Government owned or controlled corporations

GR: All corporations, agencies, or instrumentalities owned or controlled by the government shall
pay such rate of tax upon their taxable income

Except:
1. GSIS
2. SSS
3. Phil Health
4. Local Water Districts98

General Professional Partnerships and Ordinary business

partnerships
General Professional Partnerships - Partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the income of which is derived from engaging
in any trade or business.
GPPs are not subject to income tax but are required to file information returns for its income for
the purpose of furnishing information as to the share of net income of the partnership which each
partner should include in his individual return. Partners shall be liable for income tax in their
separate and individual capacities.

Computation of net income of a GPP

For purposes of computing the distributive share of each partner, the net income of the partnership
shall be computed in the same manner as a corporation. Each partner shall report as gross
income of the partnership, whether actually or constructively received.

Treatment of GPP loss

It will be divided as agreed upon by the partners and shall be taken by the individual partners in
their respective returns.

GPP vs Ordinary Business Partnership

GPP Ordinary
Partnership
Formed by persons Formed by persons
for the sole purpose for the sole purpose
of exercising their of engaging in any
common trade or business.
profession, no part
of income of which
is derived from
engaging in any
trade or business
 NOT a taxable Considered as a
entity corporation, hence,
a taxable entity and
its income is taxable
as such.
The distributive The share of an
share of the individual in the
partners in the net distributable net
income is income after tax of a
reportable and general partnership
taxable as part of is subject to a final
the partner’s gross tax.
income subject to
the scheduled
rates.
NOT required to file MUST file an ITR.
an income tax
return.
NOT subject to Taxed once on its
double taxation income and again
being taxed only when a share in the
once. profits of the
partners is
distributed; then
taxed as dividends.

Registration of a partnership is immaterial for income tax purposes. It is taxable as long as there
is an AGREEMENT, oral or written, to contribute money, property, or industry to a common fund;
and there is an INTENTION to divide the profits.
If the partnership operation resulted in a loss, the partners shall be entitled to deduct their
respective shares in the NOL from their individual gross income.
The distributive share of a partner in the net income a business partnership is equal to each
partner’s distributive share of the net income declared by the partnership for a taxable year after
deducting the corresponding corporate income tax.
In a business partnership, there is no constructive receipt of distributive share in the net income.

Is a partnership liable for income tax?

Yes. The term “corporations” includes partnerships, no matter how created or organized.

What are the kinds of partnerships under the Tax Code?

1. Taxable partnerships – these are business partnerships or partnerships which are organized
for the purpose of engaging in trade or business. They are subject to income tax as if they were
corporations whether or not registered with the SEC as a partnership
2. Exempt partnerships – these are partnerships not considered as taxable entities for income tax
purposes i.e. General Professional Partnerships).
Elements of a taxable partnership
1. An intent to form the same
2. Generally participating in both profits and losses
3. Such a community of interest, as far as third persons are concerned as enables each party to
make contract, manage the business and dispose of the whole property.

Joint venture and Consortium

The requisites of a joint venture are as follows:
1. Contribution by each party
2. Profits are shared among the parties
3. There is joint right of mutual control over the subject matter
4. There is a single business transaction rather than a general or continuous transaction.
Are joint ventures taxable?
Generally, yes. However, a joint venture or consortium undertaking construction projects or
engaged in petroleum operations with an operating contract with the government are not
liable for income tax.

Requirements in order for a joint venture formed for construction purposes be not
liable for income tax:
In RR No. 010-12 [JUNE 1, 2012], a joint venture or consortium formed for the purpose of
undertaking construction projects which is not considered as a taxable corporation should be:
1. For the undertaking of a construction project;
2. Should involve joining or pooling of resources by licensed local contractors, licensed by the
Philippine Contractors Accreditation Board (PCAB) of the DTI;
3. The local contractors are engaged in construction business;
4. The joint venture itself must likewise be duly licensed as such by the PCAB
Absent one of the requirements, the joint venture formed for construction purposes shall be
considered a taxable corporation.

The requisites of a joint venture are as follows:

1. Contribution by each party
2. Profits are shared among the parties
3. There is joint right of mutual control over the subject matter
4. There is a single business transaction rather than a general or continuous transaction.

