value-added tax collection as a percentage ofGross Domestic Product (GDP) of the previousyear exceeds 2 4/5%; or2. National government deficit as a percentage ofGP of the previous year exceeds 1 %.

Sale or Exchange of ServicesThe performance of all kinds of services in thePhilippines for others for a fee, remuneration orconsideration, including those performed orrendered by: ( CLIMB-SCHERD-TFF) 1. Construction and service contractors;2. stock, real estate, commercial, customs and

immigration B rokers;3. Lessors of property, whether personal or real;warehousing services;

4. lessors or distributors of cinematographicF ilms;

5. persons engaged in Milling, processing,manufacturing or repacking goods for others;

6. proprietors, operators or keepers of H otels,motels, rest-houses, pension houses, inns,resorts;

7. proprietors or operators of R estaurants,refreshment parlors, cafes and other eatingplaces, including clubs and caterers;

8. Dealers in securities;

9. lending I nvestors;10. Transportation contractors on their transportof goods or cargoes, including persons whotransport goods or cargoes for hire and otherdomestic common carriers by land relative totheir transport of goods or cargoes;

11. Common carriers by air and sea relative totheir transport of passengers, goods orcargoes from one place in the Philippines toanother place in the Philippines;

12. sales of Electricity by generation companies,transmission, and distribution companies;

13. services of F ranchise grantees of electricutilities, telephone and telegraph, radio and

television broadcasting and all other franchisegrantees except those under Section 119 ofthis Code and non-life insurance companies(except their crop insurances), includingsurety, fidelity, indemnity and bondingcompanies;

14. and S imilar services regardless of whether ornot the performance thereof calls for theexercise or use of the physical or mentalfaculties.


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The phrase 'sale or exchange of services'shall likewise include: (A- FACT-PIE)1. The lease or the use of or the right or

privilege to use any Copyright, patent, designor model plan, secret formula or process,goodwill, trademark, trade brand or other likeproperty or right

2. The lease or the use of, or the right to use ofany industrial, commercial or, scientificEquipment;

3. The supply of scientific, technical, industrialor commercial knowledge or I nformation;

4. The supply of any Assistance that is ancillaryand subsidiary to and is furnished as a meansof enabling the application or enjoyment ofany such property, or right as is mentioned insubparagraph (2) or any such knowledge orinformation as is mentioned in subparagraph(3);

5. The supply of services by a nonresidentperson or his employee in connection with the

use of P roperty or rights belonging to, or theinstallation or operation of any brand,machinery or other apparatus purchased fromsuch nonresident person;

6. The supply of technical Advice, assistance orservices rendered in connection with technicalmanagement or administration of anyscientific, industrial or commercialundertaking, venture, project or scheme;

7. The lease of motion picture F ilms, films, tapesand discs; and

8. The lease or the use of or the right to useradio, television, satellite transmission andcable television Time.

Lease of Properties - subject to the tax herein imposed irrespective

of the place where the contract of lease orlicensing agreement was executed if the propertyis leased or used in the Philippines.

'Gross Receipts' - the total amount of money orits equivalent representing the contract price,compensation, service fee, rental or royalty,including the amount charged for materialssupplied with the services and deposits andadvanced payments actually or constructivelyreceived during the taxable quarter for the

services performed or to be performed foranother person, excluding value-addedtaxxxx. (as amended by RA 9337,underscored parts amended or added by RA9337)

Notes: (unless otherwise indicated, from RR 16-2005 )

1. Persons engaged in milling, processing,manufacturing or repacking goods for othersare subject to VAT, EXCEPT palay into rice,corn into corn grits, and sugarcane into rawsugar

2. For dealers in securities, gross receiptsmeans gross selling price less cost of thesecurities sold. RR 7-95: Pre-needcompanies are considered dealers insecurities.

3. Lending investors all persons OTHER thanbanks, non-bank financial intermediaries,finance companies and other financialintermediaries NOT performing quasi-banking

functions who make a practice of lendingmoney for themselves or others at interest

4. Subject to VAT: Franchise grantees of electricutilities, telephone and telegraph, radioand/or TV broadcasting and all otherfranchise grantees (including PAGCOR and its

licensees/franchisees) EXCEPT franchisegrantees of radio and/or TV broadcastingwhose annual gross receipts of the precedingyear do not exceed P10M (which shall besubject to 3% franchise tax under Sec. 119,subject to optional registration), andfranchise grantees of gas and water facilities(under Sec. 109, subject to 2% franchisetax). With respect to franchise grantees oftelephone and telegraph services, amountsreceived for overseas dispatch, message, orconversation originating from the Philippinesare subject to the percentage tax under Sec.120 and hence exempt from VAT.

5. In a lease contract, the advance payment bythe lessee may be:a) a loan to the lessor from the lessee

NOT subject to VATb) an option money for the property NOT

subject to VATc) a security deposit to insure the faithful

performance of certain obligations of thelessee to the lessor NOT subject toVAT. BUT if the security deposit is appliedto rental, it shall be subject to VAT at thetime of its application.

d) or pre-paid rental subject to VAT when

received, irrespective of the accountingmethod employed by the lessor

6. On transportation: All receipts from service, hire, or

operating lease of transportationequipment not subject to the percentagetax on domestic common carriers andkeepers of garages shall be subject toVAT. (Pls refer to Sec. 117 for otherpercentage taxes.

