VALUE ADDED TAX

A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at
each stage of the supply chain, from production to the point of sale. The amount of VAT that the
user pays is on the cost of the product, less any of the costs of materials used in the product that
have already been taxed.

More than 160 countries around the world use value-added taxation, and it is most commonly
found in the European Union. But it is not without controversy. Advocates say it raises
government revenues without punishing success or wealth, as income taxes do, and it is simpler
and more standardized than a traditional sales tax, with fewer compliance issues. Critics charge
that a VAT is essentially a regressive tax that places an increased economic strain on lower-
income taxpayers, and also adds bureaucratic burdens for businesses.

KEY TAKEAWAYS

 A value-added tax, or VAT, is added to a product at every point on the supply chain
where value is added.
 Advocates of VATs claim that they raise government revenues without punishing success
or wealth, while critics say that VATs place an increased economic strain on lower-
income taxpayers and bureaucratic burdens on businesses.
 Although many industrialized countries have value-added taxation, the U.S. is not one of
them.
Value-added taxation is based on a taxpayer's consumption rather than their income. In contrast
to a progressive income tax, which levies greater taxes on higher-level earners, VAT applies
equally to every purchase.

How a VAT Works

A VAT is levied on the gross margin at each point in the manufacturing-distribution-
sales process of an item. The tax is assessed and collected at each stage, in contrast to a sales tax,
which is only assessed and paid by the consumer at the very end of the supply chain.

Say, for example, Dulce is an expensive candy manufactured and sold in the country of
Alexia. Alexia has a 10% value-added tax.

1. Dulce’s manufacturer buys the raw materials for $2.00, plus a VAT of $0.20—payable to
the government of Alexia—for a total price of $2.20.
2. The manufacturer then sells Dulce to a retailer for $5.00 plus a VAT of 50 cents for a
total of $5.50. However, the manufacturer renders only 30 cents to Alexia, which is the
total VAT at this point, minus the prior VAT charged by the raw material supplier. Note
that the 30 cents also equals 10% of the manufacturer’s gross margin of $3.00.
3. Finally, the retailer sells Dulce to consumers for $10 plus a VAT of $1 for a total of $11.
The retailer renders 50 cents to Alexia, which is the total VAT at this point ($1), minus
the prior 50-cent VAT charged by the manufacturer. The 50 cents also represents 10% of
the retailer’s gross margin on Dulce.
VAT's International Track Record
The vast majority of industrialized countries that make up the Organisation for Economic
Cooperation and Development (OECD) have a VAT system. The United States remains the only
notable exception.

Most industrial countries with a VAT adopted their systems in the 1980s. Results have been
mixed, but there is certainly no tendency among VAT countries to have small budget deficits or
low government debt. According to one International Monetary Fund study, any state that
switches to VAT initially feels the negative impact of reduced tax revenues despite its greater
revenue potential down the road.

VAT has earned a negative connotation in some parts of the world where it has been introduced,
even hurting its proponents politically. In the Philippines, for example, Senator Rafael Recto, the
chief proponent of VAT in the 1990s, was voted out of office by the electorate when he ran for
re-election. But in the years that followed its implementation, the population eventually accepted
the tax. Recto ended up finding his way back to the Senate, where he became the proponent of an
expanded VAT.

In 2009 and 2010, respectively, France and Germany famously implemented huge cuts in their
VAT rates—France by almost 75%, from a 19.6% rate to a 5.5% rate.

Industrial nations that have adopted a VAT system have had mixed results, with one study noting
that any country making the switch feels an initial negative impact from reduced tax revenues.
VAT vs. Sales Tax
VATs and sales taxes can raise the same amount of revenue; the difference lies in at what point
the money is paid—and by whom. Here is an example that assumes (again) a VAT of 10%:

 A farmer sells wheat to a baker for 30 cents. The baker pays 33 cents; the extra 3 cents
represents the VAT, which the farmer sends to the government.
 The baker uses the wheat to make bread and sells a loaf to a local supermarket for 70
cents. The supermarket pays 77 cents, including a 7 cent VAT. The baker sends 4 cents to
the government; the other 3 cents were paid by the farmer.
 Finally, the supermarket sells the loaf of bread to a customer for $1. Of the $1.10 paid by
the customer, or the base price plus the VAT, the supermarket sends 3 cents to the
government.