May joint ventures involving foreign contractors be treated as a non-taxable

corporation?
Yes, provided that the member foreign contractor is:
1. covered by a special license as contractor by the PCAB; and
2. construction project is certified by the appropriate government office as a foreign
financed/internationally-funded project and that international bidding is allowed under the bilateral
agreement between the Philippine government; and foreign/international financing institution.

Co-ownership
Is a co-ownership taxable as a corporation?
No. The common ownership of property does not by itself create a partnership between the
owners, though they may use it for purposes of making gains. Article 1769(3) of the Civil Code
provides that “the sharing of gross returns does not by itself establish a partnership whether or
not the persons sharing them have a joint or common right or interest in any property from which
the returns are derived.

Estates and Trusts

An estate is created by operation of law, when an individual dies, leaving properties to his
compulsory or other heirs.
A trust is a legal arrangement whereby the owner of the property (the trustor) transfers ownership
to a person (the trustee) who is to hold and control the property according to the owner’s
instructions, for the benefit of a designated person(s) (the beneficiary). Legal title to the trust
property is vested in the trustee while equitable title belongs to the beneficiary.
To illustrate by way of example: A died leaving a condo unit which he rents out. The rentals that
would accrue prior to the settlement of A’s estate would be subject to income tax.

To whom shall the income of a trust be taxable to?

If the trust instrument is irrevocable, the income shall be taxable to the fiduciary. If the trust
instrument is revocable, the income shall be taxable to the grantor.
The trust instrument is “revocable” where at any time the power to revest in the grantor title to any
part of the corpus of the trust is vested:
a. in the grantor, either alone or in conjunction with any person not having a substantial adverse
interest in the disposition of such part of the corpus or the income therefrom
b. in any person not having a substantial adverse interest in the disposition of such part of the
corpus or the income therefrom, the income of such part of the trust.

Is the tax imposed on trusts applicable to all trusts?

No. If the trust were an employee’s trust which forms part of an employer’s pension, stock or
profit-sharing plan that complies with the requirements of tax exemption under Section 60(B) the
NIRC, its income would be exempt from income tax.

Minimum Corporate Income Tax

A minimum corporate income tax of 2% of gross income shall be imposed on a domestic
corporation and resident foreign corporation beginning on the fourth taxable year immediately
following the year in which such corporation commenced its business operations when:
1. the MCIT is greater than the RCIT for the taxable year.
2. such operation has zero or negative taxable income

Which corporate taxpayers can be subject to MCIT?

1. Domestic corporation
2. Resident Foreign corporation

Which corporate taxpayers are exempted from MCIT?

1. Resident foreign corporations engaged in business as international carriers
2. Resident foreign corporations engaged as OBUs
3. Resident foreign corporations engaged in business as ROHQs
4. Firms that are taxed under a special income tax regime.

Improperly Accumulated Earnings Tax (Section 29, NIRC)

What is an improperly accumulated earnings tax?
This is the income tax imposed on a corporation if its earnings and profits are accumulated
(undistributed) instead of being divided and distributed to its stockholders.

An improperly accumulated earnings tax (IAET) equal to 10% is imposed for each taxable year
on the improperly accumulated taxable income of each corporation.

It is imposed on domestic corporations which are classified as closely-held corporations

Define “improperly accumulated taxable income.”

The term “improperly accumulated taxable income” means taxable income adjusted by:
1. Income exempt from tax
2. Income excluded from gross income
3. Income subject to final tax; and
4. The amount of net operating loss carry-over deducted; and
5. Reduced by the sum of:
a. dividends actually or constructively paid; and
b. income tax paid for the taxable year
c. amount reserved for the reasonable needs of the business

In relation to 5(c), RMC 35-2011 [March 14, 2011] states that the amount that may be retained,
taking into consideration the reasonable needs of the business shall be 100% of the paid-up
capital or the amount contributed to the corporation representing the par value of the shares of
stock. Any excess capital over and above the par shall be excluded.

Purpose and nature of IAET?

