Taxation 2 - Dimodlon PDF

Chapter 1
TRANSFER TAXES, IN GENERAL
A. INTRODUCTION
1. Transfer tax, defined. A tax imposed upon the privilege

of passing ownership of property without any valuable
consideration.
2. Nature of transfer taxes. Estate and donor's taxes

are excise or privilege taxes that are imposed on the act of
passing ownership of property and not taxes on the property
transferred.
3. Kinds of transfer taxes under the National Internal

Revenue Code.
a. Estate tax; and
b Donor's tax.
4. Governing law. Transfer taxes are governed by the laws

existing at the time the transfer takes place. Donations inter vivos
are governed by the law existing at the time of the effectivity of the
donation since the transfer of properties takes place at that time.
Donations mortis are governed by the law at the time of death
because it is at that time that the property is transferred
The Philippine law on transfer taxes is found under the
provisions of the National Internal Revenue Code of 1997,
specifically the provisions of Title III, Estate and Donor's Taxes.
The provisions are embraced by Sec. 84 up to Sec. 104.
Tax exemption laws, which grants exemptions from the
payment of donor's taxes, are also part of the law that governs
transfer taxes.
5. Situs of transfer taxes.' The situs of transfer taxes

(estate and donor's taxes) is considered as governed by a
combination of three (3) doctrines, the nationality doctrine, the
domiciliary doctrine and the location doctrine These doctrines are
likewise embraced by the symbiotic relationship or the protection
and support doctrine in taxation. The state that gives protection
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has the right to demand that it be supported with taxes so it would
have the wherewithal to continue giving protection.
For example, a national is given protection because of his
citizenship, a resident whether a citizen or alien is given protection
by the State of residence, and the place where the property is
located gives protection. Hence, the taxable estate of a citizen
and a resident alien includes all their property, real or personal,
tangible, intangible or mixed, wherever in the world such
properties are located.
E S S A Y T Y P E S E L F - T E S T S . It is recommended that you

cover the S U G G E S T E D A N S W E R S and that all answers must be
in writing, giving yourself three (3) minutes per number. If pressed
for time, you could answer mentally but ensure that your answer is
complete.
OBJECTIVE TYPE:
1. Define transfer tax and explain its nature.

SUGGESTED ANSWER: Refer to nos. 1 and 2, supra
2. What are the different kinds of transfer taxes and

what is the law that governs transfer taxes ?
SUGGESTED ANSWER: Refer to no. 3 and 4, supra.
PROBLEM TYPE:
You are a tax practitioner who was consulted by a client

with regard to the taxes he has to pay for donating a parcel of
land to a non-stock educational institution. What laws should
you refer to in the resolution of the issue ? Explain briefly but
comprehensively your answer.
S U G G E S T E D A N S W E R : Refer to no. 4, supra.
MULTIPLE-CHOICE TYPE SELF-TESTS:

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1. Transfer tax is a tax imposed on the privilege to

transfer property ownership
a. through a will..
b. mortis causa.
c. Inter vivos.
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d. gratuitously.
SUGGESTED ANSWER d
2. The NIRC of 1997 imposes different kinds of taxes

on dispositions of property. There are VAT, excise taxes,
estate taxes, donor' taxes,, etc. Which among the following
transactions would be subject to a transfer tax ?
a. Sales of articles that are exempt from the VA T.
b. Sale of cigars and cigarettes by a wholesaler.
c. Sale of an automobile for less than an adequate
and full consideration.
d. Sale of shares of stock that are not listed and
traded at the stock exchange.
SUGGESTED ANSWER: c
B. ESTATE TAX
1. Estate tax, definition.

a. A tax that is levied, assessed, collected and paid
upon the privilege of gratuitously transferring the net estate of a
decedent to his heirs. (NIRC of 1997, Sec. 84, reworded)
b. "An 'estate tax' is properly defined as a tax imposed
on the 'privilege' of a decedent to transmit property at death or to
specify to w h o m it may legally be transmitted. It is levied upon the
entire net estate of a decedent as a unit, regardless of the number
of shares into which it may be divided or the relationship of the
beneficiaries. (Report of the Tax Commission on National Internal
Revenue Laws, Vol. II, p. 113)
NOTES AND COMMENTS: The reader should not confuse the estate tax
with the income taxes that are imposed under the NIRC of 1997 Title n,
C h a p t e r X, E s t a t e s a n d T r u s t s , S e e s . 60 - 66
upon the "Income received by estates of deceased persons during the
period of administration or settlement of the estate." (NIRC of 1997, Sec.
60 (A) (3)]
The NIRC of 1997 does not define the word, "estate" as used in
connection with income taxation The author suggests that the word
"estate" refers to the mass of properties and assets left behind by the
deceased It may also refer to all the assets and liabilities of the decedent
existing at the time of his death.
On the other hand, the words "gross estate" for estate tax
purposes has a specific definition under the provisions of the NIRC of
1997, Sec 104 In qssence, "gross estate" for estate tax purposes
generally includes "real and personal property, whether tangible or intan-
3
gible, or mixed, whenever situated '
2. Nature of the estate tax.

a It is not a tax on property.
b. It is a tax imposed on the privilege to transmit
property at death and is measured by the value of the property.
(1955 PH Fed Tax Course, Par. 3901)
3. Purposes for imposing the estate tax. The following

are the generally accepted purposes for imposing the estate tax:
a. To generate additional revenue for the government.
An estate tax produces more revenue than an inheritance tax
because if is levied on the entire estate as a unit before it is
distributed. Where, as frequently happens, large estates are
divided among many close relatives, the total amount of tax in
relation to the value of the estate is quite insignificant.
b. To reduce the concentration of wealth.
c. Provide for an equal distribution of wealth. An estate
tax is a more effective agent for bringing about a more equitable
distribution of wealth, so far as that is the purpose of the tax,
because it applies to the entire net estate.
d. It is the most appropriate and effective method for
taxing the "privilege" which the decedent enjoys of controlling the
disposition at death of property accumulated during the lifetime of
the decedent.
e. It is the only method of collecting the share which is
properly due to the State as a "partner" in the accumulation of
property which w a s m a d e possible on account of the protection
given by the State. (Report of the Tax Commission on National Internal
Revenue Laws, Vol. I, pp. 55-57)
th
NOTES AND COMMENTS: In the 19 century, Jeremy Bentham and
John Stuart Mill were already advocating the imposition of death taxes as
a means of equalizing wealth. (Boris I. Bittker and Lawrence M. Stone,
th
Federal Income Estate and Gift Taxation, 4 ed., Boston: Little, Brown
and Co.; 1972, p 984)
4. Inheritance tax, definitions.

a. It is a privilege tax i m p o s e d on the right to succeed
to, receive, or take property by or under a will or the intestacy law.
or deed, or gift to become operative at or after death. (Lorenzo v.
Posadas, 64 Phil. 353)
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b. An imposition created by law on the privilege to
receive property. (Vera v. Navarro, 79 SCRA 434)
NOTES AND COMMENTS: Presently, there is no inheritance tax
imposed by law. Only estate taxes are imposed. Pres. Decree
No. 69, November 24, 1972 abolished the inheritance tax and
retained the estate tax. T h e NIRC of 1997 has retained the
concept of the estate tax and does not have any provision
imposing inheritance taxes.
5. Purposes for the imposition of the inheritance tax.

a. To raise revenues; and
b. to prevent undue accumulation of wealth.
6. Estate tax distinguished from inheritance tax.

a. Basis: Estate tax is a tax on the privilege to transfer
property upon one's death W H I L E inheritance tax is a tax on the
privilege to receive property f r o m the deceased.
Stated in the alternative, an estate tax is a tax on the
transmission of the estate or property by the decedent or on the
right to transmit, or on the interest which ceased by reason of
death W H I L E an inheritance tax is on the right of the heir, devisee
or legatee to take or receive the property transmitted. (61 CJS
1966)
b. W h o pays the tax: Estate tax is paid by the estate
represented by the administrator or executor while inheritance tax
is paid by the recipients of the properties of the estate.
c. Governing law. Estate taxes are presently governed
and imposed by the provisions of the NIRC of 1997 W H I L E there
are presently no provisions of law that governs and imposes
inheritance taxes.
7. Law that governs the imposition of the estate tax.

Estate taxation is governed by the statute in force at the time of
the death of the decedent. (Rev. Regs. No. 2-2003, Sec. 3, 1* par.)
This is so because estate tax is a tax on the privilege to transfer
property mortis causa
Presently, the law that governs estate taxation in the
Philippines are the provisions of the NIRC of 1997, Title III,
Chapter I, which embraces Sec. 84 through to Sec. 97, and Sec
104, as well as provisions of other pertinent sections and special
laws
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NOTES AND COMMENTS: The rationale for the principle that estate
taxation is governed by the statute in force at the time of the death of the
decedent For the rationale, the author applies by analogy the rationale
behind the principle that "inheritance taxation is governed by the statute in
force at the time of the death of the decedent (26 R.C.L., p. 206; 4 Cooley
lh
on Taxation, 4 ed., p. 3461). The taxpayer cannot foresee and ought not
to be required to guess the outcome of pending measures. Of course, a
tax statute may be made retroactive in its operations Liability for taxes
under retroactive legislation has been one of. the incidents of social life.'
(Seattle vs. Kelleher, 195 U.S. 351, 360; 49 Law. Ed 232; 25 Sup. Ct.
Rep. 44) (Lorenzo vs. Posadas, 64 Phil. 353." Cited from Dalupan,
Francisco, National Internal Revenue Code Annotated (With Illustrations)
Commonwealth Act No. 466, Vol I, 1946 ed., p. 454]
E S S A Y T Y P E S E L F - T E S T S . I t i s recommended that you

for time, you could w s w e r mentally but ensure that your answer is
complete.
OBJECTIVE TYPE:
1. State briefly the meaning and nature of the estate

tax.
SUGGESTED ANSWER: Refer to nos. 1 and 2, supra.
2. Distinguish estate tax from inheritance tax. (BAR:

1969, 1971)
SUGGESTED ANSWER: Refer to no. 6, supra.
3. Are estate and inheritance taxes in the nature of

taxes on property or not ? Why? (BAR: 1974)
SUGGESTED ANSWER: Refer to no. 2, supra
1. Inheritance tax is Imposed on the privilege to

a. transfer property Inter vivos.
b. transfer property mortis causa.
c. receive property inter vivos.
d. receive property mortis causa.
SUGGESTED ANSWER: d
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2. Estate tax is imposed on the privilege to
a. transfer property inter vivos.
SUGGESTED ANSWER: b
3. Which among the following distinguishes an

estate tax from other kinds of taxes that are presently
imposed under the provisions of the NIRC of 1997 ?
a. It is a tax imposed on the privilege to transfer
property ownership.
b. It is a tax that is imposed upon gratuitous
transfers.
c It is a tax that is imposed upon the net value of
the properties that are transferred.
d. It is a tax that is imposed only upon the death of a
person.
SUGGESTED ANSWER: d
C. DONOR'S TAX
1. Donor's tax, definition. It is an excise tax levied,

collected and paid [NIRC of 1997, Sec. 98 (A)], upon the privilege of
transferring property gratuitously by way of gift inter vivos {Lladoc
v. Commissioner of Internal Revenue, L-19201, June 16, 1965, 121 Phil
1074,14 SCRA292) by any person, resident or non-resident
2. Basis of donor's tax. T h e donor's tax is based on a

pure act of liberality without any or less than adequate
consideration and without any legal compulsion to give.
It applies
, a. whether the transfer is in trust or otherwise,
b. whether the gift is direct or indirect, and
c. whether the property is real or personal, tangible or
intangible. (NIRC of 1997, Sec. 98, numbering and arrangement
supplied)
3. Purposes for the imposition of the donor's tax.

a. To raise revenues.
b. To tax the wealthy and reduce certain other excise
taxes.
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c. To discourage inter vivos transfers of property which
could reduce the mortis causa transfers on which a higher tax, the
estate tax, would be collected.
d, It will tend to reduce the incentive to make gifts in
order that distribution of future income from the donated property
may be to a number of persons with the result that the taxes
imposed by the higher brackets of the income tax are avoided
nd s l
[U.S. Congress. House, 7 2 Congress, 1 Sess., 1932, H.R , Report No
708, reprinted in 1939-1 C.B (Part 2), pp. 476-477]
NOTES AND COMMENTS: The reader should note that no 3 of the
above stated purposes for the imposition of the donor's tax may not find
application under the provisions of the NIRC of 1997. This is especially
true if the net gifts exceed P10 million This is so because the top rate for
donations exceeding P10 million is 15% while the fop rate of 20% is
applicable to net estates that exceed P10 million.
4. Donor's tax distinguished from estate tax.

i a. Donor's tax is a tax on the privilege to transfer
property during one's lifetime (inter vivos) W H I L E estate tax is a
tax on the privilege to transfer property upon one's death (mortis
causa).
b. Donor's tax is computed on the basis of the net gifts
given during a calendar year W H I L E estate tax is computed on the
basis of the net estate transferred at the time of death.
c. The first P100.000.00 of the net gifts is exempt from
donor's tax W H I L E the first P200.000.00 of the net estate is
exempt from estate tax.
d. Donor's tax is a progressive schedular tax but with a
top rate of 15% on net gifts exceeding P10 million W H I L E estate
tax is also progressive schedular with a top rate of 2 0 % on net
estates exceeding P10 million.
e. Donor's tax has an alternative rate of 3 0 % of the net
gifts in case of strangers W H I L E estate tax does not have such an
alternative rate.
5. Law that governs the imposition of the donor's tax.

The donor's tax is governed by the statute in force at the time of
the transfer. This is so because donor's tax is a tax on the
privilege to transfer gratuitously or for less than adequate
consideration property inter vivos.
Presently, the law that governs donor's taxation in the
Philippines are the provisions of the NIRC of 1997, Title III, Chap-
8
ter II. which embraces Sec. 98 through to Sec 104, and provisions
of other pertinent sections and those of special laws
E S S A Y T Y P E S E L F - T E S T S . It is r e c o m m e n d e d that you
complete.
OBJECTIVE TYPE:
Distinguish between donor's tax from estate tax. (BAR:

1976, adapted)
SUGGESTED ANSWER: Refer to no 4, supra.
1. Donor's tax is imposed on the privilege to

a. transfer property inter vivos.
SUGGESTED ANSWER, a
2. Noynoy died leaving several parcels of land.

Before the properties are distributed to his heirs, the tax to be
paid is known as
a. donor's tax.
b. inheritance tax.
c. estefe tax.
d. transfer tax.
SUGGESTED ANSWER: c
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Chapter 2
ESTATE TAXATION
A. IMPOSITION OF THE ESTATE TAX
IMPOSITION OF ESTATE TAXES
1. W h e n the estate tax accrues. The estate tax accrues

as of the death of the decedent and the accrual of the tax is
distinct from the obligation to pay the same. Upon the death of the
decedent, succession takes place and the right of the State to tax
the privilege to transmit the estate vests instantly upon death.
s
(Rev Regs. No. 2-2003, 1 ' par, Sec. 3)
NOTES A N D C O M M E N T S : The above concept emanated from the
jurisprudential interpretation in the cases of Lorenzo v. Posadas, 64 Phil.
353, and Beam v. Yatco, No. 48122, October 29, 1948, 82 Phil. 30)
2. Rates of estate tax. There shall be levied, assessed,

collected and paid upon the transfer of the net estate of every
decedent, whether resident or nonresident of the Philippines, a tax
based on the value of such net estate, as computed in accordance
with the following schedule.
If the net estate is:
Over But Not Over The Tax Plus Of The

Shall Be Excess
Over
P 200,000 Exempt
P 200,000 500,000 0 5% P200.000
500,000 2,000,000 P 15,000 8% 500,000
2,000,000 5,000,000 135,000 11% 2,000,000
5,000,000 10,000,000 465,000 15% 5,000.000
10,000,000 and over 1,215,000 20% 10,000,000
(NIRC of 1997, Sec 84)
3. Determination of the net estate. For purposes of

imposing the estate tax the value of the estate tax shall be
determined by deducting the deductions allowed to the estate of
the decedent, whether a citizen, a resident or a non-resident alien.
10
(NIRC of 1997. Sec. 86)
4. Steps in the determination of the estate tax.

a Determine the nationality and residence of the
decedent
b. Determine the nature and location of the properties of
the decedent.
c. Determine the composition and value of the gross
estate.
d. Determine the nature and value of the allowable
deductions and subtract from the gross estate in order to arrive at
the net estate.
e. Apply the rates of the estate tax that are applicable to
the net estate.
f Determine the applicable penalties and surcharges, if
any.
complete.
OBJECTIVE TYPE:
When does the estate tax accrue ? Explain briefly.

PROBLEM TYPE:
Mr. Felix de la Cruz, a bachelor resident citizen,

suffered from a heart attack while on a business trip to the
USA. He died intestate on June 15, 2009 In New York City,
leaving behind real properties situated in New York; his
family home In Valle Verde, Pasig City; an office
condominium In Makatl City; shares of stock In San Miguel
Corporation; cash In bank; and personal belongings. The
decedent Is heavily Insured with Insular Life. He had no
known debts at the time of his death. As the sole heir and
appointed Administrator, how would you determine the gross
estate of the decedent ? (BAR 2000, paraphrasing and date
supplied)
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SUGGESTED ANSWER: Since, Mr. de la Cruz is a Filipino citizen, I
would determine his gross estate by considering all real property,
wherever situated, all personal property, tangible, intangible or mixed,
wherever situated, to the extent of the interest that Mr. de la Cruz had at
the time of his death.
NOTES NOT PART OF THE ANSWER: Refer to no. 4, supra.
MULTIPLE-CHOICE TYPE SELF-TEST:
The estate tax is to be computed starting from the death

of the decedent because
a. the provisions of the NIRC of 1997 requires it.
b. the privilege to transfer properties takes place
upon death.
c. it is only upon the decedent's death that his heirs
are known.
d. It is at the time of death that estate taxes are due.
SUGGESTED ANSWER: b
SITUS O F E S T A T E T A X A T I O N
1. Situs of real property for estate taxation. T h e place •

where the real property is located.
2. Situs of tangible personal property. T h e rule to

follow is the mobilia sequuntur personam (movables follow the
person). Thus the situs of taxation is the place where the owner is
found not the place where the tangible personal property is
physically located.
3. Situs of intangible personal property. W h e r e the

intangible personal property has obtained a business situs is the
taxing authority. For example, shares of stock of domestic
corporations have obtained a business situs in the Philippines
such that they are part of the gross estate no matter where they
are found or where the owner is domiciled.
4. T h e situs of estate taxation may also be

determined by the domicile or citizenship of the
decedent. The reader should note that the above concepts may
be used in combination for the purpose of determining what pro- .
12
parties are to be included in the gross estate of a decedent. Refer
to the following discussions.
B. COMMON DEFINITIONS THAT APPLY TO ALL

GROSS ESTATES WHETHER OF DECEDENT
FILIPINOS, RESIDENT ALIENS AND NON-
RESIDENT ALIENS
1. Real property for estate tax purposes. The NIRC of

1997 has not defined the meaning of real property for estate tax
purposes but Revenue Regulations No. 7-2003 has defined real
property, for purposes of capital gains taxation, as having "the
same meaning attributed to that term under Article 415 of Republic
Act No. 386, otherwise known as the 'Civil Code of the Philippines.'
(Rev. Regs. No. 7-2003, Sec. 2.c.)
The author submits that the general meaning of immovable
property under civil law would find application in the determination
of what is meant by real property for imposition of the estate tax.
"The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds
adhered to the soil;
(2) Trees, plants, a n d growing fruits, while they are
attached to the land or form an integral part of an immovable;
(3) Everything attached to an immovable in a fixed
manner, in such a w a y that it cannot be separated therefrom
without breaking the material or deterioration of the object;
(4) Statutes, reliefs, paintings or other objects for use or
ornamentation, placed in buildings or on lands by the owner of the
immovable in such a manner that it reveals the intention to attach
them permanently to the tenements;
(5) Machinery, receptacles, instruments or implements
intended by the owner of the tenement for an industry or works
that may be carried on in a building or on a piece of land, and
which tend directly to meet the needs of the said industry or works;
(6) Animal houses, pigeon houses, beehives, fish ponds
or breeding places of similar nature, in case their owner has
placed them or preserves them with the intention to have them
permanently attached to the land, and forming a part of it; the
animals in these places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the matter
13
thereof forms part of the bed, and waters either running or
stagnant;
(9) Docks and structures which, though floating, are
intended by their nature and object to remain at a fixed place on a
river, lake, or coast;
(10) Contracts for public works, and servitudes and other
real rights over immovable property." (Rep. Act No. 386, Civil Code
of the Philippines, Art. 415,)
2. Personal property for purposes of imposing the

estate tax. The NIRC of 1997 has not defined the meaning of
personal property for estate tax purposes. The author submits
that in the definitions of personal property under civil law would
find application as well to estate taxation.
a. "The following things are d e e m e d to be personal
property:
1) Those movables susceptible of appropriation
which are not included in Article 415 which lists immovable
property;
2) Real property which by any special provision of
law is considered as personalty;
3) Forces of nature which are brought under
control by science;.
4) In general, all things which can be transported
from place to place without impairment of the real property
to which they are fixed." (Rep. Act No. 386, Civil Code of the
Philippines, Art. 416, words in italics supplied)
b. "The following are also considered as personal
property:
1) Obligations and actions which have for their
object movables or demandable sums; and
2) Shares of stock of agricultural, commercial and
industrial entities, although they may have real estate."
(Rep. Act No. 386, Civil Code of the Philippines, Art. 417)
3. Classification of personal property. T h e NIRC of 997

has not classified personal property for estate tax purposes. While
this may be so, the reader should note that there are two kinds of
personal property and the tax treatment for each of them may be
different. Personal property may be classified into
a. Tangible personal property, and
b. Intangible personal property.
14
NOTES AND COMMENTS It is important to know the distinction
because the situs of estate taxation for tangible personal property follows
the rule of mobilia sequuntur personam (movables follow the person)
while that for intangible personal property follow the business situs
concept.. For further discussion refer to the Situs of Estate Taxation.
4. Tangible personal property, definition. Tangible

personal property is that which may be felt or touched: It must
necessarily be corporeal. (Adapted from Bouvier)
5. Property considered as tangible personal

property.
a. Those movables susceptible of appropriation which
are not included in Article 415 which lists immovable property;
b. Real property which by any special provision of law is
considered as personalty. [Rep. Act No. 386, Civil Code of the
Philippines, Art. 416 (1) and (2), words in italics supplied)
c. In general, all things which can be transported from
place to place without impairment of the real property to which
they are fixed. [Ibid, Art. 416 (4)]
6. Examples of tangible personal property.

a. motor vehicles;
b. watercraft such as pleasure crafts, jet skis, etc.
c. personal appliances such ^as computers, printers,
etc.,
d. home furnishings such as furniture, etc.
e. home appliances such as television sets. Radios,
refrigerators, etc.
f. collections such as art collections, stamp collections,
antique collections, etc.,
g. jewelry, etc.
7. Intangible personal property, definition. Intangible

personal property is that which could NOT be felt or touched: It
must necessarily be incorporeal. (Adapting the reverse of the
Bouvier definition)
8. Property considered as intangible personal

property.
a. Forces of nature which are brought under control by
science. [Rep Act No. 386, Civil Code of the Philippines, Art 416 (3)]
15
b. Obligations and actions which have for their object
movables or demandable sums; and
c. Shares of stock of agricultural, commercial and
industrial entities, although they may have real estate." (Ibid.,, Art
417)
9. Examples of intangible personal property.

a Cash;
b. Bank deposits;
c. Life insurance policies;
d. Shares of stock in corporations;
e Bonds or other evidences of long term indebtedness,
f. Negotiable instruments such as promissory notes,
checks, etc.,
10. Importance of knowing whether personal property

is tangible or intangible. Intangible personal property of non-
resident aliens are included in the decedent's gross estate only if
they are situated in the Philippines. Intangibles of of Filipinos and
those of resident aliens wherever situated are included in the
decedent's gross estate.
in writing, giving yourself three (3) minutes per number If pressed
complete.
OBJECTIVE TYPE:
What property are considered as real property for estate

tax purposes ? Give some examples.
S U G G E S T E D A N S W E R : Refer to no 1. supra
Which among the following should be treated as real

property ?
a. An Amorsolo painting.
b. A Porshe sports car.
c. A contract for the construction of a public road.
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d. Shares of stock of San Miguel Corporation.
SUGGESTED ANSWER: c
C. THE GROSS ESTATE OF DECEDENT

FILIPINOS A N D R E S I D E N T A L I E N S
1. Gross estate for p u r p o s e s of estate taxation of

decedent Filipino citizens, whether residents or
nonresident.
a The value at the time of death of all: r
1) real property, wherever situated,
2) personal property
a) whether tangible or intangible, or
mixed,
b) wherever situated. (NIRC of 1997,
s t
Sees. 85, 1 par., and 104, numbering and arrangement
supplied);
b. to the extent of the interest therein of the decedent at
the time of his death. [Ibid., Sec. 85 (A)]
2. Kinds of estates of decedents for the purpose of

imposing the estate tax:
a. Estates of decedent Filipinos, whether residents or
not, and estates of decedent resident aliens;
b. Estates of decedent non-resident aliens.
3. Filipinos for purposes of estate taxation. The NIRC

of 1997 has not defined w h o are considered as Filipinos for
purposes of estate taxation. The author submits that the
constitutional definition of w h o are Filipinos would find application.
The following are citizens of the Philippines.
a Those who are citizens of the Philippines at the time
of the adoption of the 1987 Philippine Constitution;
b. Those whose fathers or mothers are citizens of the
Philippines;
c. Those born before January 17, 1973, of Filipino
mothers, who elect Philippine citizenship upon reaching the age of
majority; and
d. Those who are naturalized in accordance with law
(1987 Philippine Constitution, Article IV, Sec 1)
NOTES AND C O M M E N T S : An interesting issue would the case of
Filipinos who are dual citizens. The author makes the submission that a
17
person who is both a Filipino citizen and a citizen of another country may
be subject to the Philippine laws on estate taxation. While this may be so,
the provisions of the NIRC of 1997, Title III, Chapter I, Sec. 86 (E) Tax
Credit for Estate Taxes Paid to a Foreign Country. Refer to the
discussion of this in Chapter 2, H COLLECTION AND PAYMENT OF
ESTATE TAXES
The reader should also note that the NIRC of 1997 does not make
a distinction between a resident Filipino and a non-resident Filipino with
regard to the determination of what constitutes the gross estate of a
decedent Filipino The rationale behind this absence of distinction with
regard to residency is the symbiotic relation of protection and support
between a citizen and his State It does not matter where the property of
the decedent is located so long as he is a Filipino, such property shall
form part of his gross estate because protection is given to him by the
Philippine government by reason of his citizenship
4. Residence for purposes of estate taxation,

definition. Residence is the permanent home, the place to
which, whenever absent for business or pleasure, one intends to
return, and depends on facts and circumstances in the sense that
they disclose intent. (Cone v. Cone, 100 Phils. 321)
The term "residence: is s y n o n y m o u s with "domicile". (Velilla
v. Posadas, 62 Phil. 624)
5. Determinant for a b a n d o n m e n t of domicile. There

must be a deliberate and provable choice of a new domicile,
coupled with actual residence in the place chosen, with a declared
or provable intent that it should be one's fixed and permanent
place of abode, one's home. (Velilla v. Posadas, 62 Phil 624)
6. Gross estate for purposes of estate taxation of

decedent resident aliens.
a. The value at the time of death of all:
1) real property, wherever situated,
a) whether tangible or intangible, or
mixed,
b) wherever situated. (NIRC of 1997,
st
Sees 85, 1 par., and 104, numbering and arrangement
supplied);
the time of his death. [Ibid.. Sec 85 (A)]
NOTES A N D C O M M E N T S : The reader should note that the
18
composition of the gross estate for estate tax purposes of a resident alien
is the same as that of Filipinos. All properties wherever situated are
included This is so because resident aliens are entitled to the protection
of the Philippine government, hence the application of the protection and
support concept in taxation.
7. Resident aliens for purposes of estate taxation.

The provisions of the NIRC of 1997, Title III - Estate and Donor's
Taxes has not provided for a definition of who are resident aliens
unlike the provisions of Title II - Income Taxes, Chapter I -
Definitions. The author submits that the definitions of resident
aliens for purposes of income taxation may be adopted as the
same definition for purposes of estate taxation.
Thus, "The term 'resident alien' means an individual whose
residence is within the Philippines and who is not a citizen
therefor." [NIRC of 1997, Sec. 22 (F)J
Revenue Regulations provide an interpretation of who
may be considered as resident aliens:
a. An alien actually present in the Philippines who is
not a mere transient or sojourner.
b. Whether he is a transient or not is determined by his
intentions with regard to the length and nature of his stay.
c. A mere floating intention indefinite as to time, to
return to another country is not sufficient to constitute such alien
as a transient. If he lives in the Philippines and has no definite
intention as to stay, he is a resident.
d. One who c o m e s to the Philippines for a definite
purpose which in its nature m a y be promptly accomplished is a
transient. But if his purpose is of such a nature that an extended
stay may be necessary for its accomplishment, and to that end the
alien makes his home temporarily in the Philippines, he becomes
a resident though it may be his intention at all times to return to his
domicile abroad when the purpose for which he came has been
consummated or abandoned. (Rev Regs. No 2, Sec. 5, numbering
supplied)

complete
19
OBJECTIVE TYPE:
What constitutes the gross estate of non-resident

Filipino citizens ? Explain briefly.
SUGGESTED ANSWER: Refer to no 1, supra
PROBLEM TYPE:
1. In determining the gross estate of a decedent,

are his properties abroad to be included, and more
particularly, what constitutes gross estate ? (BAR: 1979)
S U G G E S T E D A N S W E R : Yes, if the decedent is a Filipino
citizen or a resident alien.
The gross estate of a Filipino citizen or a resident alien comprises
all his real property, wherever situated; all his personal property, tangible,
intangible or mixed, wherever situated, to the extent of his interest existing
therein at the time of his death.
The gross estate of a non-resident alien comprises all his real
property, situated in the Philippines; all his personal property, tangible,
intangible or mixed, situated in the Philippines, to the extent of his interest
existing therein at the time of his death.
2. Mr. AS, Filipino citizen, died abroad leaving the

following properties: house and lot in Texas, USA; shares
of stock in San Miguel Corporation and PHILEX, both local
companies; bank deposits in New York City and in the Bank
of the Philippine Islands in Makati; a car registered in the
name of his son aged 21 years. He was buried in Manila and
expenses were incurred to bring the remains home and for
his funeral.
What should be reported as part of his gross estate
xxx ? Explain. (BAR: 1987, paraphrasing supplied)
S U G G E S T E D A N S W E R ; All of the above described properties
except the car registered in the name of his son should be reported as
part of his gross estate.
Since Mr. AS was a Filipino citizen at the time of his death, then,
the value of his gross estate shall be determined by including the value,,
at the time of his death, of all property, real or personal, tangible,
intangible or mixed wherever situated, of which he has an interest existing
at the time of his death. Thus, all of his properties located in the
Philippines and in the U.S.A. at the time of his death form part of his gross
estate. Mr AS does not have any interest, at the time of his death, in the
20
car registered in name of his son, hence the car is not included in his
gross estate. (NIRC of 1997, Sec. 85,)
3. SS died on 2 September 2009 in Taipei,

Republic of China. At the time of his death, SS was a citizen
of the Republic of China and a resident of Makati, Metro
Manila. SS left the following properties: (a) a residential
condominium unit at Rltz Tower, Makati; (b) a house and lot in
Taipei; (c) shares of stock in Simplex Communications, Inc., a
Taipei-based company, and (d) shares of stock in San Miguel
Corporation.
Which of these properties are subject to Philippine
estate tax ? Explain. (BAR: 1990, date supplied)
S U G G E S T E D A N S W E R : All of the above properties of SS are
subject to Philippine estate tax because they form part of his gross estate.
SS, a citizen of the Republic of China and a resident of Makati, is
considered, for Philippine estate tax purposes, a resident alien
Consequently, the value of his gross estate shall be determined by
including the value, at the time of his death, of all property, feat or
personal, tangible, intangible or mixed, wherever situated Thus, all of the
properties enumerated in the problem irrespective of where they are
situated are includible in the gross estate of SS.
4. Cliff Robertson, an American citizen, was a

permanent resident of the Philippines. He died in Miami,
Florida. He left 10,000 shares of Meralco, a condominium
unit at the Twin Towers Building at Pasig, Metro Manila
and a house and lot in Los Angeles, California.
What assets shall be included in the Estate Tax Return
to be filed with the BIR ? (BAR 1994)
SUGGESTED A N S W E R : All of the assets should be included in
the Estate Tax Return to be filed with the BIR.
Cliff Robertson, an American citizen and a permanent resident of
the Philippines is considered, for Philippine estate tax purposes, a
resident alien Consequently, the assets to be included in the Estate Tax
Return to be filed with the BIR should be all property, real or personal,
tangible, intangible or mixed, wherever situated, to the extent of the
interest that Cliff Robertson has at the time of his death Thus, all of the
properties enumerated in the problem irrespective of where they are
situated are includible in the gross estate of Cliff Robertson
21
1. Mr. AS, Filipino citizen, died abroad leaving the
following properties: house and lot in Texas, USA; shares
of stock in San Miguel Corporation and PHILEX, both local
companies; bank deposits in New York City and in the Bank
of the Philippine Islands in Makati; a Toyota Camry sedan
registered in the name of his son aged 21 years. He was
buried in Manila and expenses were incurred to bring the
remains home and for his funeral.
Which among the above properties should be excluded
from his estate tax return? (Adapted from the 1987 BAR)
a. The house and lot in Texas, USA.
b. The shares of stock In San Miguel Corporation.
c. The bank deposits in new York City.
d. The Toyota Camry sedan.
. SUGGESTED ANSWER: d
2. Cliff Robertson, an American citizen, was a

permanent resident of the Philippines. He died in Miami,
Florida. He left 10,000 shares of Meralco, a condominium
unit at the Twin Towers Building at Pasig, Metro Manila; aa
house and lot in Los Angeles, California, USA; a lease
contract over a condominium located in Florida, USA.
Which among the following assets shall be excluded in
the Estate Tax Return to be filed with the BIR ? (Adapted from
the 1994 BAR)
a. The value of the Florida, USA condominium.
b. The value of the Pasig, Metro Manila
condominium.
c. The value of the house and lot located in
California, USA.
d. The value of the 10,000 Meralco shares.
SUGGESTED ANSWER: a
EXPLANATION NOT PART OF THE ANSWER: The value of the
Florida, USA condominium unit is not included because Cliff Robertson's
interest is only the value of the lease contract and not the value of the
condominium itself
D. GROSS ESTATE OF DECEDENT NON-

RESIDENT ALIEN
1- Gross estate for purposes of estate taxation of a

non-resident alien decedent. The gross estate of a non-
22
resident alien decedent shall be determined by including
a. the value at the time of his death of his:
1) real property situated in the Philippines;
a) whether tangible, intangible or mixed,
b) situated in the Philippines. (NIRC of
1997, Sees. 85 and 104, numbering arid arrangement
supplied)
the time of his death. [Ibid., Sec. 85 (A.)
2. Intangible property of a non-resident alien

decedent considered as situated in the Philippines.
a. Franchise which must be exercised in the Philip-
pines;
b. shares, obligations or bonds
1) issued by any corporation or sociedad
anonima organized or constituted in the Philippines in
accordance with its laws;
2) issued by any foreign corporation eighty-five
per centum (85%) of the business of which is located in the
Philippines;
3) issued by any foreign corporation if such
shares, obligations, or bonds have acquired a business
situs in the Philippines;
c. shares or rights in any partnership, business or
industry established in the Philippines. (NIRC of 1997, Sec 104, 1"
par., numbering and arrangement supplied)
All of the above items are includible in the gross estate of a
non-resident alien decedent.

complete.
OBJECTIVE TYPE:
What Intangible property of a non-resident alien

decedent an considered as situated In the Philippines, hence
to be Included as part of his gross estate for purposes of
23
estate taxation ?
SUGGESTED ANSWER: Refer to no 2. supra
PROBLEM TYPE:
John Doe, an American domiciled in South Africa, died

in 2009. He left the following properties: a. a rest house in the
Bahamas; b. a villa in Switzerland; c. shares of stock in (1)
Hongkong Corporation; (2) San Miguel Brewery; (3) Taipeh
Corporation operating in and with office at Makati; d. time
deposits with PNB; e. Philippine Treasury bills; f. lease
contract over his Manhattan apartment leased to the
Philippine consulate.
Explain fully which of the foregoing properties
formed part of his gross estate in the Philippines. (BAR: 1985,
date supplied and reworded)
SUGGESTED ANSWER. John Doe, an American citizen,
domiciled in South Africa, is considered, for Philippine estate tax
purposes, a non-resident alien decedent. As such, all the properties, real
or personal, tangible, intangible or mixed, which are situated in the
Philippines to the extent of John Doe's interest existing at the time of his
death, shall form part of his gross estate.
The following properties situated in the Philippines form part of the
gross estate of John Doe in the Philippine:.
a. Shares of stock in 1) San Miguel Corporation; 2) Taipei
Corporation operating in and with office at Makati;
b. Time deposits with PNB; and
c. Philippine Treasury Bills
The shares of stock in San Miguel corporation, a domestic
corporation and the shares of stock in a Taipei corporation operating and
managed in Makati, Metro Manila although physically situated outside of
the Philippines, are considered as situated in the Philippines. (NIRC of
s l
1997, Sec. 104, 1 par) The fact that the Taipei Corporation is operating
and managed in the Philippines has given it a business situs in the
Philippines.
All the other properties being situated outside of the Philippines do
not form part of John Doe's gross estate.
1. Mr. Siok Tong, a Chinese citizen, met an accident

and died while visiting the Philippines. Which among the
following properties are to be included as part of his gross
estate for Philippine tax purposes ?
24
a. His house and lot in China.
b. A condominium unit in California, U.S.A.
c. Shares of stock in Philippine Long Distance
Telephone Company (PLDT).
d. Accident insurance issued by a Philippine
insurance company payable to his wife.
SUGGESTED ANSWER: c
2. John Doe, an American domiciled in South Africa,

died in 2009. He left the following properties: a. a rest house
in Florida, USA; b. a villa in Switzerland; c. shares of stock in
(1) Hongkong Corporation; (2) San Miguel Brewery, a
Philippine corporation; (3) An American Corporation
operating in and With office at Makati; d. time deposits with
PNB; e. Philippine Treasury bills; f. lease contract over his
Manhattan apartment leased to the Philippine consulate.
Which of the following properties forms part of his
gross estate in the Philippines. (Adapted from the 1965 BAR)
a. The lease contract.
b. The shares of stock in the American corporation.
c. The rest house In Florida, USA.
d. The villa in Switzerland.
SUGGESTED ANSWER: b
3. John Doe, an American domiciled in South Africa,

died in 2009. He left the following properties: a. a rest house
in Florida, USA; b. a villa In Switzerland; c. shares of stock In
(1) Hongkong Corporation; (2) San Miguel Brewery, a
Philippine corporation; (3) An American Corporation
operating in and with office at Makati; d. time deposits with
PNB; e. Philippine Treasury bills; f. lease contract over his
Manhattan apartment leased to the Philippine consulate.
Which of the following properties should be
excluded from his gross estate In the Philippines. (Adapted
from the 1985 BAR)
a. The shares of stock in the American corporation.
b. The shares of stock In San Miguel Corporation.
c. Time deposits with PNB.
d. The rest house in Florida, USA.
SUGGESTED ANSWER d
25
E. C O M M O N RULES FOR THE DETERMINATION
OF ITEMS THAT A R E INCLUDIBLE IN ALL GROSS
ESTATE WHETHER OF DECEDENT FILIPINOS,
RESIDENT ALIENS A N D NON-RESIDENT ALIENS
E X T E N T OF THE DECEDENT'S INTEREST AT THE

T I M E O F HIS DEATH
1. Transfers of property by death that are subject to

the estate tax.
a. Transfers of property to the extent of the interest of
the decedent in the property at the time of his death;
b. Transfers in contemplation of death;
c Revocable transfers;
d. Property passing under general power of
appointment;
e. S o m e kinds of life insurance proceeds;
f. Prior interests; a n d
g. Transfers for insufficient consideration. (NIRC of 1997,
Sec 85)
2. T h e g r o s s estate of d e c e d e n t Filipinos, resident

and non-resident alien decedents is limited only to "the
extent of the interest therein of t h e d e c e d e n t at the time
Of his death." [NIRC of 1997, Sec. 85 (A)]
NOTES A N D C O M M E N T S :
The rationale behind the above limitation is the concept that an
estate tax is imposed upon the privilege to transfer properties mortis
causa. If the decedent has no interest in a property at the time of his
death, then he could not transfer it. There is therefore nothing to tax.
The above is a general rule, because there are certain .instances
where the decedent does not have any title to a property but may have a
beneficial interest in a property at the time of his death. Thus, such
properties are included as part of the gross estate. An example is sale of
property made for other than an adequate and full consideration in money
or moneys worth, in short less than the fair market value. In this
instance, the decedent has already surrendered all his interest over the
property sold but the difference between the fair market value and the
actual consideration paid would be included in the gross estate. [NIRC of
1997, Sec. 85(G),]
3. Extent of "interest" in properties w h i c h a decedent
26
may have in properties for the s a m e to be included as
part of his gross estate. There are certain kinds of "interests"
over property which may be exercised by a person even if the said
property is not titled in his name or even if he does not o w n these
properties. The "interests" may be attributes of ownership which
the owner has allowed the decedent to exercise, or in certain
instances the property is disposed of but there is no complete
transfer of some attribute of ownership. Such retained interest
may include the following:
a. the right to possess the property;
b. the right to enjoy the fruits to the property;
c. the right to use the property;
d. the right to dispose of the property;
e. the right to determine w h o shall possess, enjoy the
fruits, or dispose of the property.
4. "Interests" in properties that are considered by

the NIRC of 1997 to be included as part of gross estate:
a. Interest of a decedent in any property transferred in
contemplation of death [NIRC of 1997, Sec. 85 (B)J;
b. Interest of a decedent in a revocable transfer of
property [NIRC of 1997, Sec. 85 (C)J; and
c. Transfers for insufficient consideration [NIRC of 1997,
Sec. 85 (G)].
5. Common rules for determination of items

includible in gross estate of resident or non-resident
Filipino citizens, alien residents and nonresident aliens
with respect to:
a. Transfers in contemplation of death,
b. Revocable transfers;
c. Property passing under general power of
appointment;
d. Proceeds of life insurance;
e. Transfers for insufficient consideration; and
f. Capital of the surviving spouse.

27
complete.
OBJECTIVE TYPE:
In general, what types of transfers of property by death

that are subject to estate taxes ?
SUGGESTED A N S W E R : Refer to no. 1, supra.
PROBLEM TYPE:
Jose Ortiz owns 100 hectares of agricultural land

planted to coconut trees. He died on May 30, 2009. Prior to
his death, the government, by operation of law, acquired
under the Comprehensive Agrarian Reform Law all his
agricultural lands except five (5) hectares. Upon the death of
Ortiz, his widow asked you how she will consider the 100
hectares of agricultural land in the preparation of the estate
tax return. What advice will you give her ? (BAR: 1994, date
supplied, and reworded)
S U G G E S T E D A N S W E R : The widow should include in the
estate tax return only the five (5) hectares because this is the only
remaining portion of the 100 hectares which Ortiz had an interest at the
time of his death.
J o s e Ortiz owns 100 hectares of agricultural land

planted to coconut trees. He died on May 30, 2009. Prior to
his death, the government, by operation of law, acquired
under the Comprehensive Agrarian Reform Law all his
agricultural lands except five (5) hectares. Upon the death of
Ortiz, his widow asked you how she will consider the 100
hectares of agricultural land In the preparation of the estate
tax return. What advice will you give her ? (Adapted from the
1994 BAR)
a. Exclude the 100 hectares because Jose Ortiz did
not have any Interest in the said property at the time of his
death.
b. Include the 100 hectares In the estate tax return
but deduct tin same as property deemed taken for public use.
c. Include only the five (5) hectares which were
28
retained because this is the extent of the Interest that Jose
Ortiz had Ih A e said property at the time of his death.
d. Exclude the 100 hectares because these are
properties that were taken for public use by operation of law
SUGGESTED ANSWER: c
TRANSFERS IN C O N T E M P L A T I O N OF DEATH
1. Transfers in contemplation of death when

includible as part of a decedent's gross estate. To the
extent of any interest therein of which:
a. The decedent,
1) has at any time
2) m a d e a transfer, by trust or otherwise,
3) in contemplation of, or Intended to take effect
in possession or enjoyment
4) at or after his death, OR
b. The decedent
1) has at any time
2) m a d e a transfer, by trust, or otherwise,
3) under which he has retained
a) for his life or
b) for a period not ascertainable
without reference to his death or
c) for any period which does not in
fact end before his death;
4) The possession or enjoyment of, or the right
to the income from the property, or
5) The right either alone or in conjunction
with any person to designate the person who shall
a) possess or
b) enjoy the property or the income
therefrom. [NIRC of 1997, Sec. 85 (B), numbering and
arrangement supplied]
NOTES AND COMMENTS: For property transferred in contemplation of
death to be includible as part of gross estate, the transfer must be
covered by the provisions of the NIRC of 1997, Sec 85(B), which read as
follows: "To the extent of any interest therein of which the decedent has
at any time made a transfer, by trust or otherwise, in contemplation of or
intended to take effect in possession at or after death, or of which he has
at any time made a transfer, by trust or otherwise, under which he
retained for his life or for any period which does not in fact end before his
death (1) the possession or enjoyment of, or the right to the income from
29
the property, or (2) the right either alone or in conjunction with any person,
to designate the person which shall possess or enjoy the property or the
income therefrom; except in case of a bona fide sale for an adequate and
full consideration in money or money's worth."
There may be valuation issues involved in instances where there
is a transfer in contemplation of death.
2. Kinds of transfers under the NIRC of 1997, Sec. 85

(B) Transfer in Contemplation of Death.
a Transfers taking effect at death; and
b. Transfers retaining certain interests
1) the decedent retained the possession or
enjoyment of, or the right to the income from the property
2) the decedent retained the right to designate
the person who shall possess or enjoy the property or the
income.
3. Interests in transfers taking effect at death

considered as a transfer in contemplation of death
hence included as part of gross estate. Included as part of
the gross estate of a Filipino, resident or non-resident alien is the
extent of any interest therein of which:
a. The decedent,
1) has at any time
b made a transfer,
1) by trust
2) or otherwise,
c. in contemplation of, or intended to take effect
1) in possession
2) or enjoyment
d. at or after his death. [NIRC of 1997, Sec 85 (B),
arrangement and numbering supplied)
NOTES AND COMMENTS:
a The concept of a transfer in contemplation of death has a
technical meeting. It does not mean that a person transfers his properties'
because he knows he is going to die.. It is not the mere transfer that
constitutes a transfer in contemplation of death but the retention of some
type of control over the property transferred. This is evident from the
provisions of the NIRC of 1997, Sec. 85 (B) which deleted all the
presumptions of contemplation of death under the old law. Thus, the U S
Supreme Court in Bromley v. McCaughn, 280 U.S. 124 held that it was
unconstitutional for the estate tax statute to contain a conclusive
presumption that all gifts made within two years of death were made in
30
contemplation of death and were, therefore automatically includible in the
gross estate
Of course there are authorities who believe otherwise. "It is the
thought of death as a controlling motive prompting the • disposition of
property that afford the test of a transfer in contemplation of death and it
cannot be said that the determinative motive is lacking merely because of
the absence of consciousness that death is imminent. It is a
contemplation of death, not necessarily contemplation of imminent death,
to which, the law refers. It is conceivable that the idea of death may
possess the mind so as to furnish a controlling motive for the disposition
of property, although death is not thought to be close at hand The
words 'in contemplation of death' means that the thought of death is the
impelling cause of the transfer, and while the belief in the imminence of
death may afford convincing evidence, the statute is not to be limited and
its purpose thwarted by a rule of construction which in place of
contemplation of death makes the final criterion to be an apprehension
that death is near at hand." (U.S. v. Wells, 283 U.S. 102, cited in 1955 PH
Fed. Tax Service, Par. 123, 526 in turn cited in Umali, Roman M.,
Reviewer in Taxation, 1980 ed. (Manila: Rex Book Store, 1980) pp. 289-
290]
The author submits that if there is no retention of any interest and
the properties transferred "in contemplation of death' are included in the
gross estate, neither the government nor the estate may be seriously
prejudiced The amount of taxes collected would not be affected If the
appropriate taxes attendant to the transfer "in contemplation of death'
(donor's taxes for example) were paid, then the appropriate deduction
would be made for vanishing deduction. Of course, the effect on tax
collection would be dependent upon the length of time the "transfer in
contemplation of death" was made and death of the transferor If the
transfer was made more than five (5) years before the transferor's death
then the concept of vanishing deduction does not apply.
b. There may be a valuation issue involved in instances
where the transfer of the possession of enjoyment shall take place after
the death of the decedent. The law is specific in the determination of
what constitutes part of gross estate as, "the extent of any interest therein
of which the decedent has at any time made a transfer, by trust or
otherwise" [NIRC of 1997, Sec. 85 (B).
c. The total value of the property transferred is not the value
that is included in the gross estate, it is "the extent of any interest therein"
that the decedent had at the time of his death. The reader should relate
this provision with Sec. 88 (A) (2) and Sec 86 (B) (2) with regard to the
deduction for Property Previously Taxed
4. Donation mortis causa DISTINGUISHED FROM

donation inter vivos. "The principal characteristics of a
donation mortis causa, which distinguish it essentially from a do-
31
nation inter vivos, are that in the former it is the donor's death that
determines the acquisition of, or the right to, the property, and that
it is revocable at the will of the donor. In the donation in question,
their effect, that is, the acquisition of, or the right to, the property,
was produced while the donor was still alive, for according to their
expressed terms they were to have this effect upon acceptance,
and this took place during the donor's lifetime. Neither can these
donations be considered as an advance on inheritance or legaqy,
because they are neither an inheritance not a legacy. And it
cannot be said that the plaintiffs received such an advance on
inheritance or legacy, since they were not heirs or legatees of their
predecessor in interest upon his death. Neither can it be said that
they obtained this inheritance or legacy by virtue of a document
which does not contain the requisites of a will (Sec. 618 of the
Code of Civil Procedure)." [Zapanfa, ef a/., v. Posadas, 52 Phil 557
cited in Dalupan, Francisco, National Internal Revenue Code Annotated
(With Illustrations) Commonwealth Act No 466, Vol I, 1946 ed , (Manila:
M Colcol & Co., 1946) pp 454 - 455]
5. Characteristics of a donation mortis causa which

is subject to an estate tax because the transfer takes
effect after death.
a. It conveys no title or ownership to the transferee
before the death of the transferor; or what amounts to the same
thing, that the transferor should retain the ownership (full or naked)
and control of the property while alive;
b. That before his death, the transfer should be
revocable by the transferor at will, ad nutum; but revocability may
be provided for indirectly by m e a n s of a reserved power in the
donor to dispose of the properties c o n v e y e d ;
c. That the transfer should be void if the transferor
should survive the transferee. (Ganuelas v. Cawed, 401 SCRA 447)
NOTES AND COMMENTS Donations inter vivos are subject to the
donor's tax which is a tax upon the privilege to transfer properties during
the lifetime of the donor WHILE donations mortis causa are subject to the
estate tax because the transfer takes place after the donor's death. An
estate is a tax imposed upon the privilege to transfer properties mortis
causa or after death
6. Donations inter vivos m a d e in consideration of the

donor's death are transfers in contemplation of death
included as part of gross estate. T h e s e are donations that
32
take effect immediately or during the lifetime of the donor, but are
made in consideration of his death Gifts inter vivos, the
transmission of which is not made in consideration of the donor's
death, should not be understood as included within the concept of
a transfer in contemplation of death. (Vidal de Roces. et al v.
NOTES AND COMMENTS: The above ruling is applicable only if the
decedent has retained an interest in the property donated during
his lifetime.
7. Interests in transfers to take effect after the

decedent's death are N O T included as part of a
decedent's gross estate, in case of
a. A bona fide sale
b. for an adequate and full consideration in money or
money's worth. [NIRC of 1997, Sec 104 (B), numbering and
8. Interests in transfers w h e r e the decedent retained

the possession or e n j o y m e n t of, or the right to the
income from the property are included as part of gross
estate. Included as part of the gross estate of a Filipino, resident
or non-resident alien is the extent of any interest therein of which
a. The decedent
1) has at any time
b. made a transfer,
1) by trust,
2) or otherwise,
c. under which he has retained
1) for his life or
2) for a period not ascertainable without
reference to his death or
3) for any period which does not in fact end
before his death;
d. the possession or enjoyment of, or the right to the
S e c 8 5 B
income from the property. [NIRC of 1997, ( ) ' arrangement
and numbering supplied)
NOTES AND COMMENTS:
a. The reader should note the distinction between the transfer
in contemplation of death discussed under no. 3, supra and the foregoing
transfer with retention. In no. 3, there is no indication who should possess
or enjoy prior to death, white in the foregoing the transferor/decedent has
33
retained for himself the possession or enjoyment of the right to the income
from the property.
b. It is to be noted that the law does not require that the
retention should be in writing An implied agreement is sufficient to
constitute control For example, Nini donated to her granddaughter, a
residential building which Nini continued to occupy without paying any
rent despite the transfer of ownership. The value of Nini's interest in the
residential building at the time of the donation should be included in Nini's
gross estate because there is an Implied agreement for her to retain
possession until her death There is no full transfer of all interests in the
property inter vivos.
9. Interests in transfers where the decedent retained

the right to designate the person w h o shall possess or
enjoy the property or the income are included as part of
gross estate. Included as part of the gross estate of a Filipino,
resident or non-resident alien is the extent of any interest therein
of which
a. The decedent
1) has at any time
b. made a transfer,
1) by trust,
2) or otherwise,
c. under which he has retained
1) for his life or
2) for a period not ascertainable without
3) for any period which does not in fact end
before his death;
d. The right either alone or in conjunction with any
person
1) to designate the person w h o shall
a) possess or
b) enjoy the property or the income
therefrom. [NIRC of 1997, Sec. 85 (B), numbering and
10. Factors that are determinants of transfers in

contemplation of death.
a. Age and state of health of the decedent at the time of
the gift. [Umali, Roman M., Reviewer in Taxation, 1980 ed. (Manila: Rex
Book Store, 1980) pp 290 - 291 citing 1955 PH Fed. Tax Service, Par
123,549)]
34
b. Length of time between the gift and the death
A gift that was m a d e so close to the actual death was held
to be made in contemplation of death (ibid citing Dizon v
Posadas 57 Phil 465)
c. Execution of a will within a short time of the
making of the gift was considered as a transfer in
contemplation of death. (Ibid., citing Vidal de Roces v
11. illustrations of transfers in contemplation of death.

a. A father donated all his property to his only son but
he reserved to himself the usufruct of three parcels of land. (Dizon
v. Posadas, 57 Phil 465)
b. W h e r e a donor donated a property and after a short
time executed a will instituting the donee as one of the legatees in
his will. It is clear that the donation w a s made in contemplation of
death. (Vidal de Roces v. Posadas, 58 Phil 108)
12. Illustrations where transfers were NOT considered

in contemplation of death.
a. Transfers to reduce annual income tax liability
[Umali, Roman M., Rev/ewer in Taxation, 1980 ed (Manila Rex Book
Store, 1980) pp. 291 citing 1955 PH Fed. Tax Service, Par. 123,569)]
b. Transfer to relieve taxpayer from burden of
management. (Ibid., citing Par. 123,541)
c. Transfers to provide independent income for
dependents. (Ibid., citing Par. 123,542)
d. Transfers to protect family from hazards of business
operations. (Ibid., citing Par. 123,544)
e. Transfers to settle family disputes. If the
predominant motive of the transfer was to enable the donor to re-
marry without subjecting certain real property to the control of his
second wife. (Ibid., citing Par. 123,545)
f. Transfers actuated by fear of future impairment of
mental faculties. (Ibid., citing Par. 123,546)
NOTES AND COMMENTS: The reader should note that the basic
rationale for the inclusion in the gross estate of properties "transferred in
contemplation of death" is Jo prevent the taxpayer from escaping the
imposition of estate taxes Where the avowed and proven purpose does
show any indication to escape estate taxes, then the property is not
considered as "transferred in contemplation of death "
35
cover the SUGGESTED A N S W E R S and that all answers must be
complete.
OBJECTIVE TYPE:
Are donations inter vivos and donations mortis causa

subject to estate taxes ? (BAR: 1994)
SUGGESTED A N S W E R : The general rule is that donations
inter vivos are subject to donor's taxes while donations mortis causa are
subject to estate taxes.
However, if the transferor's control over the property donated inter
vivos .extends up to the death of the donor, sucn as transfers in
contemplation of death, revocable transfers, then these are subject to
estate taxes
PROBLEM TYPE:
A, aged 90 years and suffering from incurable cancer, on

August 1, 2009 wrote a will and, on the same day, made
several inter-vivos gifts to his children. Ten days later, he
died. In your opinion, are the inter-vivos gifts considered
transfers in contemplation of death for purposes of
determining properties to be included in his gross estate ?
Explain your answer. (BAR: 2 0 0 1 , date supplied)
S U G G E S T E D A N S W E R : Yes. The rule is that where a donor
donated a property and after a short time executed a will instituting ihe
donee as one of the legatees in his will, the donation was made in
contemplation of death. (Vidal de Roces v. Posadas, 58 Phil. 108)
Reasoning a su contrario, it is evident that the exclusion from the
will of the several inter-vivos gifts has no other purpose than to escape
estate taxation. Hence, they are includible as part of his gross estate.
However, if the donor's taxes have been paid, the children are entitled to
the deduction for property previously taxed.
A L T E R N A T I V E A N S W E R : No. It is clear that for inter vivos
r
gifts to be considered as "in contemplation of death' the transfer must be

in "contemplation of or intended to' take effect in possession at or after
death." Such is not the case on the problem because the transfer through
gifts took effect immediately and not after A s death.
It is likewise evident from the problem that A has not "retained for
his life or for any period which does not in fact end before his death (1)
the possession or enjoyment of, or the right to the income from the
property, or (2) the right either alone or in conjunction with any person, to
36
" \j,s c
designate the person which shall possess or enjoy the property or the
income therefrom."
NOTE NOT PART OF THE ANSWER: From the tax collection point of
view, it does not matter whether the inter-vivos gifts forms part of the
gross estate or not. If the inter vivos gifts form part of the gross estate,
and he proper donor's taxes were paid, then the concept of vanishing
deduction finds application. There would then be no effect on the taxes to
be collected from the estate. Refer to no. 3 supra which explains in detail
?he concept of transfer in contemplation of death.
X owns a residential lot with a BIR determined zonal

valuation of P1 million. In 2008 he sold the same to Y for P1
million subject to the condition that while X Is still alive he
shall be allowed to use part of the property as a garage for
whatever personal car he would own but limited only to one
car. The proper taxes attendant to the sale were paid. X died In
2009. What should be the treatment of the value of the
residential lot In the preparation of the estate tax return.
a. Include because X retained the right to enjoy a
portion of the property which right ends with his death.
b. Include because there Is no showing in the
problem that the title to the property was already transferred to
Y.
c. . Exclude because there was a bona fide sale of the
residential lot for sufficient and adequate consideration.
d. Exclude because the execution of the deed of sale
and the payment of the taxes effectively deprived X of
ownership over the property.
SUGGESTED ANSWER: c
REVOCABLE T R A N S F E R S
1. Revocable transfers when includible as part of a

decedent's gross estate. To the extent of any interest therein
of which the decedent
a. has at any time
b. made a transfer, by trust, or otherwise,
c. where the enjoyment thereof
d. was subject at the date of his death
e. to any change through the exercise of a power (in
37
whatever capacity exercisable)
1) by the decedent alone or
2) by the decedent in conjunction with any other
person (without regard to when or from what source the
decedent acquired such power),
f. to alter, amend, revoke, or terminate or
g. when any such power is relinquished in con-
templation of the decedent's death. [NIRC of 1997, Sec. 85 (C) (1),
numbering and arrangement supplied]
2. When power to alter, amend or revoke considered

to exist on date of decedent's death.
a. Even though the exercise of the power is subject to a
precedent giving of notice or
b. even though the alteration, amendment or revocation
takes effect only on the expiration of a stated period after the
exercise of the power, whether or not on or before the date of the
decedent's death
1) notice has been given or
2) the power has been exercised.
In such cases, proper adjustment shall be made
representing the interests which w o u l d have been excluded from
the power if the decedent had lived, and for such purpose if the
notice has not been given or the power has not been exercised on
or before the date of his death, such notice shall be considered to
have been given, or the power exercised, on the date of his death.
[NIRC of 1997, Sec. 85 (C) (2), numbering and arrangement supplied]
3. Revocable transfers not included as part of a

decedent's gross estate. Where the transfer is
a. A bona fide sale
b. for an adequate a n d full consideration in money or
money's worth. [NIRC of 1997, Sec. 85 (C) (1), numbering and
ESSAY TYPE SELF-TESTS. It is recommended t h a t ' y o u

coyer the S U G G E S T E D A N S W E R S a n d that all answers must be
complete.
38
ORJFCTIVE TYPE:
Explain briefly when a revocable transfer should not be

included as part of the gross estate upon the death of the
transferor.
SUGGESTED A N S W E R : Refer to no 3, supra.
Which among the following transfers of property, by

trust or otherwise, during the lifetime of the transferor is not
included as part of a deceased transferor's gross estate ?
a. When the deceased transferor has reserved to
himself the power to alter, amend, revoke or terminate the
transfer and such power is relinquished in contemplation of
the transferor's death.
b. Where the deceased transferor has reserved for
himself the power to determine who could alter, amend,
revoke or terminate the transfer and such power is
relinquished in contemplation of the transferor's death.
c. Where the deceased transferor had made the
transfer through a bona fide sale and for adequate
consideration but he has made a reservation of the power to
alter, amend, revoke or terminate the transfer prior to his
death.
d. Where the deceased transfer had made the
transfer but he has reserved for himself the enjoyment
thereof subject to his death to any change by himself or in
connection with any other person could alter, amend, revoke
or terminate the transfer and such power is relinquished in
contemplation of the transferor's death.
SUGGESTED ANSWER: c
PROPERTY PASSING UNDER GENERAL POWER