Just as it would with a traditional 10% sales tax, the government receives 10 cents on a $1 sale.
The VAT differs in that it is paid at different stops along the supply chain; the farmer pays 3
cents, the baker, 4 cents and the supermarket, 3 cents.

However, a VAT offers advantages over a national sales tax. It is much easier to track. The exact
tax levied at each step of production is known; with a sales tax, the entire amount is rendered
after the sale, making it difficult to allocate to specific production stages. Additionally, because
the VAT only taxes each value addition—not the sale of a product itself—assurance is provided
that the same product is not double-taxed.
Special Considerations
There's been much debate in the U.S. about replacing the current income tax system with a
federal VAT. Advocates claim it would increase government revenue, help fund essential social
services and reduce the federal deficit. Most recently, a VAT has been advocated by Democratic
presidential candidate Andrew Yang.

In 1992, the Congressional Budget Office conducted an economic study on implementing a

VAT. At the time, the CBO concluded that a VAT would add only $150 billion in annual
revenue, or less than 3% of the national output. If you adjust $150 billion to current dollars, it
comes out to just under $250 billion; 3% of the 2016 gross domestic product (GDP) comes out to
just over $557 billion. Using these approximations, it can be estimated that a VAT might raise
between $250 billion and $500 billion in revenue for the government.

Of course, these figures don't account for all of the outside impacts of a VAT system. A VAT
would change the structure of production in the United States; not all firms will be equally able
to absorb the hike in input costs. It is unknown if the additional revenue would be used as an
excuse to borrow more money – historically proved to be the case in Europe – or reduce taxes in
other areas (potentially making the VAT budget-neutral).

The Baker Institute, in conjunction with Ernst & Young, conducted a macroeconomic analysis of
the VAT in 2010. The three principal findings were that the VAT would reduce retail spending
by $2.5 trillion over 10 years, the economy could lose up to 850,000 jobs in the first year alone
and the VAT would have "significant redistributional effects" that would harm current workers.

Three years later, in a 2013 Brookings Institution report, William Gale and Benjamin Harris
proposed a VAT to help solve the country's fiscal problems coming out of the Great Recession.
They calculated that a 5% VAT could reduce the deficit by $1.6 trillion over 10 years and raise
revenues without distorting savings and investment choices.

Pros and Cons of a Value-Added Tax

In addition to the fiscal arguments, proponents of a VAT in the U.S. suggest that replacing the
current income tax system with a federal VAT would have other positive effects.

Pros

 Substituting a VAT for other taxes would close tax loopholes.

 Provides a stronger incentive to earn more money than a progressive income tax does.

Cons

 Creates higher costs for businesses.

 Encourages tax evasion.
 Conflicts with the ability of state and local governments to set their own sales tax levels.
 Passed-along costs lead to higher prices—a particular burden on low-income consumers.

Pro: Closing Tax Loopholes

Not only would a VAT greatly simplify the complex federal tax code and increase the efficiency
of the Internal Revenue Service (IRS), proponents argue, but more important, it would make it
much more difficult to avoid paying taxes. A VAT would collect revenue on all goods sold in
America, including online purchases. Despite efforts to close tax loopholes that allow internet
companies to avoid charging customers taxes in states where they do not have a brick-and-mortar
business, unpaid taxes on online sales cost states billions in potential income that could fund
schools, law enforcement and other services.

Pro: A Stronger Incentive to Earn

If a VAT supplants American income tax, it eliminates the disincentive-to-succeed complaint
levied against such progressive tax systems: Citizens get to keep more of the money they make
and are only affected by taxes when purchasing goods. This change not only confers a stronger
incentive to earn, it also encourages saving and discourages frivolous spending (theoretically).

Con: Higher Costs for Businesses

Opponents, however, note many potential drawbacks of a VAT, including increased costs for
business owners throughout the chain of production. Because VAT is calculated at every step of
the sales process, bookkeeping alone results in a bigger burden for a company, which then passes
on the additional cost to the consumer. It becomes more complex when transactions are not
merely local, but international. Different countries may have different interpretations on how the
tax is calculated. This not only adds another layer to the bureaucracy, it can also result in
unnecessary transaction delays.

Con: Encouraging Tax Evasion

In addition, while a VAT system may be simpler to maintain, it is costlier to implement. And tax
evasion can still continue, even be widespread, if the general public does not give it its
wholehearted support. Smaller businesses in particular can evade paying VAT by asking their
customers if they require a receipt, adding that the price of the product or service being
purchased is lower if no official receipt is issued.