The imposition of IAET discouraged tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared dividends
received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty
tax designed to compel corporations to distribute earnings so that the said earnings by
shareholders could, in turn, be taxed (see CYNAMID PHILIPPINES INC VS. CA [JANUARY 20,
2000])
The IAET is being imposed in the nature of a penalty to the corporation for the improper
accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders
who are supposed to pay dividends tax on the earnings distributed to them by the corporation
(see RR 2-01 [FEBRUARY 12, 2001]).

Corporations subject to IAET

As a general rule, the IAET shall apply to every corporation formed or availed for the purpose of
avoiding the income tax with respect to its shareholders or the shareholders of any other
corporation, by permitting earnings and profits accumulate instead of being divided or distributed.
As provided in RR 2-01, this refers to all domestic corporations which are classified as closely
held corporations. A closely held corporation are those at least 50% in value of the outstanding
capital stock or at least 50% of the total combined voting power of all classes of stock is owned
directly or indirectly by not more than 20 individuals.
As exceptions, the IAET shall not apply to:
1. Publicly-held corporations
2. Banks and other non-bank financial intermediaries; and
3. Insurance companies
4. GPPs
5. Non-taxable joint ventures
6. Enterprises registered under SEZs (see RR 2-01 [FEBRUARY 12, 2001]).

Main factor to consider in holding a corporation liable for IAET:

The touchstone of the liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends is due to some other
causes, such as the use of undistributed earnings and profits for the reasonable needs of the
business, such purpose would not generally make the accumulated or undistributed earnings
subject to the tax. However, if there is a determination that a corporation has accumulated income
beyond the reasonable needs of the business, the 10% improperly accumulated earnings tax shall
be imposed. [see RR 2-01 [FEBRUARY 12, 2001]).

Circumstances indicative of a purpose to avoid the income tax with respect to

shareholders:
The fact that any corporation is a mere holding company or investment company shall be prima
facie evidence of a purpose to avoid the tax upon its shareholders or members. (see Section
29(C)(1), Tax Code).

Moreover, the fact that the earnings or profits of a corporation are permitted to accumulate beyond
the reasonable needs (including reasonably anticipated needs) of the business shall be
determinative of the purpose to avoid the tax upon its shareholders or members unless the
corporation, by the clear preponderance of evidence shall prove the contrary (see Section
29(C)(2), Tax Code)
RR 2-01 adds three more instances, namely:
1. Investment of substantial earnings in unrelated business or in stock or securities of an unrelated
business
2. Investment in bonds and other long term securities
3. Accumulation of earnings in excess of 100% of paid up capital

What is meant by “reasonable needs”?

Reasonable needs means the immediate needs of the business. Examples of what can be
considered reasonable needs include:

1. Allowance for the increase of accumulated earnings up to 100% of the paid-up capital
2. Earnings reserved for building, plant or equipment acquisitions
3. Earnings reserved for compliance with any loan or obligation established under a legitimate
business agreement
4. In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings
intended or reserved for investments in the Philippines.
5. Earnings required by law to be retained
6. Anticipated losses or reserves in business.

Immediacy Test
The Immediacy Test is used to determine the “reasonable needs” of business” in order to justify
an accumulation of earnings. Under this test, the term "reasonable needs of the business" are
hereby construed to mean the immediate needs of the business, including reasonably anticipated
needs. The corporation should be able to prove an immediate need for the accumulation of the
earnings and profits, or the direct correlation of anticipated needs to such accumulation of profits.
Otherwise, such accumulation would be deemed to be not for the reasonable needs of the
business, and the penalty tax would apply.

In determining if profits are reasonably accumulated for business needs, the

intention of the taxpayer is reckoned at what time?
It is reckoned at the time of accumulation. In MANILA WINE MERCHANTS V. CIR [FEBRUARY
20, 1984], one of the contentions of MWM was that it held on to said bonds for several years to
wait for 60% of its stock to be owned by Filipinos so it can purchase its own lot and building. The
Supreme Court stated that to determine if profits are reasonably accumulated for business needs,
the controlling intention is that manifested at the time of accumulation and not later ones. The
second reason given by MWM was too indefinite and was a mere afterthought.