OF APPOINTMENT
1• "Power of appointment," definitions.

a. A power of appointment, in its general sense, is a
power to designate who shall enjoy the use of property
It does not relate to property which the decedent owned but
to property with respect to which some other person had granted
39
to the decedent the power to designate persons who shall
possess
or enjoy the property or income therefrom. [NIRC of 1997, Sec. 85

(D)J
b. A power of appointment consists of the right,

exercisable during life or by will, to designate the recipients of
income or corpus from a fund subject to the power. (Campbell.
Regis W., Estate Planning and Drafting, 1984 ed., Commerce Clearing
s
House, Inc., Illinois, USA, p. Sec. 11,051, 1 ' par.)
c "A power of appointment is a right to designate by will
or deed the person or persons w h o are to receive certain property
from.the estate of a prior decedent. Usually such power is held by
one who has enjoyed a life income from the property. However, it
is possible for one person to have a life income from certain
property and another person to have the right to designate who
shall receive the property after the death of the life tenant." [1955
PH Fed Tax Course, Par 3907 cited in Umali, Roman M., Reviewer in
Taxation, 1980 ed (Manila: Rex Book Store, 1980) p. 292]
d. "The term 'power of appointment' includes all powers
which are in substance and effect powers of appointment
regardless of the nomenclature used in creating the power and
regardless of local property tax connotations. For example, if a
trust instrument provides that the beneficiary may appropriate or
consume the principal of the trust, the power to consume or
appropriate is a power of appointment. Similarly, a power given to
a decedent to effect the beneficial enjoyment of trust property or
its income by altering, amending, or revoking the trust instrument
or terminating the trust is a power of appointment.
. . . (A) power t o amend only the administrative provisions o f
a trust instrument, which cannot substantially affect the beneficial
enjoyment of the trust property or income, is not a power of
appointment. The mere power of management, investment,
custody of assets, or the power to allocate receipts and
disbursements as between income and principal, exercisable in a
fiduciary capacity, whereby the holder has no power to enlarge or
shift any of the beneficial interests therein except as an incidental
consequence of the discharge of such fiduciary duties is not a
power of appointment." [Sec. 20.2041- 1 (b) (1), Regulations under the
U.S. Internal Revenue Code, Sec 2041)
40
NOTES AND COMMENTS: The NIRC of 1997 has not defined the
meaning of a power of appointment It merely provides that certain
properties that are passed under a general power of appointment shall be
considered as part of gross estate for estate tax purposes. [NIRC of 1997
Sec. 85 (D)l
The above definitions and the discussion that follow are taken from
discussion of American authors on the provisions of Sec. 2041 of the US
Internal Revenue Code and the Regulations promulgated thereunder
The author submits that the following discussion may find application in
the interpretation of the provisions of the NIRC of 1997, Sec 85 (D)J.
2. Specific terms of a power of appointment:

a. How the right is to be exercised;
b. W h e n it can be exercised;
c. W h o are the permissible recipients of appointed
funds (appointees) are; and
d. What funds are subject to the power. (Campbell, Regis
W., Estate Planning and Drafting, 1984 ed., Commerce Clearing House,
n d
Inc., Illinois, USA, p. Sec. 11,051, 2 par.)
3. Illustration of power of appointment. A will created a

trust in favor of Angelo a n d provided that all the income of the trust
be distributed to Angelo during his lifetime and that upon Angelo's
death, he be given the power to "appoint" the balance remaining in
the trust to beneficiaries of Angelo's choice. This power
possessed by Angelo would constitute a power of appointment
and depending upon the specific terms of the power and the
scope of Angelo's authority in appointing the assets held in trust at
the time of his death, might require the inclusion of the assets of
the trust in Angelo's estate for purposes of estate taxation.
4. How the power of appointment is constituted or

created. The specific terms of the power of appointment are
established by the donor of the power. The donor can create the
power
a. by will or
b. by deed executed in contemplation, or intended to
take effect in possession of or enjoyment at, or after his death, or
c. by deed under which he has retained for his life or
any period not ascertainable without reference to his death or for
any period which does not in fact end before his death certain
aspects of possession or enjoyment of or the right to the income
from the property. [NIRC of 1997, Sec 85 (D), paraphrasing,
41
arrangement and numbering supplied]
5. When the power of appointment may be exercised.

a. presently exercisable, or
b. limited to exercise
1) on some future date or
2) the occurrence of some particular event."
(Campbell, Regis W., Estate Planning and Drafting. 1984 ed.,
nd
Commerce Clearing House, Inc., Illinois, USA. p Sec. 11,051, 2
par.)
6. Kinds of powers of appointment for purposes of

assigning tax consequences.
a. General power of appointment; and
b Special or limited power of appointment.
7. General power of appointment, definitions.

a. The term general power of appointment means a
power which is exercisable in favor of
1) the decedent,
2) his estate,
3) his creditors, or
4) the creditors of his estate. [ U S Internal
Revenue Code, Sec. 2014 (b) (1), arrangement and numbering
supplied]
NOTES AND COMMENTS: Property passing under a general power of
appointment are considered as part of the gross estate of the decedent.
To bring it out of the gross estate, the power of appointment must be a
limited power of appointment.
8. Special or limited power of appointment,

definitions.
a. "A special power of appointment is one where a
donee of a power cannot exercise the power in favor of himself,
his creditors, his estate, or the creditors to his estate." (Campbell,
House, Inc., Illinois, USA, p. Sec. 11,067,1" par.)
b. A special power is one w h i c h authorizes the donee or
holder of the power to c o n s u m e principal, limited by an
ascertainable standard relation to the decedent's health,
education, support or maintenance. [1955 PH Fed. Tax Course. Par
3907 cited in Umali, Roman M , Reviewer in Taxation, 1980 ed. (Manila.
Rex Book Store, 1980) p. 293]
42
9. Tax consequences of a special power of
appointment. If a person holding a special power of
appointment dies while holding the same, there is no inclusion in
the gross estate because the decedent would have no interest
existing in the property at the time of his death.
10. Tax consequences of a general power of

appointment.
a. Donee dies holding the property. "If a donee dies
holding a general power of appointment, all property subject to
that power will be included in the donee's gross estate." [Campbell,
n d
House, Inc. Illinois. USA, p. Sec. 11,067, 2 par, applying the provisions
of the NIRC of 1997, Sec. 85 (D)] Here the property that passed
under a general power of appointment are considered as part of
the interest that the decedent had at the time of his death that are
includible as part of his gross estate for estate taxation. [NIRC of
1997, Sec. 85 (D)]
b. Donee assigns the exercise of the power. "If, during
his lifetime, the d o n e e exercises his general power of appointment
in favor of some appointee other than himself, that exercise will be
a taxable gift by the donee/powerholder to the appointee."
(Campbell, Regis W , Estate Planning and Drafting, 1984 ed., Commerce
n d
Clearing House. Inc., Illinois, USA. p. Sec. 11,067. 2 par.)
The value of the property w o u l d not be included in the gross
estate of the decedent but shall be subject to donor's taxes. The
reason being that the decedent does not have any interest
anymore in the property which he may pass on to his heirs.
c. Donee releases his general power of appointment.
"If the donee releases his general power of appointment, the
release will be considered a taxable gift from the
powerholder/donee to the 'taker in default.' The 'taker in default' is
the person w h o will receive the property subject to the general
power of appointment if the power is never exercised by the
powerholder. The instrument creating the power of appointment
usually identifies the 'taker in default.' (Campbell, Regis W , Estate
Planning and Drafting, 1984 ed., Commerce Clearing House. Inc., Illinois,
n d
USA, p. Sec. 11,067, 2 par.)
1 1 . Property passing under general power of

appointment includible as part of a decedent's gross
estate.
43
a The decedent passes property under a general
power of appointment either
1) by will, or
2) by deed executed
a) in contemplation of, or
b) intended to take effect
(1) in possession or enjoyment
(2) at or after his death, OR
3) by deed under which he has retained
a) for his life or
b) for any period not ascertainable without
c) for any period which does not in fact
end before his death
b 1) The possession or enjoyment of, or the right to
the income from, the property, or
2) The right, either alone or in conjunction with
any person, to designate the persons, who shall possess, or
enjoy the property or the income therefrom. [NIRC of 1997,
Sec. 85 (D), numbering and arrangement supplied]
12. Property passing u n d e r general power of

appointment w h e n not includible as part of a decedent's
gross estate. W h e r e the transfer is:
a. A bona fide sale
b. Foi an adequate and full consideration in money or
money's worth. [NIRC of 1997, Sec. 85 (D), numbering and
ESSAY TYPE SELF-TESTS. It is recommended that you

complete.
OBJECTIVE TYPE:
When is property that passed under a general power of

appointment not includible as part of a decedent's gross
estate. Explain briefly but comprehensively,
estate. Explain briefly but comprehensively.
44
TRANSFERS FOR INSUFFICIENT CONSIDER-
ATION
1. Transfers for insufficient consideration, a m o u n t

includible as part of a decedent's gross estate.
a. W h e r e the decedent's property is transferred in
contemplation of death, revocable transfer or passed under a
general power of appointment for a consideration in money or
money's worth
b. but not for an adequate and full consideration in
money or money's worth,
c. the amount includible as part of the decedent's gross
estate should be the difference between the fair market value at
the time of the decedent's death and the actual consideration
received by the decedent. [NIRC of 1997,Sec 85 (G), numbering and
2: Formula for computation of transfers for

insufficient consideration.
Fair market value of property at decedent's death

LESS: Actual consideration received by decedent
Amount includible in decedent's gross estate.
LIFE I N S U R A N C E P R O C E E D S
1. General criteria for inclusion of l i f e insurance

proceeds in the decedent's gross estate.
a. The life insurance proceeds are payable to the
decedent's estate; or
b. The life insurance proceeds are payable to beneficia-
ries other than the decedent's estate and the decedent possessed
"incidents of ownership" in the policy.
NOTES AND COMMENTS: In general, "incidents of ownership'' refers to
the right or power of the insured under the policy that gives him the
"economic benefits" of the policy. The insurance proceeds becomes part
of the gross estate where the decedent retains "incidents of ownership'
because he would then have an interest existing in such proceeds at the
time of his death
The insurance proceeds must arise from an insurance taken up on
the life of the decedent not upon the life of others.
45
2. Powers considered as "incidents of ownership" in
the policy which if retained by the decedent results to
inclusion of life insurance proceeds in the decedent's
gross estate. The NIRC of 1997 and its implementing
regulations have not set out the parameters of what are
considered as "incidents of ownership." The author suggests that
the U.S. rules may find application in the determination of whether
there are "incidents of ownership" that result to inclusion of the life
insurance proceeds in the estate of the decedent. "Incidents of
ownership" may include the power
a. or revocability of the beneficiary, which is to change
the beneficiary;
b. to surrender or cancel the policy;
' c. to assign the policy;
d. to revoke an assignment of the policy;
e. to pledge the policy for a loan;
f. to obtain from the insurer a loan against the cash
surrender value of the policy. [Adapted from the U.S. IRS Reg. Sec
20.2042-1 (c) (2)]
g. An insured's right to purchase a policy taken out by
the employer for its cash surrender value from the employer, thus
preventing the employer from cancelling the policy. (Adapted from
U.S. IRS Rev. Ruling 79-46, 1979-1 CB 303)
NOTES AND COMMENTS: In order to negate the "incidents of
ownership" which would result to the exclusion from gross estate of the
insurance proceeds, the insured has to designate the beneficiary in an
irrevocable capacity.
3. Proceeds of life insurance includible in a

a. The decedent takes the insurance policy on his own
life
1) The amounts are receivable by
a) the decedent's estate,
b) his executor, or
c) administrator irrespective of whether or
not the insured retained the power of revocation, OR
2) The amounts are receivable by any beneficiary
designated in the policy of insurance as revocable [NIRC
of 1997, Sec. 85 (E)j
b. One, other than the decedent takes the insurance
policy on the life of the decedent
46
1) The amounts are receivable by
a) the decedent's estate,
b) his executor, or
c) administrator
2) irrespective of whether or not the insured
retained the power of revocation.
NOTES A N D C O M M E N T S : The reader should not confuse the
concept of exclusion from the gross estate of irrevocable life insurance
proceeds under the NIRC of 1997, Sec. 85 (E) with the concept of
exclusion of life insurance proceeds from gross income provided for under
the NIRC of 1997, Sec. 32 (B) (1) where the concept of irrevocability is
not required.
Life insurance proceeds are always excluded from gross
income, whether the designation of the beneficiary is revocable or
irrevocable. The concept of irrevocability finds application to exclusions
from gross because the proceeds pass on after death subject to the
decedent's control if the designation of the beneficiary is revocable. Thus,
included as part of gross estate. The life insurance proceeds are
excluded from gross estate if the designation is irrevocable because the
decedent has not retained any interest which pass on after death. Thus,
excluded from gross estate.
4. Determination of w h e t h e r the insurance proceeds

are to be included or excluded f r o m a d e c e d e n t married
person's gross estate. T h e primary determinant of whether to
include the life insurance proceeds of a decedent married person
in his/her gross estate is the source of the premium payments and
governing regime of property relations between the spouse.
5. If there is no marriage* settlement (ante-nuptial

agreement) which regime of property relations should
govern the spouses, then the property relation is the
system of absolute community.
6. Property included in t h e absolute community,

The absolute community includes all property at time of marriage
and acquired thereafter. Unless otherwise provided in the Family
Code or in the marriage settlements, the community property shall
consist of all the property o w n e d by the spouses at the time of the
celebration of the marriage or acquired thereafter. (Family Code of
the Philippines, Art. 91)
Property acquired during the marriage is presumed to be-
47
long to the community, unless it is proved that it is one of those
excluded therefrom. (Ibid. Art 93)
7. Effect if insurance premiums are paid from funds

of the absolute community. If the premiums are paid from
the community funds, the life insurance proceeds that are to be
paid as a result of the death of either of the spouses becomes part
of the absolute community. Thus, one-half (V*) of the insurance
proceeds that are properly includible in the estate of the decedent
should form part of the gross estate. This is the share which the
decedent could dispose of. The remaining one-half (V2) becomes
the share of the surviving spouse in the absolute community.
On the other hand, if the life insurance proceeds are not
properly includible in the estate of the decedent (because the
designation of the beneficiary is irrevocable in character), the
author is of the opinion that one-half (V2) of the insurance proceeds
which constitute the share of the deceased in the absolute
community should go to the irrevocable beneficiary. The
remaining one-half (Vi) appertains to the share of the surviving
spouse in the absolute community of property.
NOTES AND COMMENTS: The above rule finds application only if the
marriage took place after August 3, 1988, the effectivity of the Family
Code. Before that date, the system of conjugal partnership of gains
governs the property relations of the spouses in the absence of an ante-
nuptial agreement.
The reader should remember that the insurance company - is
mandated to pay the insurance proceeds to the named irrevocable
beneficiary But this does not prevent the surviving spouse in the
absolute community from laying, claim to his/her share of the absolute
community where the premiums originated from community funds.
The author welcomes any views that may be contrary to the
above position taken by the author with regard to irrevocable
beneficiaries.
8. T h e above rule proposed by t h e author does not

find application where the p r e m i u m s did not originate
from funds of the absolute community of property but
from the separate funds of the decedent spouse. Where
the premiums were sourced from the separate property of the
decedent spouse then the life insurance proceeds may either be
excluded from or included in the gross estate of the decedent
depending on whether "incidents of ownership" were retained.
48
9. The separate property of the spouses under the
regime of absolute community. The following are
considered as separate property of the spouses and do not form
part of the absolute community of property.
a. Property acquired during the marriage by gratuitous
title by either spouse, and the fruits as well as the income thereof,
if any, unless it is expressly provided by the donor, testator or
grantor that they shall form part of the community property;
b. Property for personal and exclusive use of either
spouse. However, jewelry shall form part of the community
property;
c. Property acquired before the marriage by either
spouse who has legitimate descendants by a former marriage, and
the fruits as well as the income, if any, of such property. (Family
Code of the Philippines, Art 92, renumbered)
10. The spouses may agree in the marriage

settlement (ante-nuptial agreement) that their property
relations shall be governed by the conjugal partnership
of gains.
11. Nature of the conjugal partnership of gains. The

regime of conjugal partnership of gains is a special type of
partnership, where the husband and wife place in a common fund
tbe proceeds, products, fruits and income from their separate
properties and those acquired by either or both spouses through
their efforts or by chance. {Homeowners Savings & Loan Bank v.
Dailo, G. R. No. 153802, March 11, 2005)
12. The composition of conjugal partnership property.

All property acquired during the marriage, whether the acquisition
appears to have been made, contracted or registered in the name
of one or both spouses, is presumed to be conjugal unless the
contrary is proved. (Family Code of the Philippines, Art 116)
13. Effect if insurance premiums are paid from funds

of the conjugal partnership of gains. If the premiums are
paid from the funds of the conjugal partnership of gains the life
insurance proceeds that are to be paid as a result of the death of
either of the spouses becomes part of the conjugal partnership
Thus, one-half ('/,) of the insurance proceeds that are properly in-
49
cludible in the estate of the decedent should form part of the gross
estate. This is the share which the decedent could dispose of.
The remaining one-half (Vi) becomes the share of the surviving
spouse in the conjugal partnership.
On the other hand, if the life insurance proceeds are not
properly includible in the estate of the decedent (because the
designation of the beneficiary is irrevocable in character), the
author is of the opinion that one-half (V4) of the insurance proceeds
which constitute the share of the deceased in the conjugal
partnership should go to the irrevocable beneficiary. The
remaining one-half (%) appertains to the share of the surviving
spouse in the conjugal partnership.
NOTES AND COMMENTS: The reader should remember that the
insurance company is mandated to pay the insurance proceeds to the
named irrevocable beneficiary. But this does not prevent the surviving
spouse in the conjugal partnership from laying claim to his/her share of
the absolute community where the premiums originated from
community funds.
The author welcomes any views that may be contrary to the
above position taken by the author with regard to irrevocable
beneficiaries.
14. The above rule proposed by the author does find

application where the p r e m i u m s did not originate from
funds of the conjugal partnership of gains but from the
separate funds of the decedent spouse. W h e r e the
premiums were sourced from the separate property of the
decedent spouse then the life insurance proceeds m a y either be
excluded, from or included in the gross estate of the decedent
depending on whether "incidents of ownership" were retained.
15. The separate property of the spouses under the

regime of conjugal partnership of gains. The following
shall be the exclusive property of each spouse:
a. That which is brought in the marriage as his or her
own;
b. That which each acquires during the marriage by
gratuitous title;
c. That which is acquired by right of redemption, by
barter or by exchange with property belonging to only one of the
spouses; and
d. That which is purchased with exclusive money of the
50
wife or of the husband. (Family Code of the Philippines, Art 102.
renumbered)
16. The spouses may agree in the marriage

settlement (ante-nuptial agreement) that their property
relations shall be governed by the absolute separation
of property. In such a case the premiums are considered to
have been paid from the separate property of the decedent
spouse.
Where the premiums were sourced from the separate
property of the decedent spouse then the life insurance proceeds
may either be excluded from or included in the gross estate of the
decedent depending on whether "incidents of ownership" were
retained.
17. Proceeds of life insurance NOT included in a

a. The decedent takes the insurance policy on his own
life, and
1) the proceeds are receivable by a beneficiary
2) designated as irrevocable [NIRC of 1997, Sec
85 (E)]
NOTES AND COMMENTS: The beneficiary must not be the decedent's
estate, executor or administrator, because the proceeds are includible as
part of gross estate whether or not the decedent retained the power of
revocation. (Ibid.)
b. Where the insurance
1) was NOT taken by the decedent upon his own
life and
2) the beneficiary is not the decedent's estate, his
executor or administrator.
18. The value of the life insurance proceeds that may

be included in or excluded from the gross estate of the
decedent. Neither the provisions of the NIRC of 1997 nor
Revenue Regulations have provided for a definition of the value of
the life insurance proceeds that may" be included in or excluded
from the gross estate of the decedent. The author suggests that
the Federal estate tax return would provide for the indicative value.
The life insurance "proceeds should include not only the face
amount of the insurance, but, in addition, the amount of any
dividends which had accumulated on the policy, any post-mortem
51
dividends and any premium which may have been returned as a
1
result of the decedent's death. ' (Introduction to Estates and Trusts by
The Institute for Paralegal Training. Statsky, William P and Matz, David,
eds,, St. Paul, Minn, West Publishing, 1979, p 170)
T h e value of the policy, of course, would be reduced by the
amount of any outstanding loan payable to the insurance
company Thus, if the insured borrowed from the insurance
company against the cash value of his policy, the amount of any
indebtedness at the time of his death would be deducted by the
company in calculating the proceeds payable to the beneficiary
and only the reduced amount would be includible in -the
decedent's e s t a t e " (Ibid.)

complete.
OBJECTIVE TYPE:
Are proceeds of a life insurance policy includible in

the gross.estate of the decedent ? Explain. (BAR: 1977)
SUGGESTED ANSWER: Yes. The proceeds of a life
insurance policy is includible in the gross estate of a decedent if:
a The proceeds are receivable by the estate of the decedent,
his executor or administrator and the insurance was under a policy taken
out by the decedent upon his own life, OR
b The proceeds are from an insurance under a policy taken
out by the decedent upon his own life and are receivable by any
beneficiary designated as a revocable beneficiary in the policy of
insurance [Sec 85 (E), NIRC of 1997]
If the above conditions are not met, the life insurance proceeds
are not includible as part of gross estate.
PROBLEM TYPE:
1. The widow and children of a passenger who

died in an airplane crash were paid P350.000.00 by the airline.
This figure was released after negotiation between the heirs
of the deceased and the insurer of the airlines, the latter
having received Indubitable evidence that the deceased had a
net income ofP35.000.00 at the time of his death and that ten
52
productive years would have insured financial stability for his
family. Should the heirs declare this amount in the estate tax
B A
returns? State your reasons. ( R 1970, adapted)
SUGGESTED ANSWER: No. The heirs should not declare the
P350.000.00 in the estate tax returns.
The ^350,000.00 is not part of the gross estate of the passenger
decedent because the proceeds are not from an insurance policy taken by
the decedent on his own life. [NIRC of 1997, Art. 85 (E)J Furthermore, the
insurance proceeds are not part of the passenger's property at the time of
his death. {Ibid, Sec. 85 (A) (1)J
2. Mr. "J", .a British citizen, died In June, 2009,

while domiciled in London. He left the following properties:
a. House and lot in London;
b. House and lot in Manila;
c. Shares of stock in 1) a British corporation;
2) a Philippine corporation; 3) a Hongkong corporation
operating and managed In Makati, Philippines;
d. Accounts receivable from a Philippine
debtor;
e. Proceeds* from a revocable life insurance
policy issued by a Philippine insurance company;
f. Proceeds from a life insurance policy
issued by a U.S. corporation;
g. Savings deposit in a Manila bank, and in a
New York bank;
h. Lease contract over his London
apartment rented by the Philippine consul.
Explain fully which of the foregoing form part of his
gross estate in the Philippines and which do not.
(Disregard the effects of reciprocity provisions on intangible
property) (BAR:-1979, date supplied, and reworded)
SUGGESTED ANSWER: Mr. "J", is a non-resident alien Thus,
his gross estate should include only properties which are situated in the
Philippines to the extent of his interest in such properties existing at the
time of his death, such as the following:
a Hduse and lot in Manila,
b. Scares of stock in (1) A Philippine Corporation (2) A
Hongkong corporation operating and managed in Makati, Philippines;
c Accounts receivable from a Philippine debtor
d Proceeds from e revocable life insurance policy issued by
a Philippine insurance company if he secured the life insurance and the
beneficiary is not his estate, executor or administrator; and
e Savings deposifin a Manila Bank
53
4
The shares of stock in a Hongkong corporation operating and
managed in Makati, Metro Manila although physically situated outside of
the Philippines are considered as situated in the Philippines (NIRC of
s1
1997, Sec 104, 1 par.) The fact that it is operating and managed in the
Philippines has given it a business situs in the Philippines.
All the properties not mentioned in the above which are not situated
in the Philippines do not form part of the gross estate of Mr "J" in the
Philippines
3. "X" Corporation took a Keyman insurance on the

life of its President, Mr. Rodel Cruz, designating Mr. Cruz'
wife as its revocable beneficiary. In the event of death of
Mr. Cruz, will the insurance proceeds form part of the gross
estate of Mr. Cruz ? (BAR: 1980, adapted)
SUGGESTED ANSWER. No. The insurance proceeds do not
form part of the gross estate of Mr. Cruz.
The insurance proceeds are not pan" of the property of Mr. Cruz at
the time of his death because he was not the one who procured the
insurance on his own life and are receivable by his estate. [NIRC of 1997,
Sec. 85 (E)'.l
If the life insurance policy was not taken out by the decedent, or if
taken out by him but not payable to his estate, or that the designation of
the wife as beneficiary was irrevocable, then the insurance proceeds do
not form part of the estate of Mr. Cruz. (Ibid)
4. The widow of your best friend has just been paid

P500,000.00 on account of the life insurance policy of her
deceased husband. She asks you whether she should
declare the amount for income tax purposes or for estate tax
purposes. State your answers with reasons. (BAR: 1984)
SUGGESTED ANSWER: The P500.000.00 should not be
declared for income tax purposes The proceeds of life insurance policies
paid to the heirs or beneficiaries (in this case the widow), upon the death
of the insured are among the items excluded from gross income for
income tax purposes. [NIRC of 1997, Sec. 32 (B) (1)]
The P500.000 00 is to be declared for estate tax purposes if the
life insurance policy was taken by the decedent and the wife was the
named executor or administrator of the decedent's estate to whom the
proceeds are to be payable.
Likewise, if the life insurance policy was taken by the decedent
and the wife was designated as the revocable beneficiary, then the
P500.000.00 should be declared for estate tax purposes. [Ibid., Sec 85
(E)]
5. Ralph Donald, an American citizen, was a top exe-
54
cutive of a U.S. company in the Philippines until he retired in
2002. He came to like the Philippines so much that following
his retirement, he decided to spend the rest of his life in the
country. He applied for and was granted a permanent
resident status the following year. In the spring of 2009, while
vacationing in Orlando, Florida, USA, he suffered a heart
attack and died. At the time of his death, he left the following
properties: (a) bank deposits with Citibank Makati and
Citibank Orlando, Florida; (b) a resthouse in Orlando, Florida;
(c) a condominium unit in Makati; (d) shares of stock in the
Philippine subsidiary of the U.S. Company where he worked;
(e) shares of stock In San Miguel Corp. and PLDT; (f) shares
of stock in Disney World in Florida; (g) U.S. treasury bonds;
and (g) proceeds from a life insurance policy issued by a U.S.
corporation.
Which of the foregoing assets shall be included in the
taxable gross estate in the Philippines ? Explain. (BAR: 2005,
dates supplied)
SUGGESTED A N S W E R : All of the properties, except the
proceeds from a life insurance policy issued by a U.S. corporation, shall
be included in the taxable gross estate in the Philippines because the
gross estate of a resident alien such as Ralph Donald includes the value
at the time of his death of all property, real or personal, tangible or
s l
intangible, wherever situated (NIRC of 1997, Sec. 85, 1 par.,]
The proceeds from the life insurance policy is excluded from Ralph
Donald's taxable gross estate in the Philippines because there is no
showing in the problem that it was the decedent who took out the same
on His own life. (NIRC of 1997, Sec. 85 (E)]
6. On 30 June 2007, X took out a life insurance

policy on his own life In the amount of P 2, 000,000.00. He
designated his wife, Y, as irrevocable beneficiary to P
1,000,000.00 and his son Z, to the balance of P 1,000,000.00
but, In the latter designation, reserving his right to substitute
him for another. On 01 September 2009, X died and his wife
and son went to the Insurer to collect the proceeds ofX's life
Insurance policy.
Are the proceeds of the insurance to form part of the
gross estate of X? Explain. (BAR: 2003 dates supplied)
SUGGESTED ANSWER: Only the P 1 000,000 00 proceeds that
went to his son form part of the gross estate because the designation of
the beneficiary is revocable
55
7. Antonia Santos, 30 years old, gainfully employed,
is the sister of Edgardo Santos. She died in an airplane
crash. Edgardo is a lawyer and he negotiated with the airline
company and insurance company and they were able to agree
to a total settlement of P10 Million. This is what Antonia
would have earned as somebody who was gainfully
employed. Edgardo was her only heir.
Is the P10 Million subject to estate tax ? Reason briefly.
(BAR: 2007, paraphrasing supplied)
SUGGESTED A N S W E R : The P10 Million is not subject to
estate tax because the proceeds are not part of Antonia s gross estate. It
is clear that the payment came from the airline and its insurer There is
no showing that the P10 Million came from an insurance policy taken by
the decedent Antonia on her own life. [NIRC of 1997, Art. 85 (E)]
Furthermore, the P10 Million is not part of Antonia's property at the time
of her death [Ibid, Sec. 85 (A) (1)]
"X" Corporation took a Keyman insurance on the life

of its President, Mr. Rode/ Cruz, designating Mr. Cruz' wife
as its revocable beneficiary. In the event of death of Mr.
Cruz, will the insurance proceeds form part of the gross
estate of Mr. Cruz ? (Adapted from the 1980 BAR)
a. Yes because Mrs. Cruz was designated as a
revocable beneficiary.
b. No because the premium was not paid by Mr.
Cruz.
c. Yes because the insurance proceeds form part of
the benefits of Mr. Cruz enjoyed by him as an employee of
"C" Corporation.
d. No because Mr. Cruz had no interest in the
proceeds at the time of his death hence this is not property
that he transferred at the time of his death.
SUGGESTED ANSWER: d
2. On 30 June 2007, X took out a life

insurance policy on his own life in the amount of P 2,
000,000.00. The premiums were paid from his separate
property. He designated his wife, Y, as irrevocable
beneficiary to P 1,000,000.00 and his son Z, to the balance of
P1.000.000.00 but, in the latter designation, reserving his right
56
to substitute him for another. On 01 September 2009, X died
and his wife and son went to the insurer to collect the
proceeds ofX's life insurance policy.
Are the proceeds of the insurance to form part of the
gross estate of X ? (Adapted from the 2003 BAR)
a. All of the proceeds would not form part of X's
gross estate. The insurance company is obligated to pay to
the named beneficiaries, thus no part of the proceeds should
appertain the X's estate.
b. All of the proceeds would form part of X's gross
estate. The premiums were paid from the separate property of
X hence the insurance proceeds are also part of his separate
property subject to estate tax. The proceeds though would not
be taken from the named beneficiaries.
c. Only the proceeds that were paid to the son would
form part of X's gross estate. X retained an "incident of
ownership" in the insurance when he retained the right to
revoke the designation of his son as beneficiary.
d. Only a portion of the insurance proceeds that
appertain to his wife should form of X's gross estate. The
insurance proceeds paid to the wife forms part of the conjugal
partnership property hence X's share should appertain to his
estate.
SUGGESTED ANSWER: c
CAPITAL OF T H E S U R V I V I N G S P O U S E
1. The capital of the surviving spouse of a decedent

shall not, for purposes of the imposition of the estate
tax, be deemed a part of the decedent's gross estate.
[NIRC of 1997, Sec. 85(H)]
NOTES AND COMMENTS The share of the surviving spouse in the
common properties owned with the decedent appertains to the surviving
spouse The share, should not form part of the gross estate because the
decedent could not transfer the same He/She does not have an interest
in said property existing at the time of death.
Capital under the above provisions of the Tax Code should be taken
to mean the property of the spouses brought into the marriage.
Strictly speaking, capital under the civil law refers to the property
brought by the husband to the marriage while that brought into the
marriage by the wife is known as paraphernal property
The strictissimi juris principle on the interpretation of the exclusion
being an exemption should not be applied, otherwise the result would be
57
absurd . Applied strictly, the exclusion does not include the separate
property of the wife (paraphernal property). Surely this is absurd if only
the separate property of the husband would be excluded. The decedent
husband does not have any interest in the paraphernal property of the
surviving wife which should be subject to estate taxes.
The provisions of the Family Code of the Philippines (E.O No
209) which took effect on August 3, 1988 shall govern the property
relations between husband and wife whose marriage was celebrated on
or after such date For marriages celebrated prior to the effectivity of the
Family Code of the Philippines, the Civil Code of the Philippines shall
govern the property relations between husband and wife in relation to the
pertinent provisions of the Family Code. (Rev. Regs. 2-2003, Sec. 1,)
ESSAY TYPE SELF-TESTS. It is recommended that you*

complete.
OBJECTIVE TYPE:
1. The NIRC of 1997, Sec. 85 (H) specifically provides

that, "The capital of the surviving spouse of a decedent shall
not, for the purpose of this Chapter, be deemed a part of his
her gross estate."
Considering the above, is the paraphernal property of
the surviving wife included as part of the gross estate of the
decedent husband ? Explain briefly.
F. EXEMPT ACQUISITIONS AND

TRANSMISSIONS HENCE NOT INCLUDED IN ALL
RESIDENT ALIENS
1. Acquisitions and transmissions not included in
gross estate, hence tax exempt. The following shall not be
taxed:
a The merger of usufruct in the owner of the naked
title.
b. The transmission or delivery of the inheritance or
legacy by the fiduciary heir or legatee to the fideicommissary.
58
c The transmission from the first heir, legatee, or
donee in favor of another beneficiary. In accordance with the
desire of the predecessor.
d. All bequests, devises, legacies or transfers to social
welfare, cultural and charitable institutions, no part of the net
income of which inures to the benefit of any individual: Provided,
however. That not more than 3 0 % of the said bequests, devises,
legacies or transfers shall be used by such institutions for
administration purposes. (NIRC of 1997, Sec. 87, numbering and
arrangement supplied)
e Exempt acquisitions a n d transmissions of intangible
personal property under the principle of reciprocity.
MERGER OF T H E U S U F R U C T IN T H E O W N E R OF
THE NAKED TITLE IS E X C L U D E D F R O M G R O S S
ESTATE
1. Usufruct, definition. Usufruct gives a right to enjoy the

property of another with the obligation of preserving its form and
substance, unless the title constituting it or the law otherwise
provides. (Rep. Act No. 386, Civil Code of the Philippines, Art 562)
2. Valuation of usufruct subject to estate tax. To

determine the value of the right of usufruct, use or habitation, as
well as that of annuity,
a. There shall be taken into account the probable life of the
beneficiary
b. In accordance with the latest Basic Standard Mortality
Table, to be approved by the Secretary of Finance, upon
recommendation of the Secretary of Finance. [NIRC of 1997, Sec
88 (A), numbering and arrangement supplied; Rev. Regs. No. 2-2003,
Sec 5, last par]
TRANSMISSION F R O M T H E FIDUCIARY T O THE

FIDEICOMMISSARY HEIR IS E X C L U D E D F R O M GROSS
ESTATE
1. Non-taxable transmission or delivery to a

fideicommissary. The transmission or delivery of the
inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary shall not be taxable. [NIRC of 1997, Sec 87 (B)]
59
2. Rationale for the exclusion. The estate tax is a tax
imposed upon the privilege to transfer properties mortis causa.
There is only one transmission of property from the decedent to
the final heir through the fiduciary heir or' legatee, the
transmission from the fiduciary heir or legatee to the
fideicommissary is not taxed. The fideicommissary heir merely
holds the property for transmission to the ultimate heir.
3. Inheritance, definition. The totality of all the properties,

rights and obligations constituting the patrimony of the decedent
which are not extinguished by his death and which are available
for distribution among his heirs after settlement or liquidation.
4. Legacy, definition. A gift of personal property given by

virtue of a will. (Rep. Act No. 386, Civil Code of the Philippines, Art.
n d
782, 2 par.)
It is also known as a bequest. (Bouvier)
The person w h o received the gift is called the legatee.
5. Devise, definition. A gift of real property given by virtue

n d
of a will. (Rep. Act No. 386, Civil Code of the Philippines, Art 782,. 2
par.)
The person w h o received the gift is called the devisee.
6. Fideicommissary, definition. T h e indirect substitute

who is entrusted with the obligation to preserve a n d to transmit to
a second heir the whole or part of the inheritance. (Rep. Act No
386, Civil Code of the Philippines, Art. 863) .
7. Fideicommissary substitution, definition. Indirect

substitution which takes place w h e n the fiduciary or first heir
instituted is entrusted with the obligation to preserve and to
transmit to a second heir the whole or part of the inheritance,
provided such substitution does not go b e y o n d o n e degree from
the heir originally instituted, and provided further, that the fiduciary
or first heir arid the second heir are living at the time of the death
of the testator. (Rep. Act No. 386, Civil Code of the Philippines, Arts.
859, 860, 861 and 863)
NOTES AND COMMENTS: The value of the property that is transferred
to the fiduciary or first heir is included as part of the gross estate of the
decedent transferor but not included in the value of the gross estate of
the fiduciary or first heir if he should die. He does not have any interest in
60
the property that he is transferring to the second heir It is the decedent
transferor who had an interest which was transferred.

complete
OBJECTIVE TYPE:
1. Who is a fideicommissary ?
2. Who is a legatee ?
3. Who is a devisee ?
4. Is the property that is transmitted by the

decedent fiduciary heir part of the gross estate of such
decedent ? Explain briefly.
SUGGESTED ANSWER: Refer to nos 1 and 2, supra.

1. A person who is the recipient of a gift of real
property given by virtue of a will is called
a. a legatee.
b. a devisee.
c. a fideicommissary heir.
d. a compulsory heir.
SUGGESTED ANSWER: b
2. A person who Is the recipient of a gift of personal

property given by virtue of a will is called
a. a legatee.
b. a devisee.
c. a fideicommissary heir.
d. a compulsory heir.
SUGGESTED ANSWER: a
61
TRANSMISSION FROM THE FIRST HEIR TO
ANOTHER BENEFICIARY IN ACCORDANCE WITH THE
DESIRE OF THE PREDECESSOR IS EXCLUDED FROM
GROSS ESTATE
1. Non-taxable transmission to another beneficiary.

The transmission from the first heir, legatee or done in favor of
another beneficiary, in accordance with the desire of the
predecessor shall not be taxable. [NIRC of 1997, Sec 87 (C)]

for lime, you could answer mentally but ensure that your answer is
complete.
OBJECTIVE TYPE:
Before he died, John left a will bequeathing a parcel of

land to Priscilla provided that when Priscilla dies she should
give the property to Janice. Should Priscilla die, would the
parcel of land form part of her gross estate ? Explain.
PROBLEM TYPE:
1. In 2001, Xavier purchased from his friend, Yuri, a

painting for P500.000.00. The fair market value (FMV) of the
painting at the time of the purchase was P1-million. Yuri paid
all the corresponding taxes on the transaction. In 2003,
Xavier died. In his last will and testament, Xavier bequeathed
the painting already worth P1.5 million to his only son,
Zandro. The will also granted Zandro the power to appoint
his wife, Wilma, as successor to the painting in the event of
Zandro's death. Zandro died in 2009, and Wilma succeeded
to the property.
[a] Should the painting be included in the gross
estate of Xavier in 2003 and thus, be subject to estate tax ?
Explain. (BAR: 2009, dates and paraphrasing supplied)
SUGGESTED ANSWER The painting should be included in the
gross estate of Xavier because the transfer of ownership to his son
62
Zandro was conditioned by is death This is evident from t h e fact that the
transfer was effected through Xavier s last will and testament.
[b] Should the painting be included in the gross
estate of Zandro in 2009 and thus, be subject to estate tax ?
Explain. (BAR: 2009, dates and paraphrasing supplied)
SUGGESTED ANSWER: The painting also forms part of the
gross estate of Zandro because he had an interest existing in the painting
at the time of his death He had full disposition of the said painting
1
It is to be noted that there is no indication in the sentence, The.
will also granted Zandro the power to appoint his wife, Wilma, as
successor to the painting in the event of Zandro's death" that there is a
limitation imposed by Xavier on the disposition by Zandro of the painting
This is merely grant of a power which Zandro may or may not exercise.
ALTERNATIVE ANSWER: The painting should not be included as
part of the gross estate of Zandro because the transmission from the
legatee (Zandro) favor of another beneficiary (Wilma), was in accordance
with the desire of the predecessor (Xavier) hence it shall not be taxable.
[NIRC of 1997, Sec. 87 (C)]
Which among the following should be included as part of

the gross estate of a decedent resident alien ?
a. The transmission from the first heir, legatee or
done in favor of another beneficiary, In accordance with the
desire of the predecessor.
b. Reversion of the right of usufruct to the owner of
the naked title.
c. Property transferred under a general power of
appointment.
d. Property transferred for the use of the
Government of the Republic of the Philippines.
SUGGESTED ANSWER: d
TRANSFERS TO SOCIAL W E L F A R E . CULTURAL

AND CHARITABLE INSTITUTIONS A R E EXCLUDED
FROM G R O S S ESTATE
1. Non-taxable transfers for charity. Ail bequests,

devises, legacies or transfers to social welfare, cultural and
charitable institutions, no part of the net income of which inures to
the benefit of any individual: Provided, however, That not more
than thirty percent (30%) of the said bequests, devises, legacies or
63
transfers shall be used by such institutions for administration
purposes. [ N I R C o f 1 9 9 7 . S e c 8 7 (D)]
ACQUISITIONS A N D T R A N S F E R S OF INTANGIBLE
PERSONAL PROPERTY ARE EXCLUDED FROM
GROSS ESTATE S U B J E C T TO RECIPROCITY
.1. Intangible property of a non-resident alien

decedent considered as situated in the Philippines.
a Franchise which must be exercised in the Philip-
pines;
b shares, obligations or bonds
1) issued by any corporation or sociedad
anonima organized or constituted in the Philippines in
accordance with its laws;
2) issued by any foreign corporation eighty-five
per centum (85%) of the business of which is located in the
Philippines;
3) issued by any foreign corporation if such
shares, obligations, or bonds have acquired a business
situs in the Philippines;
c. shares or rights in any partnership, business or
st
industry established in the Philippines. (NIRC of 1997, Sec. 104, 1
par, numbering and arrangement supplied)
All of the above items are includible in the gross estate of a
non-resident alien decedent.
2. Reciprocity provision exempting from estate

taxation intangible personal property situated in the
Philippines o w n e d by a nonresident alien decedent.
a. Nonresident alien decedent,
1) is a citizen and resident
b of a foreign country
c. which at the time of his death
1) did not impose a transfer tax of any
character in respect of intangible personal property of
Filipino citizens not residing in the foreign country, OR
2) allows a similar exemption from transfer or
death taxes of every character or description in respect of
intangible personal property o w n e d by Filipino citizens not
64
s
residing in that foreign country (NIRC of 1997, Sec. 104, 1 '
G. COMMON VALUATION RULES FOR ALL

FILIPINOS, RESIDENT OR NON-RESIDENT ALIENS
1. Valuation of property subject to estate tax. Stated

otherwise, the date-of-death valuation rule.
a. The estate shall be appraised at its fair market value
as of the time of death. (NIRC of 1997, Sec 88 (B); Rev Regs No 2-
sl
2003; Sec 5, 1 par.,]
2. Rationale for the date-of-death valuation rule. The

Supreme Court agrees with the date-of-death valuation rule. Tax
burdens are not to be imposed nor presumed to be imposed
beyond what the statute expressly and clearly imports, tax statutes
being construed strictissimi juris against the government. {Dizon v
Court of Tax Appeals, 553 SCRA 111)
NOTES AND COMMENTS: a Rationale for the valuation for
purposes of the inheritance tax which is applied by analogy to valuation
for estate tax purposes. If death is the generating source from which the
power of the state to impose inheritance taxes takes its being and if, upon
the death of the decedent, succession takes place and the right of the
state to tax vests instantly, the tax should be measured by the value of the
estate as it stood at the time of the decedent's death, or any subsequent
increase or decrease in value {Lorenzo v. Posadas, 64 Phil. 353)
3. Fair market value, defined. The price at which any

seller will sell and any buyer will buy, both willingly without any
force or intimidation.
Mortgage value may be considered as the fair market
value. {Dizon, etc., v. Commissioner of Internal Revenue, CTACase No.
5116, June 17, 1997) This is so, because mortgage value is the
value acceptable to the mortgagor and the mortgagee.
4. Valuation of real property for purposes of estate

taxation. The appraised value of real property as of the time of
death shall be whichever is the higher of:
a The fair market value as determined by the BIR
Commissioner, OR
b The fair market value as shown in the schedule of
65
values fixed by the Provincial and City Assessors [NIRC of 1997,
n d
S e c . 88 (B),, R e v . Regs. 2-2003 Sec. 5, 2 par.,]
NOTES AND COMMENTS: For estate tax purposes it is the
Commissioner of Internal Revenue that determines the fair market value
[NIRC of 1997, Sec. 88 (B)] in relation to his authority to prescribe real
estate values for internal revenue tax purposes. [Ibid., Sec. 6 (E),.]
For purposes of prescribing real estate values, the Commissioner of
Internal Revenue is authorized to divide the Philippines into different
zones or areas and shall, upon consultation with competent appraisers,
both from the private and public sectors, determine the fair market value
of real properties located in each zone or area. (Rev Regs No. 2-2003,
n d
Sec 5, 2 par.)
The fair market value as determined by the Commissioner is known
as the zonal value
5. Valuation of shares of stocks not listed in the stock

exchange. Unlisted c o m m o n shares are valued based on their
book value while unlisted preferred shares are valued at par value.
In determining the book value of c o m m o n shares, appraisal
surplus shall not be considered as well as the value assigned to
rd
preferred shares, if there are any. (Rev. Regs. No. 2-2003, Sec. 5, 3
par.)
6, Valuation of shares of stock listed in the stock

exchanges. For shares which are listed in the stock exchanges,
the fair market value shall be the arithmetic mean between the
highest and lowest quotation at a date nearest the date of death, if
none is available on the death itself. (Rev. Regs. No. 2-2003, Sec. 5,
lh
4 par.)

for time you could answer mentally but ensure that your answer is
complete.
OBJECTIVE TYPE:
How should shares of stock that are part of gross estate

valued if they are not listed and traded in the stock exchange ?
PROBLEM TYPE:
66
1. A died in 1999 leaving a will which directed all real
estate owned by him not to be sold or disposed of for a
period of 10 years after his death and ordered that the
property be given to B upon the expiry of that period. In 1999,
the estate left by A had a fair market value of P500.000.00. In
2009, the fair market value of said estate increased to
P3.000.000.00 and the Commissioner of Internal Revenue
assessed thereon estate taxes based on P3,000,000.00. Is his
assessment based of P3,000,000.00 correct ? Explain. (BAR:
1968, dates supplied and reworded)
SUGGESTED ANSWER: No The Commissioner's assessment is
erroneous because the estate of a decedent shall be appraised at its
fair market value as of the time of death. [NIRC of 1997, Sec. 88 (B)) The
fatrmarket value of the property at the time of A s death in 1996 was only
P500.000.00, hence it should be the value for estate tax purposes.
2. Remedios, a resident citizen, died on November 10,

2008. She died leaving three condominium units in Quezon
City valued at P5 Million each. Rodolfo was her only heir. He
reported her death in December 5, 2008 and filed the estate
tax return on March 30, 2009. Because he needed to sell one
unit of the condominium to pay for the estate tax, he asked
the Commissioner of Internal Revenue to give him one year to
pay the estate tax due. The Commissioner approved the
request for extension of time provided that the estate tax be
computed on the basis of the value of the property at the time
of payment of the tax.
Does the condition that the basis of the estate tax will be
the value at the time of the payment have legal basis ? (BAR
2007, dates supplied)
-SUGGESTED ANSWER: There is no legal basis for the condition
that the basis of the estate tax will be the value at the time of the payment
because the estate of a decedent shall be appraised at its fair market
value as of the time of death. [NIRC of 1997, Sec. 88 (B)]
3. Jose Ceman, Filipino citizen, married to Maria Cernan,

died in a vehicular accident In NLEX on July 10, 2008. The
spouses owned, among others, a 100-hectare agricultural
land in Sta. Rosa, Laguna with current fair market value of
P20 million, which was the subject matter of a Joint Venture
Agreement about to be implemented with Star Land
Corporation (SLC), a well-known real estate development
company. He bought the said real property for P 2 million
67
fifty years ago. On January 5, 2009, the administrator of the
estate and SLC jointly announced their big plans to start
conversion and development of the agricultural lands in Sta.
Rosa, Laguna, into first-class residential and commercial
centers. As a result, the prices of real properties in the
locality have doubled.
The administrator of the Estate of Jose Cernan filed the
estate tax return on January 9, 2009, by including in the gross
estate the real property at P2 million. After 9 months, the BIR
issued deficiency estate tax assessment, by valuing- the real
property at P40 million.
a) Is the BIR correct in valuing the real property at P40
million ? Explain.
t>) If you disagree, what is the correct value to use for
estate tax purposes ? Explain. (BAR: 2008 dates supplied)
SUGGESTED ANSWERS:
a) No.
b) The estate of Jose Cernan shall be appraised at its fair market
value as of the time of death [NIRC of 1997, Sec. 88 (B)] which was P20
million.
1. A died in 1999 leaving a will which directed all real

estate owned by him not to be sold or disposed of for a
period of 10 years after his death and ordered that the
property be given to B upon the expiry of that period. In 1999,
the estate left by A had a BIR zonal value of P500.000.00. In
2009, the fair market value of said estate increased to
P2.500.000.00, It was declared for taxation In 2009 for
P1,500,000.0 and the BIR zonal valuation was P3.000.000.00.
(Adapted from the 1968 BAR)
What value should be used for the purpose of estate
taxation ?
a. P3.000.000.00.
b. PI,500,000.00.
c. P2.500.000.00.
d. P 500.000.00
SUGGESTD ANSWER: d
2. J o s e Cernan, Filipino citizen, married to lilarla

Cernan, died in a vehicular accident In NLEXon July 10, 2008.
68
The spouses owned, among others, a 100-heciare agricultural
land in Sta. Rosa, Laguna with current fair market value of
P20 million and a BIR zonal valuation of P30 million. This
property was the subject matter of a Joint Venture Agreement
about to be implemented with Star Land Corporation (SLC), a
well-known real estate development company. He bought the
said real property for P2 million fifty years ago. On January 5,
2009, the administrator of the estate and SLC jointly
announced their big plans to start conversion and
development of the agricultural lands in Sta. Rosa, Laguna,
into first-class residential and commercial centers. As a
result, the prices of real properties in the locality have
doubled.
Which among the following is the proper valuation of the
100-hecate property for estate tax purposes ? (Adapted from
the 2008 BAR)
a. The current fair market value at the time of Jose
Ceman's death.
b. The current fair market value at the time of the filing of
the estate tax return.
c. The zonal valuation at the time of Jose Cernan's
death.
d. The original acquisition price of the said property.
SUGGESTED ANSWER: c
H. DEDUCTIONS FROM THE GROSS ESTATE TO

ARRIVE AT THE NET ESTATE
DEDUCTIONS. IN G E N E R A L
I. Determination of the net estate. For purposes of

imposing the estate tax, the value of the estate tax shall be
determined by deducting the deductions allowed to the estate of
the decedent, whether a citizen, a resident or a non-resident alien
(NIRC of 1997, Sec 86)
2. Items deductible from the gross estate of a

Filipino decedent, whether a resident or not, or of a
resident alien decedent.
a. Expenses, losses, claims, indebtedness and taxes;
b Property previously taxed;
69
c. Transfers for public use:
d. The Family Home,
e. Standard deduction;
f. Medical expenses; and
g. Amount received by heirs under Republic Act No.
4917. [NIRC of 1997, Sec 86 (A)]
h. Net share of the surviving spouse in the conjugal
partnership. [Ibid., Sec. 86 (C)j
NOTES AND COMMENTS:
a. It appears that a non-resident Filipino citizen may not be
allowed to deduct the value of the Family Home. This is so because of the
requirement for the deductibility of the value of the Family Home that has
been "the decedent's family home as certified by the barangay captain of
the locality," [NIRC of 1997, Sec. 86 (A) (4)] This presupposes that the
Family Home is located in the Philippines.
b. The cost of the gift to the doctor who attended the
deceased in his last illness is deductible, but expenses to celebrate the
death anniversary of the deceased are not chargeable against the estate
( D e Guzman v. De Guzman-Carillo, L-29276, May 18, 1978. 83 SCRA
256)
3. Items deductible from the gross estate of a

nonresident alien decedent.
a. The proportion which expenses, losses, indebted-
ness and taxes bears to the total value of the entire gross estate
wherever situated;
b. Property previously taxed;
c. Transfers for public use. [NIRC of 1997, Sec 86 (B)]
d Net share of the surviving spouse in the conjugal
partnership. [Ibid., Sec 86 (CJ
NOTES AND COMMENTS: The following items are not allowed to be
deducted from the gross estate of a nonresident alien:
a The Family Home;
b Standard deduction;
c Medical expenses; and
d. Amount received by heirs under Republic Act No. 4917
[NIRC of 1997, Sec. 86 (A), in relation to Sec. 86 (B)]
4. Resident estate distinguished from a non-resident

estate.
a As to character. A resident estate is the estate of
either a citizen or a resident alien W H I L E a nonresident estate is
that of a nonresident alien;
b As to composition A resident estate comprises
70
property which are situated anywhere in the world W H I L E a
nonresident estate comprises only property situated in the
Philipp'nes or w h i c h have obtained a business situs in the
Philippines;
c. Deductions. A resident estate is allowed to deduct
the value of a family home, a standard deduction, medical
exDenses and the amount received by heirs under R.A. No. 4917
WHILE nonresident estates are not allowed to deduct the
preceding items.
5. R e q u i r e m e n t for deductibility in the case of a non-

resident alien* No deduction shall be allowed in the case of a
nonresident, not a citizen of the Philippines .unless the executor,
administrator, or anyone of the heirs, as the case may be, includes
in the estate tax return required to be filed, the value at the time of
his death of that part of the gross estate of the nonresident not
situated in the Philippines. [NIRC of 1997, Sec 86 (D) in relation to Se
90]
6. Purpose for the a b o v e requirement, to enable the

revenue officers to determine how much of the deduction is
allocable to property situated in the Philippines. (Collector v. Fisher,
L-11622^-LH4668, January 28, 1961, 1 SCRA93)
EXPENSES THAT A R E DEDUCTIBLE FROM THE

GROSS ESTATE OF DECEDENT FILIPINOS AND
RESIDENT ALIENS
1. -Expenses deductible from the gross estate of a

Filipino decedent, whether resident or not, or of a
a. Funeral expenses; and
b. Judicial expenses of the testamentary or intestate
proceedings. [NIRC of 1997, Sec. 86 (A) ( 1 ) (a) (b), numbering and
arrangementsupplied]
2. Funeral expenses deductible from the gross .estate

of a Filipino decedent, whether resident or not, or of a
resident alien decedent. Actual funeral expenses or in an
amount equal to five percent (5%) of the gross estate whichever is
lower PUT NOT TO EXCEED P200.000.00. JNIRC of 1 9 9 7 , Sec 86
71
(A) (1) (a), n u m b e r i n g a n d a r r a n g e m e n t supplied]
3. Actual funeral expenses. Those which are actually

incurred in connection with the internment er • burial of the
deceased The expenses must be duly supported by receipts or
invoices or other evidence to show that they were actually
lh
incurred. [Rev. Regs. No 2-2003Sec. 6 (A) ( 1 ) , 6 par ]
The funeral expenses must have been actually paid for from
the estate of the deceased.
4. Funeral expenses allowed as deductions from

gross estate. The term is not confined to its ordinary or usual
meaning. They include:
a. The mourning apparel of the surviving spouse and
unmarhed minor children of the deceased bought and used on the
occasion of the burial.
b. Expenses for the deceased's wake, including food
and drinks;
c. Publication charges for death notices;
d. Telecommunication expenses incurred in informing
relatives of the deceased;
e. Cost of burial plot, tombstones, monument or
mausoleum but not their upkeep. In case the deceased owns a
family estate or several burial lots, only the value corresponding to
the plot where he is buried is deductible;
f. Internment and/or cremation fees and charges; and
g. A|l other expenses incurred for the performance of
the rites and ceremonies incident to interment. [Rev. Regs. No 2-
rd
2003, Sec. 6(A) (1), 3 par]
5. Funeral expenses not allowed as deductions from

gross estate. Expenses incurred after the internment, such as
prayers, masses, entertainment, or the like are not deductible.
Any portion of the funeral and burial expenses borne or defrayed
by relatives and friends of the deceased are not deductible. [Rev.
,h
Regs. No.2-2003, Sec. 6 (A) (1), 4 par]
Medical expenses as of the last illness will not form part of
funeral expenses but should be claimed as medical expenses if
incurred within one (1) year before the death of the decedent.
l h
[Rev. Regs No 2-2003, Sec. 6 (A) (1), 5 par. in relation to Sec. 6 (F)]
6. Judicial expenses deductible from the gross
72
estate of a Filipino decedent, whether resident or not, or
of a resident alien decedent. Judicial expenses of the
testamentary or intestate proceedings. [NIRC of 1997, Sec. 86 (A)
0)(b)i
Judicial expenses which have been allowed by the probate
court are deductible even if the expenses were incurred after the
estate taxes have been paid. {Collector v. Fisher, L-11622 & L-11668,
January 28, 1961, 1 SCRA93)
7. Judicial expenses of the testamentary or intestate

proceedings. Expenses allowed as deduction under this
category are those
a. incurred in the inventory-taking of assets comprising
the gross estate,
b. their adrhinistration,
c. the payment of debts of the estate, as weH the
distribution of-the estate among the heirs.
In Short, these deductible items are expenses incurred
during the settlement of the estate but not beyond the last day
prescribed by law, or the extension thereof, for the filing of the
sl
estate tax return. [Rev. Regs. No. 2-2003, Sec. 6 (A) (2), 1 par, ,
8. Items considered as judicial expenses may

include:
a Fees of executor or administrator;
sl
b. Atterqey's fees [Rev. Regs. No 2-2003, Sec. 6 (A) (2), 1
par ] Reasonable attorney's fees are also deductible. (Delgado v
de la Rama, 43 Phil. 419)
c. Court fees; . ..
d. Accountant's fees. [Rev. Regs. No. 2-2003,. Sec 6 (A)
s1
(2), 1 par] Payments made to an accounting firm for services in
taking inventory of assets, tax consultations, and preparation of
income tax returns for the estate are deductible. (Ozaefa v. Palanca
del Rio, 101 Phil. 976)
e. Appraiser's fees;
f. Clerk hire;
g. Costs of preserving and distributing the estate;
h Costs of storing or maintaining property of the estate;
and
L Brokerage fees for selling property of the estate.
st
[Rev Regs. No 2-2003, Sec 6 (A) (2), 1 par ]
73
j. Expenses of the administrator to preserve the family
home and maintain the family's social standing are also
deductible. ( D e Guzman v De Guzman-Carillo, L-29276, May 18, 1978,
83 SCRA 256)
k. Notarial fees paid for the extrajudicial settlement is a
deductible expense since such settlement effected a distribution of-
the estate to his lawful heirs. (Commissioner of Internal Revenue v
Coun of Appeals, etal., G. R. No. 123206, March 22, 2000)
I Attorney's fees for a guardian of the property during
the decedent's lifetime should also be considered as a deductible
administration expense. The guardian gives a detailed accounting
of the decedent's property and gives advice as to the proper
settlement of the estate, acts which contributed towards the
collection of decedent's assets and the subsequent settlement of
the case. (Ibid.)
9. Not included as judicial expenses of the

testamentary and judicial proceedings are:
a. Expenditures incurred for the individual benefit of the
heirs, devisees or legatees;
b. Compensation paid to a trustee of the decedent's
estate when it appeared that such trustee was appointed for the
purpose of managing the decedent's real property for the benefit
of the testamentary heir. This is not deductible because such
expense is for the account and benefit of the beneficiaries and not
of the estate. (Lorenzo v. Posadas, 65 Phil. 353)
c. Premiums paid on the bond filed by the administrator
as an expense of administration since the giving of the bond is in
the nature of a qualification for the office and not necessary for the
settlement of the estate. (Sison v. Teodoro, 100 Phil 1056)
d. Attorney's fees incident to litigation incurred by the
heirs in asserting their respective rights. (Commissioner of Internal
Revenue v. Court of Appeals, etal., G. R. No. 123206, March 22, 2000)
10. Documentary requirements for deduction of

unpaid judicial expenses. A n y unpaid amount of the
aforementioned cost and expenses claimed under "Judicial
Expenses" should be supported by a sworn statement of account
issued arid signed by the creditor [Rev. Regs. No. 2-2003, Sec 6 (A)
(2), last par]
ESSAY TYPE SELF-TESTS. It is r e c o m m e n d e d that you
74
for time, you could answer'mentally but ensure that your answer is
complete.
OBJECTIVE TYPE:
What evidence should be presented in order to support a

deduction for allowable funeral expenses ?
PROBLEM T Y P E :
On the first anniversary of the death of Y, his heirs

hosted a sumptuous dinner for his doctors, nurses, and
others who attended to Y during his last Illness. The cost of
the dinner amounted to Php 50,000.00. Compared to his
gross estate, the Php 50,000.00 did not exceed five percent of
the estate. Is the said cost of the dinner to commemorate his
one year death anniversary deductible from his gross estate?
Explain your answer. (BAR: 2 0 0 1 , adapted)
S U G G E S T E D A N S W E R : No. The deduction could not be
construed as funeral expenses which should refer only to burial expenses.
The allowable deduction is for funeral expenses which should be strictly
construed as deductions are considered as exemptions The Php
50,000.00 are not funeral expenses.
When Procopio died, he left an estate valued at-P10

million. His heirs spent P700,000.00 for all the funeral services
rendered by St. Peter Memorial Chapel, including the expenses
attendant to the wake, the coffin, cremation services and the
um where his ashes were placed. P300,000.00 out of the.
P700,000.00 funeral expenses were shouldered by friends and
relatives. Which among the following amounts may be
deducted from his gross estate for funeral expenses ?
a. P500.000.00.
b. P700.000.00
c P400.000.00
d. P200.000.00
SUGGESTED ANSWER: d
75
CLAIMS DEDUCTIBLE F R O M T H E GROSS ESTATE
OF DECEDENT FILIPINOS A N D RESIDENT ALIENTS
1. Claims deductible from the gross estate of a