Con: Conflicts with State and Local Governments

In the U.S., a federal VAT could also create conflicts with state and local governments across the
country, which currently set their own sales taxes at varying rates.

Con: Higher Prices—Especially for Low-Income Consumers

Critics also note that consumers typically wind up paying higher prices with a VAT. While the
VAT theoretically spreads the tax burden on the added value of a good as it moves through the
supply chain, from raw material to final product, in practice the increased costs are typically
passed along to the consumer.

Even so, better-off consumers could ultimately benefit if a VAT replaced the income tax: As
with other flat taxes, a VAT's impact would be felt less by the wealthy and shouldered more
heavily by the poor, who spend a larger percentage of their take-home pay on necessities. In
short, lower-income consumers would pay a much higher proportion of their earnings in taxes
with a VAT system, critics, including the Tax Policy Center, charge. That could be mitigated to
some extent if the government excluded certain necessary household goods or foodstuffs from
the VAT, or provided rebates or credits to low-income citizens to offset the tax's effects. (For
related reading, see "What Are Some Examples of a Value-Added Tax?")

How to calculate VAT

 Excluding VAT from gross sum:

VAT calculation formula for VAT exclusion is the following: to calculate VAT having
the gross amount you should divide the gross amount by 1 + VAT percentage (i.e. if it is
15%, then you should divide by 1.15), then subtract the gross amount, multiply by -
1 and round to the closest value (including eurocents). The last two operations are not
mandatory since you see the VAT value even before you do them.
 Adding VAT to net amount:
Easy deal. Simply multiply the net amount by 1 + VAT percentage (i.e. multiply by 1.15
if VAT is 15%) and you'll get the gross amount. Or multiply by VAT percentage to get
the VAT value.
 Read more about VAT tax on Wikipedia.
ESTATE TAX

An estate tax is a levy on estates whose value exceeds an exclusion limit set by law. Only the
amount that exceeds that minimum threshold is subject to tax. Assessed by the federal
government and about a dozen state governments, these levies are calculated based on the
estate's fair market value, rather than what the deceased originally paid for its assets. The tax is
levied by the state in which the deceased person was living at the time of their death.

Under what is known as the unlimited marital deduction, the estate tax does not apply to assets
that will be transferred to a surviving spouse. However, when the surviving spouse who inherited
an estate dies, the beneficiaries may then owe estate taxes if the estate exceeds the exclusion
limit.

Among the matters that we are now attending to in the Philippines is helping our U.S.-based
clients settle the properties left behind by their ancestors. By this, we mean undertaking the
required legal steps to transfer the properties from the deceased predecessors to the living heirs.
During our more than twenty years of law practice in the Philippines, we have observed that
many estates still remain in the names of the deceased ancestors. This is mainly due to the
financial inability of the heirs to pay the estate taxes (inheritance taxes) which are quite
substantial.

The current estate tax rates in the Philippines range from 5% to 20% of the net estate. This is
more specifically outlined in the table below:

Table 1: Philippine Estate Tax Rates

The estate tax is payable upon the transfer of the net estate of every decedent, whether a resident
or nonresident of the Philippines. However, if the decedent was neither a resident nor a citizen of
the Philippines at the time of his or her death, only the portion of the estate in the Philippines
shall be included in the taxable estate. For example, if the decedent was a resident of the United
States and became a naturalized U.S. citizen before death, then only the properties in the
Philippines will be subject to estate tax. The properties in the United States would not be covered
by Philippine estate tax.

What’s the basis of the net estate tax? How is it computed? The law says that the estate shall be
appraised at its fair market value as of the time of death, which is either the fair market value as
determined by the Commissioner (the “zonal vaue”, or the fair market value as shown in the
schedule of values fixed by the Provincial and City Assessors (the “assessed value”), whichever
is higher.

Usually, the zonal value is much higher than the assessed value. In fact, oftentimes the zonal
value approximates the prevailing market price since many properties are being sold based on
their zonal value. However, we should stress that the fair market value is that which was
prevailing at the time of the decedent’s death.
So, if the decedent died twenty years ago, then the estate tax will be computed based on its zonal
or assessed value (again, whichever is higher) in 1991. It is also possible that at that time, the
BIR had not yet come out with a zonal valuation of the property, thus the computation will have
to be based on its 1991 assessed value.