Commoncarrier

Transporting Kind ofcarrier

TaxLiability

By land Persons Domestic 3%, Sec.117Goods/cargo Domestic 12% VAT

By sea

Whethertransportingpersons orgoods/cargo

Domestic Domestictrip - 12%VAT

Internationaltrip zero-rated

International 3%, Sec.118

By air Domestic Domesticflight -12% VAT

International

flight zero-rated

International 3%, Sec.118

7. Sale of electricity by generation,transmission, and distribution companiesshall be subject to 12% VAT, EXCEPT sale ofpower or fuel generated through renewablesources of energy, such as, but not limitedto, biomass, solar, wind hydropower,


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geothermal, ocean energy, and otheremerging energy sources using technologiessuch as fuel cells and hydrogen fuels, whichshall be subject to 0% rate of VAT (zero-rated). The universal charge passed on andcollected by distribution companies andelectric cooperatives shall be excluded from

the computation of gross receipts.8. Insurance and reinsurance commissions , as

opposed to premiums, whether life or non-life, are subject to VAT. Non-life insurance

premiums are subject to VAT. Life insurance premiums are NOT subject to VAT, for theyare subject to percentage tax.

B. 0% VAT (ZERO-RATEDTRANSACTIONS)

A zero-rated sale by a VAT-registered person is a

taxable transaction for VAT purposes, but shallnot result in any output tax .

Input tax on purchases of goods, properties orservices related to such zero-rated sale shall beavailable as tax credit or refund . ( RR 16-2005 ) 27

i. ZERO-RATED SALE OF GOODS ORPROPERTIES ( 106, (2))

A. Export sales (IF-GONE)

1) The sale and actual shipment of goods fromthe Philippines to a Foreign country ANDpaid for in acceptable foreign currency or itsequivalent in goods or services, ANDaccounted for in accordance with the rulesand regulations of the BSP

2) Sale of raw materials or packaging materialsto a N onresident buyer for delivery to aresident local export-oriented enterprise tobe used in manufacturing, processing,packing or repacking in the Philippines of thesaid buyer's goods AND paid for in acceptableforeign currency AND accounted for in

accordance with the rules and regulations ofthe BSP

3) Sale of raw materials or packaging materialsto Export-oriented enterprise whose exportsales exceed seventy percent (70%) of totalannual production. Any enterprise whoseexport sales exceed 70% of the total annualproduction of the preceding taxable year shall

27 Thus, the benefit of being zero-rated vis--vis being exemptis that enterprises which enjoy zero-rating of transactions canavail of input taxes on purchases of goods, properties, orservices (as either tax credit or refund, there being no output

tax against which input tax can be credited). In mathematicalterms, the enterprises enjoy 100% of their input taxes.On the other hand, exempt enterprises cannot avail of theseinput taxes; instead, these input taxes form part ofcost/expense. Thus, the net benefit these enterprises get fromtheir exempt transactions is 35% (in the case of corporations),or to the extent that they can be used as deductions fromincome in the computation of income tax payable (subject torules in income taxation).

There is therefore a 65% difference (100% in the case of zero-rated transactions, less 35% in exempt transactions). [ Editorsnote ]

be considered an export-oriented enterpriseupon accreditation under the rules &regulations of Export Development Act, RA7844 (RR 7-95)

4) Sale of Gold to the Bangko Sentral ngPilipinas (BSP);

5) Those considered export sales under theO mnibus Investment Code of 1987, andother special laws (ex. Bases Conversion &Development Act of 1992)Under Omnibus Investment Code:a) Phil. port FOB value of export products

exported directly by a registered exportproducer

b) Net selling price of export products soldby a registered export producer toanother export producer, or to an exporttrader that subsequently exports thesame (only when actually exported by

the latter)Constructive Exports:a) sales to bonded manufacturing

warehouses of export-orientedmanufacturers

b) sales to export processing zonesc) sales to registered export traders

operating bonded trading warehousessupplying raw materials in themanufacture of export products underguidelines to be set by the Board inconsultation with the BIR and Bureau ofCustoms

d) sales to diplomatic missions and other

agencies and/or instrumentalities grantedtax immunities, of locally manufactured,assembled or repacked products, whetherpaid for in foreign currency or not.Provided that export sales of registeredexport traders may include commissionincome, and that exportation of goods onconsignment shall not be deemed exportsales until the export products consignedare in fact sold by the consignee, andprovided finally that sales by a VAT-registered supplier to amanufacturer/producer whose productsare 100% exported are considered export

sales. A certification to his effect mustbe issued by the Board of Investmentwhich shall be good for 1 year unlesssubsequently re-issued. (RR 16-2005)

6) The sale of goods, supplies, equipment andfuel to persons engaged in I nternationalshipping or international air transportoperations. (added by RA 9337) Provided,that the same is limited to goods, supplies,equipment and fuel pertaining to orattributable to the transport of goods andpassengers from a port in the Phil. directly toa foreign port without docking or stopping at

any other port in the Phil., and that if anyportion of such fuel, goods, or supplies isused for purposes other than that mentionedhere, such po

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