Filipino citizen, whether resident or net, or of a resident
alien decedent.
a Claims against the estate. [NIRC of 1997, Sec. 86 (A)
(D(c)]
b. Claims of the deceased against insolvent persons. [Ibid,
Sec 86 (A)(1)(d)]
2. Claims against the estate, defined. T h e word "claims'

is generally construed to mean debts or demands of a pecuniary
nature which could have been enforced against the deceased in
his lifetime and could have been [educed to simple money
judgments. Claims against the estate or indebtedness in respect of
property may arise out of:
a. contract;
b. tort; or
c. operation of law. [Rev. Regs. No 2-2003, Sec. 6 (A) |3)
Ail unpaid obligations and liabilities of the decedent at the
time of his death (except unpaid funeral or medical expenses
which are deductible under a different category) are allowed as
deductions from gross estate. [Ibid., Sec 6 (A) (3) (ii)]
3. Claims against the estate deductible from the

gross estate of a Filipino citizen, w h e t h e r resident or
not, or of a resident alien decedent. Claims against the
estate
a. at the time the indebtedness w a s incurred, the debt
instrument w a s duly notarized;
b. if the loan w a s contracted within three (3) years
before the decedent's death, the executor or administrator shall
submit a statement showing the disposition of the proceeds of the
loan. [NIRC of 1997, Sec. 86 (A) (1) (c)]
4. Requisites for deductibility of claims against the

estate.
a. The liability represents a personal obligation of the
deceased existing at the time of his death except unpaid obligat-
76
ions incurred incident his death such as unpaid funeral
expenses (i.e. expenses, incurred up to the time of interment) and
unpaid medical expenses which are classified under a different
category df deductions pursuant to these Regulations;
b. The liability was contracted in good faith and for
adequate find full consideration in money or money's worth;
c. The claim must be a debt or claim which is valid in
law and enforceable in court;
d. T h e indebtedness must not have been condoned by
the creditor or the action to collect from the decedent must not
have prescribed. (Rev. Regs. No. 2-2003, Sec. 6 (A) (3) (i)]
NOTES AND COMMENTS: "The deduction herein allowed in the case
of claims against the estate, unpaid mortgages, or any indebtedness
shall, when founded upon a promise or agreement, be limited to the
extent that they were contracted bona fide and for an adequate and full
cdnsideration in money or money's worth." [NIRC of 1997, Sec. 86,
5. Claims against the estate allowed as a deduction

Is an existing claim, not one that w a s previously
condoned. The claims against the estate which the law allows
as deduction from the gross estate are existing claims against the
estate. An indebtedness that has been condoned is in legal effect
no indebtedness at all. If there is no more indebtedness by reason
of the condonation, there is no claim against the estate which may
be allowed as deduction. (Dizon, etc., v. Commissioner of Internal
Revenue, CTA Case No. 5116, June 17, 1997 citing Bocanegra, et al, v.
Collector of Internal Revenue, CTA Case No. 520, October 12, 1959)
6. Substantiation requirements. The requirements/

documents to be complied with and submitted are dependent on
whether the claim against the estate is
a. a simple loan (including advances), or
b. the unpaid obligation arose from purchase of goods
or services.
7. Substantiation requirements where the claim

against the estate is a simple loan (including advances):
a. The debt instrument rtiust be duly notarized at the
time the indebtedness was incurred, such as promissory note or
contract of loan, except for loans granted by financial institutions
where notarization is not part of the business practice/policy of the
financial institution-lender;
77
b. Duly notarized certification from the creditor as to
unpaid balance of the debt, including interest as of the time of
death. If the creditor is a corporation, the sworn certification
should be signed by the President, or Vice-President, or other
principal officer of the corporation. If the creditor is a partnership,
the sworn certification should be signed by any of the general
partners. In case the creditor is a bank or other financial
institutions, the certification shall be executed by the branch
manager of the bank/financial institution which monitors and
manages the loan of the decedent-debtor. If the creditor is an
individual, the sworn certification should be signed by him. In any
of these cases, the one w h o should certify must not be a relative
of the borrower within the fourth civil degree, either by
consanguinity or affinity, except when the requirement below is
complied with.
When the lender, or the President/Vice-President/principai
officer of the creditor-corporation, or the general partner of the
creditor-partnership is a relative of the debtor in the degree
mentioned above, a copy of the promissory note or other evidence
of the indebtedness must be filed with the R D O having jurisdiction
over the borrower within fifteen days from the execution thereof.
c. In accordance with the requirements as prescribed in
existing or prevailing internal revenue issuances, proof of financial
capacity of the creditor to lend the amount at the time the loan w a s
granted, as well as its latest audited balance sheet with a detailed
schedule of its receivable showing the unpaid balance of the
decedent-debtor. In case the creditor is an individual w h o is no
longer required to file income tax returns with the Bureau, a duly
notarized Declaration by the creditor of his capacity to lend at the
time the loan w a s granted without prejudice to verification that may
be made by the BIR to substantiate such declaration of the
creditor.
If the creditor is a non-resident, the executor/administrator
or any of the legal heirs must submit a duly notarized declaration
by the creditor of his capacity to lend at the time when the loan
was granted, authenticated or certified to as such by the tax
authority of the country where the non-resident creditor is a
resident;
d. A statement under oath executed by the
administrator or executor of the estate reflecting the disposition of
the proceeds of the loan if said loan w a s contracted within three
(3) years prior to the death of the decedent [Rev Regs No 2-2003
78
Sec 6 (A) (3) (ii) (a), n u m b e r i n g supplied]
8. Substantiation requirements where the unpaid

obligation claimed against the estate arose from the
purchase of goods or services:
a. Pertinent documents evidencing the purchase of
goods or service, such as sales invoice/delivery receipt (for sale of
goods), or contract for the services agreed to be rendered (for sale
of service),as duly acknowledged, executed and signed by the
decedent-debtor a n d creditor, and statement of account given by
the creditor as duly received by the decedent-debtor;
b. Duly notarized Certification from the creditor as to
unpaid balance of the debt, including interest as of the time of
death. If the creditor is a corporation, the sworn certification
should be signed by t h e . President, or Vice-President, or other
principal officer of the corporation. If the creditor is a partnership,
the sworn certification should be signed by any of the general
partners. In case the creditor is a bank or other financial
institutions, the Certification shall be executed by the branch
manager of the bank/financial institution which monitors and
manages the loan of the decedent-debtor. If the creditor is a sole
proprietorship, the sworn certification should be signed by the
owner of the business. In any of these cases, the one who should
certify must not be a relative of the borrower within the fourth civil
degree, either by consanguinity or affinity, except when the
requirement below is complied with.
W h e n the lender, or the President/Vice-President/principal
officer of the creditor-corporation, or the general partner of the
creditor-partnership is a relative of the debtor in the degree
mentioned above, a copy of the promissory note or other evidence
of the indebtedness must be filed with the RDO having jurisdiction
over the borrower within fifteen days from the execution thereof.
c. Certified true copy of the latest audited balance sheet
of the creditor with a detailed schedule of its receivable showing
the unpaid balance of the decedent-debtor. Moreover, a certified
true copy of the updated latest subsidiary ledger/records of the
debt of the debtoc-decedent, (certified by the creditor, i.e., the
officers mentioned in the preceding paragraphs) should likewise
be submitted. [Rev. Regs. No. 2-2003, Sec 6-(A) (3) (ii) (b), numbering
supplied]
9. Substantiation requirements where the settlement
79
was made t h r o u g h the testate or intestate p r o c e e d i n g s
Where the settlement ;s made through the Court in a testate or
intestate proceeding, pertinent documents filed with the Court
evidencing claims against the estate, and the Court Order
approving the said claims, if already issued, in addition to the
documents mentioned in nos. 7 and 8, supra [Rev Regs No 2-
2003, Sec. 6 (A) (3) (ii) (c). paraphrasing supplied)
10. Claims of the deceased deductible from the gross

estate of a Filipino citizen, whether resident or not, or of
a resident alien decedent. Claims of the deceased
a. against insolvent persons
b. where the value of the decedent's interest is included
in the gross estate. [NIRC of 1997, Sec. 86 (A) (1) (d)]
NOTES A N D C O M M E N T S : To the author's knowledge, neither the
law nor jurisprudence has resolved the issue of whether the person who
owes the deceased has to be judicially declared as an insolvent in order
to avail of this deduction.
One school of thought may posit that there is need for a judicial
declaration of insolvency because this is a deduction and deductions are
to be strictly interpreted. The author subscribes to. the view that there is
no need for a judicial declaration so long as the person is unable to pay
his obligation to the deceased. The concepts for deducting bad debts
from gross income may be applied by analogy.
11. Requisites for a claim of the deceased to be that

against an insolvent person (Applying by analogy the
concept of bad debts as a deduction from gross income).
a. There must be an existing indebtedness due to the
taxpayer which must be valid and legally demandable;
b. The s a m e must be connected with the taxpayer's
trade, business or practice of profession;
c. The same must not be sustained in a transaction
entered into between related parties enumerated under Sec. 36
(B) of the Tax Code of 1997;
d. The same must be actually charged'off the books of
accounts of the taxpayer as of the end pf the taxable year; and
e. The debt must be actually ascertained to be
worthless and uncollectible during the taxable year;
f. The debts are uncollectible despite diligent effort
exerted by the taxpayer. [NIRC of 1997, Sec 34 (E) (1); Rev Regs
No. 5-99, Sec.3, reiterated in Rev. Regs No. 25-2002; Philippine Refining
Corporation v Court of Appeals, et al., 256 SCRA 667]
80
g. Must have been reported as receivables in the
income tax return of the current or prior years. (Rev Regs No 2
' Sec 103)
12. Meaning of debt "actually ascertained worthless"

to consider the debtor as an insolvent, person (Applying
by analogy the concept of worthless debts to be allowed as
a deduction from gross income). "In general, a debt is not
worthless simply because it is of doubtful value or difficult to
collect. Worthlessness is not determined by an inflexible formula
or slide rule calculation but upon the exercise of sound business
judgment. The determination of worthlessness in a given case
must depend upon the particular facts and the circumstances of
the case. A taxpayer m a y not postpone a bad debt deduction on
the basis of a mere hope of ultimate collection or because of a
continuance of attempts to collect notes which long become
overdue, a n d where there is no showing that the surrounding
circumstances differ from those relating to other notes which were
charged off in a prior year. While a mere hope probably will not
justify, postponement of the deduction, a reasonable possibility of
recovery will permit the account to be carried along
notwithstanding that the probabilities are that the debt may not be
collected at all. The creditor may offer evidence to show some
expectation that the debt would have been paid in the intervening
years, and that subsequently the hope was shattered or appeared
tn have been unfounded If, for example, the creditor could show
that during the years he attempted to collect the debt, the debtor
had property the title of which was in dispute but which could
enable him to pay his debts when the title was cleared, the creditor
would be entitled to defer the deduction on the ground that there
was no genuine ascertainment of worthlessness.
Thus, accounts receivable, the amount whereof is
insignificant and the collection of which through court action may
be more costly to the taxpayer, may be written-off as bad debts
even without conclusive evidence that the taxpayer's receivable
from a debtor has definitely become worthless.
Good f a i t h ' does not require the taxpayer to be an
'incorrigible optimist' but on the other hand, he may not be unduly
pessimistic. Creditors do not have to wait until some turn of the
wheel of fortune may bring their debtors in affluence The
taxpayer may strike a middle course between pessimism and
optimism and determine debts to be worthless in the exercise of
81
sound business judgment based upon as complete information as
is reasonably ascertainable The taxpayer need not have perfect
discernment" (Rev Regs. No 5-99, Sec. 2 c.)
INDEBTEDNESS THAT A R E D E D U C T I B L E F R O M
THE GROSS ESTATE OF FILIPINOS AND RESIDENT
ALIENS
1. Indebtedness in respect to property deductible

from the gross estate of a Filipino decedent, whether
resident or not, or of a resident alien decedent.
a. For unpaid mortgages upon, or any indebtedness
. b. in respect to property w h e r e
1) the value of the decedent's interest in the
property undiminished by such mortgage or indebtedness!
is included in the value of the gross estate;
2) the mortgage or indebtedness js founded upon
a promise or agreement
c. w h e n founded upon a promise or agreement, the
deduction is limited to the extent that the mortgage or
indebtedness
1) were contracted bona fide and
2) for an adequate consideration in money or
money's worth. [NIRC of 1997, Sec. 86 (A) (1) (e), numbering
and arrangement supplied]
In case unpaid mortgage payable is being claimed by the
estate, verification must be made as to w h o w a s the beneficiary of
the loan proceeds. If the loan is found to be merely an
accommodation loan where the loan proceeds went to another
person, the value of the unpaid loan must be included as a
receivable of the estate. If there is a legal impediment to
recognize the same as receivable of the estate, said unpaid
obligation/mortgage payable shall not be allowed as a deduction
from the gross estate. In all instances, the mortgaged property, to
the extent of the decedent's interest therein, should always form
part of the gross taxable estate. [Rev. Regs. No. 2-2Q03, Sec 6 (A)
(5), last par)
LOSSES T H A T A R E D E D U C T I B L E F R O M T H E
G R O S S ESTATE O F FILIPINOS A N D R E S I D E N T A L I E N S
82
1. L o s s e s deductible from t h e gross e s t a t e o f a
a Losses incurred during the settlement of the estate
b arising from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement,
c w h e n such losses are not compensated for by
insurance or otherwise, and
d if at the filing of the return such losses have not
been claimed as a deduction for income tax purposes in an
income tax return, and
e. Provided that such losses were incurred not later
than the last day for the payment of the estate tax as prescribed
by law. [NIRC of 1997, Sec. 86 (A) (1) (e), numbering and arrangement
supplied]
TAXES THAT ARE DEDUCTIBLE FROM THE GROSS

E S T A T E O F FILIPINOS A N D R E S I D E N T A L I E N S
1. Indebtedness for taxes in respect of property not

deductible from the g r o s s estate of a Filipino decedent,
w h e t h e r resident or not, of a resident alien d e c e d e n t , or
of a nonresident alien decedent.
a. Income taxes upon income received after
decedent's death;
b. property taxes not accrued before,, d e c e d e n t s
death;
c. estate taxes. [NIRC of 1997, Sec. 86 (A) (1) (e),
NOTES AND COMMENTS: While generally, estate taxes are not allowed
as a deduction from gross estate, the estate taxes imposed shall be
credited with the amounts of any estate tax imposed by the authority of a
foreign country [NIRC of 1997, Sec. 86 (E) (1)]
Refer to Sec N, COLLECTION AND PAYMENT OF ESTATE
TAXES, infra.
2. Indebtedness for taxes in respect to property

deductible from the gross estate of a Filipino decedent,
whether resident or not, or a resident alien decedent.
a. Income taxes upon income received before
decedent's death;
b Property taxes accrued before decedent's death
83
[NIRC of 1S97, Sec 86 (A) (1) (e). numbering and arrangement supplied]

for time, you could answer mentally but ensure that your answer Is
complete.
OBJECTIVE TYPE:
Enumerate the taxes that could not be deducted from the

gross estate of a resident alien.
X, an American citizen, who is a permanent resident of

the Philippines died while on a vacation in his place of birth in
the United States. Which one of the following is a valid
deduction from his gross estate ?
a. Estate taxes paid in the Philippines.
b. Income tax paid on income earned and received
after X's death.
c. Unpaid income taxes on salaries received by X
before his death.
d. Real property taxes on X's Quezon City
condominium due after his death.
SUGGESTED ANSWER: c
EXPENSES THAT A R E DEDUCTIBLE FROM THE

GROSS ESTATE OF NON-RESIDENT ALIENS
1. Expenses that are deductible from the gross

estate of non-resident aliens. T h e value of the net estate of
a nonresident not a citizen of the Philippines, shall be determined
by deducting from the gross estate which at the time of his death
is situated in the Philippines that proportion of the expenses,
losses, indebtedness and taxes which the value of such part bears
to the value of his entire gross estate wherever situated. [NIRC of
1997, Sec. 86 (B) (1)]
84
2. Formula for computing expenses, losses,
indebtedness, and taxes deductible from the gross
estate of a nonresident alien decedent.
Phil. Gross Estate Expenses, Losses, Allowable

. x Indebtedness and = Deductions
World Gross Estate Taxes from gross
estate
[Rev. Regs. No. 2-2003, Sec. 7 (1)]
I. ITEMS THAT ARE DEDUCTIBLE FROM THE

GROSS ESTATE OF FILIPINOS AND RESIDENT
ALIENS BUT NOT DEDUCTIBLE FROM THE GROSS
ESTATE OF NON-RESIDENT ALIENS
DEDUCTIONS FOR THE VALUE OF THE FAMILY

HOME
1. Deductions for the value of the family home from

the gross estate of a Filipino decedent, whether resident
or not, or of a resident alien decedent.
a. A m o u n t equivalent to the current market value of
the decedent's family home,
b. not exceeding one million pesos (P1,000,000.00). If
exceeding P1,000,000.00, only the excess shall be subject to
estate tax,
c. certified by the barangay captain of the locality as the
decedent's family home. [NIRC of 1997, Sec. 86 (A) (4), numbering
NOTES AND COMMENTS: The author believes that non-resident
decedents, whether Filipinos or aliens are not entitled to the deduction for
the value of the family home. This is so because there could be no family
home in the Philippines, of a non-resident because, a family home is
"The dwelling house, including the land on which it is situated, where the
husband and wife, or a head of the family, and members of their family
reside, as certified to by the Barangay Captain of the locality." [Arts 152
s
and 153, Family Code) [Rev. Regs. No 2-2003, Sec 6 (D) a), 1 ' par ]
The decedent and the members of his family should reside in that family
home.
The issue becomes ticklish if there is a family home constituted by
the decedent but it is located outside of the Philippines The author main-
85
tains the same stance, that there should be no deduction allowed. The
law is clear that there should be a certification by the barangay captain of
the locality that the dwelling house is the decedent's family home. This
presupposes that the family home must be located in the Philippines
There is no barangay captain in places outside of the Philippines
2. Conditions for the allowance of family home as a

deduction from gross estate.
a. The family home must be the actual residential home
of the decedent and his family at the time of his death, as certified
by the Barangay Captain of the locality where the family home is
situated;
b. The total value of the family home must be included
as part of the gross estate of the decedent;
c. Allowable deduction must be in an amount equivalent
to the current fair market value of the family home as declared or
included in the gross estate, or the extent of the decedent's
interest (whether conjugal/community or exclusive property),
whichever is lower, but not exceeding P1,000,000. [Rev Regs. No
2-2003, Sec. 6 (D) b), numbering supplied]
3. Family home, defined for availment of the

deduction from gross estate. The dwelling house, including
the land on which it is situated, where the husband and wife, or a
head of the family, and members of their family reside, as certified
to by the Barangay Captain of the locality. T h e family home is
deemed constituted on the house and lot from the time it is
actually occupied as a family residence and is considered as such
for as long as any of its beneficiaries actually resides therein.
[Family Code, Arts. 152 and 153; Rev. Regs. No 2-2003, Sec 6 (D)
91
(a), 1 par.,]
For purposes of these regulations, however, actual
occupancy of the house or house and lot as the family residence
shall not be considered interrupted or abandoned in such cases as
the temporary absence from the constituted family home due to
travel or studies or work abroad, etc.,
In other words, the family home is generally characterized
by permanency, that is, the place to which, whenever absent for
business or pleasure, one still intends to return.
The family home must be part of the properties of the
absolute community or of the conjugal partnership, or of the
exclusive properties of either spouse depending upon the classi-
86
fication of the property (family home) and the property relations
prevailing on the properties of the husband and wife. It may also
be constituted by an unmarried head of a family on his or her own
property, (ibid., Art. 156,)
For purposes of availing of a family home deduction to the
extent allowable, a person may constitute only one family home. (
n d th
Ibid., Art 156.; Rev. Regs. No. 2-2003, Sec 6 (D) a), 2 t o 5 pars]
4. Husband and wife, definition. Legally married man

th
and w o m a n . [Rev. Regs. No. 2-2003, Sec. 6 (D) a), 6 par]
5. Unmarried Head of a Family, definition. An

unmarried or legally separated man or w o m a n with one or both
parents, or with one or more brothers or sisters, or with one or
more legitimate, recognized natural or legally adopted children
living with a n d dependent upon him or her for their chief support,
w h e r e such brothers or sisters or children are not more than
twenty one (21) years of age, unmarried and not gainfully
employed or w h e r e such children, brothers or sisters, regardless
of age are incapable of self-support because of mental or physical
defect, or any of the beneficiaries mentioned in Article 154 of the
Family C o d e w h o is living in the family home and dependent upon
the head of the family for legal support. [Rev. Regs. No 2-2003, Sec
th
6 ( D ) a), 7 p a r ]
6. Beneficiaries of a family home, definition. The

beneficiaries of a family h o m e are:
a. The husband and wife, or the head of a family; and
b. Their parents, ascendants, descendants including
legally adopted children, brothers and sisters, whether the
relationship be legitimate or illegitimate, who are living in the family
home and w h o depend upon the head of the family for legal
support. [Art 154, Family Code; Rev. Regs. No. 2-2003. Sec. 6 (D) a),
m
7 par., numbering supplied]
S T A N D A R D DEDUCTION
1. Standard deduction from the gross estate of a

resident alien decedent. An amount equivalent to one million
pesos (P1,000,000.00) [NIRC of 1997, Sec. 86 (A) (5)], shall be
87
pesos (P1,000,000.00) [NIRC of 1 9 9 7 . Sec. 66 (A) (5)] shall be
allowed as an additional deduction without need of substantiation
The full amount of P1,000,000 shall be allowed as deduction for
the benefit of the decedent. [Rev Regs N o 2 - 2 0 0 3 Sec 6 (E)]
NOTES AND COMMENTS. Non-resident estates are not allowed this
deduction as it is not among those enumerated under NIRC of 1 9 9 7 , Sec
8 6 (B).

complete.
OBJECTIVE TYPE:
To what group of decadents is the standard deduction

allowed for purposes of estate taxation ?
PROBLEM TYPE:
1. Mr. Felix de la Cruz, a bachelor resident citizen,

USA. He died intestate on June 15, 2009 in New York City,
leaving behind real properties situated in New York; his
family home in Valle Verde, Pasig City; an office
condominium in Makati City; shares of stock in San Miguel
Corporation; cash in bank; and personal belongings. The
decedent is heavily insured with Insular Life. He had no
known debts at the time of his death, xxx xxx What
deductions may be claimed by the estate xxx xxx ? (BAR:
2000, paraphrasing and date supplied)
SUGGESTED ANSWER: Since Mr. de la Cruz is a Filipino citizen,
the deductions he could claim are the standard deduction of P1 million,
the value of the famiiy home and his funeral expenses. There are no
other deductions shown in the problem.
2. While driving his car to Baguio last month, Pedro

Asuncion, together with his wife Assunta, and only son, Jaime,
met.an accident that caused the Instantaneous death of Jaime.
The following day, Assunta also died in the hospital. The
8B
spouses and their son had the following assets and liabilities
at the time of death:
Assunta Jaime
Exclusive Coniuaal Exclusive
Cash P10.000.000 P1.2000.000
Cars P2.000.000 500,000
Land 5,000,000 2,000,000
Residential house 4,000,000
Mortgage payable 2,500,000
Funeral expenses 300,000
Is the Estate of Jaime Asuncion liable for estate tax ?

Explain. (BAR. 2008)
SUGGESTED ANSWER: No A standard deduction of P 1,000,000
is allowed from the gross estate of P1,200,000. Thus, the net estate is
P200.000 which is exempt from the payment of estate tax.
DEDUCTIONS FOR MEDICAL EXPENSES
1. Deductions for medical expenses from the gross

estate of a Filipino decedent, whether resident or not, or
of a resident alien decedent.
a Medical expenses incurred by the decedent
b. within one (1) year prior to his death
c. which shall be duly substantiated by receipts
d. Provided, That in no case shall the deductible
medical expenses exceed five hundred thousand pesos
(P500.000.00). [NIRC of 1997, Sec. 86 (A) (6), , numbering and
arrangement supplied] - -
NOTES AND COMMENTS: Nonresident estates are not allowed this
deduction because it is not among those listed under the NIRC of 1997,
Sec. 86 (B).
2. Substantiation requirements for medical

expenses. Official receipts for services rendered by the
decedent's attending physicians, invoices, statements of account
duly certified by the hospital, and such other documents in support
thereof and provided, further, that the total amount thereof,
whether paid or unpaid, does not exceed Five Hundred Thousand
Pesos (P500.000) [Rev Regs No 2-2003, Sec 6 (F), 1 " par)
89
3. Tax treatment of amount exceeding PSOO.OOO. Any
amount of medical expenses incurred within one year from death
in excess of Five Hundred Thousand Pesos (P500.00G) shall no
longer be allowed a 6 a deduction. Neither can any unpaid amount
thereof in excess of the P500.000 threshold nor any unpaid
amount for medical expenses incurred prior to the one-year period
from date of death be allowed to be deducted from the gross
estate as claim against .the estate. [Rev. Regs No. 2-2003, Sec. 6
n d
(F), 2 par.)
4. Illustration on how to determine the amount of

allowable medical expenses given the P500.000
threshold amount.
a. If the actual amount of medical expenses incurred is
P250.000, then only P250.000 shall be allowed as a deduction
and not to the extent of the P500.000 threshold amount;
b. If the actual amount of medical expenses incurred within
the year prior to the decedent's death is P600.000, only the
maximum amount of P500.000 shall be allowed as deduction. If in
case the excess of P100,000 (P600.000 - 500,000) is still unpaid,
such amount shall not be allowed to be deducted f r o m the gross
estate as "claims against the estate". [Rev. Regs. No. 2-2003, Sec. 6
rt
( F ) , 3 par.]
AMOUNT RECEIVED UNDER REP. ACT NO. 4917
1. Amount received by heirs under Republic Act No.

4917. Republic Act No. 4917 refers to tax-exempt retirement or
separation.
Any amount received by the heirs from the decedent's
employer as a consequence of the death of the decedent-
employee in accordance with Republic Act No. 4917 is allowed as
a deduction provided that the amount of the separation benefit is
included as part of the gross estate of the decedent. [Rev. Regs.
No. 2-2003, Sec. 6 (G)]
J. COMMON ITEMS THAT ARE DEDUCTIBLE

FROM ALL GROSS ESTATES WHETHER OF
RESIDENT ALIENS
90
PROPERTY PREVIOUSLY TAXED (VANISHING
DEDUCTION)
1. Vanishing deduction, definition. The deduction

allowed from the gross estates of citizens, resident aliens and
nonresident estates for properties which were previously subject to
donor's or estate taxes. The deduction is called a vanishing
deduction because the deduction allowed diminishes over a period
of five (5) years.
It is also known as a deduction for property previously
taxed.
2. Purpose of the v a n i s h i n g deduction or deduction

for property previously t a x e d . A s c h e m e of "vanishing
deduction" is provided, in order to reduce the tax on property
received from a prior decedent where the deceased died within
five years (5) years after the death of the prior decedent. (Report of
the Tax Commission on National Internal Revenue Laws, Vol. I, p. 61)
3. Property previously t a x e d allowed as a deduction

from the gross estate of a Filipino citizen, whether
resident or not, of a resident alien decedent, or of a
nonresident alien decedent.
a. An amount equal to the value specified below of
b. any property forming a part of the gross estate
situated in the Philippines
c of any person w h o died within five years prior to
the death of the. decedent, or transferred to the decedent by gift
within five years prior to his death,
d. w h e r e such property can be identified as having
been received by the decedent from the donor by gift, or from such
prior decedent by gift, bequest, devise, or inheritance, or
e. which can be identified as having been acquired in
exchange for property so received:
1 0 0 % of the value if the prior decedent died within one year
prior to the death of the decedent, or if the property was
transferred to him by gift within the same period prior to his death;
8 0 % of th.e value if the prior decedent died more than one
year but not more than two years prior to the death of the
decedent, or if the property w a s transferred to him by gift within
the same period prior to his death;
91
6 0 % of the value if the prior decedent died more than two
years but not more than three years prior to the death of the
decedent, or if the property was transferred to him by gift within
the same period prior to his death;
4 0 % of the value if the prior decedent died more than three
years but not more than four years prior to the death of the
the same period prior to his death; and
2 0 % of the value if the prior decedent died more than four
years but not more than five years prior to the death of the
the same period prior to his death. [NIRG of 1997, Sec. 86 (A) (2)
and (B) (2), /lumbering, arrangement and underlining supplied]
4. Conditions for deductibility of property previously

taxed.
a. The gift tax, or estate tax imposed were finally
determined and paid by or on behalf of such donor, or the estate
of such prior decedent, as the c a s e m a y be and
b. the deduction is allowed only in the amount finally
determined as the value of such property in determining the value
of the gift, or, the gross estate of such prior decedent, and
c. only to the extent that the value of such property is
included in the decedent's gross estate, a n d
d. only if in determining the value of the estate of the
prior decedent no deduction w a s allowed for property previously
taxed in respect of the property or properties given in exchange
therefor.
e. W h e r e a deduction w a s allowed of any mortgage or
other lien in determining the gift tax, or the estate tax of the prior
decedent, which were paid in whole or in part prior fo the
decedent's death, then the deduction allowable for property
previously taxed shall be reduced by the amount so paid.
f. Such deduction allowable shall be reduced by an
amount which bears the s a m e ratio to the amounts allowed as
deductions for expenses, losses, indebtedness, taxes, and
transfers for public use as the amount otherwise deductible for
property previously taxed bears to the value of the decedent's
estate.
g. W h e r e the property referred to consists of two or
more items the aggregate value of such items shall be used for the
92
purpose of computing the deduction. [NIRC of 1997, Sec. 86 (A) (2)
last par. and (B) (2)]
5. Formula for computing vanishing deduction.
Value of Property Previously T a x e d

LESS: Mortgage debt paid, if any (first deduction)
= First basis
Value of gross estate of present decedent

LESS: Expenses, etc. Transfers for public purposes etc.
= 2nd deduction
First basis
LESS:2nd deduction
= 2nd basis
Multiplied by 8 0 % . 6 0 % . etc.
= Vanishing deduction

complete.
OBJECTIVE TYPE:
1. What are vanishing deductions in estate taxation

? (BAR: 1994)
PROBLEM TYPE:
1. While driving his car to Bagulo last month, Pedro

Asuncion, together with his wife Assunta, and only son, Jaime,
met an accident that caused the Instantaneous death of Jaime.
The following day, Assunta also died in the hospital. The
spouses and their son had the following assets and liabilities
at the time of death:
Assunta Jaime
Exclusive Coniuaal Exclusive
93
«
Cash P10,000,000 P1,2000,000

Cars P2,000,000 500,000
Land 5,000,000 2,000,000
Residential house 4,000,000
Mortgage payable 2,500,000
z.soo.ouu
Funeral expenses 300,000
Is vanishing deduction applicable to the Estate of

Assunta Asuncion ? Explain. ( BAR: 2008)
SUGGESTED ANSWER: No. The reason being that there were
no taxes paid upon the estate of Jaime Asuncion. The net estate being only
in the amount of P200 000 after deducting the standard deduction of
P1,000,000 is.exempt from estate tax.
Vanishing deduction finds application only upon properties
previously taxed in this case if an estate tax has been paid upon the estate
of the prior decedent, Jaime.
2. In 2001, Xavier purchased from his friend, Yuri, a

painting for P500.000.00. The fair market value (FMV) of the
painting at the time of the purchase was P1~miilion. Yuri paid
all the corresponding taxes on the transaction. In 2003,
Xavier died. In his last will and testament, Xavier bequeathed
the painting already worth P1.5 million to his only son,
Zandro. The will also granted Zandro the power to appoint
his wife, Wilma, as successor to the painting in the event of
Zandro's death. Zandro died in 2009, and Wilma succeeded
to the property.
xxx xxx
[c] May vanishing deduction be allowed in either or
both of the estates ? Explain. (BAR. 2009, paraphrasing and
dates supplied)
SUGGESTED ANSWER: No. There is no deductible vanishing
deduction from the estate of Xavier because there is no showing in the
problem of any property part of his estate that was previously the subject of
a donor's or estate tax within a period of five (5) years
There is likewise no deductible vanishing deduction from the estate
of Zandro, for the reason that he died in 2009 which is five (5) years after
the death of Xavier in 2003
1• Vanishing deduction is availed of by taxpayers to:

a. correct his accounting records to reflect the actual
94
deductions made
b. reduce his gross income
c. reduce his output value-added tax liability
d. reduce his gross estate
Choose the correct answer. (Adapted from the 2006 BAR)
SUGGESTED ANSWER: d.
2. Gary died In April, 2007 leaving all his properties

to his only son Martin. Gary left no creditors. Martin
promptly executed an affidavit of self-adjudication, paid the
proper estate taxes and had the properties titled in his name.
In August, 2009 Martin died leaving as his only heirs, his two
surviving children. If vanishing deduction finds application
what percentage of the value of the properties Martin
inherited from Gary should be allowed as a deduction ?
a. 20%.
b. 40%.
c. 60%.
d. 80%
SUGGESTED ANSWER: c
TRANSFERS FOR PUBLIC USE
t. Transfers for public use deductible from the gross

estate of a Filipino decedent, whether resident or not, of
a resident alien decedent, or of a nonresident alien
decedent. T h e amount of
a. all bequests, legacies, devices, or transfers to or for the
use
b. of the Government of the Republic of the Philippines, or
any political subdivision thereof,
c. for exclusively public purposes. [NIRC of 1997, Sec. 86
(A) (3) and (B) (3), numbering and arrangement supplied]
NET S H A R E O F T H E SURVIVING S P O U S E I N T H E
C O N J U G A L P A R T N E R S H I P PROPERTY
1. Tax treatment of the net share of the surviving

spouse in the conjugal partnership property. The net
share of the surviving spouse in the conjugal partnership property
as diminished by the obligations properly chargeable to such pro-
95
perty shall, for the purposes of computing the net estate, b e .
deducted from the net estate of the decedent. [NIRC of 1997. Sec
86 (C)]
The deduction is allowed irrespective of whether the decedent
is a citizen, a resident alien or a nonresident estate.
NOTES A N D C O M M E N T S : The author submits that the above
deduction applies equally to the net share of the surviving spouse in the
absolute community property. This is so, because it would be absurd to
allow as a deduction the net share of the surviving spouse in the conjugal
partnership and not to allow the same in an absolute community. The
separate share of the surviving spouse, whether under the conjugal
partnership or absolute community, does not belong to the decedent so
he should not be taxed when it is inherited.
This view is reflected in the provisions of Rev. Regs. No. 2-2003,
See 6 (A) (8), which provides that, "After deducting the allowable
deductions appertaining to the conjugal or community properties included
in the gross estate, the share of the surviving spouse must be removed to
ensure that only the decedent's interest in the estate is taxed."
K. ADMINISTRATIVE AND OTHER

REQUIREMENTS: NOTICES, RETURNS ,
NOTICE OF DEATH
1. Instances w h e r e notice of death required to be

filed.
a. In all cases of transfers subject to tax, or
b. where, though exempt from tax,
1) the gross value of the estate exceeds
twenty thousand pesos (P20.000.00). (NIRC of 1997, Sec. 89,
numbering and arrangement supplied)
2. Purpose of the notice of death. In order to place the

estate of every deceased person on record so that the collection of
the estate tax may be assured. (Report of the Tax Commission on
National Internal Revenue Laws, Vol. II, p. 140)
3. W h o files notice of death

a. The executor, administrator or any of the legal
heirs, as the case may be,
b. shall give a written notice of death to the
Commissioner of Internal Revenue. (NIRC of 1997, Sec. 89,
numbering and arrangement supplied)
96
4. Administrator of decedent's property during her
lifetime not automatically administrator of her estate
upon death. This so because the contract of agency was
extinguished by death.
Thus, there was absolutely no obligation on the part of said
"administrator" during the lifetime, to inform the BIR of the
decedent's death. {Estate of the late Juliana Diet vda, de Gabriel v
Commissioner of Internal Revenue, G R. No 155541, January 27, 2004)
5. Period for filing notice of death.. The written notice of

death shall be filed with the Commissioner of Internal Revenue
a. within two (2) months after the decedent's
death,
b. or within a like period after qualifying as such
executor or administrator. (NIRC of 1997, Sec. 89, numbering and
arrangement supplied)
ESTATE TAX RETURNS
1. Instance w h e r e estate tax return is required to be

filed.
a. All transfers subject to estate taxes; or
b. where, though exempt from tax, the gross value of
the estate exceeds Two hundred thousand pesos
(P200,000.00);or
c. regardless of gross value of the estate, where the
said estate consists of registered or registerable property such as
real property, motor vehicle, shares of stock or other similar
property for which a clearance from the Bureau of Internal
Revenue is required as a condition precedent for the transfer of
ownership thereof in the name of the transferee. [NIRC of 1997,
Sec. 90 (A), numbering and arrangement supplied]
2. W h o should file the estate tax return.

a. T h e executor, or
b. the administrator; or
c. any of the legal heirs, as the case may be. [NIRC of
1997, Sec. 90 (A), numbering and arrangement supplied]
3. No oath required for estate tax return but

declaration made under penalties of perjury. "Any declar-
97
ation, return or other statements required under this Code, shall, in
lieu of an oath, contain a written statement that they are made
under penalties of perjury. Any person who willfully files a
declaration, return or statement containing information which is not
true and correct as to every material matter shall, upon conviction,
be subject to the penalties prescribed for perjury under the
Revised Penal Code." (NIRC of 1997, Sec. 267)
4. Time for filing estate tax return. Estate tax returns

shall be filed within six (6) months from the decedent's death.
s1
(NIRC of 1997, Sec. 90 (B), 1 par]
A certified copy of the schedule of partition and the order of
the court approving the same shall be furnished the Commissioner
within thirty (30) days after the promulgation of such order. (Ibid.,
n d
2 par.,)
For purposes of determining the estate tax, the estate tax
return shall be filed within six (6) months from the decedent's
death. The Court approving the project of partition shall furnish
the Commissioner of Internal Revenue with a certified copy thereof
and its order within thirty (30) days after promulgation of such
order. [Rev, Regs.No.2-2003, Sec. 9 (A),]
5. Extension of time to file the estate tax return. The

Commissioner shall have authority to grant in meritorious cases, a
reasonable extension not exceeding thirty (30) days for filing the
return. [NIRC of 1997, Sec. 90 (C)]
The Commissioner or any Revenue Officer authorized by him
pursuant to the Code shall have authority to grant, in meritorious
cases, a reasonable extension, not exceeding thirty (30) days, for
filing the return. The application for the extension of time to file the
estate tax return must be filed with the Revenue District Office
(RDO) where the estate is required to secure its Taxpayer
Identification Number (TIN) and file the tax returns of the estate,
which RDO, likewise, has jurisdiction over the estate tax return
required to be filed by any party as a result of the distribution of
the assets and liabilities of the decedent. [Rev. Regs No. 2-2003,
Sec 9 (B)]
6. Place of filing estate tax return and payment of

estate taxes differs according to whether the decedent
is a
a. resident of the Philippines.
96
b non-resident with no legal residence in the
Philippines

estate taxes w h e r e the decedent is a resident of the
Philippines.
a an authorized agent bank, or
b Revenue District Officer, or
c. Collection Officer, or
d. duly authorized Treasurer of the city or municipality in
which the decedent w a s domiciled at the time of his death. [NIRC
of 1997, Sec. 90 (D), numbering, paraphrasing and arrangement supplied]
In case of a resident decedent, the administrator or
executor shall register the estate of the decedent and secure a
new TIN therefore from the Revenue District Office where the
decedent w a s domiciled at the time of his death and shall file the
estate tax return and pay the corresponding estate tax with the
a. Accredited A g e n t Bank (AAB),
b. Revenue District Officer,
c. Collection Officer or
d. duly authorized Treasurer of the city or municipality
where the decedent w a s domiciled at the time of his death,
whichever is applicable, following prevailing collection rules and
s l
procedures. [Rev: Regs. No 2-2003, Sec 9 (C), 1 par, arrangement
and numbering supplied]
In any other place w h e r e the Commissioner of Internal
Revenue permits the estate tax return to be filed [NIRC of 1997,
Sec. 90 (D)]
The foregoing provisions notwithstanding, the Commissioner
of Internal Revenue may continue to exercise his power to allow a
different venue/place in the filing of tax returns. [Rev. Regs. No. 2-
r t
2003, Sec 9(C), 3 par]

estate taxes w h e r e the decedent has no legal residence
in the Philippines. With the Office of the Commissioner of
Internal Revenue. [NIRC of 1997, Sec. 90 (D)]
a. In case of a non-resident decedent, whether non-
resident citizen or non-resident alien, with executor or
administrator in the Philippines, the estate tax return shall be filed
with and the T I N for the estate shall be secured from the Revenue
District Office where such executor or administrator is registered:
99
District Office where-such executor or administrator is registered,
provided, however, that
b. in case the executor or administrator is not
registered, the estate tax return shall be filed with and the TIN of
the estate shall be secured from the Revenue District Office
having jurisdiction over the executor or administrator's legal
residence.
c. Nonetheless, in case the non-resident decedent does
not have an executor or administrator in the Philippines, the estate
tax return shall be filed with and the T I N for the estate shall be
secured from the Office of the Commissioner through RDO No.
n d
39-South Quezon City. [Rev. Regs. No. 2-2003, Sec. 9(C), 2 par]
In any other place where the Commissioner of Internal
Revenue permits the estate tax return to be filed. [NIRC of 1997,
Sec. 90 (D)]
of Internal Revenue may continue to exercise his power to allow a
different venue/place in the filing of tax returns. [Rev. Regs. No. 2-
rd
2003, Sec. 9 (C), 3 par]
9. Contents of an estate tax return, in general. The

estate tax return which shall be under oath in duplicate shall set
forth the following:
"(1) The value of the gross estate of the decedent at the time
of his death, or in case of a nonresident, not a citizen of the
Philippines, of that part of his gross estate situated in the
Philippines;
(2) The deductions allowed from gross estate in determining
the estate as defined in Section 86; and
(3) Such part of such information as may at the time be
ascertainable and such supplemental data as may be necessary
to establish the correct taxes." [NIRC of 1997, Sec 90 (A)]
NOTES AND COMMENTS: The estate defined in Sec. 86 is the net
estate which is determined by deducting from the gross estate the
allowable deductions.
10. Additional requirements where gross value of

estate exceeds P2 million. "(E)state tax returns showing a
gross value exceeding T w o million pesos (P2,000,000) shall be
supported with a statement duly certified to by a Certified Public
Accountant containing the following:
(a) Itemized assets of the decedent with their correspon-
100
ding gross value at the time of his death, or in the case of a
nonresident, not a citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
(b) Itemized deductions from gross estate allowed in
Section 86; and
(c) The amount of tax due whether paid or still due and
outstanding." [NIRC of 1997Sec: 90 (A), last par.)
1 1 . Criminal liability for failure to file estate tax

returns, supply correct and accurate information. "Any
person required under this Code or by rules and regulations
promulgated hereunder to xxx, make a return, keep any record, or
supply correct and accurate information, w h o willfully fails to xxx,
m a k e such return, keep such record, or supply such correct and
accurate information, xxx xxx at the time or times required by law
or rules and regulations shall, in addition to other penalties
provided by law, upon conviction thereof, be punished by a fine of
not less than Ten thousand pesos (P10,000) and suffer
imprisonment of not less than one (1) year but not more than ten
(10) years.
A n y person w h o attempts to make it appear for any reason
that he or another has in fact filed a return or statement, or actually
files a return or statement and subsequently withdraws the same
return or statement after securing the official receiving seal or
stamp of receipt of an internal revenue office wherein the same
w a s actually filed shall, upon conviction therefor, be punished by a
fine of not less than T e n thousand pesos (P10,000) but not more
than Twenty thousand pesos (P20.000) and suffer imprisonment
of not less than one (1) year but not more than three (3)years."
(NIRC of 1997, Sec. 255, paraphrasing supplied)
12. Civil penalties relative to estate tax returns. The

author submits that the following civil penalties with regard to
internal revenue taxes also find application to estate taxes.
"(A) There shall be imposed in addition to the tax required
to be paid, a penalty equivalent to twenty-five percent (25%) of the
amount due, in the following cases:
(1) Failure to file any return xxx as required under
the provisions of this Code or rules and regulations on the
date prescribed; or
(2) Unless otherwise authorized by the
Commissioner, filing a return with an internal revenue officer
101
other than those with w h o m the return is required to be filed:
xxx xxx xxx
(B) In case of willful neglect to file the return within the
period prescribed by this Code or by rules and regulations, or in
case a false or fraudulent return is wilfully made, the penalty to be
imposed shall be fifty percent (50%) of the tax or of the deficiency
tax, in case any payment has been made on the basis of such
return before the discovery of the falsity or fraud: Provided, That
xxx a claim of deductions in an amount exceeding thirty percent
(30%) of actual deductions shall render the taxpayer liable for xxx
overstatement of deductions, as mentioned herein." (NIRC of 1997,
Sec. 248, paraphrasing supplied)
- E S S A Y T Y P E S E L F - T E S T S . It is recommended that y o u
complete
OBJECTIVE TYPE:
1. Where should the estate tax return be filed and the

estate taxes paid where the decedent is a resident of the
Philippines ?
2. Where should the estate tax return be filed and

the estate taxes be paid where the decedent does not have
any legal residence in the Philippines ?
PROBLEM TYPE:
Mr. Felix de la Cruz, a bachelor resident citizen,

USA. He died intestate on June 15, 2009 in New Ybrk City,
xxx xxx where shall the return be Wed and estate tax be paid
? (BAR: 2000, date and paraphrasing supplied)
S U G G E S T E D A N S W E R : Since the decedent is a resident, the
estate tax return should be filed in the place where he had his residence
in the Philippines. The estate tax should be paid at the time the estate tax
return is filed or within such time as approved by the Commissioner
102
In which among the following instances is the filing of

an estate tax return a requirement ?
a. The gross value of the estate is P100,000.00 and
is exempt from the payment of the estate tax.
b. The gross value of the estate exceeds
PiOO,000.00 but Is below P200,000.00 and is exempt from the
payment of the estate tax.
c. The gross value of the estate does not exceed
P200,000.00 and is exempt from the payment of the estate tax.
d. The gross value of the estate exceeds
P200,000.00 but Is exempt from the payment of the estate tax.
SUGGESTED ANSWER: d
L. COLLECTION AND PAYMENT OF ESTATE

TAXES
EXEMPTION FROM THE PAYMENT OF THE

ESTATE TAX AND TAX CREDITS
1. Exemption f r o m estate taxes. The net estate which is

not over P2D0.000.00 is exempt from estate taxes. (NIRC of 1997,
st
Sec. 84, 1 par)
2. Exemption of certain acquisitions and

transmissions. (NIRC of 1997, Sec. 87)
Refer to Sec. F, supra for a detailed discussion of the
exempt acquisitions and transmissions.
3. Tax credit for estate taxes paid to a foreign

country. The estate taxes imposed shall be credited with the
amounts of any estate tax imposed by the authority of a foreign
country. [NIRC of 1997. Sec. 86 (E) (1)]
NOTES AND COMMENTS: The foreign estate taxes shall be deducted
from the Philippine estate taxes that are due from the estate.
4. Limitations on tax credit or deductions from the

amount of estate taxes to be paid. The amount of the credit
shall be subject to each of the following limitations:
a. The amount of the credit In respect to the tax paid
103
to any country shall not exceed the same proportion of the tax
against which such credit is taken, which the decedent's net estate
situated within such country taxable under the NIRC bears to his
entire net estate; and
b. The total amount of the credit shall not exceed the
same proportion of the tax against which such credit is taken,
which the decedent's net estate situated outside the Philippines
taxable under the NIRC bears to his entire net estate. [NIRC of
1997, Sec. 86 (E), (2), numbering and arrangement supplied]

complete.
OBJECTIVE TYPE:
What is meant when the law says that the "estate taxes
imposed shall be credited with the amounts of any estate tax
imposed by the authority of a foreign country."
PROBLEM TYPE:
A died in June 2009 in LA, California, her last residence

and domicile. She left properties consisting of among others,
shares of stocks in BMC, Inc., a company organized and
existing under the laws of the Philippines with principal office
at Makati, MM. The estate tax due on said shares were
correspondingly paid to the state of California. The BIR
sought to subject anew the same shares of stock to
Philippine estate tax. Will the action of the BIR prosper ?
Explain your answer. (BAR. 1978, date supplied and reworded)
S U G G E S T E D A N S W E R : No. The amounts of estate taxes
paid in California could be credited as a deduction from the Philippine
estate taxes to be paid. [NIRC of 1997, Sec 86 (E)]
A died in June 2009 in LA, California, her last residence

and domicile. She left properties consisting of among others,
104
shares of stocks in BMC, Inc., a company organized and
existing under the laws of the Philippines with principal office
at Makati, MM. The estate tax due on said shares were
correspondingly paid to the state of California.
For Philippine estate tax purposes what should be tax
treatment of the estate tax paid to the state of California ?
a. The California estate taxes are allowed to be
deducted from A's gross estate.
b. Since there is no showing of reciprocity then the
California estate taxes should not be considered in
determining the Philippine estate tax.
c. The amount of the California estate taxes are
allowed to be deducted from the Philippine estate tax that is
due from A's estate.
d. Since the California estate taxes have already
been paid there is no need anymore to pay Philippine estate
taxes.
SUGGESTED ANSWER: c
C O L L E C T I O N O F T H E ESTATE TAX
1. T w o w a y s of collecting inheritance (applied by
analogy to estate) taxes.
a. Proceeding against the executor or administrator in
his capacity as the person primarily liable for the payment of the
estate tax. In the absence of the executor or administrator,
b. going after all the heirs and collecting from each one
of them the amount of tax proportionate to the inheritance (by
analogy the estate) received (as the parties secondarily liable for
the payment of the estate tax).
b. Pursuant to the lien created by Section 315 of the
Tax Code (now Sec. 219, NIRC as amended by Rep Act No.
8424, the NIRC of 1997) upon all property and rights to property of
the estate and subjecting such part which is in the hands of an heir
or transferee to the payment of the tax due the estate. [Marcos II v.
Court of Appeals, et el., G.R. No. 120880, June 5, 1997 citing
Commissioner of Internal Revenue v. Pineda, 21 SCRA 105, words in
parentheses and paraphrasing supplied)
2. Collection of estate taxes does not require court

approval. Approval of the court, sitting in probate, or as a settle-
105
ment tribunal over the estate of the deceased is not a mandatory
requirement in the collection of estate taxes REASONS:
a There is nothing in the Tax Code, and in the pertinent
remedial laws that implies the necessity of the probate or estate
settlement court's approval of the state's claim for estate taxes
before the same can be enforced or collected;
b. On the contrary, under Section 87 of the NIRC (now
Sec. 94, NIRC of 1997), it is the probate or settlement court which
is bidden not to authorize the executor or judicial administrator of
the decedent's estate to deliver any distributive share to any party
interested in the estate, unless it is shown a Certification of the
Commissioner of Internal Revenue that the estate taxes have
been paid. (Marcos II v. Court of Appeals, etal., G.R. No. 120880, June
5, 1997, words in parentheses supplied)

complete.
OBJECTIVE TYPE:
1. Is the BIR authorized to collect estate tax

deficiencies by the summary remedy of levy upon and sale of
real properties without first securing the authority of the court
sitting in probate over the supposed will of the decedent ?
(BAR: 1998)
S U G G E S T E D A N S W E R : Yes. Refer to no. 2;[supra
2. Is the approval of the court, sitting as probate or

estate settlement court, required in the enforcement and
collection of estate tax ? Explain. (BAR: 2005)
S U G G E S T E D A N S W E R : No. Refer to no 2, supra.
PROBLEM TYPE:
VCC is the administrator of the estate of his father,

NGC. In the estate proceedings pending before the MM
Regional Trial Court. Last year, he received from the
Commissioner of Internal Revenue a deficiency assessment
for the estate in the amount of P1,000,000.00, but he ignored
106
4he notice. Last month, the BIR effected a levy on the real
properties of the estate to pay the delinquent tax. VCC filed a
motion with the probate court to stop the enforcement and
collection of "the tax on the ground that the BIR should have
secured first the approval of the probate court which had
Jurisdiction over the estate, before levying on Its real
properties. Is VCC's contention correct ? (BAR: 2004)
S U G G E S T E D A N S W E R : No Refer to no.2, supra.
VCC Is the administrator of the estate of his father,

NGC. In the estate proceedings pending before the MM
Regional Trial Court. Last year, he received from the
Commissioner of internal Revenue a deficiency assessment
for the estate in the amount of P1,000,000.00, but he Ignored
the notice. Last month, the BIR effected a levy on the real
properties of the estate to pay the delinquent tax.
Considering the above facts which of the following
statements correct ? (Adapted from the 2004 BAR)
a. VCC should file a motion with the probate court
to stop the enforcement and collection of the tax because the
properties from the tax to be enforced are in custodial legis.
b. VCC should within thirty (30) days from receipt of
the levy file a petition for review with an application for the
suspension of the tax before the Court of Tax Appeals.
c. VCC should advise the BIR Commissioner that it
could not enforce the levy because of the pendency of the
estate proceedings before the Regional Trial Court.
d. VCC should raise P1 million and pay the
deficiency assessment so that the real properties would not
be the subject of levy.
SUGGESTED ANSWER: d
LIABILITY FOR T H E P A Y M E N T OF THE ESTATE

TAX
1. Liability for payment of estate taxes.

a. Primary personal liability of the executor or
s
administrator. [NIRC of 1997, Sec 91 (C), 1 ' par, in relation to Sec
92]
b. Subsidiary liability of the beneficiary [ibid. Sec 91
107
b. Subsidiary liability o? the beneficiary [ibid.. Sec 91
(C), 1 * par ]
NOTES AND COMMENTS: The estate tax is a tax, imposed on the
privilege to transfer properties mortis causa. Logically, it should be
decedent who should pay the tax because he is the one transferring the
property. Since he is already dead, then it is his legal representative, his
executor or the administrator, who should be primarily liable for the tax
Of course, the executor or the administrator would source the tax
payment from the estate
2. Primary personal liability for payment of estate

taxes. The executor or administrator of an estate has the primary
obligation to pay the estate tax before delivery to any beneficiary
st
of his distributive share of the estate. [NIRC of 1997, Sec. 91 (C), 1
n d
par.; Rev. Regs. No. 2-2003, Sec. 9 (G), 2 par., rewording supplied;
Commissioner v. Yusay Gonzales, L-19494, April 24, 1976))
The liability is personal and may be discharged only upon
written application to the Commissioner of Internal Revenue and
payment of amount notified to be paid. The written discharge is
then issued. (NIRC OF 1997, Sec. 92)
3. Where there are two or more executors or

administrators all of them are severally liable for the payment of
st
the tax. [Rev. Regs. No.2-2003, Sec. 9 (G), 1 par.,]
4. Executor or administrator for tax purposes,

defined.
a. The executor or administrator of the decedent, or
b. if there is no executor or administrator appointed,
qualified, and acting within the Philippines, then
c. any person in actual or constructive possession of
n d
any property of the decedent. [NIRC of 1997, Sec. 91 (C), 2 par,
numbering and arrangement]
5. Executor, defined. An executor is the person nominated

by a testator to carry out the directions and requests in his will and
to dispose of his property according to his testamentary provisions
after his death. (21 Am Jur. 369)
6. Administrator, defined. An administrator is a person

appointed by the court, in accordance with the governing statures,
to administer and settle intestate and such testate estate as have
108
no competent executor designated by the testator (21 Am Jur
369)
7. Discharge of executor or administrator from

personal liability for the payment of the estate tax. If the
executor or administrator m a k e s a written application to the
Commissioner for determination of the amount of the estate tax
and discharge from personal liability therefor, the Commissioner,
as soon as possible, and in any event within one (1) year after the
making of the application, or if the application is made before the
return is filed, then within one (1) year after the return is filed; but
not after the expiration of the period prescribed for the assessment
of the tax, shall notify the executor or administrator of the amount
of the tax.
T h e executor or administrator, upon payment of the amount
of which he is notified, shall be discharged from personal liability
for any deficiency in the tax thereafter found to be due and shall
be entitled to a receipt or writing showing such a discharge. (NIRC
of 1997, Sec. 92, paragraphing supplied)
8. Subsidiary liability of beneficiary. The beneficiary, to

the extent of his distributive share, shall be subsidiarily liable for
the payment of such portion of the estate as his distributive share
bears to the value of the total net estate. [NIRC of 1997, Sec. 91 (C),
S|
1 par] The extent of his liability, however, shall in no case
exceed the value of his share in the inheritance. [Rev. Regs. No. 2-
2003, Sec. 9 (G), last par]

complete.
OBJECTIVE TYPE:
Who are primarily liable for the payment of the estate

taxes assessed against the estate of a deceased person ?
(BAR: 1966)
PROBLEM TYPE:
109
1. "X", "Y", and "Z " are surviving legitimate
children of "A " who died leaving a taxable estate valued at P8
million. "B" stepmother of "X","Y", and "Z" and surviving
spouse of "A" was appointed administratrix of the estate.
Under a compromise settlement, the surviving heirs
agreed to an equal distribution of the estate among
themselves. The estate tax was, however, not paid and an
assessment was issued against the surviving heirs, each In
an amount equal to 25% of the tax assessed.
"X", "Y", and "Z" protested the assessment, alleging
that the tax should be paid by "B", as administratrix.
Is Ihe protest of "X", "Y", and "Z" valid? Reasons.
(BAR: 1981)
SUGGESTED ANSWER: Yes. "B", the appointed administratrix, is
primarily liable for the payment of the estate tax before delivery is made to
any beneficiary of his distributive share of the estate. [NIRC of 199/, Sec.
91 (C)]
This primary personal liability of "B", the appointed administratnx,
is discharged only upon written advise of the Commissioner of Internal
Revenue, after "B" files an application for discharge and after payment of
the taxes due as notified by the Commissioner. (Ibid., Sec. 85)
It should however, be noted, that "X", "Y" and "Z" being
beneficiaries of the estate are subsidiarily liable for the payment of such
portion of the estate tax as their distributive shares bear to the value of
the total estate. (Ibid., Sec. 92)
2. Jose, Miguel and Vicente are surviving

legitimate children of Mr. Mario Castro who died leaving a
taxable estate worth P12 million. Ana, surviving spouse of Mr.
Castro and mother of Jose, Miguel and Vicente, was
appointed administratrix of the estate. A compromise
agreement was made and the surviving heirs agreed to an
equal distribution of the estate among themselves. The
estate tax however, was not paid and an assessment was
issued against the surviving heirs, each in an amount equal
to 25% of the tax assessed. Jose, Miguel and Vicente
protested the assessment, alleging that the tax shbuld be
paid by Ana as administratrix. Is the protest of Jose, Miguel
and Vicente tenable ? Explain. (BAR: 1989)
SUGGESTED ANSWER: Yes. Ana, the administratrix.-is
primarily liable for the payment of the estate tax.
For further explanation, refer to answer to problem type question no.
1 supra.
110
P L A C E FOR P A Y M E N T O F E S T A T E T A X E S
1. Place of payment of estate taxes differs according

to whether the decedent (s a
a. resident of the Philippines.
b. non-resident -with no legal residence in the
Philippines.
2. Place of filing estate tax return a n d payment of

estate taxes w h e r e the decedent is a resident of the
Philippines.
a. an authorized agent bank, or
b. Revenue District Officer, or
c. Collection Officer, or
d. duly authorized Treasurer of the city or municipality in
which the decedent w a s domiciled at the time of his death. [NIRC
of 1997, Sec 90 (D), numbering, paraphrasing and arrangement supplied]
In case of a resident decedent, the administrator or
executor shall register the estate of the decedent and secure a
new TIN therefore from the Revenue District Office w h e r e , the
decedent was domiciled at the time of his death and shall pay the
corresponding estate tax with the
a. Accredited A g e n t Bank (AAB),
b. Revenue District Officer,
c Collection Officer or
d. duly authorized Treasurer of the city or municipality
where the decedent was domiciled at the time of his death,
whichever is applicable, following prevailing collection rules and
s l
procedures. [Rev. Regs. No. 2-2003, Sec. 9 (C), 1 par., arrangement
and numbering supplied]
Sec. 90 (D)]
of Internal Revenue may continue to exercise his power t o allow a
different venue/place in the filing of tax returns. [Rev. Regs No 2-
rd
2003, Sec. 9(C), 3 par.,]
3. Place pf payment of estate taxes where the

decedent has no legal residence in the Philippines is
the place where the return is fljed.
a In case of a non-resident decedent, whether non-
111
resident citizen or non-resident alien, with executor or
administrator in the Philippines, the estate tax return shall be filed
with and the TIN for the estate shall be secured from tne Revenue
District Office where such executor or administrator is registered:
provided, however, that
b. in case the executor or administrator is not
registered, the estate tax return shall be filed with and the T I N of
the estate shall be secured from the Revenue District Office
having jurisdiction over the executor or administrator's legal
residence.
c. Nonetheless, in case the non-resident decedent does
not have an executor or administrator in the Philippines, the estate
tax return shall be filed with and the TIN for the estate shall be
secured from the Office of the Commissioner through RDO No.
n d
39-South Quezon City. [Rev. Regs. No. 2-2003, Sec. 9 (C), 2 par]
Sec. 90 (D)]
The foregoing provisions notwithstanding, the
Commissioner of Internal Revenue may continue to exercise his
power to allow a different venue/place in the filing of tax returns.
r t
[Rev. Regs. No. 2-2003, Sec. 9 (C), 3 par.]
TIME FOR P A Y M E N T O F E S T A T E T A X E S
1. Time for payment of estate taxes. As a general rule,

estate tax imposed under the NIRC of 1997 shall be paid at the
time the return is filed by the executor, administrator or the heirs,
which is within six (6) months from the decedent's death. [NIRC of
1997,Sec. 91 (A); Rev. Regs. No. 2-2003, Sec. 9 (D), paraphrasing
supplied]
NOTES A N D C O M M E N T S : The estate tax return shall be filed within
six (6) months from the decedent's death [NIRC of 1997, Sec. 90 (B)]
which period may be the subject to a reasonable extension, not
exceeding thirty (30) days, in meritorious cases by the Commissioner of
Internal Revenue. [Ibid., Sec. 90 (B), 1*' par, and (C)]
The above time for payment follows the "Pay as you go" concept in
taxation which posits that the tax should be paid at the time of the filing of
the tax return.
It may happen that the estate is suffering from liquidity problems
because it does not have sufficient cash to pay the estate taxes. In such
a case the executor or administrator may opt to do either of the fpllowing:
a. Pay the tax in installments; or
112
b. Apply for an extension of time within which to pay the tax
2. Payment of the estate tax by installment. In case

the available cash of the estate is not sufficient to pay its total
estate tax liability, the estate may be allowed to pay the tax by
installment and a clearance shall be released only with respect to
the property the corresponding/computed tax on which has been
paid. There shall, therefore, be as many clearances (Certificates
Authorizing Registration) as there are as many properties released
because they have been paid for by the installment payments of
the estate tax. T h e computation of the estate tax, however, shall
always be on the cumulative amount of the net taxable estate. Any
amount paid after the statutory due date of the tax shall be
imposed the corresponding applicable penalty thereto. However,
if the payment of the tax after the due date is approved by the
Commissioner or his duly authorized representative, the
imposabie penalty thereon shall only be the interest. Nothing, in
this paragraph, however, prevents the Commissioner from
executing enforcement action against the estate after the due date
of the estate tax provided that all the applicable laws and required
procedures are followed/observed. [Rev. Regs. No. 2-2003, Sec. 9
(F)l
3. Interest on e x t e n d e d p a y m e n t "If any person required

to pay the tax is qualified a n d elects to pay the tax on installment
under the provisions of this Code, but fails to pay the tax or any
installment thereof, or any part of such amount or installment on or
before the date prescribed for its payment, or where the
Commissioner has authorized an extension of time within which to
pay any tax or a deficiency tax~ or any part thereof, there shall be
assessed and collected interest at the rate of twenty percent
(20%) per annum, or such higher rate as may be prescribed by
rules and regulations, on the tax or deficiency tax or any part
thereof unpaid from the date of notice and demand until it is paid."
[NIRC of 1997, Sec. 249 (D), in relation to Sec. 249 (A), words in italics
supplied]
4. Criminal liability for failure to pay the estate tax.