Ways to avoid liability from IAET

When the accumulation is justified by reasonable needs of the business such as:
1. Accumulation up to 100% of the paid-up capital
2. For definite corporate expansion projects or programs
3. For buildings, plants or equipment acquisitions
4. For compliance with a loan covenant or pre-existing obligation under a legitimate business
agreement
5. When there is a legal prohibition for its distribution
6. In the case of Philippine subsidiaries of foreign corporations, undistributed earnings intended
or reserved for investments within the Philippines
Branch Profit Remittance Tax (Section 28, NIRC)
Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which
shall be based on the total profits applied or earmarked for remittance without any deduction for
the tax component thereof (except those activities which are registered with the Philippine
Economic Zone Authority). The tax shall be collected and paid in the same manner as provided
in Sections 57 and 58 of this Code: Provided, that interests, dividends, rents, royalties, including
remuneration for technical services, salaries, wages premiums, annuities, emoluments or other
fixed or determinable annual, periodic or casual gains, profits, income and capital gains received
by a foreign corporation during each taxable year from all sources within the Philippines shall not
be treated as branch profits unless the same are effectively connected with the conduct of its
trade or business in the Philippines.

Accounting Methods
1. Accrual Method
Method of accounting for income in the period it is earned, regardless of whether it has been
received or not. Expenses are accounted for in the period they are incurred and not in the period
they are paid.

2. Cash Method
A method of accounting whereby all items of gross income received during the year shall be
accounted for in such taxable year and that only expenses actually paid shall be claimed as
deductions during the year.

3. Installment Method
Installment Method is a method of accounting considered appropriate when collections of the
proceeds of sales and incomes extend over relatively long periods of time and there is strong
possibility that full collection will not be paid. As customers make installment payments, the seller
recognizes the gross profit on sale in proportion to the cash collected during the year. (see Section
49, Tax Code).

4. Percentage of Completion Method

Percentage of Completion Method is a method of accounting applicable in the case of a building,
installation or construction contract covering a period in excess of one year, whereby gross
income derived from such contract may be reported upon the basis of percentage of completion.
(see Section 48, Tax Code)

Manual Filing of Income Tax Returns (including new deadlines

under the TRAIN law)
Under the Tax Code, as amended by the TRAIN Law, the deadline for the filing of the Annual
Income Tax Return (BIR forms 1700 and 1701) is still on APRIL 15, and the deadline for filing the
First Quarterly Income Tax Return (BIR form 1701Q) has been moved to MAY 15.
Substituted Filing of Income Tax Returns (Section 51-A of the
NIRC, as amended)
SEC. 51. Individual Return. -
(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required
to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income from sources
within the Philippines;
(c) Every alien residing in the Philippines, on income derived from sources within the
Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise of profession
in the Philippines.
(2) The following individuals shall not be required to file an income tax return:
(a) An individual whose gross income does not exceed his total personal and additional
exemptions for dependents under Section 35: Provided, That a citizen of the Philippines
and any alien individual engaged in business or practice of profession within the Philippine
shall file an income tax return, regardless of the amount of gross income;
(b) An individual with respect to pure compensation income, [35] as defined in Section 32
(A)(1), derived from sources within the Philippines, the income tax on which has been
correctly withheld under the provisions of Section 79 of this Code: Provided, That an
individual deriving compensation concurrently from two or more employers at any time
during the taxable year shall file an income tax return. [36]
(c) An individual whose sole income has been subjected to final withholding tax pursuant
to Section 57(A) of this Code; and
(d) A minimum wage earner as defined in section 22 (HH) of this Code or an individual
who is exempt from income tax pursuant to the provisions of this Code and other laws,
general or special. [37]

(3) The foregoing notwithstanding, any individual not required to file an income tax return may
nevertheless be required to file an information return pursuant to rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the Commissioner.
(4) The income tax return shall be filed in duplicate by the following persons:
(a) A resident citizen - on his income from all sources;
(b) A nonresident citizen - on his income derived from sources within the Philippines;
(c) A resident alien - on his income derived from sources within the Philippines; and
 (d) A nonresident alien engaged in trade or business in the Philippines - on his income
derived from sources within the Philippines.

Withholding Tax System

What is a withholding tax?
Withholding tax is a method of collecting income tax in advance from the taxable income of the
recipient of income. It is not a tax.