But of course, there is a deadline to file the estate tax return, which is six (6) months from the
decedent’s death. But this may still be extended. When the Commissioner finds that the payment
on the due date of the estate tax or of any part thereof would impose undue hardship upon the
estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not
to exceed five (5) years, in case the estate is settled through the courts, or two (2) years in case
the estate is settled extrajudicially.

Atty. Rogelio Karagdag , Jr. is licensed to practice law in both California and the Philippines. He
practices immigration law in San Diego and has continuously been a trial and appellate attorney
in the Philippines since 1989. He travels between San Diego and Manila. His office address is
located at 10717 Camino Ruiz, Suite 131, San Diego, CA 92126. He also has an office in the
Philippines at 1240 Apacible Street, Paco, Manila, Philippines 1007, with telephone numbers
(632)522-1199 and (632)526-0326. Please call (858)348-7475/(858)536-4292 or email him at
rkaragdag@attyimmigration.com. He speaks Tagalog fluently. Articles written in this column are
not legal advice but are hypotheticals intended as general, non-specific legal information.
Readers must seek legal consultation before taking any legal steps.
 DONOR TAX

DONOR’S TAX
SEC. 11. RATE OF DONOR’S TAX. –
 1.1. Rate. – The donor’s tax for each calendar year shall be six percent (6%) computed on the
basis of the total gifts in excess of Two Hundred Fifty Thousand Pesos (P250,000) exempt gift
made during the calendar year.
 1.2. The application of the rates as provided above is imposed on donations made on or after the
effectivity date of the TRAIN Law.
 1.3. Contribution for election campaign. – 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.
SEC. 12. THE LAW THAT GOVERNS THE IMPOSITION OF DONOR’S TAX. – The
donor’s tax is not a property tax, but is a tax imposed on the transfer of property by way of gift
inter vivos. (Lladoc vs. Commissioner of Internal Revenue, L-19201, June 16, 1965; 14 SCRA,
292). The donor’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 the delivery, either actually or constructively, of the donated property to the
donee. Thus, the law in force at the time of the perfection/completion of the donation shall
govern the imposition of the donor’s tax.
In order that the donation of an immovable may be valid, it must be made in a public document
specifying therein the property donated. The acceptance may be made in the same Deed of Donation or
in a separate public document, 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, the donor shall be notified thereof in an
authentic form, and this step shall be noted in both instruments.

A gift that is incomplete because of reserved powers, becomes complete when either:

(1) the donor renounces the power; or

(2) his right to exercise the reserved power ceases because of the happening of some event or
contingency or the fulfilment of some condition, other than because of the donor’s death.

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 whereas general renunciation by an heir, including the surviving
spouse, of his/her share in the hereditary 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 hereditary estate.

Where property, other than a 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.

The law in force at the time of the completion of the donation shall govern the imposition of donor’s
tax.

For purposes of the donor’s tax, “NET GIFT” shall mean the net economic benefit from the transfer that
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 mortgage assumed.

SEC. 13. VALUATION OF GIFTS MADE IN PROPERTY. – The valuation of gifts in the form of property shall
follow the rules set forth in Section 6 of this regulations: Provided, That the reckoning point for
valuation shall be the date when the donation is made.

Sample Computations and Illustrations: Donor’s Tax

SEC. 14. COMPUTATION OF THE DONOR’S TAX. – Donations shall be subject to donor’s tax applicable
when the donations are made. Hence, for donor’s tax purposes, donations made before January 1, 1998
shall be subject to the donor’s tax computed on the basis of the old rates imposed under Section 92 of
the National Internal Revenue Code of 1977 (R.A. No. 7499), while donations made on or after January
1, 1998 until December 31, 2017 shall be subject to the donor’s tax computed in accordance with the
amended schedule of rates prescribed under Section 99 of the National Internal Revenue Code of 1997
(R.A. No. 8424), implemented by RR No. 2-2003, as amended. Only donations made on or after January
1, 2018 shall be subject to the donor’s tax rate provided under the TRAIN Law as implemented by these
Regulations.

The computation of the donor’s tax is on a cumulative basis over a period of one calendar year. Husband
and wife are considered as separate and distinct taxpayer’s for purposes of the donor’s tax. However, if
what was 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 pertinent provisions of the
Civil Code of the Philippines and the Family Code of the Philippines.