"Any person required under this Code or by rules and regulations
promulgated hereunder to pay any tax, make a return, keep any
record, or supply correct and accurate information, who willfully
fails to pay such tax, make such return, keep such record, or
113
supply such correct and accurate information, xxx xxx at the time
or times required by law or rules and regulations shall, in addition
to other penalties provided by law, upon conviction thereof, be
punished by a fine of not less than Ten thousand pesos (P10,000)
and suffer imprisonment of not less than one (1) year but not more
than ten (10) years. ( N I R C of 1 9 9 7 , Sec 2 5 5 , 1 * par, paraphrasing
supplied)
5. Civil penalties relative to payment of the tax. The

author submits that the following civil penalties with regard to
internal revenue taxes also find application to estate taxes.
(1) Failure to xxx pay the tax due xxx as required
under the provisions of this Code or rules and regulations
on the date prescribed; or
Xxx xxx xxx
(3) Failure to pay the deficiency tax within the time
prescribed for the payment in the notice of assessment; or
(4) Failure to pay the full or part of the amount of
tax shown on any return required to be filed under the
provisions of this Code or rules and regulations, or the full
amount of tax due for which no return is required to be filed,
on or before the date prescribed for its payment. (NIRC of
1997, Sec. 248, paraphrasing supplied)
6. Criminal liability for attempt to evade or defeat the

payment of the estate tax. "Any person w h o willfully attempts
in any manner to evade or defeat any tax imposed under this
Code or the payment thereof shall, in addition to other penalties
not less than Thirty thousand pesos (P30.000) but not more than
One hundred thousand pesos (P100,000) and suffer imprisonment
of not less than two (2) years but not more than four (4) years:
provided, That the conviction or acquittal obtained under this
Section shall not be a bar to the filing of a civil suit for the
collection of taxes." (NIRC of 1997, Sec 254)
7. Interest on estate tax payments, in general. "There

shall be assessed and collected on any unpaid amount of tax,
interest at the rate of twenty percent (20%) per annum, or such
114
hNflhjftr rate as may be prescribed by rules and regulations from the
M t e prescribed for payment until the amount is fully paid " [NIRC
of t9»J\ Set 249(A)]
8. Deficiency interest A n y deficiency in the tax due, as

1hls term is defined in the NIRC of 1997, shall b e subject of
interest at the-rate of twenty (20%) p e r annum, or such higher rate
as m a y be prescribed by rules a n d regulatibns, which interest shall
b e a s s e s s e d a n d collected from the date prescribed for its
paymeht Unfit the full payment thereof. [NIRC of 1997, Sec. 249 (B)
in relation to Sec. 249 (A)]
9. Delinquency interest. "In case of failure to pay:

(1) T h e amount of the tax due on any return required to
be filed, or
(2) The amount of the tax due for which no return is
required, or
(3) A deficiency tax, or any surcharge or interest thereon
on the due date appearing in the notice a n d d e m a n d of the
Commissioner, there shall be assessed and collected on the
unpaid amount, interest at the rate of twenty (20%) per annum, or
such higher rate as may be prescribed by rules and regulations,
until the amount is fully paid, which interest shall form part of the
tax." [NIRC of 1997, Sec. 249 (C) In relation to Sec. 249 (A), words in
italics supplied]
10. Extension of time to pay the estate tax.

a. W h e n the Commissioner of Internal Revenue finds
that the payment on due date of the estate tax or of any part
thereof
b. would impose undue hardship upon the estate o r a n y
of the heirs,
c. he may extend the time for payment or any part
thereof not to exceed
1) five (5) years, in case the estate is settled
through the courts, or
2) two (2) years in case the estate is settled
s
extrajudicially. [NIRC of 1997, Sec 91 (B), 1 * par, numbering
11. Where application for extension of time to be filed.
The application for extension of time to file the return and exten-
115
sion of time to pay estate tax shall be filed with the Revenue
District Office (RDO) where the estate is required to secure its TIN
and file the estate tax return. This application shall be approved
by the Commissioner of Internal Revenue or his duly authorized
n d
representative. [Rev. Regs. No. 2-2003, Sec. 9 (E), 2 p a r ]
12. Grounds for denial of extension.

a: Where the taxes are assessed by reason of
1) negligence,
2) intentional disregard of rules and regulations,
or
3) fraud on the part of the taxpayer,
b. no extension will be granted by the Commissioner.
n d
[NIRC of 1997, Sec. 91 (B), 2 par]
13. Effect of grant of extension of time to pay estate

taxes.
a. In case of an extension, the amount in respect of
which the extension is granted shall be paid on or before the d a t e ,
of the expiration of the period of the extension, and the running of
the Statute of Limitations for assessment under the NIRC of 1997
shall be suspended for the period of any such extension. [NIRC of
s t
1997, Sec. 91 (B), 1 par., last sentence]
b. If an extension is granted, the Commissioner may
require the executor, or administrator, or beneficiary, as the case
may be, to furnish a bond in such amount, not exceeding double
the amount of the tax and with such sureties as the Commissioner
deems necessary, conditioned upon the payment of the said tax in
accordance with the terms of the extension." (Ibid, last par.)
c. Any amount paid after the statutory due date of the
tax, but within the extension period, shall be subject to interest but
not to surcharge [Rev. Regs. No. 2-2003, Sec. 9 (E), last par ]

complete.
OBJECTIVE TYPE:
116
Up to what period may the Commissioner of Internal
Revenue extend the payment of estate taxes ?
SUGGESTED ANSWER. Refer to no. 10, supra
P R O B L E M TYPE:
Remedios, a resident citizen, died on November 10,

2008. She died leaving three condominium units in Quezon
City valued at P5 Million each. Rodolfo was her only heir. He
reported her death in December 5, 2008 and filed the estate
tax return on March 30, 2009. Because he needed to sell one
unit of the condominium to pay for the estate tax, he asked
the Commissioner of Internal Revenue to give him one year to
pay the estate tax due. The Commissioner approved the
request for extension of time provided that the estate tax be
computed on the basis of the value of the property at the time
of payment of the tax.
Does the Commissioner of Internal Revenue have the
power to extend the payment of estate tax ? If so, what are
the requirements to allow such extension ? (BAR: 2007, dates
supplied).
SUGGESTED ANSWER: Yes, the Commissioner has the power
to extend the payment of estate tax. The following are the requirements
for such an extension:
a The Commissioner of Internal Revenue finds that the
payment on due date of the estate tax or of any part thereof would impose
undue hardship upon the estate or any of the heirs [NlRC of 1997, Sec.
st
91 (B), 1 par.]
b. There is no negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer [Ibid., 2", par]
c. The extension of the time for payment 01* any part thereof
should not exceed
1) five (5) years, in case the estate is settled
through the courts, or
2) two (2) years in case the estate is settled
st
extrajudicially. [NIRC or1997, Sec. 91 (B), 1 par.]',
d. "If an extension is granted, the Commissiorter may require
the executor, or administrator, or beneficiary, as the case may be, to
furnish a bond in such amount, not exceeding double the amount of the
tax and with such sureties as the Commissioner deems necessary,
conditioned upon the payment of the said tax in accordance with the
terms of the extension." {Ibid., last par)
117
The Commissioner of Internal Revenue may grant an
extension of time for the payment of the estate tax or any part
thereof, in case the estate is settled through the courts for a
period not exqeeding
a. two (2) years from grant of the extension.
b. two (2) years from the settlement of the estate.
c. five (5) years from the settlement of the estate.
d. five (5) years from the grant of the extension,
SUGGESTED ANSWER: d
EFFECTS OF PAYMENT. DEFICIENCY IN

PAYMENT OR FAILURE TO PAY T H E ESTATE TAX
1. Effects of payment of the estate tax.

a. The executor or administrator, upon payment of the
amount of which he is notified, shall be discharged from personal
liability for any deficiency in the tax thereafter found to be due and
shall be entitled to a receipt or writing showing such a discharge.
(NIRC of 1997, Sec. 92, paragraphing supplied)
T h e following provisions on the effect of failure to pay the
estate tax are applied a su contrario as the effects of payment of
the estate tax..
b. The executor or administrator shall be discharged
from personal liability for the payment of the estate tax. (Ibid., Sec.
92, applied in the reverse)
c. The judge shall authorize the executor or judicial
administrator to deliver a distributive $hare to any party interested
in the estate upon issuance of a certification from the
Commissioner that the estate tax has been paid is shown (Ibid.
Sec. 94, applied in the reverse)
d. Registers of Deeds shall register in the Registry of
Property any document transferring real property or real rights
therein or any chattel mortgage, by w a y of gifts mortis causa,.
legacy or inheritance, upon a certification from the Commissioner
that the estate tax fixed a n d actually due thereon had been paid is
shown. (Ibid., Sec. 95, applied in the reverse)
e. A debtor of the deceased may pay his debts to the
heirs, legatees, executor or administrator of his creditor, upon: \ftff
certification of the Commissioner that the estate tax fixed had
been paid as shown. (Ibid., applied in the reverse)
f. Transfer is allowed to a hew owner in the books of
any corporation, sociedad anonima, partnership, business, or in-
118
dustfy organized or established in the Pf„ :ppines any share,
obligation, b o n d , or right by way of gift mortis causa, legacy or
inheritance, if a certification from the Commissioner that estate
taxes fixed and due thereon have been paid is shown (ibid., Sec
S|
97, 1 par, applied in the reverse)
g. A bank who has knowledge of the death of a person,
w h o maintained a bank deposit account alone, or jointly with
another shall allow withdrawal from the said deposit account, if
the Commissioner has certified that the estate taxes have been
n d
paid. (Ibid., Sec. 97, 2 par., applied in the reverse)
2. Deficiency in the estate tax. There may be two

instances where a deficiency exists:
a. The amount by which the estate tax imposed under
the NIRC of 1997 "exceeds the amount shown as the tax by the
executor, administrator, or any of the heirs upon his return; but the
amount so shown on the return shall first be increased by the
amounts previously a s s e s s e d (or collected without assessment)
as a deficiency and decreased by the amounts previously abated,
refunded or otherwise repaid in respect of such tax." (NIRC of
1997, Sec. 93 (a)]
b.' "If no amount is shown as the tax by the executor,
administrator or any of the heirs upon his return, or if no return is
made by the executor, administrator, or any heir, then the amount
by which the tax exceeds the amounts previously assessed (or
collected without assessment) as a deficiency; but such amounts
previously assessed or collected without assessment shall first be
decreased by the amounts previously abated, refunded or
otherwise repaid in respect bf such tax." [Ibid., Sec. 93 (b)]
3. Effects of failure to pay the estate tax or in case of

deficiency in the payment of the estate tax.
a. The executor or administrator shall not be discharged
from personal liability for the payment of the estate tax (NIRC of
1997, Sec. 92)
b. No judge shall authorize the executor or judicial
administrator to deliver a distributive share to any party interested
in the estate unless a certification from the Commissioner that the
estate tax has been paid is shown (Ibid., Sec 94)
c. Registers of Deeds shall not register in the Registry
of Property any document transferring real property or real rights
therein or any chattel mortgage, by way of gifts mortis causa, leg-
119
acy or inheritance, unless a certification from the Commissioner
that the estate tax fixed and actually due thereon had been paid is
shown. (Ibid., Sec. 95)
d. Neither shall a debtor of the deceased pay his debts
to the heirs, legatees, executor or administrator of his creditor,
unless the certification of the Commissioner that the estate tax
fixed had been paid is shown; but he may pay the executor or
judicial administrator without such certification If the credit is
included in the inventory of the estate of the deceased. (Ibid)
e. There shall not be transferred to any new owner in
the books of any corporation, sociedad anoaima, partnership,
business, or industry organized or established in the Philippines
any share, obligation, bond or right by w a y of gift mortis causa,
legacy or inheritance, unless a certification f r o m the Commissioner
that estate taxes fixed and due thereon have been paid is Shown.
st
(NIRC of 1997, Sec. 97, 1 par.)
f. A bank w h o has knowledge of the death of a person,
who maintained a bank deposit account alone, or jointly with
another shall not allow any withdrawal from the said deposit
account, unless the Commissioner has certified that the estate
n d
taxes have been paid. (Ibid, 2 par.)
4. Prohibition on withdrawal of bank deposits upon

depositor's death.
a. If a bank has knowledge of
b. the death of a person
1) w h o maintained a bank deposit
2) alone, or jointly with another,
c. it shall not allow any withdrawal from said deposit
account,
d. UNLESS the Commissioner of Internal Revenue has
certified that the estate taxes have been paid. (NIRC of 1997, Sec.
n d
97, 2 par., numbering and arrangement supplied)
5. Exception or instance w h e r e there may be allowed

withdrawal even if estate* taxes were not paid. The
administrator of the estate or any one (1) of the heirs may, upon
authorization of the Commissioner of Internal Revenue, withdraw
an amount not exceeding Twenty thousand pesos (P20,000.Q(N
without the certification that the estate taxes have been paid.
n d
(NIRC of 1997, Sec. 97, 2 par., numbering and arrangement supplied)
120
6. Requirement for contents of bank withdrawal
slips. All withdrawal slips shall contain a statement to the effect
that all of the joint depositors are still living at the time of
withdrawal by any one of the joint depositors and such statement
shall be under oath by the said depositors. (NIRC of 1997, Sec 97,
2" par., last sentence)
7. Restitution of tax upon satisfaction of outstanding

obligations. If, after the payment of the estate tax, new
obligations of the decedent shall appear, and the persons
interested shall have satisfied them by order of the court, they
shall have a right to the restitution of the proportional part of the
tax paid. (NIRC of 1997, Sec. 96)
E S S A Y T Y P E S E L F - T E S T S . I t i s recommended that you

complete.
OBJECTIVE TYPE:
What requirements should be compiled with where a co-

depositor of a decedent desires to withdraw from the joint
account?
SUGGESTED ANSWER: Refer to rios. 4 and 5, supra.
P R O B L E M TYPE:
1. Mr & Mrs. de los Santos opened a joint

sayings account Under "end/or" signatures. When Mr. de los
Santos died, the BIR included the Joint deposit as part of his
estate. The' lawyer of Mrs. De los Santos objected on the
ground that the deposit account Is not Jointly owned by Mr. &
Mrs. de los Santos and that, In fact, the Bank allowed the
withdrawal by Mrs. de los Santos of the deposits even after
Its knowledge of Mr. de los Santos' death.
a) Will the argument of Mrs. De los Santos prosper?
b) DM the Bank act correctly In allowing the
withdrawal ? (BAR: 1980)
SUGGESTED ANSWERS:
121
a) No. The presumption under the law is that the bank
deposits are jointly owned. This is true whether the property relations of
Mr. & Mrs. de los Santos is governed by the system of absolute
community (Family Code, Art. 93) or the conjugal partnership of gains
(Ibid., Art. 116,) The burden is on Mrs. de los Santos to prove that the
deposit is not jointly owned.
b) No. If a bank has knowledge of the death of a person
who maintained a bank deposit account alone, or jointly with another, it
shall not allow any withdrawal from the said deposit account, unless the
Commissioner of Internal Revenue has certified that the estate taxes
imposed under the National Internal Revenue Code have been paid
n d
(NIRC of 1997, Sec. 97, 2 par.)
2. On September 10, 2009, a Bank Manager of

People's Bank, Inc. (PBI), upon reading an obituary
announcing the death of Mr. Roberto Diaz refused to allow
one of his heirs to withdraw Diaz' deposit amounting to P2
million.
A week later, immediately following said denial, the
administrator of the estate sued the Bank/Bank Manager to
compel them to release the money since such act was
arbitrary and constituted a denial of property/ constitutional
rights.
a) If you are retained as counsel by the Bank/Bank
Manager to defend their stand in refusing to release the P2
million to the heir, what would you raise as a legal defense?
Discuss.
b) Under the same set of facts, would you as
administrator of the estate, rather file an administrative
appeal with the Commissioner of Internal Revenue or a
petition for review with the Court of Tax Appeals ? Explain.
c) If the Commissioner of Internal Revenue allows the
administrator of the estate or the heirs of the decedent to
withdraw from the deposit account, what are the conditions
under the Tax Code that have to be met first ? (BAR: 1992,
date supplied)
SUGGESTED ANSWERS:
a) I would raise as a defense the prohibition in the National
Internal Revenue Code for a bank who has knowledge of the death of a
person who maintained a bank deposit account from allowing any.
Withdrawal from said deposit account without a certification from the
Commissioner of Internal Revenue that the estate taxes Imposed under
the National Internal Revenue Code have been paid. (NIRC of. 1997, Sec
n d
97, 2 par.)
122
b) I would file an administrative appeal with the
Commissioner of Internal Revenue for three reasons:
1) The Court of Tax Appeals does not have jurisdiction as
the matter is not a disputed assessment, nor a refund of internal
revenue taxes. (Republic Act No. 1125, Sec 7,) Furthermore,
there is no decision of the Commissioner of Internal Review that
is the subject of a review.
2) Granting arguendo, that the Court of Tax Appeals
has jurisdiction as the subject refers to other matters arising
under the National Internal Revenue Code (Ibid.) the appeal
would not prosper as the prohibition on banks (NIRC of
n d
1997Sec. 97, 2 par.) to allow the withdrawals is very clear
3) Resolution of the administrative appeal is more
expeditious than a full blown trial before the Court of Tax
Appeals.
c) 1) A certification that the estate taxes has been paid OR
2) If there is no such payment, the Commissioner
authorizes the withdrawal of an amount not exceeding P20.000.00
3. D dies in 2009 leaving a bank deposit of P

2,000,000.00 under Joint account with his associates in a law
office. Learning of D's death from the newspapers, the
Commissioner of Internal Revenue wrote to every bank in the
country asking them to disclose to him the amount of
deposits that might be outstanding in his name or jointly
owned with others at the date of his death. May the bank
holding the deposit refuse to comply on the ground of the
Secrecy of Bank Deposit Law ? Explain. (BAR: 2003, date
supplied)
S U G G E S T E D A N S W E R : No, because the NIRC of 1997 has
empowered the Commissioner, as an exception to the Secrecy of Bank
Deposit Law, to inquire'into the deposits of a decedent depositor for the
purpose of determining the gross estate
The fact that it is a joint account is an exception to this authority
because withdrawals from such Joint account with the deceased depositor
is allowed only after a clearance from the Commissioner that all the estate
taxes have been paid An inquiry into the deposits is necessary to
determine the taxes due in order to collect the same and issue the
clearance.
123
Chapter 3
DONOR'S TAXATION
A. INTRODUCTION
1. Donor's tax, definition. It is an excise tax imposed on

the privilege transfer of property by way of gift inter vivos (Lladoc
v. Commissioner of Internal Revenue, L-19201, June 16, 1965, 121 Phil
1074,14 SGRA 292), based on a pure act of liberality without any or
less than adequate consideration and without any legal
compulsion, to give.
. Thus, it is not a tax on the property donated but on the
privilege to transfer property.
It is levied, assessed, collected and paid upon the transfer
by any person, resident or non-resident, of property by gift inter
vivos. It applies
$. whether the transfer is in trust or otherwise,
b. whether the gift is direct or indirect, and
c. whether the property is real or personal, tangible or
intangible. (NIRC of 1997, Sec. 98, numbering and arrangement
supplied)
2. Purpose of donor's tax.

a. To raise revenues.
b. To tax the wealthy and reduce certain other excise
taxes.
c. To discourage inter vivos transfers of property which
could reduce the mortis causa transfers on which a higher tax, the
estate tax, would be collected.
d It will tend to reduce the incentive to make gifts in
order that distribution of future income from the donated property
may be to a number of persons with the result that the taxes
imposed by the higher brackets of the income tax are avoided.
nd s l
[U.S. Congress, House, 7 2 Congress, 1 Sess., 1932, H.R , Report No.
708, reprinted in 1939-1 C.B. (Part 2), pp. 476-477]
3. Imposition of donor's tax. There shall be levied,

assessed, collected and paid upon the transfer by any person,
resident or nonresident, of the property by gift, a donor's tax.
The tax shall apply whether the transfer is in trust or other-
124
wise, whether the gift is direct or indirect, and whether the property
is real or personal, tangible or intangible. [NIRC of 1997, Sec 98 (A)
(B), paraphrasing supplied]
4. Law that governs imposition of donor's tax. The

law in force at the time of the perfection/completion of the donation
shall govern the imposition of the donor's tax. (Rev. Regs No.2-
s
2003, Sec, 11, 1 ' par.)
5. W h e n donor's tax applies. The d o n o r s tax shall not

apply unless and until there is a completed gift. The transfer of
property by gift is perfected from the moment the donor knows of
the acceptance by the donee; it is completed by delivery, either
actually or constructively, of the donated property to the donee.
s t
(Rev. Regs.No.2-2003, Sec. 11, 1 par.)
6. W h e n incomplete gift b e c o m e s complete. A gift that

is incomplete because of reserved powers, becomes complete
w h e n either:
a. the donor renounces the power; or
b. his right to exercise the reserved power ceases
because of the happening of some event or contingency or the
fulfillment of some condition, other than because of the donor's
rd
death. (Rev. Regs. No. 2-2003, Sec. 11, 3 par., , arrangement and
numbering supplied)
7. Requisites for validity of a donation of an

immovable. In order that the donation of an immovable may be
valid,
a. it must be made in a public document,
b. specifying therein
1) the property donated and
2) the value of the charges which the donee must
satisfy.
c. The acceptance may be made
1) in the same deed of donation
2) or in a separate public document,
(a) but it shall not take effect unless it is
done during the lifetime of the donor
If the acceptance is made in a separate instrument,
a, the donor shall be notified thereof in an
authentic form, and
125
b. that step shall be noted in both instruments. (Civil
n d
Code; Art. 749, Rev. Regs. No. 2-2003, Sec. 11, 2 par., arrangement
and numbering supplied)
Registration of the deed in the Office of the Registry of
Property or in the Assessor's Office is not necessary for it to be
considered valid and official. (Heirs of Rosendo Sevilla Florencio v.
Heirs of Teresa Sevilla de Leon, 425 SCRA 447) It is enough that the
parties to a donation of an immovable property, that the donation
be made in a public document but, in order to bind third persons,
the donation must be registered in the Registry of Property.
(Shopper's Paradise Realty & Development Corporation v. Roque, 419
SCRA 93)
8. When donation of a movable is valid. The donation

of a movable may be made orally or in writing.
An oral donation requires the simultaneous deliver/ of the
thing or of the document representing the right donated.
If the value of the personal property donated exceeds two
thousand pesos, the donation and the acceptance must be in
writing. Otherwise, the donation shall be void. (Civil Code, Art. 748)
9. Elements of donations subject to donor's tax.

a. Act of liberality on the part of the donor;
b. inter vivos in its effect;
c. gratuitous disposal of property; or for less than
adequate consideration
d. in favor of another
e. w h o accepts it (Civil Code, Art. 725)
f. without any legal compulsion to give.
10. Donation inter vivos DISTINGUISHED FROM

donation mortis causa.
a. In donation inter vivos the act is immediately
operative even if the actual execution may be deferred until the
death of the donor W H I L E in donation mortis causa nothing is
conveyed to or acquired by the donee until the death of the donor.
(Ganuelas v. Cawed, 401 SCRA 447)
b. Donation inter vivos is subject to donor's tax W H I L E
donation mortis causa is subject to estate tax.
11. Elements of remuneratory donations subject to

donor's tax.
126
a. A person gives to another a thing or right
b. on account of the latter's merits or of services
rendered by him to the donor;
c. The giving does not constitute a demandable debt
(Civil Code, Art. 726)
12. O n e r o u s donations are not subject to donor's tax.

R E A S O N : There is no gratuitous disposal which may otherwise
reduce estate taxes.
13. Elements of onerous donations subject to donor's

tax.
a. A person gives to another a thing or right;
b. other than real property;
c. the transfer is for less than an adequate and full
consideration in money's worth; or the gift imposes upon the
donee a burden which is less than the value of the thing given;
d. The excess of the fair market value of the property
over the actual value of the consideration shall be subject to
donor's tax. (Civil Code, Art. 726, in relation to the NIRC of 1997, Sec.
100, numbering and arrangement supplied)
14. Donation whether remuneratory or simple is

taxable. (Pirovano, et a/., v. Commissioner of Internal Revenue, L-
19865, July 31, 1965, 122 Phil., 113, 14 SCRA 832)
15. Tax treatment of transfers for insufficient

consideration of property, other than real property
subjected to the final capital gains tax. W h e r e property,
other than real property that has been subjected to the final capital
gains tax, is transferred for less than an adequate and full
consideration in money or money's worth, then the amount by
which the fair market value of the property at the time of the
execution of the Contract to Sell or execution of the Deed of Sale
which is not preceded by a Contract to Sell exceeded the value of
the agreed or actual consideration or selling price shall be deemed
a gift, and shall be included in computing the amount of gifts
made during the calendar year (NIRC of 1997, Sec 100; Rev. Regs
,h
No. 2-2003, Sec. 11, 5 par.)
NOTES AND COMMENTS: The author submits that the properties
covered here include both movables and immovables that are not
considered as capital assets.
127
ESSAY TYPE SELF-TESTS. It is recommended that pS*
cover the SUGGESTED A N S W E R S and that all answers mutt 6 *
in writing, giving yourself three (3) minutes per number, if pressed
for time, you could answer mentally but ensure that your answerts
complete.
OBJECTIVE TYPE:
What transfers of property are considered

subject to the donor's tax ? (PAR: 1969, adapted)
PROBLEM TYPE:
1. "A" was engaged by Premiere Movies to perform a

pantomime act in a movie it was making. "A" was to be paid
P20,000.00 for his performance and the parties signed the
necessary contract. "A" then gratuitously assigned his rights
under the contract to his son, "B"."B" later on collected the
P20.000.00 from Premiere Movies. Is the P20.000.00 taxable to
"A?" Reasons. (BAR: 1989)
SUGGESTED ANSWER: Yes. The P20.000.00 is taxable to "A"
for income taxes because it is income derived by "A" in the practice of his
profession as an artist.
When he donated the same out of liberality to "B", his son who
accepted the same by collecting the amount, "A" likewise may be subject
to donor's tax if his net gifts for the calendar year to all persons, including
the P20.000.00 exceed P100.000.00. [NIRC of 1997, Sec. 99(A)]
ALTERNATIVE ANSWER: The gift of P20.000.00 is not
subject to donor's tax because the problem does not show that the total
net gifts for the calendar year is more than P100.000.00.
2. ABC Computer Corp. purchased some years

ago Membership Certificate No. 7 from the Calabar Golf Club,
Inc. for P300.000.00. In 4 September 2007, it transferred the
same to Mr. John Johnson, its American Computer
consultant, to enable him to avail of the facilities of the Club
during his stay here. The consultancy agreement expired two
(2) years later. In the meantime, the value of the club share
appreciated and what was purchased by the corporation at
P300,000.00, commanded a market value of P600,000.00 In
2009. Before he returned home a few days after his tenure
128
ended, Mr. Johnson transferred the subject share to Mr.
Robert James, the new consultant of the firm and the newly
designated playing representative, under a Deed of
Declaration of Trust and Assignment of Shares wherein the
former acknowledged the absolute ownership of ABC
Computer Corp. over the share, that the assignment was
without any consideration, and that the share was placed in
his name because the Club required It to be done.
Is the said assignment a gift and, therefore, subject to
gift tax ? (BAR: 1991, adapted)
SUGGESTED ANSWER: No The assignments are not
gratuitous, hence not subject to donor's taxes. The value of the right to
avail of the privileges attendant to the Calabar Golf Club, Inc.'s
Membership Certificate which is due to Mr. Johnson's merits or services
as a computer consultant is a fringe benefit taxable to the employer
[NIRC of 1997, Sec. 33 (B) (6)]
The same holds true with respect to the transfer of the shares to
Mr. Robert James.
3. Oriental, Inc. holds a proprietary share of

Capital Golf Club, Inc. It assigned without any consideration
this share to X, one of Its foreign consultants, to enable him
to use its facilities for the duration of his stay in the
Philippines. X signed a Declaration of Trust where he
acknowledged that the share is owned by Oriental, Inc. and
where he promised to transfer the same to whoever will
succeed him as consultant. When X's contract with Oriental,
Inc. expired, he left the Philippines and assigned for free the
share to Y, his successor in office. What tax, if any can be
Imposed by the BIR on the transaction ? (BAR: 1993,
adapted)
S U G G E S T E D A N S W E R : The tax to be imposed, on the value
of the "right to use the facilities" is the fringe tax to be imposed on the
employer.
The assignments are not gratuitous, hence not subject to donor's
tax^s. The value of the right to avail of the privileges attendant to the
Capital Golf Club, Inc., proprietary share which is due to X's merits or
services as a computer consultant is a fringe benefit taxable to the
employer. [NIRC of 1997, Sec 33 (B) (6)]
The same holds true with respect to the transfer of the shares to Y.
4. The employees of Travellers, Inc. staged a strike.
129
X, a non-union member joined the strike and volunteered to
picket the company premises from 8:00 a.m. to 12:00 p.m.,
Monday to Friday. Six months into the strike, X ran out of
money and asked financial aid from the union since he has no
other source of income and needed financial assistance in
order to live. The union gave him PI,000.00 a month to take
care of his food requirements plus P500.00 to take care of his
monthly rent. When X filed his return, he excluded these
benefits from gross income. The exclusion was denied by the
BIR. Decide. (BAR: 1993)
SUGGESTED A N S W E R : The P1,500.00 given to X is
considered as a donation or gift because there is no employer-employee
relation that requires the payment of compensation income. Neither was
the P1,500 00 given to X in payment of his efforts for joining the strike and
for picketing.
5. Mr. Osorio, a bank executive, while playing golf

with Mr. Perez, a manufacturing firm executive, mentioned to
the latter that his (Osorio( bank had just opened a business
relationship with a big foreign importer of goods which Perez
company manufactures. Perez requested Osorio to introduce
him to this foreign importer and put in a good word for him
(Perez), which Osorio did. As a result, Perez was able to
make a profitable business deal with the foreign importer.
In gratitude, Perez, in behalf of his manufacturing firm,
sent Osorio an expensive car as a gift. Osorio called Perez
and told him that there was really no obligation on the part of
Perez or his company to give such an expensive gift. But
Perez insisted that Osorio keeps the car. The company of
Perez deducted the cost of the car as a business expense.
The Commissioner of Internal Revenue included the fair
market value of the car as income of Osorio who protested
that the car was a gift and therefore excluded from gross
income.
Who is correct, the Commissioner or Osorio. (BAR:
1995)
SUGGESTED ANSWER: Osorio is correct because he did not
render any service that is subject to payment. There was no agreement
that he shall be compensated for the introduction made Thus, the giving
of the car was gratuitously made and should be the subject of donor's
taxes
NOTE NOT PART OF THE ANSWER: Some authorities believe that the
130
value of the car is income citing U S precedents The author insists on
his suggested answer. The income from the income tax that maybe
collected from Mr. Osorio is offset by the loss in income tax that would be
collected from the company of Perez. There would be no revenue
accruing to the government. This is so because the value of the car was
deducted as an expense
However, if the value of the car is treated as a donation there
would also be no revenue from income taxes because the income derived
from Perez company's income tax would be offset by the loss in income
tax from Osorio. However, the government could collect donor's taxes
from a "stranger."
6. Mr. Qulroz worked as chief accountant of a hospital

for forty-five years. When he retired at 65 he received a
retirement pay equivalent to two months' salary for every year
of service as provided in the hospital's BIR approved
retirement plan.
The Board of Directors of the hospital felt that the
hospital should give Qulroz more than what was provided for
in the hospital's retirement plan In view of his loyalty and
invaluable services for forty-five years; hence, it resolved to
pay him a gratuity of PI Million over and above his retirement
pay.
The Commissioner of Internal Revenue taxed the P 1
Million as part of the compensation income of Quiroz who
protested that it was excluded from income because it was a
gift.
Is Mr. Quiroz correct in claiming that the additional P 1
Million was a gift and therefore excluded from Income ?
(BAR: 1995, adapted and rephrased)
SUGGESTED'ANSWER: Yes There is no showing that the
giving is the result of a legally demandable obligation because he was
already paid his retirement. He likewise did not render a specific service
that is compensable because he is already retired
7. Mr. Rodrigo, an 80-year old retired businessman,

fell In love with 20-year old Tetchie Sonora, a night club
hospitality girl. Although she refused to marry him she
agreed to be his "live-In" partner.
In gratitude, Mr. Rodrigo transferred to her a
condominium unit, where they both live, under a deed of sale
for P 10 Million. Mr. Rodrigo paid capital gains tax of 6% on
the P 10 Million.
131
The Commissioner of Internal Revenue found that the
property was transferred to Techie Sonora by Mr. Rodrigo
because of the companionship she was providing him.
Accordingly, the Commissioner made a determination that
Sonora had compensation income of P 10 Million in the year
the condominium unit was transferred to her and issued a
deficiency income tax assessment.
Tetchie Sonora protests the assessment and claims
that the transfer of the condominium unit was a gift and
therefore excluded from income.
How will you rule on the protest of Techie Sonora ?
Explain. (BAR: 1995, adapted)
S U G G E S T E D A N S W E R : I will grant theprotest. It is clear that
the sale is a fictitious sale. No consideration pissed between Mr.
Rodrigo and Tetchie Sonora, other than the pure liberality of Mr. Rodrigo
borne out of gratitude. Donor's taxes are therefore due.
8. X, an employee of ABC Corporation died. ABC

Corporation gave X's widow an amount equivalent to X's
salary for one year.
Is the amount considered taxable income to the widow
? Why? (BAR: 1996)
SUGGESTED ANSWER: The amount should be considered as a
gift and not taxable income. This is so because there is no legally
demandable obligation for the ADC to give the amount to the widow
Furthermore, the widow has.not rendered any service for the said amount,
and there is no showing that the payment was made for services
previously rendered by X
NOTE NOT PART OF THE ANSWER: The following are requirements in
order to consider the giving as a gift and not as income:
a The gift was made to the widow rather than the estate;
b There was no obligation on the part of the employer
corporation to make further payments to the deceased;
c The widow had never worked for the corporation,
d. The corporation received no economic benefit for the
payment; and
e. The deceased had been fully compensated for his services
[Estate of Sydney Carter v. Commissioner, 453 F. 2d 61 (2d Cir 1971]
9. A, an individual, sold to B, his brother-in-law, his

lot with a market value of Pi,000,000 for P600.000.00. A's
cost in the lot is P100.000.00. B is financially capable of
buying the lot.
A also owns X Co., which has a fast growing business.
132
A sold some of his shares of stock in X Co., to his key
executives in X Co. These executives are not related to A.
The selling price is P3,000,000, which is the book value of the
shares sold but with a market value of P5,000,000. A's cost in
the shares sold is P1,000,000. The purpose of A in selling the
shares is to enable his key executives to acquire a proprietary
interest in the business and have a personal stake in the
business.
Explain if the above transactions are subject to donor's
tax. (BAR: 1999)
SUGGESTED ANSWER: All the transactions are subject to
donor's tax. The transfers were all made for less than an adequate and
full consideration in money's worth hence, the excess of the fair market
value of the property over the actual value of the consideration shall be
subject to donor's tax.
NOTE NOT PART OF THE ANSWER: Refer to nos 14 and 15. supra
1. A, an individual, sold to B, his brother-in-law, his

residential lot with a market value of PI,000,000 for
P600.000.00. A's cost in the lot is P100.000.00. B Is
financially capable of buying the lot. What tax should be
imposed and collected from A as a result of the transaction ?
a. Presumed capital gains tax.
b. Donor's tax.
c. Real property tax.
d. Tax on the transfer of real property.
SUGGESTED ANSWER: b
B. DONOR'S TAX BASE AND RATE
DONOR'S TAX BASE
1. Tax base of donor's tax. Total net gifts made during

the calendar year. [NIRC of 1997, Sec 99 (A)]
2. Gifts of a citizen or a resident alien, subject to

donor's tax. Gifts include "real and personal property, whether
tangible, intangible or mixed, wherever situated." (NIRC of 1997,
Sec. 104, 1 " par, paraphrasing supplied)
133
3. Net gift for purposes of donor's taxes. The net
economic benefit from the transfer thai accrues to the donee..
Accordingly, if a mortgaged property is transferred as a gift, but
imposing upon the donee the obligation to pay the mortgage
liability, then the net gift is measured by deducting from the fair
market value of the property the amount of the mortgage
assumed. (Rev. Regs No 2-2003, Sec. 11, last par.)
4. Determination of net gift for donor's tax purposes.

a. The totality of the gifts (gross gifts) made during the
calendar year is determined.
b. There should be deducted gross gifts any gifts that
are exempted from taxation.
c. The deduction would then result to the net gifts.
5. Donations made by s p o u s e s . H u s b a n d and wife are

considered as separate a n d distinct taxpayer's for purposes ot t h e
st
donor's tax. (Rev. Regs. No. 2-2003, Sec. 12, 1 par.)
6. Donation signed by only t h e h u s b a n d . If w h a t w a s

donated is a conjugal or community property and only the husband
signed the deed of donation, there is only one donor for donor's
tax purposes, without prejudice to the right of the wife to question
the validity of the donation without her consent pursuant to the
provisions of the Civil Code of the Philippines and the Family Code
sl
of the Philippines. (Rev. Regs. No. 2-2003, Sec. 12, 1 p a r . )
7. Renunciation of share of surviving s p o u s e of

share in conjugal or c o m m u n i t y partnership subject to
donor's tax. Renunciation by the surviving spouse of his/her
share in the conjugal partnership or absolute community after the
dissolution of the marriage in favor of the heirs of the deceased
spouse or any other person/s is subject to donor's tax. (Rev. Regs.
,fi
No 2-2003, Sec. 11, 4 par.)
NOTES AND COMMENTS: The renunciation is specific hence taxable
because the heirs of the deceased spouse and any other persons are
identified.
8. General renunciation of hereditary rights not

subject to donor's tax. General renunciation by an heir,
including the surviving spouse, of his/her share in the hereditary
134
estate left by the decedent is not subject to donor's tax, unless
specifically and categorically done in favor of identified heir/s to
the exclusion or disadvantage of the other co-heirs in the
th
hereditary estate. (Rev Regs. No. 2-2003, Sec. 11, 4 par)
N O T E S A N D C O M M E N T S : There is a general renunciation if there is
no specific identification of the persons in whose favor the renunciation is
made
9. Valuation of real property for donor's tax

purposes. For purposes of computing any internal revenue tax,
including the donor's tax, estate shall be appraised at its fair
market value as of the time of death. However, the appraised
value of real property as of the time of death shall be, whichever is
the higher of:
a. the fair market value as determined by the
Commissioner (the zonal valuation); or
b. the fair market value as shown in the schedule of
values of the Provincial and City Assessors. [NIRC of 1997, Sec
n d
102, 2 sentence in relation to Section 88 (B), arrangement, numbering
and words in parentheses and italics supplied]
10. Valuation of property, other than real property, for

donor's tax purposes. If the gift is made in property, the fair
market value thereof at the time of the gift shall be considered the
s l
amount of the gift. (NIRC of 1997, Sec 102, 1 sentence)

complete.
OBJECTIVE TYPE:
The surviving husband does not want to participate in

the inheritance left by his wife. He worded his donation as
follows: "I am waiving my share in the inheritance left by my
wife in favor of my children." Is this a taxable donation ?
Explain briefly.
SUGGESTED ANSWER Refer to no 8, supra
135
Which among the following Is subject to the payment of

the donor's tax ?
a. A general renunciation of a surviving spouse In
his/her share in the Inheritance of the deceased spouse.
b. A general renunciation by the surviving spouse
of his/her share in the conjugal partnership of gains upon Its
liquidation as a result of the death of the other spouse.
c. A remuneratory donation where there Is a legally
demandable obligation.
d. Donation made outside the Philippines by a non-
resident alien of property located outside of the Philippines.
SUGGESTED ANSWER: b
SITUS OF D O N O R ' S T A X A T I O N
1. Situs of donor's taxation. W h e r e the transfer took

place. Thus, only transfers that take place within the Philippines
are subject to donor's taxes unless the donor's are Filipino citizens
who are residents of a foreign country. This is so because donor's
taxes are in the nature of taxes imposed upon the privilege to do
something, which in this case is to transfer property.
Consequently, if the donor is a non-resident alien, then the
concept of reciprocity does not find application because the
transaction is not taxable. The concept of reciprocity, may be
used to exempt from donor's taxes only if the donation took place
in the Philippines
2. Gifts of a nonresident alien, NOT subject to

donor's tax. W h e r e the donor w a s a nonresident alien at the
time of the donation, his real and personal property so transferred
but which are situated outside the Philippines shall not be included
as part of his gross gift. (NIRC of 1997, Sec. 104, 1wt par)
3. Composition of gross gifts made by a non-

resident alien. T h e following property of a non-resident alien is
deemed situated in the Philippines for purposes of donor's
taxation:
a. Franchise which must be exercised in the Philippines;
136
taxation:
a. Franchise which must be exercised in the Philippines;
b. shares, obligations or bonds issued by any
corporation or sociedad anonima organized and constituted in the
Philippines in accordance with its laws;
c. shares, obligations or bonds by any foreign
corporation eighty-five percent (85%) of the business which is
located in the Philippines;
d. shares, obligations or bonds issued by any foreign
corporation if such shares, obligations or bonds have acquired a
business situs in the Philippines;
e. shares or rights in any partnership, business or
s t
industry established in the Philippines. (NIRC of 1997, Sec. 104, 1
4. Gifts of a nonresident alien, subject to donor's tax.

Only real and personal-property, whether tangible, intangible or
mixed, situated in the Philippines.
5. Donations of intangible property that are not

subject to donor's tax (Concept of reciprocity).
a. If the donor at the time of the donation was a
citizen and resident of a foreign country which at the time of the
donation did not impose a transfer tax of any character, in respect
of intangible personal property of citizens of the Philippines
residing in that foreign country, or
b. If the laws of the foreign country of which the donor
w a s a citizen and resident at the time of the donation allows a
similar exemption from transfer taxes of every character or
description in respect of intangible personal property owned by
citizens of the Philippines residing in that foreign country. (NIRC of
s
1997, Sec. 104, 1 ' par, numbering and arrangement supplied)

complete.
OBJECTIVE TYPE:
What donations of intangible property are not subject to
137
donor's taxes ?
SUGGESTED ANSWER Refer to no. 2. supra.
PROBLEM TYPE:
1. Mr. Bill Morgan, a Canadian citizen and a

resident of Scarborough, Ontario, sends a gift check of
$20,000 to his future Filipino daughter-in-law who is to be
married to his only son in the Philippines.
a. Is the donation by Mr. Morgan subject to tax? Explain.
(BAR: 1992;
SUGGESTED ANSWER No, because the giving of the gift took
place outside of the Philippines This is evident from the fact that the gift
check was sent to, and not given personally in, the Philippines It is of no
moment that Mr. Morgan's donation does not fall within the gifts made by
a non-resident exempt from donor's tax.
b. What is the tax consequence, if any, to the donee
(Filipino daughter-in-law of Mr. Morgan) ? (BAR: 1992;
SUGGESTED ANSWER: None. The donee (Filipino daughter-in-law
of Mr. Morgan) is not required to report the $20,000.00 as income
because the gifts are excluded from gross income and exempt from
income taxes.
The income from such gift shall, however, be included by the donee
in her gross income. [NIRC of 1997, Sec. 32 (B) (3)]
2. X, a multinational corporation doing business in

the Philippines, donated 100 shares of stock of said
corporation to Mr. Y, its resident manager in the Philippines.
What is the tax liability, if any, of X corporation ? (BAR:
1996,adapted)
SUGGESTED ANSWER: None Since, the property donated is
outside of the Philippines, X is not subject to the payment of donor's
taxes
NOTE NOT PART OF THE ANSWER: If the shares of stock have
obtained a business situs in the Philippines because 85% of X's business
is located in the Philippines, then it would be subject to donor's taxes.
3. Miguel, a citizen and resident of Mexico, donated

US$1,000.00 worth of stocks in Barack Motors Corporation, a
Mexican company, to his legitimate son, Miguelito, who is
residing in the Philippines and about to be married to a
Filipino girlfriend. Mexico does not impose any transfer tax
of whatever nature on all gratuitous transfers of property.
a. Is Miguel entitled to claim a dowry exclusion ?
138
a. Is Miguel entitled to claim a dowry exclusion •>
c , u s , o n
Why or why not? (BAR 2009) * "* ?
SUGGESTED ANSWER: No because the dowry exclusion
donation that is exempt from the payment of donor's taxes mau K ',
of only by residents (NIRC of 1997, Sec. 101 (A) (1), whethef
aliens, is a deduction from gross gifts in order to arrive at the net aift
9 m s
subject to donor's taxes.
b. Is Miguel entitled to the rule of reciprocity in
order to be exempt from the Philippine donor's tax ? Whv or
why not? (BAR: 2009)
SUGGESTED ANSWER: No because the reciprocity rule finds
application only where there is a taxable donation Miguel's donation is
not taxable because it is made by a non-resident alien, outside of the
Philippines of property that is not located here.

Mr. Bill Morgan, a Canadian citizen and a reside:
of Scarborough, Ontario, sends a gift check of $20,000 fc .>
future Filipino daughter-in-law who is to be married m ;
only son In the Philippines. Is the donation subjecz
Philippine donor's taxes ? (Adapted from the 1992 BAR)
a. Yes, but only up to extent that exceeds ^
allowable P10,000.00 exemption for donations by reason :
marriage.
b. Yes. There is no showing in the problem that the
marriage actually took place within one (1) year from the date
of the donation.
c. No. The donor is a non-resident alien hence he is
not subject to the Philippine donor's tax law.
d. No. The donation took place outside of the
Philippines hence not subject to the Philippine donor's tax
law.
SUGGESTED ANSWER: d
D O N O R ' S TAX RATES
1. Rates of donor's taxes payable where the donee is

not a stranger. The tax for each calendar year shall be
computed on the basis of the total net gifts made during the
calendar year in accordance with the following schedule:
If the net gift is:
139
Over But Not Over The Tax Plus Of The
Shall Be Excess
Over
P 100,000 Exempt
P 100,000 200,000 0 2% P 100,000
200,000 500,000 2,500 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000
[NIRC of 1997, Sec. 99 (A)]
2. Tax payable by the donor if the donee is a

stranger. W h e n the donee or beneficiary is a stranger, the tax
payable by the donor shall be thirty percent (30%) of the net gifts.
s t
[NIRC of 1997, Sec. 99 (B), 1 par.]
3. Stranger for purposes of the donor's tax. For the

purpose of the donor's tax, a stranger is a person who is not a:
a. Brother, sister (whether by whole or half-blood),
spouse, ancestor, and lineal descendant, or
b. A relative by consanguinity in the collateral line
within the fourth degree of relationship. [NIRC of 1997, Sec. 99 (B),
n d
2 par., numbering and arrangement supplied]
4. Donations by an adopter to an adopted child a n d

vice-versa not made to a stranger. A legally adopted child is
entitled to all the rights and obligations provided by law to
legitimate children, and therefore, donation to him shall not be
considered as donation m a d e to a stranger. [Rev. Regs. No. 2-
n d
2003, Sec. 109 (B), 2 to the last par.]
5. Donations by and between an adopted child and

relatives of the adopter m a d e to stranger. Donations
made by an adopted child and the following relatives of the
adopter and vice-versa are considered donations to strangers:
a. The children of the adopter (whether by whole or half-
blood), spouse, ancestor, and lineal descendant, or
b A relative by consanguinity in the collateral line col-
140
lateral line within the fourth degree of relationship.
The author makes this submission because the relationship
of adoption is personal and limited only to the adopter and the
adopted.
6. Donations to and by business organizations are

donations to strangers. Donation made between business
organizations and those made between an individual and a
business organization shall be considered as donation made to a
stranger. [Rev. Regs. No. 2-2003, Sec 109 (B), last par ]

complete.
OBJECTIVE TYPE:
When the donee or beneficiary Is a stranger, the tax

payable by the donor shall be 30% of the net gifts. For
purposes of this tax, who is a stranger ? (BAR: 2000)
SUGGESTED ANSWER. Please refer to no. 3, supra.

1. Who among the following donations is
considered a stranger for purposes of donor's taxation.
a. A first cousin of the donor.
b. The brother of the donor's father.
c. The donor's great grandchild.
d. The mother of the donor's spouse,
SUGGESTED ANSWER: d
2. Who among the following is not a stranger for

purposes of donor's taxation.
a. The donor's father-In law.
b. The donor's step mother.
c. The donor's great grandfather.
d. The husband of the donor's sister.
141
SUGGESTED ANSWER; c
C. EXEMPT DONATIONS AND TAX CREDITS
EXEMPT DONATIONS. IN G E N E R A L
1. Donations exempt from the payment of donor's

taxes.
a Total net gifts made during the calendar year not
exceeding P100,000.00;
b. Donation for political campaign purposes;
c. Certain gifts made by a resident;
c Certain gifts made by nonresident aliens;
d. Donations of intangibles subject to reciprocity;
e. Donations for athlete's prizes and awards;
f. Donations under the "adopt-a-school" program.
NOTES AND COMMENTS: The reader should be careful to distinguish
between those donations that are not covered under the NIRC of 1997
and those that are exempt under the provisions of the said law.
Donations that are not covered under the NIRC of 1997 are not subject to
donor's taxes. These were discussed under Situs of Taxation, supra.
EXEMPT DONATION IF TOTAL NET GIFTS

DURING THE CALENDAR YEAR DO NOT EXCEED
P100.000.00
1. "Donation or gift splitting", definition. Spreading the

donation or gift over numerous calendar years in order to avail of
the exemption from donor's taxes or lower donor's taxes.
2. Illustration of gift splitting. In 2008 Leon w a s thinking

of donating a parcel of land with a zonal valuation of P200.000.00
to Miklos, his first cousin. There are no other donations m a d e by
Leon during the calendar year 2008.
a. If he donated the P200.000.00 parcel of land in 2008

the donor's tax would be P2.000.00 computed as follows:
Total value of net gifts during the calendar year:
Over But not Over The Tax Plus Of the Excess

Shall Be Over
142
P 100,000 Exempt
P100.000 200,000 0 2% P100.000
The donor's tax is P100,000.00 X 2% = P2.000 00
b. If he spreads the P200.000 donation over two (2) calendar

years, 2008 and 2009, and there were no other donations made
during the two calendar years, the transaction would be exempt
from donor's tax computed as follows.
Total value of the calendar year 2 0 0 8 net donation:

Shall Be Over
P100,000 Exempt
Total value of the calendar 2009 year donation:

Shall Be Over
P100,000 Exempt
Total donor's tax would be P0.

NOTES AND COMMENTS: There are no donor's taxes due because
donor's taxes are "computed on the basis of the total net gifts made
during the calendar year." [NIRC of 1997, Sec 99 (A)
3: Alternative definition of "donation or gift

splitting." There is likewise "donation or gift" splitting where
spouses donate a c o m m o n property. In such an instance the
donation or gift is to be treated as divided between the spouses.
One or the other of the spouses may then avail of the beneficial
tax treatment of splitting, such as availing of the lower tax
brackets.
4. Illustration of the alternative definition of donation

or gift splitting." In 2009 Honorio wanted to donate to his son
Honorio, Jr., a parcel of land with a zonal valuation of
P200.000.00 There are no other donations to be made in 2009
a If Honorio made the donation singly in 2009 to Hono-
143
ri6, Jr., the donor's tax shall be computed as follows:

Shall Be • Over
P100,000 Exempt
P100.000 200,000 0 2% P100,000
The donor's tax is P100,000.00 X 2% = P2.000.00
b. If the spouses, Honorio a n d Magdalena would* make

the donation together to their son. Honorio, Jr.. the P200.000.00
would be "split" between the spouses. Since each would have a
total donation of only P100,000.00 during the calendar year, then
no donor's taxes would be paid.
in writing giving yourself three (3) minutes per number. If pressed
for time you could answer mentally but ensure that your answer is
complete.
OBJECTIVE TYPE:
Explain the concept of "gift splitting."

SUGGESTED ANSWER: Please refer to nos 1 and 3, supra.
PROBLEM TYPE:
1. Kenneth Yusoph owns a commercial lot which he

bought many years ago for P1 million. It is now worth P20
million although the zonal value Is only P15 million. He
donates one-half pro-indlviso interest In the land to his son
Dino on 31 December 2008, and the other one-half pro-
indivlso interest to the same son on January 2, 2009.
a) How much is the value of the gifts In 2008 and
2009 for purposes of computing the gift tax? Explain. BAR:
SUGGESTED ANSWER: The value of the gift in 2008 is one-half
of the zonal valuation of P15 million or P7 5 million. This is so because
the basis for valuation of the donation is the zonal value or the assessed
value made by the Provincial or City Assessors whichever is higher It is
144
the zonal valuation that prevails because there is an absence of the
assessed value made by the Provincial or City Assessor.
The value of the gift in 2009 shall be whichever is the higher
between zonal value of the remaining one-half or the assessed value
made by the Provincial or City Assessors at the time of the donation.
b) The Revenue District Officer questions the
splitting of the donations into 2008 and 2009. He says that
since there were only two (2) days separating the two
donations they should be treated as one, having been made
within one year. Is he correct? Explain. BAR: 1995, dates
supplied) V
SUGGESTED ANSWER: No. The basis for computing the net
gifts is the calendar year. There are two calendar years in the problem
2008 and 2009.
c) Dlno subsequently sold the land to a buyer for
P20 million. How much did Dlno gain On the sale ? Explain.
BAR: 1995, dates supplied)
SUGGESTED ANSWER: P19 million. Dino's basis for the
property is the value of the property in the hands of the donor, which was
P1 million. This is so because the property was acquired through
donation. Since the property was sold for P20 million there was a gain of
P19 million.
d) Suppose, instead of receiving the lot by way of
donation Dino received It by Inheritance. What would be his
gain on the sale of the lot for P20 million? Explain. (BAR:
SUGGESTED ANSWER: The gain would be P 5 Million. This is
so because the basis would be the fair market value at the time Dino
acquired the property which is P 15 Million Thus, P 20 Million less P15
Million is P 5 Million.
2. Your bachelor client, a Filipino residing In Quezon

City, wants to give his sister a gift of Php 200,000.00, He
seeks your advice, for purposes of reducing If not eliminating
the donor's tax on the gift, on whether It Is better for him to
give all of the Php 200,000.00 on Christmas 2008 or to give
Php 100,000.00 on Christmas 2008 and the other Php 100,000
on January 1, 2009. Pleaae explain your advice. (BAR 2001,
adapted)
SUGGESTED ANSWER. I would advise him to give Php
100,000.00 on Christmas 2008, and the other Php 100,000.00 on January
1, 2009 so he would not pay any donor's taxes.
Donor's taxes are "computed on the basis of the total net gifts made
during the calendar year* [Sec. 99 (A), NIRC of 1997), and the total net
145
during the c a l e n d a r year" [ S e c 9 9 (A), N I R C o f 1 9 9 7 ) , a n d t h e total net
gifts for the c a l e n d a r y e a r w h i c h d o not e x c e e d P 1 0 0 0 0 0 0 0 a r e e x e m p t
3. Spouses Jose San Pedro and Clara San Pedro,

both Filipino citizens are the owners of a residential house
and lot In Quezon City. After the recent wedding of their son,
Mario, to Maria, the spouses donated said real property to
them. At the time of donation, the real property has a fair
market value ofP2 million.
a. Are Mario and Maria subject to income tax for the
value of the real property donated to them ? Explain. (BAR:
2008)
SUGGESTED ANSWER: No The giving was a pure act of
liberality that is considered as a gift and excluded from gross income
hence not subject to income tax.
b. Are Jose and Clara subject to donor's tax ? If so,
how much is the taxable gift of each spouse and what rate
shall be applied to the gift ? Explain. (BAR: 2008)
SUGGESTED ANSWER: Yes. Both Jose and Clara would have a
taxable gift of P390.000.00 each for Mario he being their son because of
the deduction of P10.000 as a gift on occasion of his marriage. The first
P100.000.00 net donation for each is exempt from donor's tax.
They shall have a taxable gift of P500.000 each to Maria, and they
shall be subject to the 30% rate for strangers because they are not related
by blood, within the degrees allowed by law, to Maria.
EXEMPT D O N A T I O N FOR POLITICAL C A M P A I G N

PURPOSES
1. Donation for c a m p a i g n purposes. Any contribution in

cash or in kind to any candidate, political party or coalition of
parties for campaign purposes shall be governed by the Election
Code, as amended. [NIRC of 1997, Sec. 99 (C]
2. Exemption applies only if reported to the

C O M E L E C . "Any provision of law to the contrary notwithstanding,
any contribution in cash or in kind to any candidate or political
party or coalition of parties for campaign purposes, duly reported
to the Commission (on Elections), shall not be subject to the
payment of any gift tax." (Rep. Act No. 7166, Sec. 13, last par., words
in parentheses supplied)
3. Corporations are not allowed to make donations
146
for partisan political activities including for political
c a m p a i g n purposes. The above tax exemption provided for
by the Election Code should be construed strictly against the
taxpayers. Corporations are prohibited from making political
contributions.
No corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan
political activity. (Corp. Code, Title IV, Sec. 36.9)
4. Exempt donations for campaign purposes not

deductible f r o m gross income for income tax purposes

in writing, giving yourself three (3) minutes per number If pressed
complete.
O B J E C T I V E TYPE:
Are contributions to a candidate in an election subject

to donor's tax ? On the part of the contributor is It allowed as
a deduction from gross Income? (BAR: 1998)
SUGGESTED ANSWER: No, because the Election Code
specifically exempts it from donor's taxes. The contributor is not allowed
to deduct such contributions from gross income because they are not
among those which are considered as charitable and other contributions,
which are allowable deductions.
P R O B L E M TYPE:
Xlsa friend of Y, the Chairman of Political party Z, who

wants to run for President In the 2010 elections. Knowing
that Y needs funds for posters and streamers, X is thinking of
donating to Y P150.000.00 for his campaign. "He asks you
Whether his Intended donation to Y will be subject to the
donor's tax. What would your answer be ? Will your answer
be the same If he were to donate to Political Party Z instead of
to Y directly ? (BAR: 2003)
SUGGESTED ANSWER: The intended donation is not subject to
donor's tax because the Election Code specifically exempts from gift
taxes any contribution in cash or in kind to any candidate for campaign
147
taxes any contribution in cash or in kind to any candidate for campaign
purposes, duly reported to the Commission on Elections.
My answer would be the same even if the donation was made to
Political Party Z because the exemption also applies to contribution in
cash or in kind to a political party or coalition of parties for campaign
purposes, duly reported to the Commission on Elections.
EXEMPT DONATIONS OF RESIDENTS
1. Gifts made by a resident exempt from donor's tax.

a. Dowries or gifts made on account of marriage and
before its celebration or within one year thereafter by parents to
each of their legitimate, recognized natural, or adopted children to
the extent of the first ten thousand pesos (P10,000.00). This is
also known as the "dowry exclusion."
b. Gifts made to or for the use of the National
Government or any entity created by any of its agencies which is
not conducted for profit, or to any political subdivisions of the said
Government;
c. Gifts in favor of an educational and/or charitable,
religious, cultural or social welfare corporation, institution,
foundation, trust or philanthropic organization or research
institution or organization: Provided, however, That not more than
thirty percent (30%) of said gifts shall be used by such donee for
administration purposes. (NIRC of 1997, Sec. 101 (A), numbering and
NOTES AND COMMENTS: For the purpose of this exemption, a
non-profit educational and/or charitable corporation, institution,
foundation, trust or philanthropic organization and/or research institution
or organization is a school, college or university and/or charitable
corporation, foundation, trust or philanthropic organization and/or
research institution, or organization,
1) incorporated as a non-stock entity,
2) paying no dividends,
3) governed by trustees who received no
compensation, and
4) devoting all its income, whether student's fees or
gifts, donations, subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes enumerated in
its articles of incorporation [NIRC of 1997, Sec. 101 (A) (3),
d All donations, contributions and gifts exempted under
special laws made to the
1) Philippine American Cultural Foundation;
148
2) Ramon Magsaysay Awards Foundation
2. Charity, definition. A charity may be defined as a gift, to

be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds and
hearts under the influence of education or religion, by assisting
them to establish themselves in life or otherwise lessening the
burden of government. (Lung Center of the Philippines v Quezon City
433SCRA110)
3. Test whether an enterprise is charitable or not.

The test whether an enterprise is charitable or not is whether it is
maintained for gain, profit, or private advantage. (Lung Center of the
Philippines v. Quezon City, 433 SCRA110)
NOTES AND COMMENTS: A hospital charging medical and hospital
fees does not necessarily lender it as established for profit or gain
(Manila Sanitarium and Hospital v. Cabuco, et al., L-14311, January 31,
1963, 117 Phil. 11,7 SCRA 14)
4. Elements to consider to determine whether an

enterprise is a charitable institution. To determine whether
an enterprise is a charitable institution/entity or not, the elements
which should be considered include
a. the statute creating the enterprise,
b. its corporate purpose,
c. its constitution and by-laws,
d. the methods of administration,
e. the nature of the actual work performed,
f. the character of the services rendered,
g the indefiniteness of the beneficiaries, and
h. the use and occupation of the properties. (Lung
Center of the Philippines v. Quezon City, 433 SCRA110)
5. Requirement for notice of donation by a donor

engaged in business. In order to be exempt from donor's tax
and to claim full deduction of the donation given to qualified donee
institutions duly accredited by the Philippine Council for NGO
Certification, Inc. (PCNC), the donor engaged in business shall
give a notice of donation on every donation worth at least Fifty
Thousand Pesos (P50.000.00) to the Revenue District Office
(RDO) which has jurisdiction over his place of business within
thirty (30) days after receipt of the qualified donee institution's duly
149
issued Certificate of Donation, which shall be attached to the said
Notice of Donation, stating that not more than thirty percent (30%)
of the said donation/gifts for the taxable year shall be used by
such accredited non-stock, non-profit corporation. NGO institution
(qualified-donee institution) for administration purposes. [Rev
Regs. No 2-2003, Sec 13 (C)]

complete.
OBJECTIVE TYPE:
1. Enumerate at least three gifts which are not

subject to donor's taxes. (BAR: 1970, adapted)
SUGGESTED ANSWER: Please refer to no 1, supra
2. Can you name one kind of gift that is exempt

from donor's tax which is extendible to both residents and
non-residents or non-citizens of the Philippines? Include
qualifications, if any. (BAR: 1992)
SUGGESTED ANSWER: A gift made in favor of an educational
and/or charitable, religious, cultural or social welfare organization or
research institution or organization. [Sec. 101 (A) (3) and (B) (2), NIRC of
1997]
The qualification for said gift to be exempt from donor's tax is that
not more than thirty per centum (30%) of said gifts shall be used by the
donee for administration purposes. (Ibid)
PROBLEM TYPE:
1. In 2009, Imelda gave her parents a Christmas

gift of P100,000.00 and a donation ofP80.000.00 to her parish
church. She also donated a parcel of land for the
construction of a building to the P.U.P. Alumni Association, a
nonstock, nonprofit organization. Portions of the building
shall be leased to generate income for the association.
a) Is the Christmas gift of P100,000.00 to Imelda's
parents subject to tax ? (BAR: 1994, date supplied)
SUGGESTED ANSWER: No, because the net donation for
150
the calendar year that does not exceed P100 000.00 is exempt
from donor's taxes. [NIRC of 1997, Sec. 99 (A)]
b) How about the donation to the parish church? (BAR:
1994, date supplied)
SUGGESTED ANSWER: Also not subject to tax if Imelda is
a resident because the parish is a religious institution and there is
no showing in the problem that more than thirty percent (30%) of
the amount donated w a s used for administration purposes [Ibid
Sec. 101. (A) (3)1
c) How about the donation to the P.U.P. Alumni
Association? (BAR: 1994, date supplied)
SUGGESTED ANSWER: Subject to tax, because the alumni
association is not among those to whom gifts are not subject to donor's
taxes '
2. Ace Tobacco Corporation bought a parcel of land

situated at Pateros and donated It to the Municipal
Government of Pateros for the sole purpose of devoting the
said land as a relocation site for the less fortunate
constituents of said municipality. In accordance therewith,
the Municipal Government of Pateros issued to the
occupants/beneficiaries Certificates of Award giving to them
their respective areas where their houses are erected.
Through Ordinance No. 2, Series of 2009, the said municipal
government ordained that the lots awarded to the
awardees/donees be finally transferred and donated to them.
Determine the tax consequence of the foregoing dispositions
with respect to Ace Tobacco Corporation, the Municipal
Government of Pateros and the occupants/beneficiaries.
(BAR: 1998, date supplied)
SUGGESTED ANSWER: The donation of Ace Tobacco is exempt
from the donor's tax because it is a gift made to or for the use of a
political subdivision of the Government [NIRC of 1997, Sec. 101 (2)), in
this case the Municipality of Pateros. Documentary stamp taxes are not
also due because the municipality of Pateros is exempt from said tax
Ace Tobacco Corporation may deduct the value of the Land from
its gross income since it is a donation to the Government, in pursuance to
housing and resettlement which is part of the NEDA priority plan.
The municipality of Pateros is not subject to donor's tax, it being
exempt from such tax.
The occupants/beneficiaries are not subject to tax on the transfer,
but shall be subject to real property taxes on the land that they are
occupying, they using the same.
NOTES NOT PART OF THE ANSWER: While the Municipality of Pateros
151
is exempt from the payment of the documentary stamp taxes OR the
transfer, the occupants/beneficiaries shall be liable for the seme.
Whenever, "one party to the taxable document enjoys exemption from the
tax herein imposed, the other party thereto who is not exempt shall be the
one directly liable for the tax" (NIRC of 1997, Sec. 173)
EXEMPT DONATIONS OF A NONRESIDENT ALIEN
1. Gifts made by a nonresident alien exempt from

donor's tax.
a. Gifts made to or for the use of the National
Government or any entity created by any of its agencies which is
not conducted for profit, or to any political subdivision of the said
Government.
b. Gifts in favor of an educational and/or charitable,
religious, cultural or social welfare corporation, institution,
foundation, trust or philanthropic organization or research
institution or organization: Provided, however, That not more than
thirty percent (30%) of said gifts shall be used by such donee for
administrative purposes. [NIRC of 1997, Sec. 101 (B), numbering and
NOTES AND COMMENTS: It would seem from a reading of the heading
of Sec. 101 (B), "In the Case of Gifts Made by a Nonresident not a Citizen
of the Philippines", that nonresidents who are,citizens are not subject to
the exemption. Applying the principle of strictissimi juris interpretation,
non-resident Filipino citizens are not entitled to the tax exemption. This
requires remedial legislation because it would be subjecting non-resident
citizens to a higher burden than non-resident aliens.

complete.
OBJECTIVE TYPE:
1. Can you name one kind of gift that Is exempt

from donor's tax which is extendible to both residents and
non-residents or non-citizens of the Philippines? Include
qualifications, if any. (BAR: 1992)
SUGGESTED ANSWER: A gift made in favor of an educational
and/or charitable, religious, cultural or social welfare organization or re-
152
search institution or organization. [NIRC of 1997, Sec 101 (A) (3) and (B)
2. What conditions must concur In order that all

grants, donations and contributions to non-stock, non-profit
private educational Institutions may be exempt from the
donor's tax under Section 101 (a) of the Tax Code? (BAR
2000)
SUGGESTED ANSWER: They must be incorporated as a n o n -
stock entity, paying no dividends, governed by trustees who received no
compensation, and devoting all its income, whether student's fees or gifts,
donations, subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes enumerated in its articles
of incorporation.
Furthermore, not more than thirty percent (30%) of said gifts
shall be used by such donee for administration purposes. [NIRC of 1997
Sec. 101 (A)]
PROBLEM TYPE:
1. On December 6, 2009, LVN Corporation donated a

piece of vacant lot situated In Mandaluyong City to an
accredited and duly registered non-stock, non-profit
educational Institution to be used by the latter In building a
sports complex for students.
In order that donations to non-stock, non-profit
educational Institutions may be exempt from the donor's tax,
what conditions must be met by the donee ? (BAR: 2002,
date supplied and reworded)
SUGGESTED ANSWER: They must be incorporated as a non-
stock entity, paying no dividends, governed by trustees who received no
compensation, and devoting all its income, whether student's fees or gifts,
donations, subsidies or other forms of philanthropy, actually, directly and
exclusively, to .the accomplishment and promotion of the purposes
enumerated in its articles of incorporation.
Furthermore, not more than thirty percent (30%) of said gifts
shall be used by such donee for administration purposes. [NIRC of 1997,
Sec. 101 (A),]
2. The Congregation of the Mary Immaculate

donated a land and a dormitory building located across
Espana St., In favor of the Sisters of the Holy Cross, a group
of nuns operating a free clinic and high school teaching basic
153
spiritual values. Is the donation subject to donor's tax ?
(BAR. 2007)
SUGGESTED ANSWER: No, the donation is not subject to tax if
the conditions for exemption are met. To be exempt the donor
Congregation of the Mary Immaculate should show that the donee Sisters
of the Holy Cross is religious/charitable institution
a incorporated as a non-stock entity,
b. paying no dividends,
c governed by trustees who received no compensation, and
d. devoting all its income, whether gifts, donations, subsidies or
other forms of philanthropy, to the accomplishment and promotion of the
purposes enumerated in its articles of incorporation. [NIRC of 1997, Sec
1 0 1 (A) (3), arrangement and numbering supplied]
e. not more than thirty per centum (30%) of land and dormitory
building donated shall be used by the donee for administration purposes.
(Ibid.)
EXEMPT DONATIONS FOR ATHLETE'S PRIZES

AND AWARDS
1. Conditions for exemption from donor's tax of

athlete's prizes and awards.
a. The donation must be prizes and awards
b. given to athletes
1) in local and international sports tournaments
and competitions.
2) held in the Philippines or abroad, and
3) sanctioned by their respective national sports
associations. (Rep. Act No. 7549, Sec. 1)
NOTES AND COMMENTS: The author submits that this exemption may
be availed of by corporations and individuals, whether resident or non-
resident. This is evident from the use of the unqualified word "donors" in
Rep. Act No. 7549.

cover the S U G G E S T E D A N S W E R S a n d that all answers must be
complete.
OBJECTIVE T Y P E :
Are.donations for athlete's prizes and awards subject to
154
donor's tax ? Explain.
P R O B L E M TYPE:
Onyoc, an amateur boxer, won in a boxing competition

sponsored by the Gold Cup Boxing Council, a sports
association duly accredited by the Philippine Boxing
Association. Onyoc received the amount of P500,000.00 as
his prize donated by Ayala Land Corporation. The BIR tried
to collect donor's tax from Ayala Corporation, which tax
Ayala Land Corporation refuses to pay.
Decide. (BAR: 1996)
SUGGESTED ANSWER: Ayala is exempt from the payment of
donor's taxes. It is apparent that the competition was sanctioned by the
appropriate national sports association. (Rep. Act No. 7549, Sec. 1)
EXEMPT DONATIONS UNDER THE "ADOPT-A-

SCHOOL" PROGRAM
1. Exemption f r o m d o n o r ' s taxes of assistance made

under the "Adopt-A-School" Program. Aid/help/
contribution/donation provided by an adopting private entity under
the provisions of R. A. No. 8525, otherwise known as the "Adopt-a
School Act of 1998" to a government school, whether elementary,
secondary, post-secondary or tertiary are exempt from donor's
t a x e s . [Rev. Regs. No. 10-2003, Sec. 3 (b)j
The assistance may be in the form of, but not limited to,
infrastructure, teaching and skills development, learning support,
computer and science laboratories, and food and nutrition, {ibid.,
Sec. 2 (c),
2. Procedures for the availment of tax incentives

under the "Adopt-A-School" Program.
"(a) National Secretariat shall endorse to the RDO of the
Bureau of Internal Revenue (BIR) having jurisdiction over the
place of business of the adopting private entity, copy furnished the
RDO having jurisdiction over the property of the donation or
contribution is in the form of real property, the following"
(i) duly notarized/approved Agreement,
(ii) duly notarized Deed of Donation,
(iii) Official receipts or any document showing the
155
actual contribution/donation;
(iv) Certificate of Title and Tax Declaration, if the
donation is in the form of real property; and
(v) Other adequate records showing the direct
connection or relation of the expenses being claimed as
deduction/donation to the adopting private entity's
participation in the Program, as well as showing or proving
receipt of the donated property.
(b) Adopting private entity shall submit application for
entitlement to the additional 50% special deduction from the gross
income, and for exemption from donor's tax to the RDO having jurisdiction
over the place of business of the adopting private entity, copy furnished
the RDO having jurisdiction over the donated real property." (Rev.
Regs. No. 10-2003, Sec. 6,)
TAX CREDITS FOR F O R E I G N D O N O R ' S TAXES
1. Tax credit for donor's taxes paid to a foreign

country.
a. Donor w a s a Filipino citizen or resident alien;
b. at time of foreign donation;
c. donor's taxes of any character and description;
• d. are imposed and paid by the authority of a foreign
country. [NIRC of 1997, Sec 101 (C) (1), numbering and arrangement
supplied]
2. Limitations on tax credit.

a. The amount of the credit in respect to the tax paid
to any country shall not exceed the s a m e proportion of the tax
against which such credit is taken, which the decedent's net gifts
situated within such country taxable under the NIRC bears to his
entire net gift; and
b. The total amount of the credit shall not exceed the
same proportion of the tax against which such credit is taken,
which the decedent's net gift situated outside the Philippines
taxable under the NIRC bear6 to his entire net gift. [NIRC of 1997,
Sec. 101 (C) (2), numbering and arrangement supplied]
D. DONOR'S TAX RETURNS AND PAYMENT OF

DONOR'S TAXES
1• Requirement for filing a donor's tax return. Any
156
erson making a donation (whether direct or indirect), unless the
donation is specifically exempt under the NIRC of 1997 or other
special laws, is required, for every donation, to accomplish under
oath a donor's tax return in duplicate. [NIRC of 1997, Sec 103 (A)
Rev Regs No. 2-2003, Sec. 13 (A)]
2. Contents of a donor's tax return. The donor's tax

return shall set forth
a Each gift made during the calendar year which is to
be included in computing net gifts;
b. The deductions claimed and allowable;
c. Any previous net gifts made during the same
calendar year;
d. The name of the donee; and
e. Such further information as may be required by rules
and regulations m a d e pursuant to law [NIRC of 1997, Sec 103 (A);,
numbering supplied]
f. Relationship of the donor to the donee; and
g. Such further information as the Commissioner of
Internal Revenue may require. [Rev. Regs. No. 2-2003, Sec. 13 (A)]
3. No oath required for donor's tax return but

declaration made under penalties of perjury. "Any
declaration, return or other statements required under this Code,
shall, in lieu of an oath, contain a written statement that they are
made uridef penalties of perjury Any person w h o willfully files a
declaration, return or statement containing information which is not
true and correct as to every material matter shall, upon conviction,
be subject to the penalties prescribed for perjury under the
Revised Penal Code." (NIRC of 1997, Sec. 267)
4. Time of filing the donor's tax return and payment

of donor's tax. The donor's tax return shall be filed within thirty
(30) days after the date the gift is made or completed and the tax
due thereon shall be paid at the same time that the return is filed.
[NIRC of 1997, Sec. 103 (B); Rev. Regs. No. 2-2003, Sec. 13 (B)]
5. Place of filing of donor's tax return and payment

of donor's tax.
a. Unless the Commissioner, otherwise permits, the
return shall be filed and the tax paid to an authorized agent bank,
157
the Revenue District Officer, Revenue Collection Officer or duly
authorized Treasurer of the city or municipality where the donor
was domiciled at the time of the transfer, or
b: if there be no legal residence in the Philippines, with
the Office of the Commissioner.
c In the case of gifts made by a non-resident, the return
may be filed with the Philippine Embassy or Consulate in the
country where he is domiciled at the time of the transfer, or directly
with the Office of the Commissioner. [NIRC of 1997, Sec. 103 (B);
Rev. Regs No 2-2003, Sec 13 (B), arrangement and numbering
supplied]
For this purpose, the term "Office of The Commissioner"
shall refer to the Revenue District Office (RDO) having jurisdiction
over the BIR-National Office Building which houses the Office of
the Commissioner, or presently, to the Revenue District Office
No. 39 - South Quezon City. [Rev. Regs. No. 2-2003, Sec. 13 (B)]
6. Criminal liability for failure to file donor's tax

returns, supply correct and accurate information. "Any
person required under this Code or by rules and regulations
promulgated hereunder to*xxx, make a return, keep a n y record, or
supply correct and accurate information, w h o willfully fails to xxx,
make such return, keep such record, or supply such correct and
accurate information, xxx xxx at the time or times required by jaw
or rules a n d regulations shall, in addition to other penalties
not less than T e n thousand pesos (P10,000) and suffer
imprisonment of not less than one (1) year but not more than ten
(10) years.
Any person w h o attempts to make it appear for any reason
files a return or Statement and subsequently withdraws the same
was actually filed shall, upon conviction therefor, be punished by a
fine of not less than Ten thousand pesos (P10,000) but not more
than Twenty thousand pesos (P20,000) and suffer imprisonment
of not less than one (1) year but not more than three ( 3 ) y e a r s "
(NIRC of 1997, Sec. 255, paraphrasing supplied)
7. Civil penalties relative to donor's tax returns. The

author submits that the following civil penalties with regard to in-
158
ternal revenue taxes also find application to estate taxes.
to be paid, a penalty equivalent to twenty-five percent (25%) of he
(1) Failure to file any return xxx as required under
the provisions of this Code or rules and regulations on the
date prescribed; or
other than those with w h o m the return is required to be filed;
xxx xxx xxx
tax, in case any payment has been made on the basis of such
return before the discovery of the falsity or fraud: Provided, That
xxx a claim of deductions in an amount exceeding thirty percent
(30%) of actual deductions shall render the taxpayer liable for xxx
overstatement of deductions, as mentioned herein." (NIRC of 1997,
Sec. 248, paraphrasing supplied)
8. Criminal liability for failure to pay the donor's tax.

"Any person required under this Code or by rules and regulations
punished by a fine of not less than Ten thousand pesos (P 10,000)
s t
than ten (10) years. (NIRC of 1997, Sec 2 5 5 , 1 par., paraphrasing
supplied)
9. Civil penalties relative to payment of the donor's

tax. The author submits that the following civil penalties with
regard to internal revenue taxes also find application to donor's
taxes
amount due, in the following cases
159
(1) Failure to xxx pay the tax due xxx as required
under the provisions of this Code or rules and regulations
on the date prescribed; or
Xxx xxx xxx
on or before the date prescribed for its payment. (NIRC of
1997, Sec. 248, paraphrasing supplied)

payment of the donor's tax. "Any person w h o willfully
attempts in any manner to evade or defeat any tax imposed under
this Code or the payment thereof shall, in addition to other
penalties provided by law, upon conviction thereof, be punished by
a fine of not less than Thirty thousand pesos (P30.000) but not
more than One hundred thousand pesos (P 100,000) and suffer
imprisonment of not less than two (2) years but not more than four
(4) years: provided, That the conviction or acquittal obtained under
this Section shall not be a bar to the filing of a civil suit for the
collection of taxes." (NIRC of 1997, Sec. 254)
11. Interest on donor's tax payments, in general.

"There shall be assessed and collected on any unpaid amount of
tax, interest at the rate of twenty percent (20%) per annum, or
such higher rate as may be prescribed by rules and regulations
from the date prescribed for payment until the amount is fully
paid." [NIRC of 1997, Sec. 249(A)]
12. Deficiency interest. A n y deficiency in the tax due, as

this term is defined in the NIRC of 1997, shall be subject of
interest at the rate of twenty (20%) per annum, or such higher rate
as may be prescribed by rules and regulations, which interest shall
be assessed and collected from the date prescribed for its
payment until the full payment thereof. [NIRC of 1997, Sec 249 (B)
in relation to Sec 249 (A)]
13. Delinquency interest. "In case of failure to pay:

(1) The amount of the tax due on any return required to
160
be filed, or
required, or
on the due date appearing in the notice and demand of the-
unpaid amount, interest at the rate of twenty (20%) per annum, or
such higher rate as may be prescribed by rules and regulations,
until the amount is fully paid, which interest shall form part of the
tax." [NIRC of 1997, Sec. 249 (C) in relation to Sec 249 (A), words in
italics supplied]
14. Prohibition on transfers of real property until

estate or donor's taxes are paid. Registers of Deeds shall
not register in the Registry of Property any document transferring
real property or real rights therein or any chattel mortgage, by way
of gifts inter vivos or mortis causa, legacy or inheritance, unless
u p o n a certification from the Commissioner of Internal Revenue
that the estate or donor's tax fixed and actually due thereon has
been paid. (NIRC of 1997, Sec. 95)
15. Duty of lawyer, notary public or government

officer.
a. Any lawyer, notary public or any government
officer
b who, by reason of his official duties, intervenes in
the preparation or acknowledgment of documents regarding
partition or disposal of donation inter vivos or mortis causa, legacy
or inheritance,
c. shall have the duty of furnishing the
Commissioner of Internal Revenue, Regional Director, Revenue
District Officer or Revenue Collection Officer of the place where he
may have his principal office,
d. copies of such documents and any information
whatsoever which may facilitate the collection of the estate or
donor's tax. (NIRC of 1997, Sec 95, numbering and arrangement
supplied)

161
complete.
OBJECTIVE TYPE:
Where should the donor's tax return be filed and the

donor's tax paid ? Explain briefly.
PROBLEM TYPE:
"X" donated a piece of farm land to his son "Y," 19,

and single. The donor's tax on the donated property was
not paid but "Y" took possession of the property and
operated it himself. A year after the donation, an assessment
on the income derived from the farm was issued against "Y."
Is the assessment against "Y" valid ? Reasons. (BAR:
1981, adapted)
S U G G E S T E D A N S W E R : Yes. It was "Y" who earned the
income and not "X." While it is true that the property is still owned by "X,"
because until the, donor's taxes have been paid, there would be no
transfer effected in the records of the Register of Deeds in "Y's" name
(NIRC of 1997, Sec. 95), the issue is not ownership of the land but the
taxability of the income derived from the land.
162
Chapter 4
VALUE-ADDED TAX
A. INTRODUCTION
DEFINITIONS A N D P U R P O S E S
1. Value-added tax (VAT), definitions.

a. A tax which is imposed only on the increase in the
worth, merit or importance of goods, properties or services, and
not on the total value of the goods or services being sold or
rendered.
b. The V A T is a uniform tax ranging, at present, from 0
percent to 12 percent (now under the RVAT) levied on every
importation of goods, whether or not in the course of trade or
business, or imposed on each sale, barter, exchange or lease of
goods or properties on each rendition of services in the course of
trade or business as they pass along the production and
distribution chain, the tax being limited only to the value added to
such goods, properties or services by the seller, transferor or
lessor. [Commissioner of Internal Revenue v. Seagate Technology
(Philippines), G. R. No. 153866, February 11. 2005, 451 SCRA 132
citing various cases, amount changed]
The V A T on importation of goods has replaced the
compensating tax and advance sales tax under the old Tax Code.
(Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company, G. R. No. 140230, December 15, 2005)
c. The V A T is a tax on spending or consumption. It is
levied on the sale, barter exchange or lease of foods or properties
and services. (Abakada Guro Party List (etc.) v. Ermita, etc., et a/., G
R. No. 168056, September 1, 2005 and companion cases)
d. It is a tax on the value, added by every seller, with
aggregate annual sales of articles and/or services, exceeding
P1,500,000.00, td his purchase of goods reported and services
unless exempt. VAT is computed at the rate of 0% or 12% of the
gross selling price of goods or gross receipts realized from the
sale of services. (Kapatiran ng mga Naglilingkod sa Pamahalaan ng
Pilipinas, Inc., e r a / , v. Tan, etc and companion cases, 163 SCRA 3 7 1 .
amount and rates supplied)
163
2. Purposes or objectives of VAT. The V A T system of
taxation is
a. principally aimed at realizing the system of taxing
goods and services,
b. simplifying tax administration, and
c make the tax system more equitable, to enable the
country to attain economic recovery. (Kapatiran ng mga Naglilingkod
sa Pamahalaan ng Pilipinas, Inc., et al, v. Tan, etc and companion
cases, 163 SCRA 371)
3. History of the Value-Added Tax (VAT) law in the

Philippines. The first V A T law, found in Executive Order (EO)
No. 273 [1987], took effect on January 1, 1988. It amended
several provisions of the National Internal Revenue Code of 1986
(Old NIRC). (Fort Bonifacio Development Corporation v.
Commissioner of Internal Revenue, et al., G. R. No. 170680,
October 2, 2009) This was known as the Value-Added Tax (VAT)
Law.
Rep. Act No. 7716, which took effect on January 1, 1996
restructured the Value-Added (VAT) System widening its tax base
and enhancing its Administration. This c a m e to be known as the
E-VAT or Expanded VAT.
The V A T provisions w e r e further a m e n d e d with the
passage of the new National Internal Revenue Code of 1997 (New
NIRC),also officially known as Republic Act (RA) 8424. (Fort
Bonifacio Development'Corporation, supra)
Rep. Act No. 9337, subsequently a m e n d e d the VAT system
and provided for the conditions for the increase of the rate from
10% to 12%. This w a s known as the R-VAT or the Reformed
VAT.
The NIRC of 1997, Title IV, Value-Added Tax w a s further
amended by Rep. Act No. 9 3 6 1 .

in writing, giving yourseif three (3) minutes per number. If pressed
complete.
OBJECTIVE TYPE:
164
1. What is value-added tax ? (BAR 1983)
SUGGESTED ANSWER: R e f e r t o no. 1, supra.
2. Discuss the meaning and scope of value-added

tax (VAT). (BAR: 1988)
SUGGESTED ANSWER: Refer to no 1. supra.
N A T U R E OR C H A R A C T E R I S T I C S OF VAT
1. Nature of V A T or characteristics of VAT.

a. It is an indirect tax;
b It is a tax on consumption; and
c. It is a percentage tax.
2. Indirect tax, definition. An indirect tax "is imposed upon

goods [before] reaching the consumer who ultimately pays for it,
not as a tax, but as a part of the purchase price " (Commissioner, of
Internal Revenue v. American Express International, Inc. (Philippine
Branch), G. R. No. 152609, June 29, 2005 citing various cases and
authorities)
3. Nature or characteristic of VAT as an indirect tax.

a. T h e value-added tax is an indirect tax and the
amount of tax may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services. (NIRC of 1997, Sec.
n d
105, 2 sentence)
The seller is the one statutorily liable for the payment of the
tax but the amount of the tax may be shifted or passed on to the
buyer transferee or lessee of the goods, properties or service.
The rule shall likewise apply to existing contracts of sale or lease
of goods, properties or services at the time of the effectivity of RA
No. 9337. However, in the case of importation, the importer is the
nd r d
one liable for the VAT. (Rev. Regs No. 16-2005, Sec. 4.105-2, 2 , 3
and last sentences)
b. The VAT is an indirect tax and can be passed on to
the buyer. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation,
G. R. No. 166408, October 6, 2008)
c. The VAT being an indirect tax on expenditure, the
seller of goods or services may pass on the amount of tax paid to
the buyer, with the seller acting merely as a tax collector. The
burden of VAT is intended to fall on the immediate buyers and
ultimately, the end-consumers (Abakada Guro Party List (etc.) v.
165
Ermita, etc, et al., G R No 168056, September 1, 2005 and companion
cases)
d VAT is an indirect tax that may be shifted or passed
on to the buyer, transferee or lessee of the goods, properties or
services. As such, it should be understood not in the context of
the person or entity that is primarily, directly liable for its payment,
but in terms of its nature as a tax on consumption. [Commissioner
of Internal Revenue v. Seagate Technology (Philippines), G. R No.
153866, February 11, 2005 citing various authorities]
e. As an indirect tax on services, its main object is t h e .
transaction itself or, more concretely, the performance of all kinds
of services conducted in the course of trade or business in the
Philippines. These services must be regularly conducted in this
country, undertaken in "pursuit of a commercial or an economic
activity," for a valuable consideration, and not exempt under the
Tax Code, other special laws, or any international agreement.
[Commissioner, of Internal Revenue v. American Express International,
Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various
cases and authorities]
f. A seller w h o is directly and legally liable for payment
of an indirect tax, such as the V A T on goods or services is not
necessarily the person w h o ultimately bears the burden of the
same tax. It is the final purchaser or the consumer of such goods
or services w h o although not directly and legally liable for the
payment thereof, ultimately bears the burden of the tax. (Contex
Corporation v. Commissioner of Internal Revenue, 433 SCRA 376)
4. Effect on exemptions of V A T being an indirect tax.

If a special law merely exempts a party as a seller f r o m its direct
liability for payment of the V A T , but does not relieve the s a m e
party as a purchaser from its indirect burden of the V A T shifted to
it by its VAT-registered suppliers, the purchase transaction is not
exempt.
R E A S O N : T h e V A T is a tax on consumption, the amount of
which may be shifted or passed on by the seller to the purchaser
of the goods, properties or services. [Commissioner of Internal
Revenue v. Seagate Technology (Philippines), G. R. No. 153866,
February 11, 2005]
Illustration: A V A T exempt seller sells to a non-VAT exempt
purchaser. The purchaser is subject to V A T because the V A T is
merely added as part of the purchase price and not as a tax
because the burden is merely shifted. The seller is still exempt
because it could pass on the burden of paying the tax t o t h e
166
purchaser.
5. Nature or characteristic of VAT as a consumption

tax.
a. V A T Is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties and services in
the Philippines a n d on importation of goods into the Philippines.
However, in the case of importation, the importer is the one liable
s
for the VAT. (Rev Regs No. 16-2005, Sec 4.105-2, 1 ' sentence)
b. The V A T is a tax on consumption [Commissioner of
Internal Revenue v. American Express International, Inc. (Philippine
Branch), G R. No. 152609, June 29, 2005 citing Deoferio, Jr. and
Mamalateo, The Value Added Tax in the Philippines (2000), p. 93],
"expressed as a percentage of the value added to goods or
services" [Commissioner, supra citing Smith, Wesf's Law Dictionary
(1993), p. 892], purchased by the producer or taxpayer.
(Commissioner, supra, citing Kapatiran ng mga Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371, 378-379, June 30,
1988)
The V A T is a tax on consumption "expressed as a
percentage of the value a d d e d to goods or services" purchased by
the producer or taxpayer. As an indirect tax on services, its main
object is the transaction itself or, more concretely, the
performance of all kinds of services conducted in the course of
trade or business in the Philippines. These services must be
regularly conducted in this country; undertaken in "pursuit of a
commercial or an economic activity;" for a valuable consideration;
and not exempt under the Tax Code, other special laws, or any
international agreement. [Commissioner of Internal Revenue v. Placer
Dome Technical Services (Phils.), Inc. G. R No 164365, June 8, 2007
citing Commissioner of Internal Revenue v. American Express G.R No
152609, 29 June 2005, 462 SCRA 197]
c V A T is ultimately a tax on consumption, even though
it is assessed on many levels of transactions on the basis of a
fixed percentage. It is the end user of consumer goods or services
which ultimately shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of these goods or
services w h o in turn may credit their own VAT liability (or input
VAT) from the VAT payments they receive from the final consumer
(or output VAT). The final purchase by the end consumer
represents the final link in a production chain that itself involves
several transactions and several acts of consumption. The VAT
system assures fiscal adequacy through the collection of taxes on
167
every level of consumption, yet assuages the manufacturers or
providers of goods and services by enabling them to pass on their
respective VAT liabilities to the next link of the chain until finally
the end consumer shoulders the entire tax liability. (Commissioner
of internal Revenue v Magsaysay Lines, Inc., et al., G. R. No. 146984,
July 28, 2006)
d. Being a consumption tax is a key characteristic of the
VAT. No matter how many the taxable transactions that precede
the final purchase or sale, it is the end-user, or the consumer, that
ultimately shoulders the tax.
Despite its name, V A T is generally not intended to be a
tax on value added, but rather as a tax on consumption. Hence,
there is a mechanism in the V A T system that enables firms to
offset the tax they have paid on their own purchases of goods and
services against the tax they charge on, their sales of goods and
services." [Commissioner of Internal Revenue v. Placer Dome Technical
Services (Phils), Inc. G. R. No. 164365, June 8, 2007 refemng to
ABAKADA v. Ermita, Abakada Guro Party List v. Ermita, G.R. Nos.
168056, 168207, 168461, 168463, 168730, 1 September 2005, 469
SCRA 1, 282, J. Tinga, Dissenting and Concurring Opinion; CIR v.
Magsaysay Lines, G.R. No. 146984, 28 July 2006, 497 SCRA 63, 691
6. VAT Requirement for the supply of service.

Alternatively, this may be referred to as the nature of
VAT. The V A T is a tax on consumption [Commissioner of Internal
Revenue v. American Express International, Inc. (Philippine Branch), G.
R. No. 152609, June 29, 2005 citing Deoferio, Jr. and Mamalateo, The
Value Added Tax in the Philippines (2000), p. 93], "expressed as a
percentage of the value added to goods or services"
[Commissioner, supra citing Smith, West's Law Dictionary (1993), p. 892],
purchased by the producer or taxpayer. (Commissioner, supra, citing
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan,
163 SCRA 371, 378-379, June 30, 1988)
7. The meaning of consumption as used under the

VAT system. Consumption is "the use of a thing in a way that
thereby exhausts it."
Applied to services, the term means the performance or
"successful completion of a contractual duty, usually resulting in
the performer's release from any past o r future liability x x x *
Unlike goods, services cannot be physically used in or bound for a
specific place when their destination is determined. Instead, there
can only be a "predetermined end of a course" when determining
168
the service "location or position x x x for legal purposes."
For example, the services rendered by a local firm to its
foreign client are performed or successfully completed upon its
sending to a foreign client the drafts and bills it has gathered from
service establishments here. Its services, having been performed
in the Philippines, are therefore also consumed in the Philippines.
Such facilitation service has no physical existence, yet takes place
upon rendition, and therefore upon consumption, in the
Philippines. [Commissioner of Internal Revenue v. American Express
G.R. No. 152609, 29 June 2005, 462 SCRA 197 cited in Commissioner of
Internal Revenue v. Placer Dome Technical Services (Phils), Inc. G. R
No. 164365, June 8, 2007]
t
8. Nature or characteristic of VAT as a percentage
tax. V A T is a percentage tax imposed on any person whether or
not a franchise grantee, w h o in the course of trade or business,
sells, barters, exchanges, leases, goods or properties, renders
services. It is also levied on every importation of goods whether or
not in the course of trade or business. The tax base of the VAT is
limited only to the value a d d e d to such goods, properties, or
services by the seller, transferor or lessor. (Quezon City, et al., v.
ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008,
567 SCRA 496)
9. Tax pyramiding, defined. The practice of imposing a

tax upon another tax. It is a situation where some or all of the
stages of distribution of goods or services are taxed, with the
accumulation borne by the final consumer. There is tax
pyramiding w h e n sales taxes are applied to both inputs and
outputs, thus shifting the tax burden to the ultimate consumer. (R.
G. Holcombe, Taxing Services, 30 Fla. St. U.L. Review Rev. 467 (1996])
It has no basis in law because It has been rejected, since
1922, by the Supreme Court, the legislature and our tax
authorities. It is prohibited as a taxpayer cannot be compelled to
pay a tax on the tax itself. (People of the Philippines v.
Sandiganbayan, etc., et al., G R. No. 152532, August 16, 2005 citing
Commissioner of Internal Revenue v American Rubber Co., 124 Phil
1471, 1483; 18 SCRA 842, November 29, 1966) Thus, it violates the
principle of uniformity and neutrality in taxation. (R.G. Holcombe,
supra)
NOTES A N D C O M M E N T S : The constitutionality of the imposition of
the VAT may be raised if we consider that the VAT is a tax upon a tax.
169
The tax base for VAT on the importation of goods is "the total value used
by the Bureau of Customs in determining tariff and customs duties, pius
customs duties, excess taxes, if any, and other charges.'' [NIRC of
1997, Sec. 107 (A), paraphrasing and smphasis supplied]

complete.
OBJECTIVE TYPE:
1. What are the characteristics of the Value-Added

Tax? (1996)
SUGGESTED ANSWER: Refer to nos. 1 to 8, supra
2. What is tax pyramiding ? What is its basis in law

? (BAR: 2006)
B. VARIOUS VAT METHODS AND SYSTEMS AND

ZERO RATING
VARIOUS VAT M E T H O D S A N D S Y S T E M S
1. The various VAT methods and systems.

a. Cost deduction method;
b. Tax credit method;
c. Mixture of cost deduction m e t h o d " and "tax credit
method.".
2. Cost deduction m e t h o d , definition. This is a single-

stage tax which is payable only by the original sellers. [Abakada
Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September
1, 2005 and companion cases citing Deoferio, Jr. V. A. and Mamalateo,
V.C., The Value Added Tax in the Philippines (First Edition 2000)]
This was subsequently modified and a mixture of "cost
deduction method" and "tax credit method" w a s used to determine
the value-added tax payable. (Ibid.)
170
Tfex Credit method, definition. This method relies on
Invoices, * n entity c a n credit against or subtract from the V A T
tfrjargea on its sales or outputs the V A T paid on its purchases,
'irtputs and imports. [Commissioner of Internal Revenue v. Seagate
technology (Philippines), G. R. No. 153866, February 11, 2005 citing
vanotis cases and authorities; Abakada Gum Party List (etc.) v. Erniita,
etc., etal., G. R. No. 168056, September 1;2005 and companion cases)
If at the e n d of a taxable period, the output taxes charged
o y a seller are equal to the input taxes p a s s e d on by the suppliers,
no payment is required. It is w h e n the output taxes exceed the
i n p u t taxes that the excess has to be paid. If however, the input
taxes e x c e e d the output taxes, the excess shall be carried over to
the succeeding quarter or quarters. Should the input taxes result
from zero-rated or effectively zero-rated transactions or from
acquisition of capital goods, any excess over the output taxes shall
instead be refunded to the taxpayer or credited against other
internal revenue taxes. [Commissioner of Internal Revenue v. Seagate
Technology (Philippines), G. R. No. 153866, February 11, 2005 citing
various cases and authorities]
4, M e t h o d presently u s e d . T h e "cost deduction method''

w a s subsequently modified a n d a mixture of "cost deduction
method" a n d "tax credit method" w a s used to determine the value-
added tax payable. [Abakada Guro Party List (etc.) v. Ermita] etc.. et
al., G. R. No. 168056, September 1, 2005 and companion cases citing
Deoferio. Jr. V. A. and Mamalateo, V.C., The Value Added Tax in the
Philippines (First Edition 2000)]
5. V A T registration fee on non-VAT enterprises not a

tax. The V A T registration fee imposed on non-VAT enterprises
which includes a m o n g others, religious sects which sells and
distributes religious literature is not violative of religious freedom,
although a fixed amount is not imposed for the exercise of a
privilege but only for the purpose of defraying part of the cost of
registration.
The registration fee is thus more of an administrative fee,
one not imposed on the exercise of a privilege, much less a
constitutional right. (Tolentino v Secretary of Finance, et al., and
companion cases, 235 SCRA 630)
T H E CONCEPT OF ZERO-RATING
171
1. Basis used under the VAT system of taxation to
determine whether VAT is to be imposed. As a general
rule, the VAT system uses the destination principle as a basis for
the jurisdictional reach of the tax.
2. Destination principle under the VAT system of

taxation, definition.
a. Goods and services are taxed only in the country
where they are consumed. Thus, experts are zero-rated, while
imports are taxed.
b. According to the Destination Principle, goods and
services are taxed only in the country where these are consumed,
and in connection with the said principle, the Cross Border
Doctrine mandates that no V A T shall be imposed to form part of
the cost of the goods destined for consumption outside the
territorial order of the taxing authority. Sales to enterprises
operating with the export processing z o n e s are export sales
subject to 0% VAT. {Atlas Consolidated Mining and Development
NOTES A N D C O M M E N T S : Refer to Commissioner of Internal
Revenue v. Placer Dome Technical Services (Phils), Inc., 524 SCRA 27
which stated that consumption abroad is not a pertinent factor to imbue
zero-rating on services by Value-Added (VAT) registered persons
performed in the Philippines.
3. Exception to the destination principle. The law

clearly provides for an exception to the destination principle
(exports are zero-rated whereas imports are taxed), an exception
to this 'rule is the zero-rated sales or services by VAT-registered
persons. {Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., G. R No. 153205, January 22;
2007, 512 SCRA 124)
4. Concept of V A T zero-rating.
a. The tax rate is set at zero. W h e n applied to the tax
base, such rate obviously results in no tax chargeable against the
purchaser. The seller of such transactions charges no output tax,
but can claim a refund or a tax credit certificate for the V A T
previously charged by suppliers. [Commissioner of Internal Revenue
v. Seagate Technology (Philippines), G. R. No. 153866, February 11,
2005,451 SCRA 132)
b. Under a zero-rating scheme, the safe or exchange of
172
a particular service is completely freed from the VAT, because the
seller is entitled to recover, by way of a refund or as an input tax
credit, the tax that is included in the cost of purchases attributable
to the sale or exchange. The tax paid or withheld is not deducted
from the tax base [Commissioner, of Internal Revenue v. American
Express International, Inc (Philippine Branch), G R. No. 152609, June
29, 2005 citing various cases)
c. Export sales, or sales outside the Philippines, are
subject to V A T at 0% rate if made by a VAT-registered person -
the seller of such transactions charges no output tax, but can
claim a refund or tax credit certificate for the VAT previously
charged by suppliers. {Intel Technology Philippines, Inc. v
Commissioner of Internal Revenue, 522 SCRA 657; .Atlas Consolidated
Mining and Development Corporation v. Commissioner of Internal
Revenue, 524 SCRA 73)
5. Illustration of concept that zero-rating is not for

the benefit of the person legally liable for the tax but for
the benefit of the person to w h o m the indirect tax is to
be passed on. T h e Supreme Court emphasized that effective
zero-rating is not intended as a benefit to the person legally liable
to pay the tax, such as San Roque Power Corporation, but to
relieve certain exempt entities, such as the NPC, from the burden
of indirect tax so as to encourage the development of particular
industries. Before, as well as after, the adoption of the VAT,
certain special laws w e r e enacted for the benefit of various entities
and international agreements were entered into by the Philippines
with foreign governments and institutions exempting sale of goods
or supply of services from indirect taxes at the level of their
suppliers.
Effective zero-rating w a s intended to relieve trie exempt
entity from being burdened with the indirect tax which is or which
will be shifted to it had there been no exemption. In this case, San
Roque Power Corporation is being exempted from paying VAT on
its purchases to relieve NPC of the burden of additional costs that
petitioner may shift to NPC by adding to the cost of the electricity
sold to the latter. [San Roque Power Corporation v. Commissioner of
Internal Revenue, G.R. No. 180345, November 25, 2009 citing Deoferio,
Victor and Victorino Mamalateo, THE VALUE ADDED TAX IN THE
PHILIPPINES, (First Edition) Diliman: Info Solutions Research Center,
2000)]
173
ZERO-RATED SALES OF GOODS OR
PROPERTIES
1. Zero-rated Sales of Goods or Properties,

definition. A zero-rated sale of goods or properties by a sale by
a VAT-registered person is a taxable transaction for VAT purposes
but the sale does not result in any output tax.
However, the input tax on the purchases of goods, properties
or services related to such zero-rated sale shall be available as tax
credit or refund in accordance with Rev. Regulations No. 16-2005.
(Rev Regs. No. 16-2005, l " p a r )
2. Zero-rated sale distinguished from exempt

transactions:
a. A zero-rated sale is a taxable transaction but does
not result in an output tax W H I L E an exempt transaction is not
subject to the output tax.
b. The input tax on the purchases of a V A T registered
person w h o has zero-rated sales may be allowed as tax credits or
refunded W H I L E the seller in an exempt transaction is not entitled
to any input tax on his purchases despite the issuance of a V A T
invoice or receipt.
c. Persons engaged in transactions which are zero
rated being subject to VATI are required to register W H I L E
registration is optional for V A T - e x e m p t persons.
3. Zero-rated sales by VAT-registered persons. The

following sales by VAT-registered persons shall be subject to zero
percent (0%) rate:
a. Export sales;
b. Considered export sales under Executive Order No.
224;
c. Foreign currency d e n o m i n a t e d sale; a n d
d. Sales to persons or entities d e e m e d tax-exempt
under special law or international agreement. [NIRC OF 1997, Sec.
n d
106 (A) (2); Rev. Regs. No. 16-2005, Sec, 4.106-5, 2 par., arrangement,
numbering and paraphrasing supplied)
e. Zero-rated value-added tax (VAT) on transactions
involving • the sale/purchase of bio-organic products, whether
organic inputs or organic products. [Rep. Act No 10068, the Organic
Agricultural Act of 2010, Sec. 24 (e)]
174
4. Zero-rated export sales by VAT-registered
persons. The term export sales' means:
a. The sales and actual shipment of goods from the
Philippines to a foreign country paid for in acceptable foreign
currency or its equivalent in goods or services, and accounted for
in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);
b. Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local export-oriented
enterprise to be used in manufacturing, processing, packing or
repacking in the Philippines and paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
c. Sale of raw materials or packaging materials to
export-oriented enterprise w h o s e export sales exceed seventy
percent (70%) of total annual production.;
d. Sale of gold to the Bangko Sentral ng Pilipinas
(BSP);
e. Those considered export sales under Executive
Order No. 226, otherwise known as the Omnibus Investment Code
of 1987, and other special laws; and
f. The sale of goods, supplies, equipment and fuel to
persons engaged in international shipping or international air
transport operations [NIRC OF 1997, Sec 106 (A) ( 2 ) (a)]
5. Rationale for zero-rating of exports. The Philippine

V A T system adheres to the Cross Border Doctrine, according to
which, no V A T shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the
taxing authority. [Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils), Inc., G R.. No. 150154, August 9, 2005]
Hence, actual or constructive export of goods and services
from the Philippines to a foreign country must be zero-rated for
VAT; while, those destined for use or consumption within the
Philippines shall beJmposed the twelve percent (12%) VAT.
NOTES AND COMMENTS The "Cross Border Doctrine'' is also known
as the destination principle.
6. Purpose of zero-rating. The zero-rated seller becomes

internationally competitive by allowing the refund or credit of input
taxes that are attributable to export sales. [Commissioner of Internal
Revenue v Seagate Technology (Philippines). G.R No 153866, Feb-
175
11, 2005, 4 5 1 S C R A 132, 143-144]
7. Actual exports that are zero-rated.

a The sales and actual shipment of goods
1) frcm the Philippines to a foreign country,
b. irrespective of any shipping arrangement that may be
agreed upon
r
1) which may influence or determine the transfe
of ownership of the goods so exported and
c. paid for in acceptable foreign currency or its
equivalent in goods or services, and
1) accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP)."
[NIRC OF 1997, Sec. 106 (A) (2) (a) (1), arrangement and
numbering supplied]
8. Sale of raw materials or p a c k a g i n g materials. T h e r e

are two kinds of sales of raw materials or packaging materials that
are considered as export sales hence zero-rated:
a. Sales to a nonresident buyer paid for in acceptable
foreign currency; and
b. Sales to a local export-oriented enterprise paid for in
local currency.
9. Zero-rated sales of raw materials or packaging

materials to a nonresident buyer
a. Sale of raw materials or packaging materials
1) to a nonresident buyer
b. for delivery to a resident local . export-oriented
enterprise
c. to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's goods and
d. paid for in acceptable foreign currency and
regulations of the Bangko Sentral ng PHipinas (BSP)."
[NIRC of 1997, Sec 106 (A) (2) (a) (2), arrangement and
numbering supplied]
10. Zero-rated sales of raw materials or packaging

materials to export-oriented enterprises.
a. Sale of raw materials or packaging materials
b to export-oriented enterprise
176
c w h o s e export sales exceed seventy percent (70%) of
total annual production. (NIRC of 1997, Sec 106 (A) (2) (a) (3),
NOTES AND COMMENTS: There is no requirement for payment in
acceptable foreign currency.
11. Application of the zero rate. The 0% rate applies to

the total sale of raw materials or packaging materials to an export-
oriented enterprise and not just the percentage of the sale in
proportion to the actual exports of the enterprise. (Atlas
Consolidated Mining and Development Corporation v. Commissioner of
Internal Revenue, 534 SCRA 51)
12. Zero-rated sale of gold to the Bangko Sentral ng

Pilipinas (BSP). [NIRC of 1997, Sec. 106 (A) (2) (a) (4)] Sale of
gold to the Central Bank considered as export sales. As export
sales, the sale of gold to the Central Bank is zero-rated, hence, no
tax is chargeable to it as purchaser. Zero rating is primarily
intended to be e n j o y e d by the seller, which charges no output VAT
but can claim a refund of or a tax credit certificate for the input
V A T previously charged to it by suppliers. (Commissioner of Internal
Revenue v. Manila Mining Corporation, G.R No. 153204, August 31,
2005)
13. Zero-rated export sales under the Omnibus

Investment C o d e of 1987 and other special laws. "Those
considered export sales under Executive Order No. 226, otherwise
known as the Omnibus Investment Code of 1987, and other
special laws;" [NIRC of 1997, Sec. 106 (A) (2) (a) (5)']
14. " E c o z o n e , " definition. An E C O Z O N E or a Special

Economic Zone has been described as selected areas with highly
developed Or which have the potential to be developed into agro-
industrial, industrial, tourist, recreational, commercial, banking,
investment and financial centers w h o s e metes and bounds are
fixed or delimited by Presidential Proclamations. An ECOZONE
may contain any or all of the following: industrial estates (lEs),
export processing zones (EPZs), free trade zones and
tourist/recreational centers. The national territory of the Philippines
outside of the proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory. [Commissioner of Internal
Revenue v. Toshiba Information Equipment (Phils), Inc., G R.. No.
177
150154, August 9, 2005]
15. Sales to ecozone, such as PEZA, considered

export-sale. Notably, while an ecozone is geographically within
the Philippines, it is deemed a separate customs territory and is
regarded in law as foreign soil Sales by suppliers from outside
the borders of the ecozone to this separate customs territory are
deemed as exports and treated as export sales. These sales are
zero-rated or subject to a tax rate of zero percent. (Commissioner
of Internal Revenue v. Sekisui Jushi Philippines, Inc., G. R No. 149671,
July 21, 2006 citing various authorities)
NOTES A N D C O M M E N T S : What applies to a PEZA-registered export
enterprise is the Court's pronouncement that leniency in the
implementation of the VAT is an imperative, precisely to spur economic
growth in the country and attain global competitiveness as envisioned in
our laws. (Intel Technology Philippines, Inc. v Commissioner of Internal
Revenue, 522 SCRA 657)
16. Fiscal incentives to be enjoyed by Philippine

Economic Z o n e Authority ( P E Z A ) registered enterprises
in relation to the VAT. Rep. A c t No. 7916, Sec. 23 grants
PEZA registered enterprises two options with regard to the VAT:
a. They could avail of an income tax holiday under the
provisions of Executive Order (EO) No. 226, and be exempt from
income taxes but not from other internal revenue taxes such as
VAT or
b. They could avail of the tax exemptions on all taxes
including VAT under Pres. Decree No. 66 and pay only the
preferential tax rate of 5% under Republic Act No. 7916.
(Commissioner of Internal Revenue v. CSbu,Toyo Corporation, 451 SCRA
447)
17. Sales made to export-oriented Board of

Investments (BOI) registered enterprises
DISTINGUISHED FROM sales to Export Processing
Z o n e Authority (EPZA) registered enterprises located
within export processing z o n e s . Distinction must be m a d e
between these two types of sales because each may have
different substantiation requirements.
Merchandise purchased by a registered zone enterprise
from the customs territory and subsequently brought into the zone,
shall be considered as export sales and the exporter thereof shall
178
.be ejttfttftd t o the benefits allowed by law for such transaction
{Atlas Consolidated Mining and Development Corporation v
Commissioner of Internal Revenue. 524 SCRA 73)
18. Zero-rated sales to international carriers. "The sale

of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport o p e r a t i o n s "
[NIRC OF 1997, Sec. 106 (A) (2) (a) (6), as added by Rep. Act No. 9337]
19. Other sales of g o o d s or properties considered as

zero-rated.
a. Foreign currency denominated sales; and
b. Zero rated sales in accordance with special laws or
international agreements.
20. Z e r o - d e n o m i n a t e d foreign currency denominated

sales. "The phrase 'foreign currency denominates sale' means
a. sale to a nonresident of goods, except those
mentioned in
1) Sections 149 (Automobiles) and
2) 150 (Non-essential G o o d s such as jewelry,
perfumes and toilet waters, yachts and other vessels
intended for pleasure or sports),
b. assembled or manufactured in the Philippines
c. for delivery to a resident in the Philippines,
d. paid for in acceptable foreign currency and
regulations of the Bangko Sentral ng Pilipinas ( B S P ) ' '
[NIRC of 1997, Sec. 106 (A) (2) (b), arrangement and numbering
supplied]
2 1 . Z e r o rated sales in accordance with special laws

or international agreements.
a. "Sales to persons or entities whose exemption under
1) special laws or
2) international agreements, to which the
Philippines is a* signatory
b. effectively subjects such sales to zero rate." [NIRC of
1997, Sec. 106 (A) (2) (c), arrangement and numbering supplied]
Z E R O - R A T E D S A L E S OF SERVICES A N D USE OR
L E A S E O F PROPERTIES
179
1. Zero-rated sale of service, definition. A zero-rated
sale of service (by a VAT-registered person) is a taxable
transaction for VAT purposes, but shall not result in any output tax
However, the input tax on purchases of goods, properties or
services related to such zero-rated sale shall be available as tax
credit or refund in accordance with Rev. Regs. No. 16-2005. (Rev.
Regs. No. 16-2005, Sec. Sec. 4 108-5 (a), words in italics supplied)
2. Transactions subject to zero percent (%) rate.

Stated otherwise, the zero-rated sale of services. "The
following services performed in the Philippines by VAT-registered
persons shall be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for
other persons doing business outside the Philippines which goods
are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);,
(2) Services other than those mentioned in the preceding
paragraph rendered to a person engaged in business conducted
outside the Philippines or to a non-resident person not engaged in
business w h o is outside of the Philippines when the services are
performed, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose
exemption under special laws or international agreements to which
the Philippines is a signatory effectively subjects the supply of
such services to zero percent (0%) rate;
(4) Services rendered to persons engaged in
international shipping or international air-transport operations,
including leases of property for use thereof;
(5) Services performed by subcontractors and/or
contractors in processing, converting, or manufacturing goods for
an enterprise whose export sales exceed seventy percent (70%)
of total annual production. [NIRC of 1997, Sec. 108 (B)]
(6) Transport of passengers and cargo by air or sea
vessels from the Philippines to a foreign country. [Ibid, as amended
by Rep. Act No 9337)
(7) Sale of power or fuel generated through renewable
sources of energy such as, but not limited to biomass, solar, wind,
hydropower, geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel cells and hydro-
180
gen fuels [ibid ]
3. Requirements to qualify for zero rating under the

NIRC of 1997, Sec. 102 (b) (2) [Now Sec. 108 (B) (2)].
a. The services must be other than "processing,
manufacturing or repacking of goods,"
b. that the payment for such services be in acceptable
foreign currency accounted for in accordance with Bangko Sentral
ng Pilipinas (BSP) rules, and that
c. the recipient of such services is doing business
outside of the Philippines because only those not doing business
in the Philippines can be required under BSP rules to pay in
acceptable foreign currency for their purchase of goods or
services from the Philippines. {Commissioner of Internal Revenue v
Bumneister and Wain Scandinavian Contractor Mindanao, Inc., G R. No.
153205, January 22, 2007, 512 SCRA 124)
4. A foreign Consortium composed of BWSC-

Denmark, Mitsui Engineering and Shipbuilding Ltd., and
Mitsui and Co., Ltd., which entered into a contract with
N A P O C O R for the operation and maintenance of two
power barges appointed BWSC-Denmark as its
coordination manager. B W S C M I was established as the
subcontractor to perform the actual work in the
Philippines. The Consortium paid BWSCMI in
acceptable foreign exchange and accounted for in
accordance with the rules and regulations of the BSP.
Through a February 14, 1995 ruling the BIR
declared that B W S C M I may choose to register as a VAT
persons subject to V A T at zero rate. For 1996, it filed
the proper V A T returns showing zero rating. On
December 29, 1997, believing that it is covered by Rev.
Regs. 5-96, dated February 20, 1996, BWSCMI paid 10%
output VAT for the period April-December 1996, through
the Voluntary Assessment Program (VAP).
On January 7, 1999, BWSCMI was able to obtain a
Ruling from the BIR reconfirming that it is subject to
VAT at zero-rating. On this basis, BWSCMI applied for a
refund of the output VAT it paid.
Is BWSCMI zero rated ?
181
HELD: BWSCMI is not zero rated and is subject to the 10% (now
12%) VAT It is rendering service for the Consortium which is doing
business in the Philippines. Zero-rating finds application only where the
recipient of the services are other persons doing business outside of the
Philippines BWSCMI provides services to the Consortium which by
virtue of its contract with NAPOCOR does the actual work within the
Philippines (Commissioner of Internal Revenue v Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22,
2007. 512 SCRA 124)
NOTES AND COMMENTS.
a. Do not confuse the BWSCMI case with the American
Express case. American Express International, Inc. (Philippine Branch)]
is a VAT-registered person that facilitates the collection and payment of
receivables belonging to its non-resident foreign client [American Express
International, Inc. (Hongkong Branch)], for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in accordance with
BSP rules and regulations (Commissioner of Internal Revenue v.
Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G. R. No.
153205, January 22, 2007, 512 SCRA 124) WHILE in BWSCMI there was
domestic consumption of the service because the power barges are found
in the Philippines.
b. At the time the factual antecedents of the BWSCMI case
took place the rate was 10%.
5. Situs of taxation of zero-rated V A T services such

as facilitating the collection of receivables from credit
card members situated in the Philippines and payment
to service establishments in tye Philippines. T h e place,
where the service is rendered determines the jurisdiction
[Commissioner of Internal Revenue v. American Express International,
Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing "[N]o
state may tax anything not within its jurisdiction without violating the due
process clause of the [C]constitution." (Manila Gas Corp. v. Collector of
Internal Revenue, 62 Phil. 895, 900, January 17, 1936, per Malcolm, J.)]
to impose the V A T [Commissioner, supra citing Deoferio, Jr. and
Mamalateo, The Value Added Tax in the Philippines (2000), p. 93]
Performed in the Philippines, the service is necessarily
subject to its jurisdiction [Commissioner, supra citing Alejandro, The
Law on Taxation (1966 rev. ed.) p. 33], for the State necessarily has to
have a "substantial connection" [Commissioner, supra citing Gamer
lh
(ed. in chief), Black's Law Dictionary (8 ed., 1999). p. 1503] to it in
order to enforce a zero rate. [Commissioner, supra citing De Leon,
th
The Fundamentals of Taxation (12 ed., W98), p. 3] The place of
payment is immaterial [Commissioner, supra citing Deoferio. Jr and
182
Mamalateo. The Value Added Tax in the Philippines ( 2 0 0 0 ) . p. 9 3 ] , much
less is t h e place where the output of the service will be further or
ultimately used
This is so because the law neither makes a qualification nor
adds a condition in determining the tax situs of a zero-rated
service. (Commissioner, supra)
6. Service performed by A m e r i c a n Express in

facilitating the collection of receivables from credit card
m e m b e r s situated in t h e Philippines and payment to
service establishments in the Philippines in behalf of its
H o n g - K o n g b a s e d client is subject to V A T but zero-
rated. This is so because it meets all the requirements for VAT
imposition, as follows:
a. It regularly renders in the Philippines the service of
facilitating the collection a n d payment of receivables belonging to
a foreign company that is a clearly separate and distinct entity.
b. Such service is commercial in nature; carried on over
a sustained period of time; on a significant scale with a reasonable
degree of frequency; and not at random, fortuitous, or attenuated.
c. For this service, it definitely receives consideration in
foreign currency that is accounted for in conformity with law.
d. It is not an entity exempt under any of our laws or
international agreements. (Commissioner, of Internal Revenue v.
American Express International, Inc. (Philippine Branch), G R. No
152609, June 29, 2005)
7. While the service performed by American Express

is subject to V A T it is zero-rated, and BIR Revenue
Regulations that alter the legal requirements for zero-
rating are ultra vires and invalid. The VAT system uses the
destination principle which posits that the goods and services are
taxed only in the country where they are consumed,
However, the law itself provides for clear exceptions under
which the supply of services shall be zero-rated, among which are
the following:
a. The service is performed in the Philippines;
b. The services are within the categories provided for
under the Tax Code; and
c. It is paid for in acceptable foreign currency of the
Bangko Sentral ng Pilipinas.
183
American Express renders assistance to its foreign clients
by receiving the bills of service establishments located in the
country and forwarding them to their clients abroad. The services
are performed or successfully completed upon send to its foreign
clients the drafts and bills it has gathered from service
establishments here, Its services, having been performed in the
Philippines are therefore also consumed in the Philippines. Thus,
its services are exempt from the destination principle and are zero-
rated.
The BIR could not change the law. (Commissioner, of Internal
Revenue v. American Express International, Inc (Philippine Branch), G.
R. No. 152609, June 29, 2005)
C. LIABILITY FOR V A L U E - A D D E D TAX (VAT)
TRANSACTIONS SUBJECT TO VAT
1. Persons and transactions subject to the value-

added tax (VAT).
a. Any person who, in the course of his trade or'
business,
1) sells, barters, exchanges or leases goods
or properties, or
2) renders services, and
b. any person w h o imports goods xxx
However, in the case of importation of taxable goods, the
importer, whether an individual or corporation and whether or not
made in the course of his trade or business, shall be liable to V A T
s t
xxx. (NIRC of 1997, Sec. 105, 1 par.,; Rev. Regs. No. 16-2005,Sec.
4.105-1, paraphrasing supplied)
NOTES A N D C O M M E N T S : For domestic transactions, the person must
be engaged in trade or business. For imports, the person may or may not
be engaged in trade or business.
"IN THE C O U R S E OF T R A D E OR BUSINESS"
1. "In the course of trade or business," definition.

"The phrase 'in the course of trade or business' means
a. the regular conduct or pursuit of a commercial or an
economic activity,
1) including transactions incidental thereto,
b by an person regardless of whether or not the person
184
engaged therein is
1) a nonstock, nonprofit private organization
a) (irrespective of the disposition of its. net
income and
b) whether, or not it sells exclusively to
members or their guests)
2) or government entity.
The rule of regularity, to the contrary notwithstanding,
services as defined in this Code rendered in the Philippines by
nonresident foreign persons shall be considered as being rendered
rt
in the course of trade or business." (NIRC of 1997. Sec 105, 3 and
4rth pars., arrangement and numbering supplied)
2. Interpretation of the term "In the Course of Trade

or Business. V A T is not a singular-minded tax on every
transactional level. Its assessment bears direct relevance to the
taxpayer's role or link in the production chain. Hence, as affirmed
by Section 99 of the Tax Code and its subsequent incarnations,
the tax is levied only on the sale, barter or exchange of goods or
services by persons w h o engage in such activities, in the course
of trade or business. T h e s e transactions outside the course of
trade or business may invariably contribute to the production
chain, but they do so only as a matter of accident or incident. As
the sales of goods or services do not occur within the course of
trade or business, the providers of such goods or services would
hardly, if at all, have the opportunity to appropriately credit any
V A T liability as against their o w n accumulated V A T collections
since the accumulation of output V A T arises in the first place only
through the ordinary course of trade or business. (Commissioner of
Internal Revenue v. Magsaysay Lines, Inc., et al., G. R No. 146984, July
28, 2006)
3. Sale of vessels not in the ordinary course of
business of N D C . Pursuant to a government program of
privatization, NDC, a VAT-registered entity created for the purpose
of selling real property, decided to sell to private enterprise all of
its shares in its wholly-owned subsidiary, the National Marine
Corporation (NMC). The NDC decided to sell in one lot its NMC
shares and five (5) of its ships, which are 3,700 DWT Tween-
Decker, "Kloeckner" type vessels. The vessels were constructed
for the NDC between 1981 and 1984, then initially leased to Luzon
Stevedoring Company, also its wholly-owned subsidiary.
185
Subsequently, the vessels were transferred and leased, on
a bareboat basis, to the NMC. The NMC shares and the vessels
were offered for public bidding. Among the stipulated terms and
conditions for the public auction was that the winning bidder was
to pay "a value added tax of 10% on the value of the v e s s e l s "
Magsaysay Lines, Inc., offered to buy the shares and the vessels
for P168,000,000.00. The bid was made by Magsaysay Lines,
purportedly for a new company still to be formed composed of
itself, Baliwag Navigation, Inc., and FIM Limited of the Marden
Group based in Hongkong . The bid was approved by the
Committee on Privatization, and a Notice of Award was issued to
Magsaysay Lines Is the sale subject to VAT ?
HELD:. The sale is not subject to VAT. In Imperial v.
Collector of Internal Revenue, G.R. No. L-7924, September 30,
1955 (97 Phil. 992), the term "carrying on business" does not
mean the performance of a single disconnected act, but means
conducting, prosecuting and continuing business by performing
progressively all the acts normally incident thereof; while "doing
business" conveys the idea of business being done, not from time
to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL
REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course
of business" is what is usually done in the management of i i a d e
or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss 65,
cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited
jurisprudence, is that "course of business" or "doing business"
connotes regularity of activity. In the instant case, the sale was an
isolated transaction. The sale which was involuntary and made
pursuant to the declared policy of Government for privatization
could no longer be repeated or carried on with regularity. It should
be emphasized that the normal VAT-registered activity of NDC is
leasing personal property.
This finding is confirmed by the Revised Charter of the NDC
which bears no indication that the NDC was created for the
primary purpose of selling real property. (Commissioner of Internal
Revenue v. Magsaysay Lines, Inc., et al., G. R No 146984, July 28,
2006)
4. Kinds of value-added tax (VAT).

a. Value-added Tax on Sale of Goods or Properties
(NIRC of 1997, Sec. 106);
b. Value-added Tax on Importation of Goods (Ibid., Sec
186
107); a n d
c. Value-added Tax on Sale of Services and Use or
Lease of Properties (Ibid., Sec 108)
5. Conditions for t h e increase of the V A T from ten

percent (10%) to twelve percent (12%). The President,
upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has
been satisfied:
a. Value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%); or
b. National government deficit as a percentage of GDP
of the previous year exceeds one and one-half, percent (1 1/2%).
(NIRC of 1997, Sec 108 (A), as amended by Rep Ac tNo 9337,
NOTES AND COMMENTS: The rate was increased to 12% effective
February 1, 2006. (RMC No. 7-2006)
D. VALUE-ADDED TAX ON SALE OF GOODS OR

PROPERTIES
R A T E A N D B A S E O F V A L U E - A D D E D TAX O N THE
SALE. BARTER OR EXCHANGE OF GOODS OR
PROPERTIES
1. Rate a n d base of value-added tax on the sale of

goods or properties. "There shall be levied, assessed and
collected
a. on every sale, barter or exchange of goods or
properties,
b. a value-added tax equivalent to twelve percent (12%)
1) of the gross selling price or gross value in
money
' 2) of the goods or properties sold, bartered or
exchanged,
c. such tax to be paid by the seller or transferor." (NIRC
of 1997, Sec, 106 (A), as amended by Rep. Act No. 9337, and
implemented by RMC 7-2006. arrangement and numbering supplied)
NOTES AND COMMENTS The reader should note that the transactions
subject to VAT are not limited to sales but also to exchange or barter.
187
The "gross selling price' is the tax base, the 12% is the tax rate
2. "Goods or properties" the sale, barter or exchange

of which may be subject to VAT, definition. The term
goods or properties' shall mean all tangible and intangible objects
which are capable of pecuniary estimation and shall include:
(a) Real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or business;
(b) The right or privilege to use any copyright, patent,
design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;
(c). The right or the privilege to use in the Philippines of
any industrial, commercial or scientific equipment;
(d) . The right or privilege to use motion picture films, film
tapes and discs; and
(e). Radio, television, satellite transmission and cable
s
television time. [NIRC of 1997, Sec. 106 (A) (1)), 1 ' par]
3. "Gross selling price," for purposes of V A T ,

definition. "The term 'gross selling price' m e a n s the total
amount of money or its equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of the sale, barter or
exchange of the goods or properties, excluding the value-added
tax. The excise tax, if any, on such goods or properties shall form
part of the gross selling price." [NIRC of 1997, Sec 106 (A) (1)], f
par]
4. Sales returns, allowances and sales discounts

may be deducted from the gross sales or receipts. '"The
value of goods or properties sold and subsequently returned or for
which allowances were granted by a VAT-registered person may
be deducted from the gross sales or receipts for the quarter in
which a refund is made or a credit m e m o r a n d u m or refund is
issued. Sales discount granted and indicated in the invoice at the
time of sale and the grant of which does not depend upon the
happening of a future event may be excluded from the gross sales
within the same quarter it was given " [NIRC of 1997, Sec 106 (D)]
5. Authority of the C o m m i s s i o n e r to determine the

appropriate tax base. "The Commissioner shall, by rules and
188
regulations prescribed by the Secretary of Finance, determine the
appropriate tax base in cases where a transaction is deemed a
sale, barter or exchange of goods or properties under Subsection
(B) (Rate and base of value-added tax on the sale of goods or
properties) hereof, or where the gross selling price is
unreasonably lower than the actual market value." [NIRC of 1997,
Sec 106 (E). words in parentheses supplied]
TRANSACTIONS "DEEMED SALES"
1. Transactions "deemed sales" that are subject to

VAT. "The following shall be deemed sale:
(1) Transfer, use or consumption not in the course
of business or properties originally intended for sale or for use in
the course of business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the
profits of the V A T - registered persons; or
(b) Creditors in payment of debt or obligation
(3) Consignment of goods if actual sale is not made
within sixty (60) *days following the date such goods w e r e
consigned Consigned goods returned by the consignee within
the 60-day period are not deemed sold.
(4) Retirement from or cessation of business, with
respect inventories of taxable goods existing as of such retirement
or cessation, of ail.goods on hand,
1) whether capital goods, stock-in-trade, supplies
or materials as of the date of such retirement, or
cessation,
2) whether or not the business is continued by
the new owner or successor. [NIRC of 1997, Sec. 106 (B),
arrangement and numbering supplied, words in italics are from
Rev Regs. No 16-2005, Sec. 4.106-7]
2. Transactions considered retirement or cessation

of business "deemed sale" subject to VAT.
a. Change of ownership of the business. There is
change in the ownership of the business where a single
proprietorship incorporates; or
1) the proprietor of a single proprietorship sells
his entire business.
189
b. Dissolution of a partnership and creation of a new
partnership which takes o v e r t h e b u s i n e s s . [Rev Regs N o 16-
2006, Sec 4 . 1 0 6 - 7 (a). (4) paraphrasing, arrangement and numbering
supplied]
3. Sale of electricity to NPC during the testing period

by a builder/operator of a hydroelectric power-
generating plants "deemed sale" for VAT purposes. The
Supreme Court ruled that it is not unmindful of the fact that the
sale during the testing period was not a commercial sale. In
granting the tax benefit to VAT-registered zero-rated or effectively
zero-rated taxpayers, Section 112(A) of the NIRC does not limit
the definition of "sale" to commercial transactions in the normal
course of business. Conspicuously, Section 106(B) of the NIRC,
which deals with the imposition of the VAT, does not limit the term
"sale" to commercial sales, rather it extends the term to
transactions that are "deemed" sale, which are thus enumerated:
SEC 106 Value-Added Tax on Sale of G o o d s or
Properties.
xxx xxx xxx
(B) Transactions Deemed Sale.—The following

transactions shall be d e e m e d sale:
(1) Transfer, use or c o n s u m p t i o n not in

the course of business of g o o d s or properties
originally intended for sale or for use in the
course of business; xxx xxx (Emphasis,
supplied)
After carefully examining the above provision, the Supreme

Court found it an equitable construction of the law that w h e n the
term "sale" is made to include certain transactions for the purpose
of imposing a tax, these same transactions should be included in
the term "sale" when considering the availability of an exemption
or tax benefit from the s a m e revenue measures. It is undisputed
that during the fourth quarter of 2002, San Roque Power
Corporation transferred to NPC all the electricity that w a s
produced during the trial period. The fact that it was not
transferred through a commercial sale or in the normal course of
190
business does not deflect from the fact that such transaction is
d e e m e d as a sale under the law. (San Roque Power Corporation v
Commissioner of Internal Revenue, GR No 180345 November 25
2009)
E. VALUE-ADDED TAX ON IMPORTATION
1. Value-added Tax on Importation of Goods. "There

shall be levied, assessed and collected on every importation of
goods a value-added tax equivalent to ten percent (10%) (now
12%, RMC No. 7-2006) based on the total value-added used by
the Bureau of Customs in determining tariff and customs duties,
plus customs duties, excise taxes, if any, and other charges, such
tax to be paid by the importer, prior to the release of such goods
from customs custody: Provided, That where the customs duties
are determined on the basis of the quantity or volume of the
goods, the value-added tax shall be based on the landed cost plus
excise taxes, if any xxx." (NIRC of 1997, Sec 107 (A), paraphrasing
and words in parentheses supplied)
2. Transfer of goods by tax-exempt persons. "In the

case of tax-free importation of goods into the Philippines by
persons, entities or agencies exempt from tax where such goods
are subsequently sold, transferred or exchanged in the Philippines
to non-exempt persons or entities, the purchasers, transferees or
recipients shall be considered the importers thereof, who shall be
liable for any internal revenue tax on such importation . The tax
due on such importation shall constitute a lien on the goods
superior to all charges or liens on the goods, irrespective of the
possessor thereof." [NIRC of 1997, Sec. 197 (B)]
F. VALUE-ADDED TAX ON SALE OF SERVICES

AND USE OR LEASE OF PROPERTIES
1. VAT on services and lease of properties.

a. There shall be levied, assessed, and collected,
b. a value-added tax equivalent to ten percent (10%) of
gross receipts
c. derived from the sale or exchange of services,
1) including the use or lease of properties.
d Provided, That the President, upon the recommend-
191
ation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%), after
any of the following conditions has been satisfied:
1) Value-added tax collection as a percentage of
Gross Domestic product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%); or
2) National government deficit as a percentage of
GDP of the previous year exceeds one and one-half
percent (1 1/2%). (NIRC of 1997, Sec. 108 (A), as amended
by R A. N o 9337, arrangement and numbering supplied]
2. "Sale or exchange of services", defined. The term

"sale or exchange of services" means the performance of all kinds
of services in the Philippines for others for a fee, remuneration or
consideration, whether in kind or in cash, including those
performed or rendered by the following:
a. construction and service contractors;
b. stock, real estate, commercial, customs and
immigration brokers;
c. lessors of property, whether personal or real;
d. persons engaged in warehousing services
e. lessors or distributors of cinematographic films;
f. persons engaged in milling, processing,
manufacturing or repacking goods for others;
g. proprietors, operators or keepers of hotels, motels,
rest-houses, pension houses, inns, resorts; theaters, and movie
houses;
h. proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs and
caterers;
i. dealers in securities;
j. lending investors;
k. transportation contractors on their transport of goods
or cargoes, including persons who transport goods or cargoes for
hire and other domestic c o m m o n carriers by land relative to their
transport of goods or cargoes;
I. c o m m o n carriers by air and sea relative to their
transport of passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines;
m. sales of electricity by generation companies,
transmission, and/or distribution companies;
n. franchise grantees of electric utilities, telephone and
192
telegraph, radio and television broadcasting and all other franchise
grantees except franchise grantees of radio and/or television
broadcasting whose annual gross receipts of the preceding year
do not e x c e e d Ten Million Pesos (P10,000,000.00), and franchise
grantees of gas and water utilities;
o. non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding
companies; and
p. similar services regardless of whether or not the
performance thereof calls for the exercise or use of the physical or
mental faculties. (NIRC of 1997, Sec. 108 (A), as amended by R A. No
s
9337; Rev. Regs. No. 16-2005, Sec. 4,108-2, 1 ' par., arrangement and
numbering supplied]
3. Also included] in the phrase "sale or exchange of

services.
a. T h e lease or the use of or the right or privilege to
use any copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property or
right;
b. T h e lease or the use of, or the right to use any
industrial, commercial or scientific equipment;
c. The supply of scientific,' technical, industrial or
commercial knowledge or information;
d T h e supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of enabling the
application or enjoyment of any such property, or right as is
mentioned in subparagraph (2) hereof or any such knowledge or
information as is mentioned in subparagraph (3) hereof; or
e. T h e supply of services by a non-resident person or
his employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such non-resident
person;
f. The supply of technical advice, assistance or
services rendered in connection with technical management or
administration of any scientific, industrial or commercial
undertaking, venture, project of scheme;
g. The leas** ' of motion picture films, film tapes and
discs
n. The lease or the use of or the right to use radio,
193
television, satellite transmission and cable television time. (Rev.
n d
Regs. No 16-2005, S e c 4 108-2, 2 par.)
4. Situs of taxation for lease of properties. Lease of

properties shall be subject to the value-added tax irrespective of
the place where the contract of lease or licensing agreement w a s
executed if the property is leased or used in the Philippines. [NIRC
n a
of 1997, Sec 108 (A) (8), 2 par.].
5. The tax base is gross receipts. The term gross

receipts" means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental
or royalty, including the amount charged for materials supplied
with the services and deposits and advance payments actually or
constructively received during the taxable quarter for the services
performed or to be performed for another person, excluding value-
n d
added tax. [NIRC of 1997, Sec 108 (A) (8), 2 par.].
6. Sale of or lease of real properties subject to VAT.

Sale of real properties primarily for sale to customers or held for
lease in the ordinary course of trade or business of the seller shall
s i
be subject to VAT. (Rev. Regs. No. 16-2005, Sec 4.106-3, 1 par.)
Thus, capital transactions of individuals, are not subject to
VAT. Only real estate dealers are subject to V A T
7. Sale of real property e x e m p t from VAT. The

following sales of real properties are exempt from VAT, namely:
/ a. Sale of real properties not primarily held for sale to
i customers or held for lease in the ordinary course of trade or
, business;
b. Sale of real properties utilized for low-cost housing
as defined by RA No. 7279, otherwise known as the "Urban and
Development Housing Act of 1992" and other related laws, such
as RA No. 7835 and RA No. 8763.
xxx xxx xxx
c. Sale of real properties utilized for socialized housing
as defined under RA No. 7279, and other related laws wherein the
price ceiling per unit is P225.000.00 or as may from time to time
be determined by the H U D C C and the NEDA and other related
laws.
xxx xxx xxx
d. Sale of residential lot valued at One Million Five
194
Hundred Thousand Pesos (P1,500,000.00) and below, or house &
lot a n d other residential dwellings valued at T w o Million Five
Hundred Thousand Pesos (P2.500.000.00) and below where the
instrument of sale/transfer/disposition was executed on or after
November 1, 2005, provided, That not later than January 3 1 , 2009
and every three (3) years thereafter, the amounts stated herein
shall be adjusted to its present value using the Consumer Price
Index, as published by the National Statistics Office (NSO);
provided, further, that such adjustment shall be published through
revenue regulations to be issued not later than March 31 of each
year.
If two or more adjacent residential lots are sold or disposed
in favor of one buyer, for the purpose of utilizing the lots as one
residential lot, the sale shall be exempt from V A T only if the
aggregate value of t h e lots do not exceed P1,500.000.00.
Adjacent residential lots, although covered by separate titles
and/or separate tax declarations, w h e n sold or disposed of to one
a n d the same buyer, whether covered by one or separate Deed of
Conveyance, shall be p r e s u m e d as a sale of one residential lot.
[Rev. Regs. No. 4.109-1 (B), (p), paraphrasing and numbering supplied]

complete.
OBJECTIVE TYPE:
Give at least three (3) real estate transactions which are

not subject to the Value-Added Tax. (BAR: 1996)
PROBLEM TYPE:
On January 10, 2010, X, a domestic corporation

engaged in the real estate business, sold a building for P10
million. Is the sale subject to the value-added tax (VAT) ? If
so, how much. Explain. (BAR: 1988, date supplied)
SUGGESTED ANSWER: Yes. 12% on the gross selling price
because the sale was made in the ordinary course of trade or business of
X, a domestic corporation engaged in the real estate business.
195
G. ADMINISTRATIVE AND COMPLIANCE
REQUIREMENTS, RETURNS AND PAYMENT
OF THE VAT, REFUND OR CREDIT OF
EXCESS INPUT VAT
ADMINISTRATIVE REQUIREMENTS
1. Persons required to Register for Value-added Tax.

"Any person who, in the course of trade or business, sells, barters
or exchanges goods or properties, or engages in the sale or
exchange of services, shall be liable for value-added tax if:
(a) His gross sales or receipts for the past twelve (12)
months, other than those that are exempt under Section 109(A) to
(U), have exceeded O n e million five hundred thousand pesos
(P1,500,000.00); or
(b) There a r e ' r e a s o n a b l e grounds to believe that his
gross sales or receipts for the next twelve (12) months, other than
those that are exempt under Section 109 (A) to (U), will exceed
One million five hundred thousand pesos (P1,500,000.00)." [NIRC
of 1997, Sec. 236 (G)(1)]
Every person w h o b e c o m e s liable to be registered as
referred to above shall register with the Revenue District Office
which has jurisdiction over the head office or branch of that
person, and shall pay the annual registration fee as prescribed.
sl
[Ibid., Sec. 236 (G) (2),1 sentence].
NOTES A N D C O M M E N T S : Refer to E. VAT EXEMPT
TRANSACTIONS, infra, for a discussion of Sections 109 (A) to (U).
2. Period of registration, requirements and with

w h o m registration made. "Every person subject to any
internal revenue tax shall register once with the appropriate
Revenue District Officer:
(1) Within ten (10) days from date of employment, or
(2) On or before the c o m m e n c e m e n t of business; or
(3) Before payment of any tax due; or
(4) Upon filing of a return, statement or declaration as
required in this Code.
The registration shall contain the taxpayer's name, style,
place of residence, business, and such other information as may
be required by the Commissioner in the form prescribed therefore.
A person maintaining a head office, branch or facility shall
196
register with the Revenue District Officer having jurisdiction over
the head office, branch or facility. For purposes of this Section,
the term "facility" may include but not limited to sales outlets!
places of production, warehouses or storage places " [NIRC of
1997, Sec 236 (A)]
3. Annual Registration Fee. An annual registration fee in

the amount of Five hundred pesos (P500) for every separate or
distinct establishment or place of business, including facility types
where sales transactions occur, shall be paid upon registration
and every year thereafter on or before the last day of January;
Provided, however, That cooperatives, individuals earning purely
compensation income, whether locally or abroad, and overseas
workers are not liable to the registration fee herein imposed.
The registration fee shall be paid to an authorized agent
bank located within the revenue district, or the Revenue Collection
Officer, or duly authorized Treasurer of the city or municipality
where each place of business or branch is registered." [NIRC of
1997, Sec. 236(B)]
4. Optional registration for Value-Added Tax (VAT) of

exempt person. A n y person not required to register for value-
added tax may elect to register for value-added tax by registering
with the Revenue District Office that has jurisdiction over the head
office of that person, and paying the annual registration f e e . "
[NIRC of 1997, Sec. 236 (H)(1)]
5. Identification of V A T registrant. Any person w h o has

registered value-added tax as a tax type shall be referred to as
"VAT-registered person" w h o shall be assigned only one Taxpayer
n d
Identification Number (TIN).[NIRC of 1997, Sec 236 IH) (2), 2
sentence]
6. Exhibition of Certificate of Payment at place of

business. "The certificate or receipts sowing payment of taxes
issued to a person engaged in a business subject to an annual
registration fee shall be kept conspicuously exhibited in plain view
in or at the place where the business is conducted; and in case of
a peddler or other persons not having a fixed place of business,
shall be kept in the possession of the holder thereof, subject to
production upon demand of any internal revenue officer." (NIRC of
1997, Sec. 241)
197
7. Removal of business to other location. "Any
business for which the annual registration fee has been paid may,
subject to the rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, be removed
and continued in any other place without the payment of additional
tax during the term for which the payment was made." (NIRC of
1997, Sec. 243)
8. Transfer of Registration. "In case a registered person

decides to transfer his place of business or his head office or
branches, it shall be his duty to update his registration status by
filing an application for registration information update in the form
prescribed therefor." [NIRC of 1997. Sec. 236 (D)]
9. Cancellation of value-added tax registration. "A

VAT-registered person may cancel his registration for V A T if:
(a) He makes a written application and can demonstrate
to the commissioner's satisfaction that his gross sales or receipts
for the following twelve (12) months, other than those that are
exempt under Section 109 (A) to (U), will not exceed one millipn
five hundred thousand pesos (P1,500,000.00); or
(b) He has c e a s e d to carry on his trade or business, and
does not expect to recommence any trade or business within the
next twelve (12) months.
The cancellation of registration will be effective from the first
day of the following month." [NIRC of 1997, Sec. 236 (F)]
10. Optional registration may not be cancelled. Any

person who elects to optionally register shall not be entitled to
cancel his registration for the next three (3) years. [NIRC of 1997,
st
Sec. 236 (H)(2), 1 sentence]
11. Continuation of business of deceased person.

"When any individual w h o has paid the annual registration fee
dies, and the same business is continued by the person or person
interested in his estate, no additional payment shall be required for
the residue of the term of which the tax was paid: Provided,
however, That the person or persons interested in the estate
should, within thirty (30) days) from the death of the decedent,
submit to the Bureau of Internal Revenue or the Regional or
Revenue District Office, inventories of goods or stocks had at the
198
time of such death.
The requirement under this Section shall also be applicable
in the case of transfer of ownership or change of name of the
business establishment." (NIRC of 1997, Sec. 242)
12. Effect on Vatable g o o d s in case of changes in or

cessation of status of a VAT-registered person. The V A T
"shall also apply to goods disposed of or existing as of a certain
date if under circumstances to be prescribed in rules and
regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, the status of a person as a
VAT-registered person c h a n g e s or is terminated." (NIRC of 1997
Sec. 106 (C)]
13. Effect of failure of a V A T taxpayer to register and

pay the registration fee. T h e Commissioner or his authorized
representative is hereby e m p o w e r e d to suspend the business
operations and temporarily close the business establishment of
any person w h o fails to register as a V A T taxpayer if so required,
[NIRC of 1997, Sec, 115(b)],
"The temporary closure of the establishment shall be for the
duration of not less than five (5) days and shall be lifted only upon
compliance with whatever requirements prescribed by the
Commissioner in the closure o r d e r " {Ibid., Sec. 115, last par)
14. Criminal liability for failure to pay the registration

fee. "Any person w h o carries on any business for which an
annual registration fee is imposed without paying the tax as
required by law shall, upon conviction for each act or omission, be
punished by a fine of not less than Five thousand pesos (P5.000)
but not more than Twenty thousand pesos (P20.000) and suffer
imprisonment of not less than six (6) months but not more than
two (2) year." (NIRC of 1997, Sec. 258, paraphrasing supplied)
INVOICING R E Q U I R E M E N T S
1. Issuance of receipts or s a l e * or commercial

invoices for transactions valued at P25.00 or more. "All
persons, subject to an internal revenue tax shall for each sale or
transfer of merchandise or for services rendered valued at Twenty-
five pesos (P25.00) or more, issue receipts or sales or commerial
199
invoices, prepared at least in duplicate, showing the date of
transaction, quantity, unit cost and description of merchandise or
nature of service." (NIRC of 1 9 9 7 , Sec. 2 3 7 , 1*' par., as amended by
Rep Act No. 9 3 3 7 , paraphrasing supplied)
2. Where name, business style, or address of

purchaser, customer or client is required to be shown
on the receipt or invoice.
a. "Where the receipt is issued to cover payment made
as rentals, commissions, compensations or fees
b. receipts or invoices shall be issued which shall show
the name, business style, if any, and address of the purchaser,
SL
customer or client." (NIRC of 1 9 9 7 , Sec. 2 3 7 , 1 par., paraphrasing,
arrangement and numbering supplied)
3. Distribution and preservation of the receipts or

invoices. "The original of each receipt or invoice shall be issued
to the purchaser, customer or client at the time the transaction is
effected, who, if engaged in business or in the exercise of
profession, shall keep and preserve the s a m e for a period of three
( 3 ) years from the close of the taxable year in which such invoice
or receipt w a s issued, while the duplicate shall be kept and
preserved by the issuer, also in his place of business, for a like
N D
period." (NIRC of 1 9 9 7 , Sec 2 3 7 , 2 par.)
4. Exhibition of notice for the issuance of

sales/commercial invoice and/or official receipt at place
of business. "Persons required to issue sales/commercial
invoices, and official receipts under existing rules shall cause to be
posted in their places of business, including branches and mobile
stores, in such area conspicuous to the public, a notice containing
and showing in bold letters the following:
ASK FOR BUREAU OF INTERNAL REVENUE
RECEIPT Penalties: 2 to 4 years imprisonment for

/ i o n - i s s u a n c e of receipt
This will ensure that Report violation to any of the following:
that the taxes on your A BIR Contact Center (02)981-8888
purchases will be • . C o m m i s s i o n e r @bir gov ph
remitted to the govern- A BIR District Office
200
purchases will be .'••Commissioner @bir.gov.ph
remitted to the govern- i A B I R District Office
ment It will be used :Name of Establishment
for the development of
the Philippines TIN
At no time shall the above notice be detached, removed or

covered from public view. For uniformity, the size specification of
the notice shall be twelve (12) inches in width and eight (8) inches
in length." (Rev. Regs 4-2000, Sec. 3, as amended by Rev Regs 4-
2005, Sec 2)
5. Punishable acts and omissions relative to notice.

"a) Failure or neglect to post the notice required herein;
and/or
b) Deliberate removal of the notice.
Any person w h o commits any of the above acts or
omissions shall, upon conviction, be punished by a fine of not
more than One T h o u s a n d Pesos (P 1,000) or suffer imprisonment
of not more than six (6) months, or both, pursuant to the provisions
of Section 275 of the National Internal Revenue Code (NIRC) of
1997." (Sec. 4, Rev. Regs. No 4-2000, Sec. 4)
NOTES AND COMMENTS: "Sec. 275 Violation of Other Provisions of
this Code or Rules and Regulations in General. - Any person who
violates any provision of this Code or any rule or regulation promulgated
by the Department of Finance, for which no specific penalty is provided by
law, shall, upon conviction for each act or omission, be punished by a fine
of not more than One thousand pesos (P1.000) or suffer imprisonment of
not more than six months, or both." (NIRC of 1997)
6. Invoicing requirements for VAT registered

persons. "A VAT-registered persons shall issue:
(1) A VAT invoice for every sale, barter or exchange of
goods or properties; and
(2) A VAT official receipt for every lease of goods or
properties, and for every sale, barter or exchange of services."
[NIRC of 1997. Sec 113(A)]
7. Information contained in the VAT Invoice or VAT
201
Official Receipt. "The following information shall be indicated in
the V A T invoice o r V A T official receipt,
(1) A statement that the seller is a V A T - r e g i s t e r e d
person, followed by his Taxpayer's Identification Number ( T I N ) ;
(2) The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that such amount
includes the value-added tax: Provided, that:
(a) The amount of the tax shall be shown as a
separate item in the invoice or receipt:
(b) If the sale is exempt from value-added tax, the
term VAT-exempt sale' shall be written or printed
prominently on the invoice or receipt,
(c) If the sale is subject to zero percent (0%)
value-added tax, the term 'zero-rated sale' shall be written
or printed prominently on the invoice or receipt;
(d) If the sale involves goods, properties or
services some of which subject to and some of which are
VAT zero-rated or VAT-exempt, the invoice or receipt shall
clearly indicate the breakdown of the sale price between its
taxable, exempt and zero-rated components, and the
calculation of the value-added tax on each portion of the
sale snail be shown on the invoice or receipt: Provided,
That the seller may issue separate invoices or receipts for
the taxable, exempt, and zero-rated components of the
sale.
(3) The date of transaction, quantity, unit cost and
description of the goods or properties or nature of the service; and
(4) In the case of sales in the amount of one thousand
pesos (P1.000) or more where the sale or transfer is made to a
VAT-registered person, the name, business style, if any, address
and Taxpayer Identification Number (TIN) of the purchaser,
customer or client." (NIRC of 1997, Sec. 113 (B)]
8. Consequences of a non VAT-registered person

issuing erroneous VAT Invoice or V A T Official Receipt.
"If a person w h o is not a VAT-registered person issues an invoice
or receipt showing his Tax Identification Number (TIN), followed by
the word "VAT":
(a) The issuer shall, in addition to any liability to other
percentage taxes, be liable to:
(i) The tax imposed under Section 106 (Value-
added Tax on Sale of Goods or Properties) or 108 (Value-
202
added Tax on Sale of Services and Use or Lease of
Properties) without the benefit of any input tax credit; and
(ii) A fifty percent (50%) surcharge under Section
248 (B) (Civil Penalties) of this Code." [NIRC of 1997, S e c
113 ( D ) (1). words in parentheses supplied]
9. Invoice or receipt issued by non-VAT registered

taxpayer m a y b e utilized for input credit. The V A T shall be
recognized as an input tax credit to the purchaser where the
receipt or invoice issued by the non-VAT registered taxpayer
shows the information required to be contained in the V A T invoice
or V A T Official Receipt. [NIRC of 1997, Sec. 113 ( D ) (1) (b) in relation
to Sec 113(B)]
10. Issuer of receipts or sales or commercial invoices

to secure authority to print from BIR. "All persons who are
engaged in business shall secure from the Bureau of Internal
Revenue an authority to print receipts or sales or commercial
invoices before a printer can print the same." (NIRC of 1997, Sec
s
238, 1 ' par)
11. Requisites for issuance of authority to print. "No

authority to print receipts or sales or commercial invoices shall be
granted unless the receipts or invoices to be printed are serially
numbered and shall show, a m o n g other things, the name,
business style, Taxpayer Identification Number (TIN) and business
address of the person or entity to use the same, and such other
information that may be required by rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation
n d
of the Commissioner." (NIRC of 1997, Sec. 238, 2 par)
12. Duty of printer of receipts or sales invoices. All

persons w h o print receipt or sales or commercial invoices shall
maintain a logbook/register of taxpayers who availed of their
printing services. The logbook/register shall contain the following
information:
(1) Names, Taxpayer Identification Numbers of the
persons or entities for w h o m the receipts or sales or commercial
invoices were printed; and
(2) Number of booklets, number of sets per booklet,
203
number of copies per set and the serial numbers of the receipts of
invoices in each booklet." ( N I R C of 1 9 9 7 , S e c . 238, last par)
13. Criminal violations related to the printing of

receipts or invoices and other violations. Any person who
commits any of the acts enumerated hereunder shall upon
conviction for each act or omission, be punished by a fine of not
less than One thousand pesos (P1.000) but not more than Fifty
thousand pesos (P50.000) and suffer imprisonment of not less
than two (2) years but not more than four (4) years:
(1) Printing of receipts or sales or commercial invoices
without authority from the Bureau of Internal Revenue; or
(2) Printing of double or multiple sets of invoices or
receipts; or
(3) Printing of unnumbered receipts or sales or
commercial invoices not bearing the name, business style,
Taxpayer Identification Number and business address of the
person or entity." [NIRC of 1997, Sec. 264 (b) in relation to Sec. 264
(a), words in italics and paraphrasing supplied]
14. Exemption from invoicing requirement. The

Commissioner of Internal Revenue may, in meritorious cases,
exempt any person subject to an internal tax from compliance with
the invoicing requirement." (NIRC of 1997, Sec. 237, last p a r )
15. W h o may use cash register and point-of-sale

machines in lieu of sales invoices or receipts. The
"permit to use cash register and P O S machines in lieu of sales
invoices or receipts shall be issued only to proprietors, owners or
operators of any of the following lines of business and other similar
establishments:
1 Supermarkets
2. Department stores
3. Drugstores
4. Bookstores
5. Groceries
6. Bakeries
7. Restaurants, bars, beer gardens, refreshment parlors
and other eating places
8. Record Bars and Music stores
9. Video shops selling and leasing out cinematographic
films
204
10. Garages and other parking spaces
11 Gasoline stations
12 Hotels, Motels, Lodging Houses and the like
13 Token exchange stations
14. Recreational and A m u s e m e n t Centers
The Commissioner of Internal Revenue may, in meritorious
cases, qualify other lines of business to use cash register and
POS machines, considering modern business practices." (Rev
Regs No. 10-99, Sec 1)
16. Permits required for different lines of business. "A

separate permit shall be issued by the Regional Director or the
Revenue District Officer concerned for every application duly filed,
inspected and evaluated." (Rev Regs No. 10-99, Sec. 2 4)
1 7 . Registration of other kinds/types of cash register

machines and/or inclusion of other lines of business. "A
cash register machine with built-in capacity to accumulate sales
data of different lines of business may be authorized by the
Commissioner to issue cash register receipts for all such different
lines of business provided, however, that the distinction of sales by
lines of business shall be clearly shown on the machine tapes in
words other than by code of symbol.
Application for the above purpose shall be filed with the
proper Revenue District Officer w h o shall cause the investigation
of the veracity and merit of the applicant's representations on the
built-in mechanisms and operating features of the machine and on
the necessity for its use on such other lines of business The
report thereon shall be submitted to the Regional Director
concerned or in case of taxpayers belonging to the LTD shall be
submitted to the Large Taxpayers division for appropriate action."
(Rev. Regs. 10-99, Sec. 6)
18. To w h o m application to be filed and who issues

permit to use cash register and POS machines. "If the
applicant is under the jurisdiction of the Large Taxpayers Division
(LTD), the application, together with the proper attachments, is to
be filed with the LTD for proper inspection and evaluation of the
Revenue Officer and final approval of the LTD-Division Chief.
If the business establishment where the machine will be
used is in the city/municipality where the Regional Office is situa-
205
ted, the permit shall be issued by the Regional Director, except
when he has delegated such power to the Revenue District Officer
of the District where the Director's office is located." (Rev Regs
n d r d
No 10-99, Sec 2.3, 2 and 3 pars.)
19. Conditions for the issuance of the permit. "The

permit to use cash register and POS machines shall be granted
subject to the following conditions:
a) The machine shall be used exclusively in the
operation of only one line of business covered by the permit. If the
business is conducted simultaneously with another line of
business for which no cash register permit has been issued, sales
made in such business shall be covered with the corresponding
issuance of registered sales invoices or receipts,
b) The machine should be equipped with two (2) rollers
or its equivalent, one for the audit journal tape intended for audit
and internal revenue tax purposes and the other for the customers'
tape which are issued as itemized and consecutively numbered
receipts, PROVIDED, THAT, all tape receipts issued is of a quality
that could be preserved for a period within which the
Commissioner is authorized to m a k e an assessment and
collection of taxes so assessed as prescribed in Sections 203 and
222 of the National Internal Revenue Tax Code, as amended;
c) W h e n the machine is p u n c h e d for the purpose of
recording a sale, the amount of sale should automatically be
printed on the customer's receipt and the audit journal tape or its
equivalent. Under no circumstance should the machine be
operated without the corresponding tapes installed on both rollers
or its equivalent;
d) It must be equipped with a reset counter that
advances by one everytime the total is reset to zero;
e) The imprint on the customers' and audit journal tapes
or its equivalent should always be legible;
f) Electronic cash register machines with volatile
memory shall at all times be connected to a power sources and
shall not be used at anytime as reserve units (kept for future use)
to protect the memory mechanism/circuits and preserve stored
data;
g) Upon filing of the application, all the proprietor's and
reset (z) keys of machines with resettable accumulating grand
total shall be surrendered to the Revenue District Officer for safe-
206
keeping and control;
h) Registered machines with resettable accumulating
grand total shall not be reset, except when expressly authorized
by the Revenue District Officer;
i) The proprietor shall not change his business name or
the use of the registered machine or transfer to another business
location, branch or establishment, or otherwise without prior
written Notice to the proper office of the Bureau having jurisdiction
over said machine;
j) Likewise the proprietor w h o have been issued a
permit to use cash register or POS machine shall not have the
machine Tepaired, upgraded, changed, modified, updated, or
otherwise removed without prior written notice to the proper office
of the Bureau having jurisdiction over said machine;
k) After repair, upgrade, change, modification, update,
or otherwise and before re-use of the machine, the proprietor and
the person w h o m a d e the repair shall submit a joint sworn
statement to the Revenue District Officer and the proprietor shall
submit a new application for proper inspection and evaluation of
the Revenue Officer assigned by the Revenue District Officer
having jurisdiction over said machine;
I) Registered machines may be withdrawn from use,
either by retirement or sale, only upon prior application with and
approval by the Regional Director or Revenue District Officer, as
the case may be. Upon receipt of the application, such officer
shall cause the immediate verification of said machine and the
accounting records kept in connection therewith, to insure that all
the sales data registered in the. machine up to the last day it was
used are properly recorded for internal revenue purposes. The
approval shall show the following information as of the date of
retirement or sale: namely, the reset counter number, accumulated
grand total sales and the number of the last cash register receipt
issued. The permit previously granted shall be recalled for
cancellation;
m) The original permit should be securely attached to
the back of the machine to which it refers and must be
conspicuously visible to the public. The serial number of the
machine should also be printed in bold figures on the back thereof
to facilitate verification;
n) In cases where the applicant as enumerated in
Section 2 is engaged in taxable and non-taxable business
activities, a permit for a cash register or POS machine of the type
207
which is capable of clearly indicating separately in words sales of
taxable and non-taxable items, may be used." (Rev. Regs. No. 10-
99, Sec. 2.5)
20. Data required to be reflected on the register

receipts. "The cash register receipts must show among others,
the following.
1. Proprietor's business name;
2. Municipal/City address (if the machine is used by a
branch, the receipt should identify the particular branch; e.g.
Branch 1 or Branch 2 Manila, etc.);
3. Proprietor's V A T or non-VAT number;
4. Amount of the transaction; and
5. Date of the transaction.
In no case shall a cash register or POS machine be used
without the customer's receipt clearly showing all the data required
above, except in the c a s e of machines, where the proprietor has
been authorized by the Regional Director or the Revenue District
Officer concerned the use thereof pending the completion of the
installation of the tape heading for a period not exceeding thirty
(30) days from the date of such authority." [Rev. Regs. No. 10-99,
Sec. 25 (o)]
21. Receipt Numbering Mechanism/Circuit. "In order to

maintain the consecutive s e q u e n c e of the numbers imprinted on
the customer's receipts and the audit journal tape, the receipt
numbering mechanism/circuit of a registered machine shall not be
disturbed or tampered with " [Rev Regs. No. 10-99, Sec. 25 (p)]
22. Inspection/Verification of Subsidiary Cash

Register Sales Book and C a s h Register Machines. "The
subsidiary cash register sales book shall be kept at all times at the
place where the machine is located and shall be available at any
time for verification by duly authorized internal revenue officers.
Likewise, all cash register and P O S machines, whether
registered or not, shall be subject to inspection any time by duly
authorized internal revenue officers." [Rev. Regs. No. 10-99, Sec. 2.5
(q)J
23. Cash register machines for internal control. "Any

proprietor, owner or operator of a business establishment may use
a cash register machine of any type for 'internal control purposes',
208
provided that, duly registered sales invoices or receipts are issued
for every sale. However, such proprietor, owner or operator shall
first notify the proper Revenue District Officer of his intention to
use the machine solely for 'internal control' and shall secure a
poster from the said Office which shall be securely attached at the
back of the machine conspicuous to the public showing the
following:
W A R N I N G - THIS M A C H I N E IS NOT A U T H O R I Z E D T C T "

ISSUE RECEIPT
A S K FOR S A L E S INVOICE. R E P O R T ANY VIOLATION

T O T H E BIR
C O M M I S S I O N E R O F INTERNAL REVENUE
At no time shall the poster be detached or covered from

public view.
However, cash register machines without a built-in receipt
dispensing mechanism or roller on which to mount the customers'
roll may be used for internal control purposes without complying
with the foregoing requirements." (Rev Regs No 10-99, Sec 4,)
24. Exemptions. "Persons authorized to use cash register

machines are hereby e x e m p t e d from showing on the cash register
receipt the name, business style and address of the purchaser and
taxpayer identification number in case where the purchaser is a
V A T registered person, regardless of the amount of sales. This,
however, does not preclude the purchaser from requiring a
registered sales invoice or official receipt." (Rev Regs. No. 10-99.
Sec. 5)
25. Procedures in recording sales. "The entries in the audit

journal tape or its equivalent, shall be summarized at the end of
the day and the total transferred to the Cash Register Sales Book.
Thereafter, the total sales in all the registered machines shall be
summarized and entered in the Cash Receipts Book or Columnar
Journal not later than twelve o'clock noon of the following business
day. The Cash Receipts Book, or Columnar Journal shall have a
special column strictly for sales recorded thru the cash register or
POS machines to properly distinguish sales through the use of re-
209
gistered sales invoices or receipts The used portion of the audit
journal tape, appropriately identified to the machine and certified
correct by the proprietor or his authorized representative, shall be
cut off from the audit roll at the end of each business day and
shall constitute the basic document to support daily sales entries
in the cash register sales book. The cash register sales book and
the used audit journal tape or its equivalent, shall form part of the
accounting records and shall be preserved within the same period
prescribed by applicable laws, rules and regulations." (Rev Regs
No 10-99, Sec 3)
26. Registration of Cash Register Sales Book. The

cash register sales book or its equivalent shall be registered with
the proper Revenue District Office before use." (Rev Regs No 10-
sl
99, Sec. 8 3, 1 sentence)
27. Unmanned bill, coin or token operated machine to

be registered. "An unmanned machine capable of dispensing
goods and services in exchange for bills, coins or tokens without
the capacity for issuing cash register receipts are required to
register with the proper Bureau office having jurisdiction over the
1
said machine.' (Rev Regs. No. 10-99, Sec. 6.1)
28. Effect of failure of VAT-registered person to issue

receipts or invoices. The C o m m i s s i o n e r or his authorized
representative is hereby e m p o w e r e d to suspend the business
operations and temporarily close the business establishment of
any VAT-registered person w h o fails to issue receipts or invoices
(NIRC of 1997, Sec 115 (a) (1)),
duration of not less than five (5) days a n d shall be lifted only upon
Commissioner in the closure order." (Ibid., Sec 115, last par)
29. Criminal liability for failure or refusal to issue

receipts or sales or commercial invoices. Any person
who, being required under Section 237 to issue receipts or sales
or commercial invoices, fails or refuses to issue such receipts or
invoices, issues receipts or invoices that do not truly reflect and/or
contain all the information required to be shown therein, or uses
multiple or double receipts or invoices, shall, upon conviction for
each act or omission, be punished by a fine of not less than One
210
thousand pesos (P1.000) but not more than Fifty thousand pesos
(P50.000) a n d suffer imprisonment of not less than two (2)years
but not more than four (4) years." [NIRC of 1997, Sec. 264 (a)]
N O T E S A N D C O M M E N T S : "Sec 237. Issuance of Receipts or Sales
or Commercial Invoices. - All persons subject to an internal revenue tax
shall, for each sale and transfer of merchandise or for services entered
valued at Twenty-five pesos (P25.00) or more, issue duly registered
receipts or sales of commercial invoices xxx' [NIRC of 1997, as
amended by Rep Act No. 9337)
Refer to the discussions under no. 1, supra.
30. C o n s e q u e n c e s of a VAT-registered person issuing

e r r o n e o u s V A T Invoice or V A T Official Receipt. "If V A T -
registered person issues a V A T invoice or V A T official receipt for a
VAT-exempt transaction, but fails to display prominently on the
invoice or receipt the term 'VAT-exempt sale', the issuer shall be
liable to account for the tax imposed under Section 106 (Value-
added Tax on Sale of G o o d s or Properties) or 108 (Value-added
Tax on Sale of Services and Use or Lease of Properties) as if
Section 109 (Exempt Transactions) did not a p p l y " [NIRC of 1997,
Sec. 113 (D) (2), words in parentheses supplied]
31. Liability of corporate officers. In case of

corporations, partnerships or associations, the penalty shall be
imposed on the president, general manager, branch manager,
officer-in-charge and/or employees responsible for the violation."
(Rev. Regs. No 4-2000, Sec 5)
B O O K S O F A C C O U N T S FOR VAT T A X P A Y E R S
1. S u m m a r y of regular accounting records (books of

account) being used by taxpayers including VAT
taxpayers.
a. Journal
b. Ledger
c. Subsidiary Books
1) Sales journal
2) Purchases Journal
3) Cash Book
a) Cash receipts book
b) Cash disbursements book
c) Book of Inventories (Rev Regs No VI-
211
A, Sec. 13)
2. Books of accounts required to be kept by a VAT

taxpayer. "All corporations, companies, partnerships, or persons
required by law to pay internal revenue taxes shall keep
a. a journal and
b. a ledger or their equivalents." [ N I R C of 1997, Sec.
2 3 2 (A), paraphrasing, arrangement and numbering supplied]
3. Subsidiary books required to be kept by VAT

taxpayers. "Notwithstanding the provisions of Section 2 3 3 (on
Subsidiary Books), all persons subject to the value-added tax
under Sections 106 (Value-added Tax on Sale of Goods and
Properties) and 108 (Value-added Tax on Sale of Services and
Use or Lease of Properties) shall, in addition to the regular
accounting records required, maintain
a. a subsidiary sales journal and
b. subsidiary purchases journal on which the daily sales
and purchases are recorded. The subsidiary journals shall contain
such information as may be required by the Secretary of Finance."
[ N I R C of 1997, S e c 113 ( C ) , w o r d s in parentheses, arrangement a n d
numbering supplied]
4. Journal, definitions:
a. A journal is a record in which the effects of
transactions are first posted. It is a chronological '(day-to-day)
record of business transactions, such as payment and receipts of
sums of money, etc. The information that is recorded for each
transaction includes the date of the transaction, the debit and
credit changes in specific ledger accounts, and a brief explanation
of the transaction.
Since the journal is the accounting record in which
transactions are first recorded, it is sometimes called the book
of original entry.
b. A journal is "a book of original entry in which
transactions affecting the business of a taxpayer are recorded
consecutively day by day as they occur." [ B I R H a n d b o o k o n Audit
Procedures and Techniques-Volume I (Revision 2QQQ). Chapter IV A p
9]
5. Kinds of journals.
a. General journal
212
b. Special journals
1) Sales journal
2) Purchases journal
3) Cash book
6. Sales journal, definition and concept. This is a

book whereby sales on account are recorded which are supported
by sales invoices and which are also the documents that will serve
as the basis of recording the transactions in the books of
accounts.
Cash sales are usually recorded in the cash book although
they may be posted in both books representing a debit to cash in
the cash book and a credit to sales in the sales book.
Every entry in the sales journal represents a debit to a
customer's account and a credit to sales to be posted in the
general ledger.
Sales returns and allowances are also recorded in the sales
book which represents a debit to Sales Returns and Allowances
and a credit to Accounts Receivable to be posted in the general
ledger. This w o u l d m e a n a decrease in Sales and eventually a
decrease in an asset account." (BIR Handbook on Audit Procedures
and Techniques - Volume I (Revision 2000), Chapter IV. A.1, p. 9]
7. Purchase journal, definition and concept. "This is a

book used to record exclusively all transactions involving the
purchase or acquisition of merchandise on account.
The business document that serves as evidence of a
purchase transaction is the purchase invoice.
An entry to record charge purchases is a debit to Purchases
and a credit to Accounts Payable to be posted in the general
ledger.
Purchase returns and allowances are also recorded in this
book and posted in the general ledger representing a debit to
Accounts Payable and a credit to Purchase Returns and
Allowances which would mean a decrease in the purchases
account.
In certain instances where the volume of business is large
and under the Value-Added Tax system, taxpayers maintain
subsidiary sales and purchase journals where details of daily sales
and purchases are recorded." [BIR Handbook on Audit Procedures
and Techniques - Volume I (Revision 2000), Chapter IV.A.2, p 10]
213
8. Cash book, definition and concept. This is "a book
whereby all transactions involving cash such as cash receipts or
cash disbursements are recorded." [BIR Handbook on Audit
P r o c e d u r e s a n d T e c h n i q u e s - V o l u m e I (Revision 2000), Chapter IV.A.3,
p. 10]
9. Types of cash book. The two types of cash book are the
following:
a Cash receipts book; and
b. Cash disbursements book.
10. Cash receipts book, definition. This is "a book

whereby all transactions involving cash receipts of whatever
source are recorded." [BIR Handbook on Audit Procedures a n d
Techniques-Volume I (Revision 2000), Chapter IV.A.3.1, p. 10]
11. Cash disbursements book, definition. This is "a

book whereby all transactions involving cash or check
disbursements are recorded." [BIR Handbook on Audit Procedures
a n d Techniques -Volume I (Revision 2000), Chapter IV.A.3 2, p 10]
12. Ledger, definitions.

a. The collection of ail accounts used by a business.
The information that is recorded in the ledger usually comes from
the journal. A ledger may be a loose-leaf book, file, or other
record containing all the separate accounts of a business.
b. A ledger is a book of accounts in which are collected
and arranged, each under its appropriate head, the various
transactions scattered through the journal or daybook. (First
National Building Co. v. Vanderberg, 719 P. 224 cited in Consolidated
Mines, Inc. v Court of Tax Appeals, L-18843 and L-18844, August 29,
1974)
c. This is "a book of final entry wherein the classified
accounts or items of all transactions entered in the journal are
posted. All entries in the journal must be posted to the ledger and
shall be classified accordingly so as to show the assets, liabilities,
capital and the operating accounts. This will be the basis for the
preparation of the balance sheet a n d the profit and loss statement
covering the operation of the business. No entry shall be made in
the ledger unless said entry originates from the journal." [BIR
Handbook on Audit Procedures and Techniques -Volume I (Revision
s
2000), Chapter IV B, 1 ' par, p. 10]
214
13. Kinds of ledgers.
a. General ledger
b Subsidiary ledgers
1) Accounts receivable ledger
2) Accounts payable subsidiary ledger
3) Inventory subsidiary ledger
4) Others
14. The control account, its concept. "In the general

ledger, accounts are usually transferred and grouped into certain
accounts to a subsidiary book. This general ledger account is
called control account. Control accounts in the general ledger
contain summarized information that is recorded in detail in a
subsidiary book or ledger. It is, therefore, the control account
which contains s u m m a r i z e d information and the subsidiary ledger
contains the s a m e information but in detail.
Thus, in order to relieve the general ledger of too many
individual accounts, business concerns having numerous accounts
with customers and creditors will transfer said accounts to
separate ledgers - one for customers and another for creditors.
For example, the control account for the customer's subsidiary
book will be called Accounts Receivable', while the control
account for the creditor's subsidiary book will be called 'Accounts
Payable' [BIR Handbook on Audit Procedures and Techniques -
n d
Volume I (Revision 2000), Chapter IV.C, 1*' and 2 pars , p. 11)
15. Subsidiary book, definition. This is the book where

the accounts are usually transferred and grouped into certain
accounts, such as the subsidiary ledgers.
16. Book of inventories. Persons required by law to pay

internal revenue taxes on business shall keep, in addition to the
other books and records prescribed by the regulations, a book of
inventories where they shall record in detail the quantity,-
description, unit cost and total cost of every item of their stocks-in-
trade, materials, supplies and all other goods found in the
premises of their establishments at the time of the start of
business and at the close of the calendar year or accounting
period
The inventory at the beginning shall be submitted to the BIR
within ten (10) days after securing the privilege tax receipt or
starting the business, and the subsequent inventories not later
215
than thirty (30) days after the close of the calendar year or
accounting period. ( R e v R e g s No. V l - A , S e c 1 5 )
17. Language in which books are to be kept. All

corporations, companies, partnerships or persons required by law
to keep a journal and a ledger or their equivalent shall keep the
same in a native language, English or Spanish. The keeping of
such books or records in any language other than a native
language, English or Spanish, is prohibited. (NIRC of 1997, Sec
234, in relation to Sec 232)
18. W h e n translation required. "If, in addition to the

journal, ledger and their equivalent the taxpayer keeps other
books or records in a language other than a native language,
English or Spanish, he shall make a true and complete translation
of all the entries in such other books or records into a native
language, English or Spanish, and the said translation must be
made by the bookkeeper or such taxpayer, or, in his absence, by
his manager and must be certified under oath as to its correctness
by the said bookkeeper or manager, and shall form an integral part
of the books of accounts aforesaid." (NIRC of 1997, Sec. 234)
19. Criminal liability for failure to keep books of

accounts, and to translate if required. "Any person w h o : •
xxx xxx xxx
(7) Fails to keep the books of accounts or records
mentioned in Section 232 in a native language, English or
Spanish, or to make a true and complete translation as required in
Section 234 of this Code, or w h o s e books of accounts or records
kept in a native language, English or Spanish, and found to be at
material variance with books or records kept by him in another
language; or
xxx xxx shall upon conviction for such act or omission, be
punished by a fine of not less than Fifty thousand pesos (P50.000)
but not more than One hundred thousand pesos (P100,000) and
suffer imprisonment of not less than two (2) years but not more
than six (6) years.
If the offender is a Certified Public Accountant, his
certificate as a Certified Public Accountant shall be automatically
revoked or cancelled upon conviction.
In the case of foreigners, conviction under this Code shall
result in his immediate deportation after serving sentence without
216
further proceedings for deportation." (NIRC of 1997, Sec 257
paraphrasing supplied)
20. Books of account are not required to be kept

w h e r e quarterly sales do not e x c e e d P50.000.00 instead
simplified b o o k k e e p i n g records required.
a. W h e r e quarterly sales, earnings, or output do not
exceed P50,000.00,
b. books are not required to be kept.
c. Instead the taxpayer shall maintain a simplified set of
bookkeeping records
1) duly authorized by the Secretary of Finance
2) wherein all transactions and results of
operations are shown and
3) from which all taxes due the government
4) may readily and accurately be ascertained
and determined
5) any time of the year [Sec 232 (A), NIRC of
1997}
NOTES AND COMMENTS: An optionally VAT-registered person may
have quarterly sales that do not exceed P50,000.00.
21. "Simplified set of bookkeeping records" to be

kept w h e r e quarterly sales do not exceed P50.000.00.
The "simplified set of bookkeeping records," consists of the
records of daily sales and cash receipts, the record of daily
purchases, expenses and cash disbursements, record of summary
of transactions, and yearly statements of net worth and operations
which may be in combined form or in a separate book.
22. Additional requirement w h e r e quarterly sales

exceed P150,000.00: Statutory audit.
a. W h e r e the quarterly sales, earnings, receipts or
output exceeds P150,000.00,
b. Books of accounts should be audited and examined
yearly by independent CPAs [NIRC of 1997, Sec 232 (A),
paraphrasing supplied]
23. Registration of Books of Accounts. Persons

required to keep books of accounts, internal revenue books,
records of receipts and disbursements, additional registers and
other records, for recording their transactions as prescribed in
217
these regulations shall, before using any of the aforesaid books,
records, registers, first present them to the Revenue Collection
Agent where his principal place of business is located for approval
and registration." [Rev Regs No. V-1, Bookkeeping Regulations, Sec
sl s
19 (a), 1 par, 1 ' sentence, as amended by Rev Regs. No 6-87]
24. Renewal of registration of Books of Accounts, in

the case of renewal of registration of books of accounts, the
applicant-registrant shall present to the said Revenue Collection
Agent his duly registered books of accounts used during the
immediately preceding taxable year as a condition precedent for
the registration of his books of accounts for the current taxable
year. If it is shown that the said books of accounts used during the
said preceding taxable year has not been duly registered or no
such books of accounts have in fact been used, registration
applied for the current books of accounts shali be effected by the
said Revenue Collection Agent, subject to payment by the
applicant-registrant of the corresponding penalty for the said
violation. The amount of penalty shall be determined in
accordance with the corresponding schedules of compromise
penalty prescribed by regulations. This requirement shall not,
however, apply with respect io a registrani-appiicani oniy
engaging in business for the first time, since he w a s not required
to keep duly registered books of accounts with respect to such
prior period." (Rev Regs No. V-1, Bookkeeping Regulations,, Sec. 19
s
(a), 1 par, 2" and succeeding sentences, as amended by Rev. Regs.
No. 11-89]
25. Preservation of books of accounts and other

accounting records. Ail books of accounts including the
subsidiary books, and other accounting records of corporations,
partnerships, or persons shall be preserved by them for a period of
three years after the last day prescribed by law for the filing of the
return, which is the period within which the Commissioner of
Internal Revenue is authorized to make an assessment. (NIRC of
1997, Sec 235 in relation to Sec. 203)
26. Books of account admissible as evidence but of

low probative value. Books of account are admissible as
"entries made in the ordinary course of business", but in tax cases,
the Supreme Court, appears not to place too high a probative
value on them considering that "books of account do not prove per
218
se that they are veracious, in fact, they may be more consistent
than truthful." Indeed, books of account may be used to carry out
a plan of tax evasion. (Collector of Internal Revenue v. Reyes, L-11534
and L-11558, November 25, 1958 cited in Consolidated Mines, Inc v
Court of Tax Appeals, 58 SCRA 618)
NOTES AND COMMENTS: Under the best evidence rule, original
documents must be accompanied by working papers. (Collector v Li Yao
119 Rhil. 102, 207)
27. Requisite for books of account to be admissible.

In order for books of accounts to be admissible, it must appear
that they are books of original entry, that the entries were made in
the ordinary course of business, contemporaneously with the facts
recorded, and by one w h o had knowledge of the facts. (San
Francisco Teaming Co. v. Gray, 11 CA 314, Brown v. Ball, 123 CA 758
cited in Consolidated Mines, Inc. v Court of Tax Appeals, 58 SCRA 618)
28. Loose leaf f o r m may be allowed. In meritorious cases

and upon written authority of the BIR Commissioner, the use of the
general journal a n d the general ledger in loose leaf form may be
allowed.
"1. All requests for permit to use loose leaf books of
accounts, records, invoices and receipts should be filed either in
the office of the Revenue District Officer or the Regional Director.
The said request should be referred to the fieldmen of the revenue
district w h o has jurisdiction over the taxpayer, for appropriate
investigation.
T h e investigation should be conducted in accordance
with the following:
(a) The necessity of the use of the loose leaf
forms requested should be determined and the reason or
reasons for recommending the approval or disapproval of
the requests should be clearly stated in the report;
(b) The report should, likewise, include a statement
of the privilege or fixed taxes paid by the taxpayer citing
the official receipt/confirmation number, date or payment,
amount paid and the corresponding paragraph and
schedule, including a statement whether the business of
the taxpayer has been duly registered with the Bureau of
Internal Revenue. The examiner should investigate
whether all the privilege and fixed taxes due on the
activities engaged in by the taxpayer have been duly paid;
219
(c) The taxpayer should be informed by the
investigation examiner that a condition precedent to the
issuance of a permit to use loose leaf invoices and
receipts is that the taxpayer upon receipt of the permit
should immediately register with the Collection Agent or
the Revenue District Officer, a register which should be a
bound book. The bound book should show in detail and in
column the serial numbers of the invoices or receipts
printed for use by the business on the left side of the book.
Every additional printing should be recorded on the same
side of the book. On the right hand side, the serial
number of the invoices and receipts used during the week,
together with the total amount involved should be entered
weeKly.
2. Upon receipt by the Revenue District Officer of the
report of the investigating examiner, he must check with the IBM
list of delinquent accounts to determine whether the taxpayer
owes anything to the Bureau. If the taxpayer is delinquent in the
payment of his tax liabilities, such fact should be communicated to
the taxpayer with the request that the delinquent taxes should be
paid, otherwise his request to use loose leaf forms will not be
given due course. If there is no delinquency, on the part of the
taxpayer, the report should be forwarded to the Regional Office.
3. Upon receipt by the Regional Office, the reports should
be processed to determine further through the Collection Branch
whether the taxpayer has no delinquent tax liabilities, through the
Tax Fraud Unit to determine whether the taxpayer bas derogatory
information regarding tax evasion, and through the Assessment
Branch to determine whether the taxpayer has any pending report
for processing which will involve a big amount of deficiency tax. In
case of positive information on any of the above-mentioned
branches, the Regional Director should inform the taxpayer of
such fact, informing him that his request cannot be given due
course.
4. In the preparation of the permit to use loose leaf
invoices which should be prepared for the signature of the
Regional Director, the taxpayer should be required to bind the
loose leaf forms within fifteen (15) days after the end of his taxable
year and the condition to register a bound book for recording the
serial numbers of invoices printed and serial numbers of invoices
used within the week and the amount involved The letter should
likewise contain a statement that if the taxpayer is discovered to
220
have violated any of the provisions of the bookkeeping regulations,
his permit to use loose leaf forms will be immediately cancelled.
5. The permit should be duly numbered and a permit
register should be kept in the Assessment Branch showing the
number of the permit, name of the taxpayer, address, nature of
loose leaf to be used and such other information as may be
necessary for the keeping of the register
6. All permits to be issued under this Circular are to be
considered on a permanent basis unless otherwise r e v o k e d "
(RMC No. 13-82)
29. Computer-based accounting system allowed. The

adoption of a computer-based accounting system requires a
permit from the BIR. (BIR Ruling, August 17, 1989)
The adoption of a computer-based accounting system in
lieu of the standard accounting records is allowed subject to the
following:
a. A readable printout of the information/accounting
data should be made available or should be verifiable; and
b. Diskettes containing records, classification, and
summary of transactions shall be subject to examination and
inspection by internal revenue officers as if they are traditional
books of accounts, in accordance with Section 235 of the NIRC.
(BIR Ruling No. 037-91, May 17, 1991)
30. Computerized Accounting System. "It is a system

whereby information are fed into the computer, thus providing
uniformity in the processing of transactions." [BIR Handbook on Audit
sl
Procedures and Techniques -Volume I (Revision 2000), Chapter IV D, 1
par., p. 11]
31. Types of system under the computerized method

of accounting.
a. Simple system;
b Complex system.
c. Sophisticated system. [BIR Handbook on Audit
Procedures and Techniques -Volume I (Revision 2000), Chapter IV.D, p.
11]
32. Simple computerized accounting system,

characteristics. "Transactions are easily traced in a simple
computer system where the primary function performed is-the sort-
221
ing and manipulation of input data and the printing of output
reports. There is no loss of audit trail. Audit of this type of system
requires little training and background in Information Systems (IS).
An example of this type of system are shipping data that are
encoded and processed throughout the system along with
accounts receivable ledgers. The output is a multicopy sales
invoice for each sale, an updated subsidiary ledger, and a sales
j o u r n a l " (BIR Handbook on Audit Procedures and Techniques -Volume I
(Revision 2000), Chapter IV.D.1, p. 11]
33. Complex computerized accounting system,

characteristics. "This is characterized by the batch processing
mode, the existence of one Central Processing Unit (CPU) and the
extensive u s e of master files on magnetic media in processing. In
this type of system, processing is usually confined to calculations,
extensions, summarizations and the like. There is some loss of
audit trail but the same is not significant. The audit of such system
can only be done by auditors with limited specialized training in IS
auditing. Because of the extent of a printed audit trail, the auditors
have the option of performing audit tests with or without the use of
the computer based on his experience." [BIR Handbook on Audit
Procedures and Techniques -Volume I (Revision 2000), [Chapter IV.D.2,
pp. 11-12]
34. Sophisticated computerized accounting system,

characteristics. "In this type of system, transactions are
initiated within the computer. There is extensive data processing
and consequently, a substantial loss of audit trail. Most of the
output is in machine-readable form.
Heavy reliance must be placed on internal control in the
audit of said system. Since many of these tests require IS skills
beyond the knowledge of most auditors, IS specialists are usually
called upon by the auditors." [BIR Handbook on Audit Procedures and
Techniques -Volume I (Revision 2000), Chapter IV.D.3, p. 12]
35. Duty upon retiring from business. All corporations,

partnerships or persons that retire from business shall,
a. within ten (10) days from the date of retirement or
within such period of time as may be allowed by the Commissioner
in special cases,
b. submit their books of accounts, including the
subsidiary books and other accounting records to the Commis-
222
sioner or any of his deputies for examination,
c after which they shall be returned
Corporations and partnerships contemplating dissolution
must notify the Commissioner; and shall not be dissolved until
clear of any tax liability. [NIRC of 1997, Sec 235 (E)J
36. Examination of books and records. Books and

records shall be subject to examination and inspection by internal
revenue officers. (NIRC of 1997, Sec. 235, paraphrasing supplied)
37. W h e r e examination is to be made. Examination and

inspection of books of accounts and other accounting records shall
be done in the
a Taxpayer's office or
b. place of business or in the
c. Office of the Bureau of Internal Revenue. (NIRC of
1997, Sec. 235. arrangement and numbering supplied)
38. Criminal liability for making false entries, records

or reports.
"(A) Any financial officer or independent Certified Public
Accountant engaged to examine and audit books of accounts of
taxpayers xxx xxx and any person under his direction who:
(1) Willfully falsifies any report or statement
bearing on any examination or audit, or renders a report,
including exhibits, statements, schedules or other forms of
accountancy work which has not been verified by him
personally or under his supervision or by a member of his
firm or by a member of his staff in accordance with sound
auditing practices, xxx
(B) Any person who:
(1) Not being an independent Certified Public
Accountant xxx xxx or a financial officer, examines and
audits books of account of taxpayers; or
xxx xxx xxx
(3) Offers any taxpayer the use of accounting
bookkeeping records for internal revenue purposes not in
conformity with the requirements prescribed in this Code or
rules and regulations promulgated thereunder; or
(4) Knowingly makes any false entry or enters any
false or fictitious name in the books of accounts or records
mentioned in the preceding paragraphs; or
223
(5) Keeps two (2) or more sets of such records or
books of accounts; or
(6) In any w a y commits an act or omission, in
violation of the provisions of this Section; or
xxx xxx xxx
(8) Willfully attempts in any manner to evade or
defeat any tax imposed under this Code xxx xxx shall upon
conviction for such act or omission, be punished by a Tine of
not less than Fifty thousand pesos (P50.000) but not more
than One hundred thousand pesos (P 100,000) and suffer
imprisonment of not less than two (2) years but not more
than six (6) years.
If the offender is a Certified Public Accountant, his
certificate as a Certified Public Accountant shall be automatically
revoked or cancelled upon conviction.
In the case of foreigners, conviction under this Code shall
result in his immediate deportation after serving sentence without
further proceedings for deportation." ( N I R C of 1997, S e c . 257,'
RETURN A N D P A Y M E N T O F T H E V A T
1. Return required to be filed by a V A T taxpayer, in

general. " E v e r y person liable to pay the value-added tax
imposed under this Title (Title IV, Value-Added Tax) shall file a
quarterly return of the amount of his gross sales or receipts within
twenty-five (25) days following the close of each taxable quarter
prescribed for each taxpayer." (NIRC of 1997, as a m e n d e d by R e p
s
Act No. 9337, Sec 114 (A), 1 ' par., words in p a r e n t h e s e s a n d
2. W h e n tax is to be paid, in general. "VAT-registered

persons shall pay the value-added tax on a monthly basis."
s
[NIRC of 1997, as a m e n d e d by R e p A c t No. 9337, S e c . 114 (A), 1 ' par.,
p a r a p h r a s i n g supplied]
3. Return required to be filed by a person whose VAT

registration was cancelled and w h e n tax is to be paid.
"Any person, whose registration has been cancelled in accordance
with Section 236 (Registration Requirements), shall file a return
and pay the tax due thereon within twenty-five (25) days from the
date of cancellation of registration; Provided: That only one conso-
224
lidated return shall be filed by the taxpayer for his principal place
of business or head office and all branches." [NIRC of 1997 as
n d
amended by Rep. Act No. 9337, Sec 114 (A). 2 par, paraphrasinq
supplied]
4. Place w h e r e return is to be filed and tax to be paid.

"Except as the Commissioner otherwise permits, the returns shall
be filed with and the tax paid to
a. an authorized agent bank,
b. Revenue Collection Officer or
c. duly authorized city or municipal Treasurer in the
Philippines located within the revenue district where the taxpayer
is registered or required to register." [NIRC of 1997, as amended by
Rep. Act No. 9337, Sec. 114 (B), arrangement and numbering supplied]
5. No oath required for return but declaration made

under penalties of perjury. "Any declaration, return or other
statements required under this Code, shall, in lieu of an oath,
contain a written statement that they are made under penalties of
perjury. A n y person w h o willfully files a declaration, return or
statement containing information which is not true and correct as
to every material matter shall, upon conviction, be subject to the
penalties prescribed for perjury under the Revised Penal C o d e "
(NIRC of 1997, Sec. 267)
6. Failure of VAT-registered person file a value-

added tax return results to temporary closure of
business. The Commissioner or his authorized representative is
hereby empowered to suspend the business operations and
temporarily close the business establishment of any VAT-
registered person w h o fails to file a value-added tax return. [NIRC
of 1997, Sec. 115(a) (2)],
Commissioner in the closure order." {Ibid, Sec 115, last par)
7. Criminal liability for failure to file VAT returns,

supply correct and accurate Information, and pay VAT.
"Any person required under tis Code or by rules and regulations
225
punished by a fine of not less than Ten thousand pesos (P10,000)
than ten (10) years.
Any person who attempts to make it appear for any reason
files a return or statement and subsequently withdraws the same
was actually filed shall, upon conviction therefor, be punished by a
fine of not less than Ten thousand pesos (P10,000) but not more
than Twenty thousand pesos (P20.000) and suffer imprisonment
of not less than one (1) year but not more than three (3)years."
( N I R C of 1997, S e c . 255, paraphrasing supplied)
8. Civil penalties relative to V A T returns and payment

of the tax. The author submits that the following civil penalties
with regard to internal revenue taxes also find application to VAT.
to.be paid, a penalty equivalent to twenty-five percent (25%) of he
(1) Failure to file any return and pay the tax due
thereon as required under the provisions of this Code or
rules and regulations on the date prescribed; or
other than those with w h o m the return is required to be filed;
on or before the date prescribed for its payment;
tax, in case any payment has been m a d e on the basis of such re-
226
turn before the discovery of the falsity or fraud: Provided, That a
substantial underdeclaration of taxable sales, receipts or income,
or a substantial overstatement of deductions, as determined by the
1
Commissioner pursuant to the rules and regulations to be
promulgated by the Secretary of Finance, shall constitute prima
facie evidence of a false or fraudulent return: Provided, further,
That failure to report sales, receipts or income in an amount
exceeding thirty percent (30%) of that declared per return, and a
claim of deductions in an amount exceeding thirty percent (30%)
of actual deductions shall render the taxpayer liable for substantial
underdeclaration of sales, receipts or income or for overstatement
of deductions, as mentioned herein."
9. Effect of understatement of VAT taxable sales or

receipts. T h e Commissioner or his authorized representative is
hereby e m p o w e r e d to suspend the business operations and
temporarily close the business establishment of any VAT-
registered person w h o understates taxable sales or receipts by
thirty percent (30%) or more of his correct taxable sales or receipts
for the taxable quarter. (NIRC of 1997, Sec. 115 (a) (3)J,
Commissioner in the closure order." {Ibid, Sec 115, last p a r )

payment of VAT. "Any person w h o willfully attempts in any
manner to evade or defeat any tax imposed under this Code or the
payment thereof shall, in addition to other penalties provided by
law, upon conviction thereof, be punished by a fine of not less than
Thirty thousand pesos (P30.000) but not more than One hundred
thousand pesos (P100,000) and suffer imprisonment of not less
than two (2) years but not more than four (4) years, provided, That
the conviction or acquittal obtained under this Section shall not be
a bar to the filing of a civil suit for the collection of taxes." ( N I R C of
1997, Sec. 254)
11. Interest on VAT payments, in general. "There shall

be assessed and collected on any unpaid amount of tax, interest
at the rate of twenty percent (20%) per annum, or such higher rate
as may be prescribed by rules and regulations from the date
prescribed for payment until the amount is fully paid " [ N I R C of
227
1997, Sec. 249 (A)]
12. Deficiency interest. Any deficiency in the tax due, as

this term is defined in the NIRC of 1997, shall be subject of
interest at the rate of twenty (20%) per annum, or such higher rate
as may be prescribed by rules and regulations, which interest shall
be assessed and collected from the date prescribed for its
payment until the full payment thereof. [NIRC of 1997, Sec. 249 (B)
in relation to Sec. 249 (A)]
13. Delinquency interest. "In c a s e of failure to pay:

(1) The amount of the tax due on any return required to
be filed, or
required, or
on the due date appearing in the notice and demand of the
unpaid amount, interest at the rate of twenty percent (20%) per
annum, or such higher rate as may be prescribed by rules and
regulations, until the amount is fully paid, which interest shall form
part of the tax." [NIRC of 1997, Sec. 249 (C) in relation to Sec. 249 (A),
words in italics supplied]
14. Withholding of V a l u e - A d d e d Tax. "The Government or

any of its political subdivisions, instrumentalities or agencies,
including government-owned-or controlled corporations (GOCCs)
shall, before making payment on account of each purchase of
goods and services which are subject to the value-added tax
imposed under Sections 106 (Value-added Tax on Sale of Goods
or Properties) and 108 (Value-added Tax on Sale of Services and
Use or Lease of Properties) of this Code, deduct and withheld the
value-added tax due at the rate of five percent (5%) of the gross
payment thereof: Provided, That the payment for lease or use of
properties' or property rights to nonresident owners shall be
subject to twelve percent (12%) withholding tax at the time of
payment. For purposes of this Section, the payor or person in
control of the payment shall be considered as the withholding
agent." [NIRC of 1997. as amended by Rep Act No. 9337, Sec. 114 (C),
2 par, RMC No 7-2006, words in parentheses paraphrasing supplied]
15. Remittance of the withheld Value-Added Tax. The
228
value-added tax withheld under this Section shall be remitted
w i t h i n t e n ( 1 0 ) d a y s f o l l o w i n g t h e e n d o f the m o n t h t h e w i t h h o l d i n g
was m a d e " ( N I R C o f 1 9 9 7 , a s a m e n d e d b y R e p Act N o 9337 Sec 114
( C ) , last p a r ]
16. Failure of a withholding agent to collect and remit

tax. "Any person required to withhold, account for, and remit any
tax imposed by this Code or w h o willfully fails to withhold such tax,
or account for and remit such tax, or aids or abets in any manner
to evade any such tax or the payment thereof, shall, in addition to
the civil penalties and interest, be liable upon conviction to a
penalty equal to the total amount of the tax not withheld, or n o t
accounted for and remitted." ( N I R C of 1997, Sec 2 5 1 , words in
p a r e n t h e s e s supplied)
17. Criminal liability for failure to withhold and remit

VAT. "Any person required under this Code or by rules and
regulations promulgated hereunder to xxx xxx withhold or remit
taxes withheld xxx xxx at the time or times required by law or rules
and regulations shall, in addition to other penalties provided by
law, upon conviction thereof, be punished by a fine of not less than
Ten thousand pesos (P10,000) and suffer imprisonment of not
less than one (1) year but not more than ten (10) years." ( N I R C of
S I
1 9 9 7 , Art. 2 5 5 , 1 p a r , paraphrasing supplied)
18. Penal liability of corporations. "Any corporation,

association or general co-partnership liable for any of the acts or
omissions penalized under this Code, in addition to the penalties
imposed herein upon the responsible corporate officers, partners,
or employees, shall, upon conviction for each act or omission, be
punished by a fine of not less Fifty thousand pesos (P50.000) but
nor more than O n e hundred thousand pesos (P100,000)." ( N I R C
of 1 9 9 7 , S e c . 2 5 6 )
ELECTRONIC FILING A N D PAYMENT SYSTEM
1. Electronic Filing and Payment System (EFPS),

definition. This refers to the "system developed and maintained
by the Bureau of Internal Revenue (BIR) for electronically filing tax
returns, including attachments, if any, and paying taxes due
thereon, specially through the internet" ( R e v R e g s N o 9 - 2 0 0 1 , C e c
2-1.1
229
2. Purpose for development and adoption of EFPS.
T h e Electronic Filing and Payment System (EFPS) was
developed primarily to provide Philippine taxpayers with top quality
and convenient service through a much faster processing and
immediate confirmation of filing of tax returns and payment of
taxes due thereon. EFPS is an alternative mode of filing returns
and payment of taxes which deviates from the conventional
manual process of encoding paperbound tax returns filed which is
highly susceptible to human errors a n d intervention. The system
allows the taxpayers to directly encode, submit their tax returns
and pay their taxes due online over the internet through the BIR
website. EFPS would undoubtedly reduce the government's
administrative and operational costs in interacting with taxpayers
and in collecting taxes." (R M O No 5-2002,1,)
3. Availability to Taxpayers. " E F P S shall be available to

all taxpayers with e-mail account a n d internet access who are
registered in the BIR Integrated Tax S y s t e m (ITS). Taxpayers
who shall avail of E F P S shall enroll online with the EFPS which is
linked to BIR website (http://www.bir.aov.ph)." (R.M.O. 5-2002, III,
A,A)
4. e-Filing, defined. T h e "process of electronically filing

returns including attachments, if any, specifically through the
internet." (Rev. Regs. No. 9 - 2 0 0 1 , Sec. 2.3)
5. e-Payment, defined. T h e "process of electronically

paying a tax liability through the internet banking facilities of
AABs." (Rev. Regs. No. 9 - 2 0 0 1 , Sec. 2.4)
6. Large taxpayer for V A T . " B u s i n e s s establishment with

VAT paid or payable of at least O n e hundred thousand pesos
(P100,000.00) for any quarter of the preceding taxable year" [NIRC
of 1997, Sec. 245 0) (1)) is a large taxpayer.
7. Filing of return and payment of taxes by large

taxpayers. The Commissioner of Internal Revenue " r m y by
rules and regulations, require the tax returns, papers and
statements and taxes of large taxpayers be filed and paid,
respectively, through collection officers or through duly authorized
agent banks: Provided, further, That the Commissioner can exer-
230
cise this power within six (6) months from the approval of Republic
Act No. 7646 or the completion of its comprehensive
computerization program, whichever comes earlier: Provided,
finally, That separate venues for the Luzon, Visayas, and
Mindanao areas may be designated for the filing of tax returns and
payment of taxes by said large taxpayers." [NIRC of 1997, Sec 245
(j), paraphrasing supplied]
8. Large Taxpayers covered by the EFPS.

(a) Beginning the calendar year 2001 and all Fiscal
years as well as calendar years thereafter, Large Taxpayers shall
e-file their final adjustment income tax returns for the said
Calendar/fiscal years a n d e-pay the tax due thereon through the
th
EFPS on or before the 1 5 day of the fourth month following the
close of the taxable year. Nonetheless, e-payment shall be
optional for tax returns that will be filed until July 3 1 , 2002. Thus,
until July 3 1 , 2002, if a taxpayer does not opt to pay electronically,
payment shall be m a d e manually.
(b) Beginning July 1, 2002, Large Taxpayers shall e-file
all the tax returns that can be filed electronically through the EFPS
but e-payment shall nonetheless remain optional until July 3 1 ,
2002. However, unless otherwise notified by he Commissioner of
Internal Revenue (CIR), for all returns that will be filed starting
August 1, 2002, e-payment of the taxes due thereon thru EFPS
shall become m a n d a t o r y " (Rev. Regs No 9-2001, Sec 3.1, as
amended by Rev. Regs No. 2-2002 and further amended by Rev Regs
No. 9-2002)
9. Norf-Large Taxpayer, defined. A "taxpayer whose tax

payments and financial conditions do not satisfy the set criteria as
per Revenue Regulations No. 1-98 of any amendatory regulations
and/or have not been classified and notified as a Large Taxpayer
by the C I R " (Rev. Regs. No. 9-2001, Sec. 2.6)
10. Non-Large Taxpayers covered by the EFPS. "The

following Non-Large Taxpayers including their branches located in
the computerized revenue district officers shall file their returns
and pay their taxes thru EFPS, to wit:
3.2.1 The volunteering two hundred (200) or more Non-
Large Taxpayers previously identified by the BIR to have availed
of the option to file their returns under EFPS shall nevertheless
continue to file their returns under such method However, upon
231
their receipt of a notification letter duly signed by the
Commissioner of Internal Revenue, it becomes mandatory for
them, including their branches located in the computerized district
office, to file their returns and pay their taxes thru EFPS." (Rev.
Regs. No 9-2001, Sec. 3.2, as amended by Rev. Regs. No. 2-2002, Rev.
Regs No. 9-002, Rev Regs. No 5-2004 and further amended by Rev.
Regs. No 10-2007)
11. Other taxpayers covered by the EFPS. "Other

Taxpayers:
3.3.1 Corporations with paid-up capital stock of Ten
Million Pesos (P10,000,000.00 and above/
3.3.2 Corporations with complete computerized system;
3.3.3 Taxpayers joining public bidding pursuant to
Executive Order No. 398 as implemented by RR 3-2005." (Rev.
Regs. No. 10-2007, Sec. 3.3, amending Rev. Regs. No. 9-2001, as
amended by Rev. Regs No 2-2002, Rev. Regs No. 9-002, Rev Regs.
No. 5-2004)
NOTES AND COMMENTS:
a. Paid-up capital stock "shall mean that portion of the
authorized capital stock which has been both subscribed and paid. It also
refers to the amount paid for the subscription of stock in a corporation
including the amount paid in excess of par value, net of treasury stock."
(Rev. Regs 10-2007, Sec. 2.1.3,)
b Complete computerized system "refers to the books of
account and other accounting records in electronic form, in accordance
with Revenue Regulations No. 16-2006." (Ibid., Sec. 2.1.4)
c. Non-stock non profit corporations are excluded from the
requirement to comply with the EFPS. (Ibid., Sec. 1)
12. Security of Information. "The identity, authority and

capability of the taxpayer transacting with the BIR using the EFPS
is handled by the enrollment and log-on facilities of the EFPS.
The transmission of data is secured through encryption and the
use of technology provided by Verisign and Secure Socket Layer
(SSL)." (Rev. Regs. No. 9-2001, Sec. 6)
"Taxpayers shall be responsible for safeguarding their
respective user names, passwords and answers to challenge
question in acessing EFPS in case a taxpayer forgets these
necessary information or there is a change in the corporate
authorized signatory, the taxpayer concerned shall be required to
re-enroll to EFPS." (R.M.O. No. 5-2002, III, A, B)
232
13. Enrollment For Systems Usage, identified tax payers
that would like to avail of the EFPS and/or required to file certain
tax returns via the EFPS shall enroll in the EFPS in accordance
with the provisions of the applicable regulations, circulars and
d r d e r s . For juridical entities or artificial persons, enrolment shall
be m a d e by the officers required by law to file returns. Thus, for
domestic corporations, it shall either be the President, the Vice-
president or other principal officers; for partnerships, the managing
partner; for joint ventures, the managing head; and for resident
foreign corporations, the country manager." (Rev Regs No 9 - 2 0 0 1 ,
Sec 4, 1 per., as amended by Rev. Regs. No 2 - 2 0 0 2 )
s l
14. Additional R e q u i r e m e n t for e-Payment. In addition to

the requirements for enrollment for systems usage, "a taxpayer
who will e-pay shall enroll with any EFPS A A B where he/it intends
to pay through the bank debit system. However, Large Taxpayers'
enrollment shall be limited only to the EFPS AABs authorized to
serve them and w h o are capable to accept e - p a y m e n t s " (Rev
Regs No. 9 - 2 0 0 1 , Sec 4 , 2 par., as amended by Rev Regs No 2 -
n d
2 0 0 2 , and further amended by Rev Regs. No 9 - 2 0 0 2 )
15. Procedures for enrollment/re-enrollment. The

taxpayer:
"1.1 A c c e s s the BIR website http://wvvw.bir.gov.ph
1 2 Click on "EFPS" icon (the EFPS home page will
appear), click on "filing a n d Payment'' icon
and click on "enroll to EFPS" button.
1.3 Encode all the necessary information/data on
the screen.
1.4 Click the "Submit" button.
1.5 In case of a corporation, submit to RDO - Tax-
payers Service Section (TSS)/LTS - Large Tax
payers Assistance Section (LTADJ/LTDO -
Large Taxpayers Assistance Section (LTAS),
a certification from the President, Vice-Presi-
d e n t or other principal officer authorized by law to
sign and file the return of the corporation, certified
to as such officers by the Corporate Secretary, to
the effect that the bearer thereof is authorized to
enroll for availment of the EFPS.
1.6 Receive an e-mail from LTS-LTAD/LTDO-LTAS/
RDO-TSS on the status of the application for
233
enrollment
1 7 Submit written request to LTS-LTAD/LTDG-
LTAS/RDO-TSS for re-enrollment in case given
password/user name/answer to challenge question
was forgotten or there is a change in the corporate
authorized signatory.
18 Receive an e-mail from LTS-LTAD/LTDO-LTAS/
RDO-TSS on the status of re-enrollment request
19 Perform Item A. 1.1 to A. 1.1.4 after approval of
the re-enrollment request." ( R M O No 5-2002 IV A I.)
16. Authorized Agent Bank (AAB), definition. Any bank

as certified.by the Bangko Sentral ng Pilipinas (BSP) which has
satisfied the criteria on accreditation and is actually accredited to
collect internal revenue taxes." [Rev. Regs. No. 9-2001, Sec 2 2 (a),
as amended by Rev. Regs. No. 9-2002] *
17. EFPS A A B , definition. This refers to "a BIR authorized

agent bank (AAB) that has passed the accreditation criteria for
EFPS A A B such as being an internet-ready bank, indorsed by the
Bureau of Treasury (BTR) for EFPS accreditation, certified by the
Information Systems Group of the BIR that the applicant bank's
system is acceptable and compatible with th,e EFPS of the BIR."
[Rev Regs. No. 9-2001. Sec 2 2 (b), as amended by Rev Regs No 9-
2002; R M O No 5-2002, III, L]
"The A A B s accredited to participate in the EFPS should
ensure that the necessary e-payment system security is in place "
( R M O No 5-2002, III, M,)
18. Returns covered by Enrollment. "A taxpayer

enrolled with the EFPS shall file the applicable returns
enumerated in Section 2 . 1 2 hereof via the EFPS." (Sec. 5,
Rev. Regs. No. 9-2001)
"Taxpayers who shall file their returns through the EFPS
shall only file returns for the tax type/s registered in the ITS and
the form type of which is available in EFPS " ( R M O No 5-2002,
sl
III.C, 1 sentence,)
19. Return, defined. A return "refers initially to any of the

following electronic returns produced by the EFPS:
xxx xxx xxx
k. • 2550M - Monthly Value-Added Tax Declaration
234
I. 2550Q - Quarterly Value-Added Tax Return
xxx xxx xxx
In determining a taxpayer's compliance with a particular tax
liability, it is the information on the return, and not the form of such
return, that governs.
The Commissioner is authorized from time to time, and as
the system and operational requirements may so need, to expand
or reduce the list of returns that can be filed electronically through
the EFPS." (Rev Regs No. 9-2001, Sec. 2 12; R M O No 5-2002,
III.C, paraphrasing supplied)
20. Electronic Signature, defined. The "methodology or

procedures prescribed by the BIR through the EFPS, employed by
an individual taxpayer, or by an officer/s of a corporate taxpayer
who is required by the Tax Code or appropriate regulations to affix
his/her signature to such return, w h o files a return and pays taxes
through the EFPS, with the intention of authenticating, approving,
and attesting to the truth and correctness of the return. In the
case of a corporate taxpayer, the electronic signature shall be
deemed to be the signature singly, and collectively, of both the
authorized corporate officer/s that are required by the Tax Code or
appropriate regulations to file and swear to the truth and
correctness of such return and w h o are certified as such officers
by the corporate secretary in a document submitted to the BIR."
(Rev Regs No. 9-2001, Sec. 2.8, as amended by Rev Regs No. 2-
2002)
21. Presumption relating to electronic signature. An

electronic signature as defined in Rev. Regs. No. 9-2001,
"Electronic Filling of Tax Returns and Payment of Taxes", gives
rise to the following presumptions:
"10.1 That the electronic signature is the signature of the
individual taxpayer, or in the case of a Corporate taxpayer, the
signature singly and collectively, of both the authorized corporate
officer/s that are required by the Tax Code or appropriate
regulations to file and swear to the truth and correctness of such
return and w h o are certified as .such officers by the corporate
secretary in a document submitted to the BIR; and
10.2 That the electronic signature was affixed by the
above-mentioned taxpayer/person/s with the intention of signing,
approving, and swearing to the truth and correctness of such
return." (Rev. Regs. No. 9-2001. Sec. 10as amended by Rev Regs No
235
9-2002)
22. Evidence of contents of returns. "In cases of disputes

regarding the contents of returns filed via the EFPS, the contents
shown/stored in the ITS Server of the BIR shall govern." (Rev
Regs. No. 9-2001, Sec. 12)
23. Due Date, defined. The "date prescribed by law or

regulations within which to file a particular return and pay
the tax due thereon." (Rev Regs No 9-2001, Sec 2.7)
24. Time for e-filing of returns. "The e-filing of returns shall

be available 24 hours a day, 7 days a week. However, to ensure
receipt by the BIR before midnight of the due date set by
applicable laws and regulations for the filing of a return and the
payment of the corresponding tax, the electronic return for the
applicable tax must be filed on or before 10 p.m. of the due date.
In case the EFPS is not available during d u e dates as declared by
the BIR, taxpayers shall manually file their returns with the
collecting agent (AAB or RC0/DMT) for the returns with payment
or with the Revenue District Office ( R D O ) or Large Taxpayers
service (LTS) or Large Taxpayers District Office (LTDO) where
they are registered for no-payment returns." ( R M O . No. 5-2002,
III, D)
25. Taxpayers intending tc utilize Tax Debit M e m o

(TDM) should e-file earlier. "For taxpayers intending to utilize
Tax Debit M e m o (TDM) in the payment of taxes, their returns shall
have to be e-filed much earlier than the due date to allow the BIR
to issue T D M on or before the due date of the applicable tax. It
should be noted that the issuance bf T D M and its application
against the tax due on the return e-filed through the e-payment
facility of the BIR should all be done on or before the due date of
n d
the aforesaid tax." ( R M O No. 5-2002, III, G, 2 par)
26. E-file of return if taxes partly in cash and partly in

T D M . "If payment of taxes are to be made partly in cash and
partly in T D M , taxpayer shall first e-file the return and using the e-
payment facility of the system, he may, at his option, first pay the
portion of the tax in cash and thereafter apply T D M on the
remaining portion of the tax due or first apply the TDM against the
236
portion of the tax and pay the remaining balance thereof in cash
All of these must be done on or before the due date of the t a x "
( R M O No 5 - 2 0 0 2 , III. G, last par)
27. No offset for refundable returns. "Taxpayers w h o are

filing refundable returns are not allowed to directly offset against
the amount to be refunded as indicated in the return the penalties
arising from late filing thereof." (R M 0 No 5 - 2 0 0 2 , III, E)
28. Procedure for e-filing.

" 1 . 1 Access EFPS button linked to BIR website
@ htlp://www/bir.qov.ph.
1 . 2 Click on 'Login' or 'Filing and Payment' button of
EFPS home page and supply the following
information:
a. User Name;
b. Password; and
c. TIN
1 . 3 A n s w e r the challenge question displayed on the
screen.
1.4 Select the tax return form to be filed and fill-up
all necessary information.
1.5 Click 'Validate' button to confirm if all the
required fields in the return are filled-up.
1 6 Click 'Edit' button to correct erroneous entry/ies
if any.
1 . 7 Click 'submit' button to complete e-filing.
1 . 8 Print Filing Reference Number issued by EFPS
as proof of filing." ( R M O . No 5 - 2 0 0 2 , IV, B, 1)
29. Filing Reference Number, defined. The control

number issued by the EFPS to acknowledge a tax return (Rev
Regs No 9 - 2 0 0 1 , Sec. 2 9 )
30. Date of Receipt of Return. "The receipt of the return

occurs at the time it enters the EFPS and shall be evidenced by
the date indicated in the Filing Reference Number." ( R e v Regs
No 9 - 2 0 0 1 , Sec. 9 3)
31. Confirmation of receipt of return/documents and

payment/s of taxes, for e-Filing and Manual Payment.
"The return is deemed filed, on the date appearing in, and after a
237
Filing Reference Number is issued to the taxpayer via the EFPS.
The print-out of the Filing Reference Number shall be presented to
the AABs for manual payment of the tax due thereon, The
payment thereof is received upon validation of the document
containing the Filing Reference Number generated by the EFPS
and the issuance of an Official Receipt by the AAB." (Rev. Regs
No. 9,2001, Sec. 9.2)
32. Time and place of filing certificate of with-holding

tax. "The certificate of withholding tax shall be filed within fifteen
(15) days from the date of filing of any of the following BIR Form
Nos.: xxx c) 2550M, d) 2550Q; xxx. The taxpayer is required to
file three (3) copies of the certificate of withholding tax (CWT)."
sl
(Rev. Regs. No. 9-2001, Sec. 14, 1 p a r . , paraphrasing supplied)
NOTES A N D C O M M E N T S : The forms referred to are the following:
c 2550M - Monthly Value-Added Tax Declaration
d 2550Q - Quarterly Value-Added Tax Return
33. Availability of Returns. "The electronic copies of the

returns in their original format e-filed by a taxpayer can be
accessed by himself/it via the EFPS for a period of two (2) months
from filing thereof After this period, a taxpayer may secure a
certification from the BIR containing the information supplied by
him in the return which he/it e-filed via the E F P S . " (Rev. Regs. No
9-2001, Sec. 11)
R E F U N D OR CREDIT OF EXCESS INPUT VAT
1. The V A T being imposed on the increase in worth

merit or improvement utilizes the concept of the output
and input taxes. ,
2. Output tax, definition. The v a l u e - a d d e d tax due on the

sale or lease or taxable goods, properties or services by any V A T -
n d
registered person. [NIRC of 1997, Sec. 110 (A) (3) (b), 2 par]
3. Input tax, definitions.

a. The V A T due on or paid by a VAT-registered person
on importation of goods or local purchases of goods or services,
including lease or use of properties, in the course of his trade or
st
business. (Rev Regs. No 4.110-1, 1 par.)
b. The value-added tax due from or paid by a VAT-reg-
238
iStered person in the course of his trade or business on
importation^ of goods or local purchase of goods or services,
including le'ase or use of property, from a VAT-registered person'
It shall include the transitional input VAT. [NIRC of 1997 Sec 110
(A) ( 3 ) (b), f ' par]
4. Included In Input tax. The input tax shall also include:

a the transitional input tax and
b. the presumptive input tax xxx.
It includes
c. input taxes which can be directly attributed to
transactions subject to the V A T plus a ratable portion of any input
tax which cannot be directly attributed to either the taxable or
s n d nd
exempt activity. (Rev Regs. No. 4.110-1, 1 ' par., 2 sentence, and 2
par., paraphrasing, arrangement and numbering supplied )
5. The right to credit the inp'ut tax is a mere creation

of law. Prior to the enactment of multi-stage sales taxation, the
sales taxes paid at every level of distribution are not recoverable
from the taxes payable. With the advent of Executive Order No.
273 imposing a 10% multi-stage tax on all sales, it was only then
that the crediting of the input tax paid on purchase or importation
of goods and services by VAT-registered persons against the
output tex w a s established This continued with the Expanded
VAT Law (R.A. No. 7716), and T h e Tax Reform Act of 1997 ( R A .
No. 8424). The right to credit input tax as against the output tax is
clearly a privilege created by law, a privilege that also the law can
limit. It should be stressed that a person has no vested right in
statutory privileges. (ABAKADA Guro Party List, etc et al vs. Ermita,
G.R. No 168207, October 15, 2005, and companion cases, on the motion
for reconsideration)
6. Transitional input tax credits. "A person who

becomes liable to value-added tax or any person who elects to be
a VAT-registered person shall, subject to the filing of an inventory
according to rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, be allowed
input tax on his beginning inventory of goods, materials and
supplies equivalent to two percent (2%) of the value of such
inventory or the actual value-added tax paid on such goods,
materials and supplies, whichever is higher, which shall be
creditable against the output tax." [NIRC of 1997 Sec 111 (A)]
239
7. Transitional input tax credits on beginning
inventories. Taxpayers who become VAT-registered persons
upon exceeding the minimum turnover of P1,500,000.00 in any
12-month period, or who voluntarily register even if their turnover
does not exceed P1,500,000.00 (except franchise grantees of
radio and television broadcasting whose threshold is
P10,000,000.00) shall be entitled to a transitional input tax on the
inventory-on hand as of the effectivity of their VAT registration, on
the following:
a goods purchased for resale in their present condition,
b. materials purchased for further processing, but which
have not yet undergone processing;
c. goods which have been manufactured by the
taxpayer;
d. goods in process for sale; or
e. goods and supplies for use in the course of the
taxpayer's trade or business as a VAT-registered person. (Rev.
st
Regs No. 16-2005, Sec.4.111-1, (a), 1 par., arrangement and
numbering supplied]
8. Purpose of the transitional input tax. It is apparent

that the transitional input tax credit operates to benefit newly V A T -
registered persons, whether or not they previously paid taxes in
the acquisition of their beginning inventory of goods, materials
and supplies. During t h a k p e r i o d of transition from n o n V A T to
T
VAT status, the transitional input tax credit serves to alleviate the
impact of the VAT on the taxpayer. At the very beginning, the
VAT-registered taxpayer is obliged to remit a significant portion of
the income it derived from its sales as output VAT. The
transitional input tax credit mitigates this initial diminution of the
taxpayer's income by affording the opportunity to offset the losses
incurred through the remittance of the output V A T at a stage w h e n
the person is yet unable to credit input V A T payments. (Eort
Bonifacio Development Corporation v. Commissioner of Internal
Revenue, etal., G R. No. 170680, October2, 2009)
9. Presumptive input tax credits. Persons or firms

engaged in the processing of sardines, mackerel, and milk, and in
manufacturing refined sugar, cooking oil and packed noodle-based
instant meals, shall be allowed a presumptive input tax, creditable
against the output tax, equivalent to four percent (4%) of the gross
value in money of their purchases of primary agricultural products
240
which are used as inputs to their production.
As used in this paragraph, the term processing shall mean
pasteurization, canning and activities which through physical or
chemical process alter the exterior texture or form or inner
substance of a product in such a manner as to prepare it for
special use to which it could not have been put in its original form
or condition. [NIRC of 1997, as amended by Rep Act No 9337 Sec
111 (B); Rev. Regs. No. 16-2005, Sec.4 111-1, (b)]
10. The different kinds of creditable input tax.

a. The input tax evidenced by a V A T invoice or official
receipt;
b. Input tax on domestic purchase or importation of
goods or properties;
c. Input tax of a VAT-registered person w h o is also
engaged in non-VAT transactions.
11. Creditable input tax evidenced by a VAT invoice or

official receipt. Any input tax evidenced by a V A T invoice or
official receipt on the. following transactions shall be creditable
against the output tax;
a. Purchase or importation of goods:
(i) For sale; or
(ii) For conversion into or intended to form part of
a finished product for sale including packaging materials; or
(iii) For use as supplies in the course of business;
or
(iv) For use as materials supplied in the sale of
service; or
(v) For use in trade or business for which
deduction for depreciation or amortization is allowed under
the NIRC of 1997.
b. Purchase of services on which a value-added tax has
actually been paid. [NIRC of 1997, Sec 110 (A) (1)]
12. Creditable input tax on domestic purchase or

importation of goods or properties. The input tax on
domestic purchase or importation of goods or properties shall be
creditable:
a. To the purchaser upon consummation of sale and on
importation of goods or properties, and
b. To the importer upon payment of the value-added tax
241
prior to the release of the goods from the custody of the Bureau of
s
Customs. [ N I R C of 1 9 9 7 . S e c 110 (A) (2). 1 ' par]
13. Distribution of input tax on domestic purchase or

importation. The input tax on goods purchased or imported in a
calendar month for use on trade or business for which deduction is
allowed under the NIRC of 1997, shall be spread evenly over the
month of acquisition and the fifty-nine (59) succeeding months if
the aggregate acquisition cost for such goods, excluding the VAT
component thereof, exceeds One million pesos (P1,000,000.00).
s
[NIRC of 1997, as amended by Rep Act No. 9337, Sec. 110 (A) (2). 1 '
par]
14. Distribution of input tax on domestic purchase or

importation of capital goods. If the estimated useful life of
the capital good is less than five (5) years, as used for
depreciation purposes, then the input V A T shall be spread over
such a shorter period. [NIRC of 1997, as amended by Rep Act No
s
9337, Sec. 110(A) (2), 1 ' p a r ]
15. Requisite for creditable input tax on purchase of

services or lease or use of properties. In the case of
purchase of services, lease or use of properties, the input tax shall
be creditable to the purchaser, lessee or licensee upon payment of
the compensation, rental, royalty or fee. [NIRC of 1997, as amended
st
by Rep Act No 9337, Sec 110 (A) (2), 1 par ]
16. Creditable input tax of a VAT-registered person

w h o is also engaged in non-VAT transactions. A V A T -
registered person w h o is also engaged in transactions not subject
to the value-added tax shall be allowed tax credit as follows:
a. Total input tax which can be directly attributed to
transactions subject to value-added tax; and
b. A ratable portion of any input tax which cannot be
directly attributed to either activity. [NIRC of 1997, as amended by
s l
Rep Act No 9337, Sec 110 (A) (3), 1 par]
17. Determination of creditable input tax. The sum of

the excess input tax carried over from the preceding month or
quarter and the input tax creditable to a VAT-registered person
during the taxable month or quarter shall be reduced by the
amount of claim for refund or tax credit for value-added tax and
242
other adjustments, such as purchase returns or allowances and
input tax attributable to exempt sale.
The claim for tax credit referred to in the foregoing
paragraph shall include not only those filed with other government
agencies such as the Board of Investments and the Bureau of
Customs. [NIRC of 1997, Sec. 110 (C))
18. V A T Payable (Excess Output or Excess Input Tax).

If at the end of any taxable quarter, the output tax exceeds the
input tax, the excess shall be paid by the VAT-registered person
st
[NIRC of 1997, as amended by Rep. Act No 9361, Sec 110 (B); 1
sentence]
If the input tax inclusive of input tax carried over from the
previous quarter exceeds the output tax, the excess input tax shall
be carried over to the succeeding quarter or quarters: Provided,
however that any input tax attributable to zero-rated sales by a
VAT-registered person may at its option be refunded or applied for
a tax credit certificate which may be used in the payment of
internal revenue taxes, subject to the limitations as may be
provided for by law, as well as, other implementing rules. [NIRC
n d
OF 1997, as amended by Rep. Act No. 9361, Sec. 110 (B); 2 sentence;
Rev. Regs. No. 2-2007 amending Rev. Regs. No 16-2005, Sec. 4.110-7]
TAX R E F U N D OR CREDIT OF UNUTILIZED INPUT

VAT O F Z E R O - R A T E D T R A N S A C T I O N S
1. W h o may apply for tax refund or credit.

a. Any VAT-registered person, whose sales are zero-
rated or effectively zero rated may apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax. [NIRC of
1997, Sec. 112 (A)]
b. A person whose V A T registration has been cancelled
due to retirement from or cessation of business or due to changes
in or cessation of status as VAT-registered apply for the issuance
of a tax credit certificate for any unused input tax which may be
used in payment of his other internal revenue taxes. (Ibid, Sec
112(B)]
NOTES AND COMMENTS: The reader should note that a person w h o s e
VAT registration has been cancelled, cannot apply for a tax refund.
2. A zero-rated seller can claim for a tax refund or
243
credit. A zero-rated seller is directly and legally liable for VAT,
and can claim a refund or tax credit certificate. [Commissioner of
Internal Revenue v. Seagate Technology (Philippines), G.R No. 153866,
February 11, 2005, 451 SCRA 132]
3 Non-VAT registrant cannot claim refund or credit

of VAT. Petitioner's claim for exemption from VAT for its
purchases of supplies and raw materials is incongruous with its
claim that it is VAT-Exempt for only VAT-registered entities can
claim input VAT Credit/Refund. (Contex Corporation v. Commissioner
of Internal Revenue, 433 SCRA 376)
4. Period for applying for tax credit or refund for

zero-rated or effectively zero-rated transactions.
a. Any VAT-registered person, whose sales are zero-
rated or effectively zero rated within two (2) years after the close of
the taxable quarter when the sales were made. [NIRC of 1997, Sec
112(A)]
b. A person whose V A T registration has been cancelled
within two (2) years from the date of cancellation. (Ibid., Sec. 112
(B)
5. Two-year prescriptive period for claiming

unutilized or excess input taxes.
a. Unutilized input Value A d d e d Tax (VAT) payments
not otherwise used for any internal revenue tax due the taxpayer
must be claimed within two years reckoned from the close of the
taxable quarter when the relevant sales were made pertaining to
the input Value A d d e d Tax (VAT) regardless of whether said tax
was paid or not - the reckoning frame would always be the end of
the quarter when the pertinent sales or transaction was made,
regardless when the input VAT was paid. (Commissioner of Internal
Revenue v. Mirant Pagbilao Corporation, 565 SCRA 154)
b. The two year prescriptive period for filing the
application for refund/credit of input Value-Added Tax (VAT) on
zero-rated export sales shall be determined from the close of the
quarter when such sales were made.
Rationale: Unlike corporate income tax, which is reported
and paid on installment every quarter, but is eventually subjected,
to a final adjustment at the end of the taxable year, Value-Added
Tax (VAT) is computed and paid on a purely quarterly basis
without need for a final adjustment at the end of the taxable year •
244
Even in the absence of a final adjustment return, the determination
of any output V A T payable necessarily requires that the VAT-
registered taxpayer makes adjustments in its VAT return every
quarter, taking into consideration the input VAT which are
creditable for the present quarter, or had been carried over from
the previous quarters.
It is more practical and reasonable to count the two-year
prescriptive period for filing a claim for refund/credit of input Value-
A d d e d Tax (VAT) on zero-rated sales from the date of filing of the
return and payment of the tax due. {Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue 524
SCRA 73}
6. Filing of claim for refund or credit of input VAT at

close of the quarter not strictly enforced. The last
requirement for refund or credit of input VAT determines that the
claim should be filed within two years after the close of the taxable
quarter w h e n such sales were made. The sale of electricity to
NPC w a s reported by San Roque Power Corporation at the fourth
quarter of 2002, which closed on 31 December 2002. San Roque
had until 30 December 2004 to file its claim for refund or credit.
For the period January to March 2002, it filed an amended request
for refund or tax credit on 30 May 2003; for the period July 2002 to
September 2002, on 27 February 2003; and for the period October
2002 to December 2002, on 31 July 2003 In these three quarters,
San Roque Power Corporation seasonably filed its requests for
refund and tax credit. However, for the period April 2002 to May
2002, the claim was filed prematurely on 25 October 2002, before
the last quarter had closed on 31 December 2002
Despite this iapse in procedure, the Supreme Court noted
that San Roque Power Corporation w a s able to positively show
that it was able to accumulate excess input taxes on various
importations arid local purchases in the amount of
P246,131,610.40, which were attributable to a transfer of
electricity in favor of NPC. The fact that it had filed its claim for
refund or credit during the quarter when the transfer of electricity
had taken place, instead of at the close of the said quarter does
not make it any less entitled to its claim. Given the special
circumstances of this case, wherein San Roque Power
Corporation was incorporated for the sole purpose of constructing
or operating a power plant that will transfer all the electricity it
generates to NPC. there is no danger that it would try to fraudu-
245
lently claim input tax paid on purchases that will be attributed to
sale transactions that are not zero-rated. (San Roque Power
Corporation v. Commissioner of Internal Revenue, G R No 180345.
November 25, 2009)
7. Amount to be refunded or credited.

a. VAT-registered person whose sales are zero-rated or
effectively zero-rated
1) the extent to which the input tax has not been
applied against output tax;
2) where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt
sale of goods or properties or services, and the amount of
creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of
sales. [ N I R C of 1997, Sec. 112 (A)]
3) That for a person making sales that are zero-
rated for transport of passengers and cargo by air or sea
vessels from the Philippines to a foreign country, the input
taxes shall be allocated ratably between his zero-rated and
non-zero-rated sales. [Ibid., in relation to Sec. 108 (B) (6)]
b. VAT-registered person w h o s e V A T registration was
cancelled, there may be issued a tax credit certificate for any
unused input tax which may be used in payment of his other
internal revenue taxes. [NIRC of 1997, Sec. 112 (B)]
8. Conditions for refund or credit where the sales

proceeds are to be paid in acceptable foreign currency.
a. In the case of
1) The sale and actual shipment of goods from
the Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which may
influence or determine the transfer of ownership of the
goods so exported and paid for in acceptable foreign
currency or its equivalent in goods or services, and
accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP). [NIRC of 1997,
Sec. 106 (A) (2) (a)(1)]
2) Sale of raw materials or packaging materials to
a nonresident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing, processing,
246
packing or repacking in the Philippines of the said buyer's
goods and paid for in acceptable foreign currency or its
equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP). [ibid, Sec 106 (A) (2) (a) (2)]
3) Processing, manufacturing or repacking goods
for other persons doing business outside the Philippines
which goods are subsequently exported, where the services
are paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP). [Ibid, Sec 108 (B) (1)]
4) Services other than those mentioned in the
preceding paragraph rendered to a person engaged in
business conducted outside the Philippines or to a non-
resident person not e n g a g e d in business who is outside of
the Philippines w h e n the services are performed, the
consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP).
[Ibid, Sec. 108 (B) (2)]
b. the acceptable foreign currency proceeds thereof had
been duly accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP). [Ibid., Sec.
112(A)]
9. Requirements for tax refund or credit for

unutilized input V A T of zero-rated transactions. A
taxpayer engaged in zero-rated transactions may apply for tax
refund or issuance of tax credit certificate for unutilized input VAT,
subject to the following requirements:
a. the taxpayer is V A T registered;
b. the taxpayer is engaged in zero-rated or effectively
zero-rated sales;
c. the input taxes are due or paid;
d. the input taxes are not transitional input taxes;
e. the input taxes have not been applied against output
taxes during and in the succeeding quarters;
f. the input taxes claimed are attributable to zero-rated
or effectively zero-rated sales;
g. for zero-rated sales under Section 106(A)(2)(1) and
(2); 106(B); and 108(B)(1) and (2), the acceptable foreign currency
exchange proceeds have been duly accounted for in accordance
247
with BSP rules and regulations;
h. where there are both zero-rated or effectively zero-
rated sales and taxable or exempt sales, and the input taxes
cannot be directly and entirely attributable to any of these sales,
the input taxes shall be proportionately allocated on the basis of
sales volume; and
i. the claim is filed within two years after the close of
the taxable quarter when such sales w e r e made. (San Roque
Power Corporation v. Commissioner of Internal Revenue, G.R. No.
180345, November 25, 2009 citing Intel Technology of the Philippines,
Inc. v. Commissioner of Internal Revenue, G.R. No. 166732, 27 April
2007, 522 SCRA 657, 685)
10. Compliance with application for refund or credit

required. No refund or credit of input Value-Added Tax (VAT)
shall be allowed unless the VAT-registered taxpayer filed an
application for refund or credit with the Commissioner of Internal
Revenue within the two-year prescriptive period. (Atlas Consolidated
Mining and Development Corporation v. Commissioner of Internal
Revenue, 524 SCRA .73)
11. Evidence to prove payment of input Value Added

Tax (VAT).
a. The pertinent invoices, receipts, and export sales
documents are the best and competent pieces of evidence
required to substantiate a taxpayer's claim for tax credit or refund
which is merely corroborated by the summary duly certified by a
Certified Public Accountant (CPA) and the testimony of its
employee on the export sales.
No evidence which has not been formally offered shall be
considered. W h e r e the pertinent invoices or receipts purportedly
evidencing the Value-Added Tax (VAT) paid by the taxpayer w e r e
not submitted, the court a quo evidently could not determine the
veracity of the input. (Atlas Consolidated Mining and Development
The claim for refund must be substantiated by the input V A T
paid by purchase invoices or official receipts. (Commissioner of
Internal Revenue v. Manila Mining Corporation, 468 SCRA 571)
There is nothing in Court of Tax Appeals Circular No. 1-95,
as amended by Court of Tax Appeals Circular No. 10-97, which
either expressly or impliedly suggests that summaries and
schedules of input Value A d d e d Tax (VAT) payments, even if cer-
248
tified by an independent Certified Public Accountant (CPA) suffice
as evidence Of input V A T payments. (Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue 518
SCRA 425)
The law considers a duly executed Value A d d e d Tax (VAT)
invoice or Official Receipt referred to in Section 110 (A) (1) (B) of
the National Internal Revenue Code as sufficient evidence to
support a claim for input tax credit. (Commissioner of Internal
Revenue v. Mirant Pagbilao Corporation, 565 SCRA 154)
The summary of export sales, sales invoices, official
receipts, airway bills and export declaration are proof that the
taxpayer is engaged in the "sale and actual shipment of goods
from the Philippines to a foreign country. (Intel Technology
Philippines, Inc. v. Commissioner of Internal Revenue, 522 SCRA 657)
b. In a claim for refund or issuance of a tax credit
certificate attributable to zero-rated sales, what is to be closely
scrutinized is the documentary substantiation of the input VAT
paid, as may be proven by export documents, rather than the
supporting documents for the zero-rated export sales. (Intel
Technology Philippines, Inc. v. Commissioner of Internal Revenue, 522
SCRA 657)
c. Submission of photocopies of purchase invoices-and
receipts is indispensable w h e n applying for tax credit or refund
(Atlas Consolidated Mining and Development Corporation v
Commissioner of Internal Revenue, 534 SCRA 51)
12. Sales invoices have probative value in proving

business transactions. Sales invoices are recognized
commercial documents to facilitate trade or credit transactions
They are proofs that a business transaction has been concluded,
hence, should not be considered bereft of probative (Seao/7
Petroleum Corporation v. Autocorp Group, G.R. No. 164326, October 17,
2008, 569 SCRA 387)
13. Quantum of evidence to prove claim for refund or

credit. Only the preponderance of evidence threshold as applied
in ordinary civil cases is needed to substantiate a claim for tax
refund proper (AT & T Communications Services Philippines, Inc. v.
Commissioner of Internal Revenue,.G R. No 182364, August 3, 2010
citing Commissioner of Internal Revenue v. Mirant Pagbilao Corporation,
G.R. No. 172129, September 12, 2008, 565 SCRA 154, 166)
14. Period within which refund or tax credit of input
249
taxes shall be made. In proper cases, the Commissioner shall
grant a refund or issue a tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of
submission of complete documents to support the application filed
VAT-registered person on his zero-rated or effectively zero rated
s l
sale. [NIRC of 1997, Sec. 112 (C), 1 par, in relation to Sec 112 (A)]
NOTES AND COMMENTS. While the provisions of Sec 112 (C) make
specific reference to Subsection (A) of Sec. 112, the author submits that
the same period finds application to Subsection (C) on application of a
person whose VAT registration was cancelled.
15. Special tax remedies with regard to VAT claims. In

case of full or partial denial of the claim for tax refund or tax credit,
or the failure on the part of the Commissioner to act on the
application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the
decision denying the claim or a f t e M h e expiration of one hundred
twenty-day period, appeal the decision or the unacted claim with
n d
the Court of Tax Appeals. [NIRC of 1997, Sec 112 (C), 2 par I
16. Manner of giving refund. Refunds shall be made upon

warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of being countersigned by the
Chairman, Commission on Audit, the provisions of the
Administrative Code of 1987 to the contrary notwithstanding:
Provided, That refunds under this paragraph shall be subject to
post audit by the Commission on Audit. [NIRC of 1997, Sec. 112 (D)]
H. VAT-EXEMPT TRANSACTIONS
VAT-EXEMPT T R A N S A C T I O N S . IN G E N E R A L
I. VAT-Exempt transactions, definition.

a. The sale of goods or properties and/or services and
the use or lease of properties that is
b. not subject to V A T (output tax) and
c. the seller is not allowed any tax credit on VAT
(input tax) purchases.
The person making the exempt sale of goods, properties or
services shall not bill any output tax to his customers because the
A s a i d transaction is not subject to VAT. [Rev Regs. No 16-2005,
Sec. 4.109-1 (A), arrangement and numbering supplied]
250
NOTES AND COMMENTS: An exemption means that the sale of goods,
properties or services and the use or lease of properties is not subject to
VAT (output tax) and the seller is not'allowed any tax credit on VAT (input
tax) previously paid.
A VAT-registered purchaser of goods, properties or services that
are VAT-exempt, is not entitled to any input tax on such purchases
despite the issuance of a VAT invoice or receipt. (Commissioner of
internal Revenue v. Cebu Toyo Coqjoration, 451 SCRA 447)
2. V A T - e x e m p t transactions DISTINGUISHED FROM

V A T - e x e m p t entities.
a. An exempt transaction, on the one hand, involves
goods or services w h i c h , by their nature, are specifically listed in
a n d expressly e x e m p t e d from the V A T under the Tax Code,
without regard to the tax status - VAT-exempt or not - of the party
to the transaction.
An exempt party, on the other hand, is a person or entity
granted V A T exemption under the Tax Code, a special law or an
international agreement to which the Philippines is a signatory,
and by virtue of which its taxable transactions become exempt
from VAT. [Commissioner of Internal Revenue v Toshiba Information
Equipment (Phils), Inc., G. R. No 150154, August 9, 2005]
b. An exempt transaction shall not be the subject of any
billing for output V A T but it shall not also be allowed any input tax
credits W H I L E an exempt party being zero-rated is allowed to
claim input tax credits.
3. PAGCOR's exemption flows to its concessionaires.

The proviso in P.D. No. 1869 extending the exemption to entities or
individuals dealing with Philippine Amusement and Gaming
Corporation (PAGCOR) in casino operations is clearly to proscribe
any indirect tax, like Value Added Tax (VAT), that may be shifted to
PAGCOR. [Commissioner of Internal Revenue v. Acesite (Philippines)
Hotel Corporation, 516 SCRA 93)
4. Transactions exempt from VAT, in general

a. Sale or importation of agricultural and marine food
products in their original state and certain kinds of livestock,
poultry, breeding stock and genetic materials;
b. Sale or importation of fertilizers; seeds, seedlings and
fingerlings; and certain kinds of feeds including their iricj.edients;
c. Importation of personal and household 'effects of
returning residents and nonresident citizens coming to settle in the
i
251
returning residents and nonresident citizens coming to settle in the
Philippines;
d. Importation of professional instruments and
implements, wearing apparel, domestic animals, and personal
household effects belonging to persons coming to settle in the
Philippines;
e. Services subject to percentage tax under Title V of
the Tax Code;
f. Services by agricultural contract growers and milling
for others of palay into rice, corn into grits and sugar cane into raw
sugar;
g. Medical, dental, hospital and veterinary services
except those rendered by professionals;
h. Educational services rendered by private educational
institutions, duly accredited by the Department of Education
(DEPED), the Commission on Higher Education (CHED), the
Technical Education A n d Skills Development Authority (TESDA)
and those rendered by government educational institutions;
i. Services rendered by individuals pursuant to an
employer-employee relationship;
, j. Services rendered by regional or area headquarters
established in the Philippines by multinational corporations which
act as supervisory, communications and coordinating centers for
their affiliates, subsidiaries or branches in the Asia-Pacific Region
and do not earn or derive income from the Philippines;
k. Transactions which are exempt under international
agreements to which the Philippines is a signatory or under
special laws, except those under Presidential Decree No. 529 -
Petroleum Exploration Concessionaires under the Petroleum Act
of 1949;
I. Certain sales by agricultural cooperatives duly
registered with the Cooperative Development Authority (CDA) to
their members and non-members, and certain importation;
m. Gross receipts from lending activities by credit or
multi-purpose cooperatives duly registered and in good standing
with the Cooperative Development Authority,
n. Sales by non-agricultural, non-electric and non-credit
cooperatives duly registered with the Cooperative Development
Authority under certain levels of capital contributions by members;
o. Export sales by persons w h o are not VAT-registered;
p. Sale of .real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or
252
business, or real property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279, otherwise known as
the Urban Development and Housing Act of 1992, and other
related laws, such as RA No. 7835 and RA No. 8765, residential
lot valued at One million five hundred thousand pesos (P
1,500,000) and below, house and lot, and other residential
dwellings valued at Two million five hundred thousand pesos (P
2,500,000) and below;
q. Lease of a residential unit with a monthly rental not
exceeding Ten thousand pesos (P 10,000);
r. Sale, importation, printing or publication of books and
certain kinds of newspaper, magazine, review or bulletin;
s. Sale, importation or lease of passenger or cargo
vessels and aircraft, including engine, equipment and spare parts
thereof for domestic or international transport operations under
certain conditions;
t. Importation of fuel, goods and supplies by persons
engaged in international shipping or air transport operations under
certain conditions;
u. Services of banks, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank financial
intermediaries; and
v. Sale or lease of goods or properties or the
performance of services subject to VAT, the gross annual sales
and/or receipts do not e x c e e d the amount of One million five
hundred thousand pesos (P1,500,000). [NIRC of 1997, Sec 109 (1),
as amended by R. A. No. 9337; Rev. Regs. No. 16-2005, Sec. 4.109-1
(B)l
w, Exemptions from V A T of certain purchases of senior
citizens. (Rep Act No. 9994, the "Expanded Senior Citizens Act of
2010", which amended Rep. Act No. 7432, and Rep. Act No. 9257)
SALE Q R IMPORTATION OF AGRICULTURAL AND

MARINE F O O D P R O D U C T S THAT ARE EXEMPT FROM
VAT
1. Sales or Importation exempt from the Value-added

Tax (VAT). Sale or importation of
a. agricultural and marine food products in their original
state,
b. livestock and poultry of
1) a kind generally used as, or yielding or
253
producing foods for human consumption;
2) and breeding stock and genetic materials
therefor. [NIRC of 1997, as amended by Rep. Act No. 9337, Sec
109(1) (A), l " p a r ]
2. Livestock exempted from V A T . Livestock shall in-

clude cows, bulls and calves, pigs, sheep, goats and rabbits.
n d
[NIRC of 1997, as amended by Rep. Act No. 9337, Sec. 109 (1) (A), 2
par., 1 " sentence]
NOTES AND COMMENTS: It seems that horses, whether race horses or
not, carabaos, deer, etc. and other non-traditional animal food sources
are not included in the exemption.
3. Poultry e x e m p t e d from V A T . Poultry shall include

f o w l s , ducks, geese and turkey. [NIRC of 1997, as amended by
n d n d
Rep. Act No 9337, Sec. 109(1) (A), 2 par., 2 sentence]
NOTES AND COMMENTS. Non-traditional poultry food sources, such as
guinea hens, ostrich, emus, etc., are not included in the exemption.
4. Excluded from the definition of livestock or

poultry that are e x e m p t e d f r o m V A T . Livestock or poultry
d o e s not include fighting cocks, race horses, zoo animals
and other animals generally considered as pets. [NIRC of
n d
1997, as amended by Rep. Act No. 9337, Sec. 109 (1) (A), ' 2 par., last
sentence]
5. Marine food products e x e m p t e d f r o m VAT. Marine

f o o d p r o d u c t s s h a l l include f i s h and crustaceans, such as,
b u t not l i m i t e d to, eels, trout, lobster, shrimps, prawns,
o y s t e r s , mussels and clams. [NIRC of 1997, as amended by Rep.
r t
Act No. 9337, Sec. 109 (1) (A), 3 par]
6. Meat, fruit, fish, vegetables e x e m p t e d f r o m VAT.

Meat, f r u i t , fish, vegetables and other agricultural and
marine f o o d in their original state. [NIRC of 1997, as amended by
s t
Rep. Act No. 9337, Sec. 109 (1) (A), 4" par., 1 sentence]
7. "Original state," meaning of. Products shall be

considered in their original state even if they have undergone the,
simple processes of preparation or preservation for the market,
such as freezing, drying, salting, broiling, roasting, smoking or
stripping, including those using advanced technological means of
254
packaging, such as shrink wrapping in plastics, vacuum packing,
tetra-pack, and other similar packaging methods Polished and/or
husked rice, corn grits, raw cane sugar and molasses, ordinary
salt, and copra shall be considered in their original state. [NIRC of
lh n d
1 9 9 7 , as amended by Rep. Act No 9337, Sec 1 0 9 ( 1 ) (A), 4 par., 2
,d
and 3 sentences]
8. Refined sugar subject to VAT. Sugar whose content

of sucrose by weight, in the dry state, has a polarimeter reading of
99.5o and above are p r e s u m e d to be refined sugar. [NIRC of 1997.
th
as amended by Rep. Act No. 9337, Sec 109 (1) (A), 5 par ]
Cane sugar produced from the following shall be presumed,
for internal revenue purposes, to be refined sugar:
(1) products of a refining process,
(2) products of a sugar refinery, or
(3) products of a production line of a sugar mill
accredited by the BIR to be producing sugar with polarimeter
reading of 99.5o and above, and for which the quedan issued
therefor, and verified by the Sugar Regulatory Administration,
identifies the same to be of a polarimeter reading of 99.5o and
,h
above. [Ibid.., 6 par]
9. Bagasse is subject to VAT. Bagasse is not included in

the exemption provided for under this section. [NIRC of 1 9 9 7 , as
amended by Rep. Act No. 9337, Sec 1 0 9 ( 1 ) (A). 7"' par ]
N O T E S A N D C O M M E N T S : Baggage is the pulp that remains after
sugar is extracted from sugar cane
SALE OR IMPORTATION OF FERTILIZERS;

SEEDS. SEEDLINGS A N D FINGERLINGS: FISH. PRAWN.
LIVESTOCK A N D P O U L T R Y FEEDS THAT A R E EXEMPT
F R O M VAT
1. Sale or importation exempt from VAT. Sale or

importation of
a. fertilizers;
b seeds, seedlings and fingerlings;
• c. fish, prawn, livestock and poultry feeds,
1) including ingredients,
2) whether locally produced or imported,
a) used in the manufacture of finished
feeds. [NIRC of 1 9 9 7 , a s amended by Rep Act No 9 3 3 7 ,
255
Sec 109 (1) (B)J
2. Sale or importation subject to VAT. Sale or

importation of specialty feeds for race horses, fighting cocks,
aquarium fish, zoo animals and other animals generally
considered as pets [NIRC of 1997, as amended by Rep Act No 9337,
Sec 109(1)(B)]
IMPORTATION OF P E R S O N A L A N D HOUSEHOLD
EFFECTS BY RETURNING RESIDENTS A N D N O N -
RESIDENT CITIZENS C O M I N G TO RESETTLE THAT
A R E EXEMPT F R O M V A T
1. Importation of personal and household effects

exempt from VAT. Importation of personal and household
effects belonging to
a. the residents of the Philippines
1) returning from abroad
b. and nonresident citizens
1) coming to resettle in the Philippines:
c Provided, That such goods are exempt from customs
duties under the Tariff and Customs Code of the Philippines.
[NIRC of 1997, as amended by Rep. Act No. 9337, Sec: 109 (1) (C)j
2. To avail of the exemption from VAT the

importation must be exempt from customs duties. The
following discussion refers to the requisites for the tax
and duty free importation of personal and household
effects under the Tariff and C u s t o m s C o d e of the
Philippines (TCCP).
3. Returning resident for purposes of conditionally free

importation (exemption from customs duties) of
personal and household effects.
a. Nationals (Filipinos),
b who have stayed in the foreign country
c for a period of at least six (6) months [TCCP, Sec 105
(f). numbering and arrangement supplied)
4. Kinds of personal and household effects that may
256
be exempt from the payment of customs duties:
a. ' Returned personal and household effects; and
b. Personal and household effects purchased abroad.
5. Requirements for conditionally free importation

(exemption f r o m c u s t o m s duties) of returned personal
a n d household effects.
a. The privilege covers personal and household
effects, I N C L U D I N G jewelry, precious stones and other articles of
luxury;
b. The importer must be a returning resident;
c. The personal and household effects were formally
declared listed before departure and identified under oath before
the Collector of Customs when exported from the Philippines by
such returning resident upon his departure from the Philippines or
during his stay abroad
d. Certificate of identification issued by the Customs
officer showing that the imported articles are the identical articles
previously exported by the returning resident. If the articles have
been advanced ih value while abroad such increment in value
shall be subject to duty. [CAO No. 7-72, implementing TCCP. Sec
105 (f), numbering and arrangement supplied]
6. Requirements for conditionally free importation

(exemption from c u s t o m s duties) of personal and
household effects purchased abroad by resident
Filipinos (returning residents).
a T h e privilege c o v e r s personal e f f e c t s w h i c h
embraces all articles of personality not merchandise including
wearing apparel, articles of personal adornment except luxury
items, toilet articles, instruments related to one's profession and
analogous personal or household effects. Household effects are
limited to such as are similar to books, libraries, furniture, carpets,
paintings, tablewares, and other usual household furnishings,
excluding vehicles, watercraft, aircraft, animals and luxury items.
(CAO No. 7-72 implementing TCCP, Sec 105 (f)]
b. The importer must be a returning resident;
c A declaration of the owner under oath stating;
1) that articles are necessary, appropriate and
normally used for his comfort and convenience during his
stay abroad;
257
2) that he is a national who has stayed in a
foreign country for a period of al least six (6) months abroad;
3) that they are not in commercial quantities
nor intended for barter, sale or hire;
4) - that he has not previously received the
benefits under this subsection within 365 days prior to his
arrival.
d. That the articles shall accompany him upon his
return, or arriving within a reasonable time which barring
unforeseen and fortuitous events, in' no case shall exceed sixty
(60) days after the owner's return
e. That the total dutiable value shall not exceed Ten
Thousand Pesos (P10,000.00)
f. If the total dutiable value of the personal and
household effects (except luxury items), shall be in excess of Ten
Thousand Pesos (P10,000), the same shall be subject to a fifty
percent (50%) ad valorem duty across ihe board [TCCP, Sec. 105
(f), numbering and arrangement supplied]
NOTES AND COMMENTS: It seems that the provisions of CAO
No. 7 - 72 do not find application because of the amended provisions of
Sec. 105 TCCP CAO No 7-72 provided a cap of only P2.000.00.
7. Additional privileges to returning overseas

contract workers ( O C W s ) . Returning overseas contract
workers are entitled to an additional tax-free privilege as follows:
a. Bring in, duty and tax free;
b. Used home appliances,
c. Limited to one of every kind once in a given
calendar year
d. Accompanying them on their return, or arriving within
a reasonable time which barring unforeseen and forfeitures
events, in no case shall exceed sixty (60) days, after the owner's
return
e. . upon presentation of their original passport at the port
of entry;
f Provided that any excess of P10,000.00 for personal,
and household effects and/or of the number of duty and tax-free
appliances shall be subject to the corresponding duties and taxes
provided under the Tariff and Customs Code. [TCCP, Sec 105 ( M ) ,
NOTES AND COMMENTS: The author submits that the above provisions
of the Tariff and Customs Code are supplemented by Rep. Act No 6768,
as amended by Rep Act No 9174 because of the last par. of Sec 3, Rep
258
Act No. 6768, as amended by Rep. Act No 9174, which reads "The
privileges granted under this Act shall be in addition to the benefits
enjoyed by the balikbayan under existing laws, rules and regulations." It
may also be that an overseas contract worker may be entitled to all of
three (3) kinds of privileges.
8. Overseas contract workers (OCWs) for the

purpose of availment of the additional privileges.
a. Holders of valid passport duly issued by the
Department of Foreign Affairs and certified by the Department of
Labor a n d Employment/Philippine Overseas Employment Agency
for overseas employment purposes.
b. It covers all nationals working in a foreign country
under e m p l o y m e n t contracts, including Middle East contract
workers, entertainers domestic helpers regardless of their
employment status in the foreign country. [TCCP, Sec. 105 ( M ) ,
9. G o v e r n m e n t e m p l o y e e s entitled to conditionally
free importation (exemption from customs duties) of
personal a n d household effects including a motor car.
a. Any officer or employee of the Department of Foreign
Affairs, including
b. any attache, civil or military, or member of his staff
assigned to a Philippine diplomatic mission abroad, or
c. any A F P military personnel detailed with the SEATO
or
d. any A F P military personnel accorded assimilated
diplomatic rank on duty abroad. (TCC, Sec. 105, last par)
10. Requirements for the conditionally free import-

ation of g o v e r n m e n t officers or employees.
a. The officer or employee is for reassignment to his
home office, or dies, resigns or is retired from the service,
b. The motor car must have been ordered or purchased
prior to the receipt by the mission or consulate of the order of
recall, must be registered in the employee's name,
c. The personal effects should not exceed thirty per
centum (30%) of the total amount received by such officer or
employee in salary and allowances during his latest assignment
abroad but not to exceed four years;
d. The exemption shall not be availed of oftener than
259
once every four years;
e. The officer or employee concerned must have served
abroad for not less than two years. (TCC, Sec 105, last par)
11. Government employees covered by other tax-

exemption privileges.
a. Government employees including A F P military
personnel and members of the PNP who are returning from
scholarship or other schooling abroad may avail of the
conditionally free importation for returning residents;
b. Members of the A F P and PNP assigned to UN
Peacekeeping Missions abroad such as in East Timor, Haiti,
Somalia, Israel, etc., are who are not covered by the conditionally
free importation privilege on their imported personal and
household effects may avail of the tax-exemption privileges
granted to UN personnel.
12. Requirement to be presented to the Bureau of

Customs to avail of the e x e m p t i o n from VAT. The
importer must present to the Bureau of Customs an exemption
certificate duly issued and signed by the Department of Finance.
The Bureau of Customs would not release the imported articles
without presentation of this exemption certificate
IMPORTATION OF PROFESSIONAL INSTRUMENTS

AND IMPLEMENTS. WEARING APPAREL. DOMESTIC
ANIMALS AND PERSONAL HOUSEHOLD EFFECTS BY
P E R S O N S C O M I N G T O S E T T L E I N T H E PHILIPPINES
THAT ARE EXEMPT FROM VAT
1. Importation of persons c o m i n g to settle in t h e

Philippines that may be e x e m p t from the Value-added
Tax (VAT). Importation of
a. professional instruments and implements,
b. wearing apparel,
c. domestic animals, and -
d. personal household effects. [NIRC of 1997, as
amended by Rep Act No 9337, Sec 109 (1) (D)J
2. Requisites for the V A T e x e m p t i o n .

a. The articles imported must not be any vehicle,vessel,
260
aircraft, machinery, other goods for use in the manufacture and
merchandise of any kind in commercial quantity;
b, the importation must belong to persons coming to
settle in the Philippines, for their own use and not for sale, barter
or exchange, accompanying such persons, or arriving within ninety
(90) days before or after their arrival, upon the production of
evidence satisfactory to the Commissioner of Internal Revenue,
that such persons are actually coming to settle in the Philippines
and that the change of residence is bona fide. [NIRC of 1997, as
amended by Rep. Act No. 9337, Sec. 109 (1) (D)J
3. Importation of persons coming to settle in the

Philippines that are subject to VAT.
a. Any vehicle, vessel, aircraft, machinery,
b. other goods for use in the manufacture and
merchandise of any kind in,commercial quantity. [NIRC of 1997, as
amended by Rep. Act No. 9337, Sec. 109 (1) (D)]
SERVICES S U B J E C T TO PERCENTAGE TAX

U N D E R T H E NIRC OF 1997. TITLE V. THAT ARE
E X E M P T F R O M VAT
1. Services that are exempt from the Value-added

Tax (VAT). Services subject to percentage tax under Title V of
the Tax Code, as enumerated below.
a. Sale or lease of goods or properties or the
performance of services of non-VAT-registered persons, other
than the transactions mentioned in paragraphs (A) to (U) of Sec.
109 (1) of the Tax Code, the annual sales and/or receipts of which
does not exceed the amount of One Million Five Hundred
thousand Pesos (P1,500,000.00), Provided, That not later than
January 3 1 , 2009 and every three (3) years thereafter, the amount
herein stated shall be adjusted to its present value using the
Consumer Price Index, as published by the National Statistics
Office (NSO). (NIRC of 1997, as amended by Rep. Act No 9337, Sec
116)
b. Services rendered by domestic common carriers by
land for the transport of passengers and keepers of garages.
(NIRC of 1997, Sec. 117)
c. Services rendered by international air/shipping
carriers. {Ibid., Sec. 118)
d. Service rendered by franchise grantees of radio and/
261
or television broadcasting whose annual gross receipts of the
preceding year do not exceed Ten Million Pesos (P10,000,000.00)
and by franchises of gas and water utilities. (NIRC of 1997, as
amended by Rep Act No 9337, Sec 119)
e- Service rendered for overseas dispatch message or
conversation originating from the Philippines. (NIRC of 1997,,
Sec. 120)
f. Services rendered by any person, company or
corporation (except purely cooperative companies or associations
) doing life insurance business of any sort in the Philippines. (Ibid.,
Sec. 123)
g. Services rendered by fire, marine or miscellaneous
insurance agents of foreign insurance companies. (Ibid, Sec. 124)
h. Services of proprietors, lessees or operators of
cockpits, cabarets, night or day clubs, boxing exhibitions
professional basketball games, jai-Alai a n d race tracks. (Ibid, Sec.
125) and
i. Receipts on sale, barter or exchange of shares of
stock listed and traded through the local stock exchange or
through initial public offering. (Ibid., Sec. 127)
2. Telecommunications companies are subject to the

Value-Added Tax tVAT), on their domestic transactions,
if their annual receipts exceed P1,500,000.00, and their
exemption does not cover V A T . T h e services of
telecommunications c o m p a n i e s that are rendered with regard to
domestic dispatch m e s s a g e or conversation originating from the
Philippines destined also for the Philippines are not subject to the
percentage tax imposed under the NIRC of 1997, Title V. They
may therefore be subject to the payment of the V A T if their annual
receipts exceed P1,500,000.00.
NOTES A N D C O M M E N T S :
a. It should be, noted that the 'in lieu of all taxes* clause in
R.A. No. 7294 has become functus officio with the abolition of the
franchise tax on telecommunications companies - the "in lieu of all taxes'
clause in R.A. No. 7294 was rendered ineffective by the advent of the
Value-Added Tax (VAT) Law. (Smart Communications, Inc. v. The City of
Davao, 565 SCRA 237)
b From 1 January 1996, DIGITEL, ceased to be liable for
national franchise tax, and in its stead is imposed the VAT. [Digitel
Telecommunications Philippines, Inc. (Digitel) v Province of Pangasinan,
516 SCRA 541)
262
3. Telecommunications c o m p a n i e s are exempt from
the Value-Added Tax (VAT), on their overseas
messages. Telecommunications companies, are subject to
percentage taxes for service rendered for overseas dispatch
message or conversation originating from the Philippines. (NIRC of
1997, Sec. 120) Since these services are subject to percentage
taxes under the NIRC of 1997, Title V, they are exempt from the
payment of the value-added tax (VAT). [NIRC of 1997, as amended
by Rep. Act No. 9337, Sec. 109 (1) (E)]
4. Service rendered by franchise grantees of radio

and/or television broadcasting are e x e m p t from V A T if
their annual gross receipts of the preceding year do
not e x c e e d P10 million. T h e y are subject to V A T if their
annual gross receipts of the preceding year exceeds
P10 million. Service rendered by franchise grantees of radio
and/or television broadcasting w h o s e annual gross receipts of the
preceding year do not e x c e e d Ten Million Pesos (P10,000,000.00)
and by franchises of gas and water utilities are subject of the
percentage tax (NIRC of 1997, as amended by Rep. Act No. 9337, Sec.
119) under Title V, hence they are not subject to value-added tax (VAT).
[NIRC of 1997, as amended by Rep. Act No. 9337, Sec. 109 (1) (E)]
NOTES AND COMMENTS: In keeping with the laws that have been
passed since the grant of ABS-CBN franchise, the corporation should now
be subject to Value Added Tax (VAT), instead of the 3% franchise tax.
(Quezon City v. ABS-CBN Broadcasting Corporation, G R No 166408,
October 6, 2008, 567 SCRA 496)
5. T h e "in lieu of all t a x e s " clause in the franchise of

A B S - C B N has become functus officio with the abolition
of the franchise tax on broadcasting companies with
yearly gross receipts exceeding Ten Million Pesos. The
clause "in lieu of all taxes" does not pertain to VAT or any other
tax. It cannot apply when what is paid is a tax other than a
franchise tax. Since the franchise tax on the broadcasting
companies with yearly gross receipts exceeding ten million pesos
has been abolished, the "in lieu of all taxes" clause has now
become functus officio, rendered inoperative (Quezon City, et al., v
ABS-CBN Broadcasting Corporation, G R No 166408, October 6, 2008,
567 SCRA 496)
NOTES AND COMMENTS: The above ruling is practically the same
holding in an earlier case involving another telecommunications company.
263
Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No.
155491, September 16, 2008 The author opines that Since practically all
franchises granted to telecommunications companies are similarly
worded, the above doctrine finds application to the others.
6. Historical background on why A B S - C B N is subject

to VAT and not to the franchise tax. At the time of the
enactment of its franchise on May 3, 1995, A B S - C B N was subject
to 3% franchise tax under Section 117(b) of the 1977 National
Internal Revenue Code (NIRC), as amended.
On January 1, 1996, R.A. No. 7716, otherwise known as the
Expanded Value Added Tax Law, took effect and subjected to
VAT those services rendered by radio and/or broadcasting
stations. Notably, under the same law, "telephone and/or telegraph
systems, broadcasting stations and other franchise grantees"
were omitted from the list of entities subject to franchise tax. The
impression w a s that these entities were subject to 1 0 % V A T but
not to franchise tax. Subsequently, R.A. No. 8241 took effect on
January 1, 1997 containing more a m e n d m e n t s to the NIRC. Radio
and/or television companies w h o s e annual gross receipts do not
exceed P10,000,000.00 were granted the option to choose
between paying 3% national franchise tax or 1 0 % V A T
On the other hand, radio and/or television companies with
yearly gross receipts exceeding P10,000,OOO.OOwere subject to
10% VAT, pursuant to Section 102 of the NIRC.
On January 1, 1998, R.A. No. 8424 w a s passed confirming
the 10% V A T liability of radio and/or television companies with
yearly gross receipts exceeding P10,000,000.00. R.A. No. 9337
was subsequently enacted and b e c a m e effective on July 1, 2005.
The said law further amended the NIRC by increasing the rate of
VAT to 12%. The effectivity of the imposition of the 1 2 % V A T w a s
later moved from January 1, 2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on
the matter, A B S - C B N is subject to the payment of V A T . It does
not have the option to choose between the payment of franchise
tax or VAT since it is a broadcasting c o m p a n y with yearly gross
receipts exceeding Ten Million Pesos (P10,000,000.00).(Quezon
City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008, 567 SCRA 496)
NOES A N D C O M M E N T S : The author opines that since practically all
franchises granted to telecommunications companies are similarly worded
that the above doctrine finds application to the other telecommunications
264
companies.
SERVICES BY AGRICULTURAL CONTRACT

G R O W E R S A N D M I L L I N G FOR O T H E R S THAT A R F
EXEMPT FROM VAT "
1. Services of agricultural contract growers and

millers that are e x e m p t f r o m the Value-Added Tax (VAT).
Services by
a. agricultural contract growers and
b. milling for others of
1) palay irfto rice,
2) corn into grits and
3) sugar cane into raw sugar. [NIRC of 1997, as
amended by Rep. Act No. 9337, Sec 109 (1) (F)]
MEDICAL. DENTAL. HOSPITAL AND VETERINARY

SERVICES T H A T ARE EXEMPT FROM VAT
1. Health services that are exempt from the Value-

A d d e d Tax (VAT) Medical, dental, hospital and veterinary
services except those rendered by professionals; [NIRC of 1997,
as amended by Rep. Act No. 9337, Sec. 109 (1) (G)]
Laboratory services are exempted,
2. T h e import of the e x e m p t i o n is plain. It contemplates

the exemption from V A T of taxpayers engaged in the performance
of medical, dental, hospital, and veterinary sen/ices.
W h e r e an entity does not actually provide medical and/or
hospital services, but merely arranges for the same, its services
are not VAT-exempt. (Commissioner of Internal Revenue v. Philippine
Health Care Providers, Inc., 522 SCRA 131)
EDUCATIONAL SERVICES RENDERED BY

PRIVATE EDUCATIONAL SERVICES THAT ARE
EXEMPT FROM VAT
1. Edueational services that are exempt from the

Value-Added Tax (VAT). Educational services
a. rendered by private educational institutions, duly
accredited by
265
1) the Department of Education (DEPED),
2) the Commission on Higher Education (CHTfD),
3) the Technical Education And Skills
Development Authority (TESDA) and those
b. rendered by government educational institutions
[NIRC of 1997, as amended by Rep Act No 9337, Sec 109 (1) (H)]
2. Educational services, defined. "Educational services"

shall refer to academic, technical or vocational education provided
by private educational institutions duly accredited by the DepED,
the CHED and TESDA and t h o s e ' rendered by government
educational institutions
3. Not included in educational services hence

subject to VAT. Educational services does not include
seminars, in-service training, review classes and other similar
sen/ices rendered by persons w h o are not accredited by the
DepED, the C H E D and/or the TESDA.
SERVICES RENDERED BY INDIVIDUALS THAT

ARE EXEMPT FROM VAT
1. Services rendered by individuals that are exempt

from the Value-Added Tax (VAT). Services rendered by
individuals pursuant to an employer-employee relationship. . [NIRC
of 1997, as amended by Rep. Act No. 9337, Sec. 109 (1) (I)]
SERVICES RENDERED BY REGIONAL OR AREA

HEADQUARTERS OF MULTINATIONAL CORPORAT-
IONS THAT A R E E X E M P T F R O M V A T
1. Services rendered by regional or area

headquarters that are e x e m p t f r o m the Value-Added Tax
(VAT). Services rendered
a. by regional or area headquarters
1) established in the Philippines
2) by multinational corporations
b. which act as
1) supervisory,
2) communications and
3) coordinating centers for their
266
a) affiliates,
b) subsidiaries or
c) branches
(1) in the Asia-Pacific Region
c. and do not earn or derive income
1) from the Philippines. [NIRC of 1997, as amended
by Rep. Act No. 9337, Sec. 109 (1) (J)]
TRANSACTIONS UNDER INTERNATIONAL

AGREEMENTS THAT A R E EXEMPT FROM VAT
1. Transactions which are exempt under

international a g r e e m e n t s that are exempt from the
Value-Added Tax (VAT). Transactions which are exempt
under international agreements to which the Philippines is a
signatory or under special laws, except those under Presidential
Decree No. 529 - Petroleum Exploration Concessionaires under
the Petroleum Act of 1949; [NIRC of 1997, as amended by Rep Act
No. 9337, Sec. 109(1)(K)J
SALES OR IMPORTATION BY AGRICULTURAL

COOPERATIVES THAT A R E EXEMPT FROM VAT
1. Sales or importation of agricultural cooperatives

that are exempt f r o m V A T . Sales by agricultural cooperatives
duly registered with the Cooperative Development Authority (CDA)
to their members as well as sale of their produce, whether in its
original state or processed form, to non-members; their
importation of direct farm inputs, machineries and equipment,
including spare parts thereof, to be used directly and exclusively in
the production and/or processing of their produce. [NIRC of 1997, as
amended by Rep. Act No. 9337, Sec. 109 (1) (L)]
G R O S S R E C E I P T S F R O M LENDING ACTIVITIES
BY CREDIT OR MULTI-PURPOSE COOPERATIVES
THAT ARE EXEMPT FROM VAT
1. Gross receipts from lending activities of

cooperatives that are e x e m p t from VAT. Gross receipts
from lending activities by credit or multi-purpose cooperatives duly
registered and in good standing with the Cooperative Develop-
267
ment Authority. [NIRC of 1997, as amended by Rep A c t N o 9337, S e c
109(1)(M)]
SALES OR IMPORTATION BY NON-

AGRICULTURAL. NON-ELECTRIC A N D NON-CREDIT
COOPERATIVES THAT A R E E X E M P T F R O M VAT
1. Sales of other kinds of cooperatives that are

exempt from V A T . Sales by non-agricultural, non-electric and
non-credit cooperatives duly registered with the Cooperative
Development Authority: Provided, That the share capital
contribution of each member does not exceed Fifteen thousand
pesos ( P t 5 , 0 0 0 ) and regardless of the aggregate capital and net
surplus ratably distributed a m o n g the members. [NIRC of 1997, as
amended by Rep Act No. 9337, Sec. 109 (1) (N)]
E S S A Y T Y P E S E L F - T E S T S . I t i s r e c o m m e n d e d that you
in writing.giving yourself three (3) minutes per number. If pressed
complete.
OBJECTIVE TYPE:
1. When are sales by non-agricultural cooperatives

exempt from VAT?
PROBLEM TYPE:
1. Your client, United Market Cooperative, is

requesting the Commissioner of Internal Revenue to exempt it
from the payment of VAT on its purchase of prime
commodities from food suppliers/manufacturers on the ground
that it is exempt from all taxes, including VAT, under R.A. No.
6938, the Cooperative Code of the Philippines. .
Do you think your client can obtain the necessary
exemption from the BIR ? If your answer is in the affirmative,
explain the basis for the grant. If in the negative, state the
basis for the rejection of the request. (BAR: 1992)
SUGGESTED ANSWER: N o . The exemption will not b e g r a n t e d
because the VAT is imposed upon sales a n d not upon p u r c h a s e s
268
E X P O R T S A L E S T H A T A R E E X E M P T F R O M VAT
1. Export sales that are exempt from VAT. Export sales

by persons who are not VAT-registered [NIRC of 1997, as
amended by Rep Act No. 9337, Sec. 109 (1) (O)]
SALE OF REAL PROPERTY NOT P R I M A R I L Y

H E L D FOR S A L E T O C U S T O M E R S O R H E L D F O R
LEASE IN THE ORDINARY COURSE OF TRADE
1. Sale of real property that is e x e m p t from VAT. Sale

of real properties not primarily held for sale to customers or held
for lease in the ordinary course of trade or business, or real
property utilized for low-cost and socialized housing as defined by
Republic Act No 7279, otherwise known as the Urban
Development and Housing Act of 1992, and other related laws,
such as RA No. 7835 and RA No. 8765, residential lot valued at
O n e million five hundred thousand pesos (P 1,500,000) and
below, house and lot, and other residential dwellings valued at
T w o million five hundred thousand pesos TP 2,500,000) and
below: Provided, That not later than January 3 1 , 2009 and every
three (3) years thereafter, the amounts herein stated shall be
adjusted to their present values using the Consumer Price Index,
as published by the National Statistics Office (NSO). [NIRC of
1997, as amended by Rep. Act No 9337, Sec. 109 (1) (P)]
L E A S E OF A R E S I D E N T I A L UNIT T H A T IS EXEMPT
FROM VAT
1. Lease of residential unit that is exempt from VAT.

Lease of a residential unit with a monthly rental not exceeding Ten
thousand pesos (P 10,000) Provided, That not later than January
3 1 , 2009 and every three (3) years thereafter, tne amount herein
stated shall be adjusted to its present value using the Consumer
Price Index as published by the National Statistics Office (NSO).
[NIRC of 1997, as amended by Rep Act No. 9337, Sec. 109 (1) (Q)]

269
complete.
OBJECTIVE TYPE;
What rentals of residential real property not subject to

the Value-Added Tax ?
f
PROBLEM TYPE:
Emiliano Paupahan is engaged in the business of

leasing out several residential apartment units he owns. The
monthly rental for each unit ranges from P8,000.00 to
P10,000.00. His gross rental' Income for one year Is
P1,650,000.00. He consults you on whether it Is necessary for
him to register as a VAT taxpayer. What legal advice will you
give him, and why ? (BAR: 2009)
SUGGESTED ANSWER: He is not required to register as a VAT
taxpayer
His transactions of leasing residential units for an amount not
exceeding P10.000 00 per unit per month is exempt from the VAT.
SALE. IMPORTATION. PRINTING OR

PUBLICATION O F B O O K S . N E W S P A P E R . M A G A Z I N E .
REVIEW OR BULLETIN THAT A R E EXEMPT FROM VAT
1. Sale, importation, printing or publication of books

and any newspaper, magazine,, review or bulletin that is
exempt from VAT. Sale, importation, printing or publication of
books and any newspaper, magazine, review or bulletin which
appears at regular intervals with fixed prices for subscription and
sale and which is not devoted principally to the publication of paid
advertisements. (NIRC of 1997, as amended by Rep. Act No. 9337,
Sec. 109(1) (R))
SALE. IMPORTATION OR LEASE OF VESSELS

AND AIRCRAFT THAT ARE EXEMPT FROM VAT
1. Sale, importation or lease of passenger or cargo

vessels and aircraft that are e x e m p t from VAT. Sale,
importation or lease of passenger or cargo vessels and aircraft,
270
including ^engine, equipment and spare parts thereof for domestic
or international transport operations; Provided, that the exemption
from V A T on the importation and local purchase of passenger
and/of cargo vessels shall be limited to those of one hundred fifty
(150) tons and above, including engine and spare parts of 9aid
vessels; Provided, further, that the vessels be imported shall
comply with the age limit requirement, at the time of acquisition
counted from the date of the vessel's original commissioning, as
follows: (i) for passenger and/or cargo vessels, the age limit is
fifteen years (15) years old, (ii) for tankers, the age limit is ten
(10) years old, and (iii) For high-speed passenger cars, the age
limit is five (5) years old, Provided, .finally, that exemption shall be
subject to the provisions of section 4 of Republic Act No. 9295,
otherwise k n o w n as "The Domestic Shipping Development Act of
2004." (NIRC of 1997, as amended by Rep. Act No 9337, Sec. 109 (1)
(S)l
I M P O R T A T I O N O F FUEL. G O O D S A N D SUPPLIES
T H A T A R E E X E M P T F R O M VAT
1. Importation of fuel, goods and supplies that are

e x e m p t from the V a l u e - A d d e d Tax (VAT). Importation of
fuel, goods and supplies by persons engaged in international
shipping or air transport operations. (NIRC of 1997, as amended by
Rep. Act No. 9337, Sec. 109 (1) (T)]
2. Requisites for the Value-Added Tax (VAT) exempt

importation of fuel, goods and supplies:
a. T h e importer must be a person engaged in
international shipping or air transport operations; •
b. the imported fuel, goods and supplies shall be used
exclusively or shall pertain
1) to the transport of goods and/or passenger
from a port in the Philippines directly to a foreign port
2) without stopping at any other port in the
Philippines. (NIRC of 1997, as amended by Rep. Act No. 9337,
Sec. 109(1) (T)]
c. A tax exemption certificate must be issued by the
Department of Finance
3. Importation of fuel, goods and supplies by per-
271
sons engaged in international shipping or air t r a n f p q r t
operations that are subject to the Value-Added Tax
(VAT). The portion of the imported fuel, goods or supplies that is
a. used in the transport of goods and/or passenger from
a port in the Philippines directly to a foreign port
b. but stops at any other port in the Philippines. [NIRC of
1997, as amended by Rep. Act No. 9337, Sec. 109 (1) (T)]
BANKING AND SERVICES OF NON-BANK

FINANCIAL INTERMEDIARIES THAT ARE EXEMPT
FROM VAT
1. Banking and services of non-bank financial

intermediaries that are e x e m p t f r o m the Value-Added
Tax (VAT). Services of
a. banks,
b. non-bank financial intermediaries performing quasi-
banking functions, and
c. other non-bank financial intermediaries. [NIRC of
1997, as amended by Rep. Act No. 9337, Sec. 109 (1) (U)]
2. Services rendered by p a w n s h o p s are e x e m p t f r o m

the p a y m e n t of the V a l u e - A d d e d T a x (VAT). It appears
from the amendatory provisions of Rep. Act No. 9337, that
services rendered by non-bank financial intermediaries are now
expressly exempt from the imposition of the value-added tax
(VAT).
Rep. Act No. 8791 defines financial intermediaries as
persons or entities whose principal functions include the lending,
investing or placement of funds or evidences of indebtedness or
equity deposited with them, acquired by them, or otherwise
coursed through them, either for their o w n account or for the
account of others, (cited in First Planters Pawnshops, Inc., v.
Commissioner of Internal Revenue, 560 SCRA 606)
A pawnshop's business and operations are governed by
P D . No. 114 and Central Bank Circular No, 374 (Rules and
Regulations for Pawnshops). It need not be elaborated that
pawnshops are non-banks/banking institutions - the nature of their
business activities partakes that of a financial intermediary in that
its principal function is lending. (Ibid.)
NOTES AND COMMENTS: The reader should disregard the holding in •
272
various Supreme Court decisions that interpreted the provisions of the
NIRC of 1997 on VAT, subjecting pawnshops to VAT, where the factual
antecedents took place before the amendatory provisions of Rep Act No
9337 took effect. Among such rulings are those made in First Planters
Pawnshops, Inc., v. Commissioner of Internal Revenue, 560 SCRA 606
S A L E S OR RECEIPTS T H A T A R E EXEMPT FROM

VAT "
1. Sales or receipts that are exempt from the Value-

A d d e d Tax (VAT). Sale or lease of g o o d s or properties or the
performance of services other than the transactions mentioned in
the preceding paragraphs,
a. the gross annual sales and/or receipts do not exceed
the amount of O n e million five hundred thousand pesos
(P1,500,000). [NIRC of 1997, as amended by Rep Act No 9337 Sec
8,
109(1)(V), 1 par.J
NOTES AND COMMENTS: The sales or receipts should not be
derived from transactions that are exempt from the VAT
2. Adjustment of the threshold amount of

P1,500,000.00. Not later than January 3 1 , 2009 and every three
(3) years thereafter, the amount of P1,500,000.00 shall be
adjusted to its present value using the Consumer Price Index as
published by the National Statistics Office (NSO). . [NIRC of 1997.
as amended by Rep. Act No. 9337, Sec. 109 (1) (V), 1 * par]
3. Aggregation rule, definition. The total sales or

receipts of a taxpayer or groups of taxpayers are added in order to
determine the applicability of the threshold amount of
P1,500,000.00 which is exempt from VAT.
4. Computation of the P1,500,000.00 for husband and

wife taxpayers. For purposes of the threshold of P1,500,000.00,
the husband and wife shall be considered separate taxpayers.
[NIRC of 1997, as amended by Rep. Act No. 9337, Sec. 109 (1) (V), 2"
par., 1 " sentence]
NOTES A N D C O M M E N T S : The aggregation rule does not apply to
the husband and wife. Consider the following scenarios:
a. The husband had receipts amounting to P1,000,000 00
.while the wife had receipts of P700.000.00. The amounts should not be
added to determine the threshold amount of P1,500,000 00, Thus, the
273
husband and wife could avail of the exemption.
b. The husband had receipts amounting to P1,700,000 00
while the wife had receipts of P 1 , 0 0 0 , 0 0 0 . 0 0 . Only the husband would be
subject to VAT, the wife is exempt.
5. Aggregation rule applies for each taxpayer, other

than husband and wife taxpayers. The aggregation rule for
each taxpayer shall apply. For instance, if a professional, aside
from the practice of his profession, also derives revenue from
other lines of business which are otherwise subject to VAT, the
same shall be combined for purposes of determining whether the
threshold has been exceeded. Thus, the VAT-exempt sales shall
to be included in determining the threshold. . [NIRC of 1997, as
n d n d rd
amended by Rep. Act No. 9337, Sec. 109 (1) (V), 2 par., 2 and 3
sentences)]
CERTAIN SALES TO SENIOR CITIZENS THAT ARE

EXEMPT FROM VAT
1. Rep. Act No. 9994, the " E x p a n d e d Senior Citizens

Act of 2010", w h i c h a m e n d e d Rep. A c t No. 7432, and
Rep. Act No. 9257 exempts certain purchases of senior
citizens from the VAT. Up to this writing the Rev. Regs,
covering this exemption has not been released yet.

complete.
OBJECTIVE T Y P E :
Give at least three (3) real estate transactions which are

not subject to the Value-Added Tax. (BAR: 1996)
SUGGESTED ANSWER: Refer to the above discussion.
PROBLEM TYPE: t
1. Greenhills Condominium Corporation incorpor-

ated in 2003 is a non-stock, non-profit association of unit
274
QWtiers in Greenhills Tdwer, San Juan,City. To be able to
reduce the association dupe being collected from the unit
eWners, the Board bf Directors bf the Corporation decided to
l e a s e part of the ground floor Of the condominium building to
DEF Savings Bank for P120,000 a month or P1.44 million for
the year, starting January 2009*
a. Is the non-stock, don-profit association liable for
value-added tax in 2009 ? If your answer Is In the negative, Is
it liable for another kind of business tax ? (BAR: 2008, dates
supplied!)
SUGGESTED ANSWER: No, because its rentals did not exceed
P1,500,000:00 annually. It shall be subject to the 3% percentage tax.
b. Will the association be liable for value added tax
in 2010 if It increases the rental to P150,000 a month
beginning January 2010 ? Explain. (BAR: 2008, dates
supplied)
SUGGESTED ANSWER: Yes, because its gross sales would then
exceed P1,500,000.00 annually
2. Melissa inherited from her father a 300-square-

meter lot. At the time of her father's death on March 14, 2008,
the property was valued at P720,000.00. On February 28,
2009, to defray, the cost of the medical expenses of her sick
son, she sold the lot for P600.000.00, on cash basis. The
prevailing market value of the property at the time of the sale
was P3.000.00 per square meter.
Is Melissa subject of pay Value Added Tax (VAT) on the
sale of the property ? If so, how much and why ? If not, why
not ? (BAR: 2009, dates supplied)
SUGGESTED ANSWER: No. VAT is not imposed on the sale of
real properties not primarily held for sale to customers or held for lease in
the ordinary course of trade or business; The property is not held by
MeliSsa primarily for sale, not is it for lease in the ordinary course of trade
or business.

1. State whether the following transactions are a)
VAT exempt, b) subject to VAT at 12%; or c) subject to VAT
at 0%:
a. Sale of fresh vegetables by Aling Ining at the
Pamilihang Bayan ng Trece Martirez. (BAR 1998 VAT rate
supplied)
275
b. Services rendered by Jake's Construction
Company, a contractor to the World Health Organization in
%
the renovation/ of its offices in Manila. (BAR: 1998, VAT rate

supplied)
SUGGESTED ANSWER. Subject to VAT at 0%
c. Sale of tractors and other agricultural Implements
by Bungkal Incorporated top local farmers. (BAR: 1998, VAT
rate supplied)
SUGGESTED ANSWER: Subject to VAT at 12%.
d. Sale of RTW by Cely's Boutique, a Filipino dress
designer, in her dress shop and other outlets. (BAR: 1998,
VAT rate supplied)
SUGGESTED ANSWER: Subject to VAT if the gross sales
exceeded P 1,500,000 00 annually.
e. Fees for lodging paid by students to Bahay-
Bahayan Dormitory, a private entity operating a student
dormitory (monthly fee P1.500). (BAR: 1998, VAT rate
supplied)
SUGGESTED ANSWER: VAT exempt.
276
Taxation
Volume 111
TRANSFER TAXES &

VALUE-ADDED TAX
TAXATION
V o l u m e III
TRANSFER TAXES & VALUE-

ADDED TAXES
Basic Principles of Transfer Taxation, Estate Taxes, Donor's
Taxes, Value-Added Taxes
with
Bar Examination Questions from 1964 to 2009, essay type and

CPA/Bar multiple-choice type of self-tests and
selected S u p r e m e Court decisions
up to February, 2010
ABELARDO T. QQMONDON
AB, BSC. LLB. MA, l i f t , DCL ( C a n d . )
Lawyer-CPA-Customs B r o k e r
Pre-Bar Reviewer: University of the Philippines Law Center,
Ateneo de Manila University/ University of Santo Tomas, San
Sebastian College - Recoletos, P R I M U S Management Unlimited
Services, Inc., Lex Reviews and Seminars, Inc., Faculty Member:
Graduate School and Civil Law University of Santo Tomas,
Adamson University, University of the East, Pamantasan ng
Lungsod ng Maynila, . Former: Chairman, Board of Accountancy,
Chairman, Continuing Professional Education Council for CPAs,
Professional Regulation Commission; World Bank Consultant
Former Pre-Bar Reviewer: Far Eastern University, Lyceum of the
Philippines, MLQ University, Arellano University, University of
Manila, Cosmopolitan Review Center, etc. Former Executive:
Motorola (Phils.), Inc., T M X ( P h i l s ) , Inc., ESSO Standard Fertilizer
& Agricultural Chemicals, Inc., Ford Phils., Stamping Plant,
Philippine Geothermal, Inc., Honiron Phils. Inc.
2010 Tenth Edition

Published & Distributed by:
GIC ENTERPRISES & CO., INC.
2019 C. M. Recto Avenue
Manila
BAR CANDIDATE'S PRAYER*
Lord God, the creator of all, and fount of all

knowledge and wisdom, I implore you to guide me in
my undertaking to b e c o m e a lawyer.
O p e n my mind to absorb, r e m e m b e r and live the

principles of law and justice distilled in my readings and
in the lectures I attend.
I beseech you to illumine the thoughts of the bar

reviewers so they could be your instruments in guiding
me.
Fill me with your grace, so I would have a clear

mind in identifying the issues raised in the bar
questions. Give light for me to discover the correct,
just and ethical answers to the bar questions so I could
pass the Bar.
Finally, grant me the serenity to accept whatever

is thy will and show me the correct path to take for your
greater glory.
AMEN
A non-sectarian prayer written by Prof. Abelardo T.

Domondon.
CPA LICENSURE CANDIDATE'S PRAYER*
Lord God, the creator of all, and fount of all

knowledge and wisdom, I implore you to guide me in
my undertaking to become a certified public
accountant.
O p e n my mind to absorb, r e m e m b e r and live the

generally accepted principles of accounting and
auditing, as well as business law and taxation distilled
in my readings and in the lectures I attend.
I beseech you to illumine the thoughts of the

board reviewers so they could be your instruments in
guiding m e .
Fill me with your g r a c e , so I would have a clear

mind in identifying the issues raised in the board
examination questions. G i v e light for me to discover
the correct, just and ethical answers to the board
examination questions so I could pass the licensure
examination for C P A s .
Finally, grant me the serenity to accept whatever

is thy will and show me the correct path to t a k e for your
greater glory
AMEN
A non-sectarian prayer written by Prof. Abelardo T.

Domondon.
ij
P R E F A C E T O T H E 2 0 1 0 T E N T H EDITION
(How To Use the Book)
T h i s 2 0 1 0 T e n t h E d i t i o n o f V o l u m e III i s part o f t h e
u p d a t e d s e r i e s o f T a x a t i o n b o o k s w r i t t e n b y t h e a u t h o r that
s e e k s t o a d d r e s s t h e n e e d s o f b o t h bar r e v i e w e e s , C P A
L i c e n s u r e B o a r d e x a m s r e v i e w e e s , l a w a n d b u s i n e s s law
students. Tax practitioners (whether lawyers, CPAs,
professors of taxation, tax consultants, or tax agents) may
a l s o u s e this B o o k a s a h a n d y r e f e r e n c e b e c a u s e i t d i r e c t s
the reader to t h e f o u n d a t i o n of taxation. This foundation
w o u l d assist i n t h e i n t e r p r e t a t i o n o f p r e s e n t t a x l a w s , g u i d e s
the reader to further r e s e a r c h , as well as point the direction
o n h o w t o craft f u t u r e t a x l e g i s l a t i o n .
T h i s V o l u m e i s i n t e n d e d t o b e a c o m b i n a t i o n text a n d
reviewer. In order to facilitate t h e reader's understanding,
the concepts are g r o u p e d together to facilitate an integrated
grasp of the subject. T h e d i s c u s s i o n s are detailed, but there
are marks to guide the reviewee on what areas he should
focus during the review. Bar reviewees should concentrate
on the questions involving c o n c e p t s a n d should ignore the
computational problems while CPA reviewees,
business/commerce a n d law students should study both the
questions involving concepts a n d computational problems.
Reviewees are usually advised to read the review

b o o k s f r o m " c o v e r - t o - c o v e r . " T h e a u t h o r d o e s not g i v e this
advice as it may neither be possible nor practical to do so
given the time constraints attendant to reviews. Instead, he
s u g g e s t s that t h e r e v i e w e e s h o u l d c o n c e n t r a t e o n t h e a r e a s
where most of the previous Bar and C P A Board questions
were taken.
Special sections o n " E S S A Y T Y P E S E L F - T E S T S " and

"MULTIPLE-CHOICE TYPE SELF-TESTS" are added to
c h e c k t h e recollection a n d c o m p r e h e n s i o n o f t h e CPA
B o a r d a n d Bar r e v i e w e e s , a s w e l l a s a c c o u n t a n c y a n d law
iii
students The " E S S A Y T Y P E S E L F - T E S T S " were culled
from previous Bar questions, decided cases, and
hypothetical questions. T h e " M U L T I P L E - C H O I C E T Y P E
SELF-TESTS" were prepared using A I C P A and PRC/Board
o f A c c o u n t a n c y t y p e o f q u e s t i o n s , a s w e l l a s after P h i l i p p i n e
Bar a n d Multi-State Bar Examination (MBE) questions. T h e
suggested a n s w e r s are p l a c e d directly under t h e q u e s t i o n s
t o facilitate c o m p a r i s o n w i t h t h e a n s w e r o f t h e r e a d e r . T h e
reader should cover the suggested answer before he
p r e s e n t s his o w n a n s w e r , o t h e r w i s e t h e p u r p o s e b e h i n d t h e
sections would be negated.
While the reviewee is advised to do selective

readings, it is strongly s u g g e s t e d that the student of taxation
(whether a law or c o m m e r c e student) should do an
extensive reading of the textual materials as well as to m a k e
referrals to the original text of the laws, regulations a n d
jurisprudence that are referred to in this V o l u m e . This
suggestion is made so the student would have an in depth
understanding of the subject matter, which w o u l d serve him
in good stead, w h e n he practices as a tax professional.
This current edition has limited the presentation only

to transfer taxes (estate a n d donor's taxation) a n d value-
added taxes (VAT).. Other volumes devoted to discussion
of the other topics in Taxation are also to be released as
follows:
V o l u m e I. General Principles.
V o l u m e II. Income Taxation
V o l u m e IV. C o u r t of Tax Appeals and Internal
Revenue Tax Remedies
T h e t a x r e m e d i e s for l o c a l t a x e s , r e a l p r o p e r t y t a x e s
a n d tariff a n d c u s t o m s a r e i n c l u d e d i n t h e i r s e p a r a t e
volumes.
V o l u m e V. Local and Real Property Taxation
V o l u m e V I . Tariff a n d C u s t o m s T a x a t i o n
It is the author's h o p e that this 2 0 1 0 T e n t h Edition
iv
would prove invaluable not only for B a r and CPA Board
Reviewees, but also for undergraduate law and commerce
students. The author earnestly solicits comments in order to
further improve this work.
ABELARDO T. D O M O N D O N
Leon's Den (White House)

267 Bigain 1st
San Jose, Batangas
17 March 2010
v
TABLE OF CONTENTS
Volume III
Chapter Page
Bar Candidate's Prayer i
CPA Licensure Candidate's Prayer ii
Preface to the 2010 Tenth Edition iii
1 TRANSFER TAXES, IN GENERAL

A. Introduction 1
B. Estate tax 3
C. Donor's tax 7
2. ESTATE TAXATION
A. Imposition of the Estate Tax
Imposition of Estate Taxes 10
Situs of Estate Taxation 12
B. Common Definitions that apply to all
Gross Estates whether of Decedent
Filipinos, Resident Aliens and Non-
Resident Aliens 13
C. The Gross Estate of Decedent Filipinos
and Resident Aliens 17
D. The Gross Estate of Decedent Non-
Resident Aliens 22
E. Common Rules for the Determination

Of Items that are includible in all Gross
Estates whether of Decedent Filipinos,
Resident Aliens and Non-Resident
Aliens
Extent of the Decedent's Interest
vi
Chapter Page
at the Time of His Death 26
Transfers in Contemplation of
Death 29
Revocable Transfers 37
Property Passing Under General
Power of Appointment 39
Transfers for Insufficient
Consideration 45
Life Insurance Proceeds 45
Capital of the Surviving
Spouse 57
F. Exempt Acquisitions and Transmissions
hence not included in all Gross Estates
whether of Decedent Filipinos, Resident
Aliens or Non-Resident Aliens 58
Merger of the Usufruct in the
Owner of the Naked Title is Excluded
from Gross Estate 59
Transmission From the Fiduciary
To the Fideicommissary Heir is Excluded
From Gross Estate 59
Transmission From the First Heir
To another Beneficiary in accordance
With the desire of the predecessor is
Excluded from Gross Estate 62
Transfers To Social Welfare,
Cultural and Charitable Institutions are
Excluded from Gross Estate 63
Acquisitions and Transfers of
Intangible Personal Property are
Excluded from Gross Estate subject
to Reciprocity 64
G. Common Valuation Rules for All Gross
Estates whether of Decedent Filipinos,
Resident or Non-Resident Aliens ,,,, ,. . 65
H. Deductions from the Gross Estate to
vii
Chapter Page
arrive at the Net Estate
Deductions, In General 69
Expenses that are Deductible
from the Gross Estate of Decedent
Filipinos and Resident Aliens 71
Claims that are. Deductible from
the Gross Estate of Decedent Filipinos
and Resident Aliens 76
Indebtedness that are Deductible
From the Gross Estate of Filipinos and
Resident Aliens 82
Losses that are Deductible from
the Gross Estate of Filipinos and
Resident Aliens 82
Taxes that are Deductible from
the Gross Estate of Filipinos and
Resident Aliens 83
Expenses that are Deductible
from the Gross Estate of Non-Resident
Aliens 84
I. Items that are Deductible from the Gross
Estate of Filipinos and Resident Aliens
but are not deductible from the Gross
Estate of Non-Resident Aliens
Deductions for the Value of
the Family Home 85
Standard Deduction 87
Deductions for Medical
Expenses 89
Amount received under Rep.
Act No. 4917 90
J. Common Items that are Deductible
From all Gross Estates whether of
Filipinos, Resident Aliens and Non-
Resident Aliens
Property Previously Taxes
viii
Chapter Page
(Vanishing Deduction) 91
Transfers for Public Use 95
Net Share of the Surviving
Spouse in the Conjugal Partnership
Property 95
K. Administrative and Other Require-
ments: Notices, Returns
Notice of Death 96
Estate Tax Returns 97
L. Collection and Payment of Estate
Taxes
Exemption from the Payment
of the Estate Tax and Tax Credits 103
Collection of the Estate Tax 105
Liability for the Payment of
the Estate Tax 107
Place for Payment of Estate
Taxes 111
Time for Payment of Estate
Taxes 112
Effects of Payment,
Deficiency in Payment or Failure
to Pay the Estate Tax 118
3. DONOR'S TAXATION
A. Introduction 124
B. Donor's Tax Base and Rate
Donor's Tax Base 133
Situs of Donor's Taxation 136
Donor's Tax Rates 139
C. Exempt Donations and Tax Credits
Exempt Donations, In general 142
Exempt Donations if Total Net
Donations during the Calendar Year do
1 4 2
Exceed P100.000.00
Exempt Donations for Political
ix
Chapter Page
Campaign Purposes 146
Exempt Donations of Residents .... 148
Exempt Donations of a Non-
Resident Alien 152
Exempt Donations for Athlete's
Prizes and Awards 154
Exempt Donations under the
"Adopt-A-School" Program 155
Tax Credits for Foreign Donor's
Taxes 156
D. Donor's Tax Returns and Payment of
Donor's Taxes 156
4. VALUE-ADDED TAX
A. Introduction
Definitions and Purposes 163
Nature or Characteristics
of VAT 165
B. Various VAT Methods and Systems,
and Zero Rating
Various VAT Methods and
Systems 170
The Concept of Zero-Rating 171
Zero-Rated Sales of Goods or .
Properties 174
Zero-Rated Sales of Services
and Use or Lease of Properties 179
C. Liability for Value-Added Tax (VAT)
Transactions subject to VAT 184
"In the Course of Trade or
Business" 184
D. Value-Added Tax on Sale of Goods
or Properties
Rate and Base of Value-Added
Tax on the Sale, Barter or Exchange
of Goods or Properties 187
X
Chapter Page
Transactions "Deemed Sale" 189-
E. Value-Added Tax on Importations 191
F. Value-Added Tax on Sale of Services
And Use or Lease of Properties 191
G. Administrative and Compliance Require-
ments, Returns and Payment of the VAT,
Refund or Credit of Excess Input VAT
Administrative Requirements 196
Invoicing Requirements 199
Books of Accounts for VAT
Taxpayers 211
Return and Payment of the VAT .... 224
Electronic Filing and Payment
System 229
Refund or Credit of Excess
Input V A T 238
Tax Refund or Credit of Unutilized
Input VAT of Zero-Rated Transactions 243
H. VAT-Exempt Transactions
VAT-Exempt Transactions,
In general 250
Sale or Importation of Agricultural
and Marine Food Products that are
exempt from VAT 253
Sale or Importation of Fertilizers;
Seeds, Seedlings and Fingerlings; Fish,
Prawn, Livestock and Poultry Feeds that
are exempt from VAT 255
Importation of Personal and
Household Effects by Returning
Residents and Non-Resident Citizens
coming to resettle that are exempt
from VAT 256
Importation of Professional
Instruments and Implements, Wearing
Apparel, Domestic Animals and
xi
Cnapter Page
Personal Household Effects by
Persons coming to settle in the Philip-
pines that are exempt from VAT 260
Services subject to Percentage
Tax under the NIRC of 1997, Title V,
that are exempt from VAT 261
Services by Agricultural Contract
Growers and Milling for Others that are
exempt from VAT 265
Medical, Dental, Hospital and
Veterinary Services that are exempt
from VAT 265
Educational Services rendered
by Private Educational Institutions
Services rendered by individuals
that are exempt from V A T 266
Services rendered by Regional
or Area Headquarters of Multinational
Corporations that are exempt from VAT.. 266
Transactions under International
Agreements that are exempt from VAT ...267
Sales or Importation by Agricul-
tural Cooperatives that are exempt
from VAT 267
Gross Receipts from Lending
activities by Credit or Multi-Purpose
Cooperatives that are exempt from
VAT 267
Sales or Importation by Non-
Agricultural , Non-Electric and Non-
Credit Cooperatives that are exempt
from VAT 268
Export Sales that are exempt
From VAT
Sale of Real Property Not
xii
Chapter Page
primarily held for Sale to Customers or
held for Lease in the ordinary course
of business 269
Lease of a Residential Unit that
Is exempt from VAT 269
Sale, Importation, Printing or
Publication of Books, Newspaper,
Magazine, Review or Bulletin that are
exempt from VAT 270
Sale, Importation or Lease of
Vessels and Aircraft that are exempt
from VAT 270
Importation of Fuel, Goods and
Supplies that are exempt from VAT 271
Banking and Services of Non-
Bank Financial Intermediaries that are
exempt from VAT 272
Sales or Receipts that are exempt
From VAT 273
Certain Sales to Senior Citizens
xiii

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Chapter 1

TRANSFER TAXES, IN GENERAL

1. Transfer tax, defined. A tax imposed upon the privilege

2. Nature of transfer taxes. Estate and donor's taxes

3. Kinds of transfer taxes under the National Internal

4. Governing law. Transfer taxes are governed by the laws

5. Situs of transfer taxes.' The situs of transfer taxes

E S S A Y T Y P E S E L F - T E S T S . It is recommended that you

1. Define transfer tax and explain its nature.

2. What are the different kinds of transfer taxes and

You are a tax practitioner who was consulted by a client

MULTIPLE-CHOICE TYPE SELF-TESTS:

1. Transfer tax is a tax imposed on the privilege to

2. The NIRC of 1997 imposes different kinds of taxes

1. Estate tax, definition.

2. Nature of the estate tax.

3. Purposes for imposing the estate tax. The following

4. Inheritance tax, definitions.

5. Purposes for the imposition of the inheritance tax.

6. Estate tax distinguished from inheritance tax.

7. Law that governs the imposition of the estate tax.

E S S A Y T Y P E S E L F - T E S T S . I t i s recommended that you

1. State briefly the meaning and nature of the estate

2. Distinguish estate tax from inheritance tax. (BAR:

3. Are estate and inheritance taxes in the nature of

MULTIPLE-CHOICE TYPE SELF-TESTS:

1. Inheritance tax is Imposed on the privilege to

3. Which among the following distinguishes an

1. Donor's tax, definition. It is an excise tax levied,

2. Basis of donor's tax. T h e donor's tax is based on a

3. Purposes for the imposition of the donor's tax.

4. Donor's tax distinguished from estate tax.

5. Law that governs the imposition of the donor's tax.

Distinguish between donor's tax from estate tax. (BAR:

MULTIPLE-CHOICE TYPE SELF-TESTS:

1. Donor's tax is imposed on the privilege to

2. Noynoy died leaving several parcels of land.

A. IMPOSITION OF THE ESTATE TAX

IMPOSITION OF ESTATE TAXES

1. W h e n the estate tax accrues. The estate tax accrues

2. Rates of estate tax. There shall be levied, assessed,

If the net estate is:

Over But Not Over The Tax Plus Of The

3. Determination of the net estate. For purposes of

4. Steps in the determination of the estate tax.

When does the estate tax accrue ? Explain briefly.

Mr. Felix de la Cruz, a bachelor resident citizen,

MULTIPLE-CHOICE TYPE SELF-TEST:

The estate tax is to be computed starting from the death

1. Situs of real property for estate taxation. T h e place •

2. Situs of tangible personal property. T h e rule to

3. Situs of intangible personal property. W h e r e the

4. T h e situs of estate taxation may also be

B. COMMON DEFINITIONS THAT APPLY TO ALL

1. Real property for estate tax purposes. The NIRC of

2. Personal property for purposes of imposing the

3. Classification of personal property. T h e NIRC of 997

4. Tangible personal property, definition. Tangible

5. Property considered as tangible personal

6. Examples of tangible personal property.

7. Intangible personal property, definition. Intangible

8. Property considered as intangible personal

9. Examples of intangible personal property.