Purpose of the withholding tax system

1. To provide the taxpayer a convenient manner to meet his probable income tax liability
2. To ensure the collection of the income tax which could otherwise be lost or substantially
reduced through the failure to file the corresponding returns
3. To improve the government’s cash flow
4. To minimize tax evasion, thus resulting in a more efficient tax collection system?

Withholding agent
The withholding agent is the one who has control, custody, or receipt of the funds that is subject
to income tax and to be withheld and remitted to the BIR. The withholding agent holds the amount
withheld from the income of another person in trust for the government until paid.
The duty to withhold is different from the duty to pay income tax. The obligation to withhold is
imposed upon the buyer-payor of income but the burden of tax is really upon the seller-income
earner.
The obligation to withhold is compulsory as it makes such withholding agent personally liable for
payment of the tax. Such liability of the withholding agent is direct and independent from the
liability of the income recipient.

Who are required by law to withhold on income payments?

1. Agents or employees of withholding agents
2. Persons having control of the payment and claiming the expense
3. Payor having control of the payment where payment is made through brokers

When does the obligation to withhold arise?

Either when:
1. It is paid
2. It becomes payable (i.e. it is legally due, demandable, or enforceable)
3. It is accrued as an asset or expense

1. Final Withholding Tax vs. Creditable Withholding Tax

FWT CWT
The amount of income tax withheld by the Taxes withheld on certain income payments
withholding agent is constituted as a full and are intended to equal or at least approximate
the tax due of the payee on said income.
 final payment of the income tax due from the
payee on the said income.
The liability for payment of the tax rests Payee of income is required to report the
primarily on the payor as a withholding agent. income and/or pay the difference between the
tax withheld and the tax due on the income.
The payee also has the right to ask for a refund
if the tax withheld is more than the tax due.
The payee is not required to file an income tax The income recipient is still required to file an
return for the particular income. income tax return, as prescribed in Sec. 51
and Sec. 52 of the NIRC.

2. Top Withholding Agents

Top withholding agents shall refer to those taxpayers whose gross sales/receipts or gross
purchases or claimed deductible itemized expenses, as the case may be, amounted to P12 million
during the preceding taxable year.

3. Duties of a Withholding Agent

Filing of the return and paying the tax withheld
The withholding agent shall file the return and pay the tax:
1. FWT - within 25 days from the close of each calendar quarter for FWT
2. CWT - not later than the last day of the month following the close of the quarter during
which withholding was made. (see Section 58(A), Tax Code)

Other obligations of the withholding agent with respect to the return and payment
of the tax withheld:
1. He shall furnish the recipient of the income a written statement showing the income or
other payments made by him during such quarter or year, and the amount of the tax
deducted and withheld therefrom.
2. He shall submit an annual information return containing the list of payees and income
payments, amount of taxes withheld for each payee and other pertinent information. (see
Section 58(B) and (C), Tax Code)

Excess payment or deficiency in payment of CWT

The excess of the amount of tax so withheld over the tax due on his return shall be refunded.
If the income tax collected at source is less than the tax due on his return, the difference shall be
paid. (see Section 58(D), Tax Code).

Effect of non-payment of CWT to the transfer of real property

No registration of any document transferring real property shall be effected by the Register of
Deeds unless the CIR or his duly authorized representative has certified that such transfer has
been reported and the capital gains or CWT, if any, has been paid. (see Section 58(E), Tax Code).
 VAT
1. Concept of VAT

Definition:
A Value-Added Tax is a tax assessed, levied, and collected 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 or 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.

2. Characteristics of the Philippine VAT System

1. It is a percentage tax imposed at every stage of the distribution process on the sale, barter,
or exchange or lease of goods or properties and on the performance of service in the course
of trade or business or on the importation of goods, whether for business or non-business.
2. It is a business tax levied on certain transactions involving a wide range of goods, properties
and services, such tax being payable by the seller, lessor or transferor.
3. It is an excise tax or a tax on the privilege of engaging in the business of selling goods or
services or in the importation of goods
4. It is an indirect tax, the amount of which may be shifted to or passed on the buyer, transferee
or lessee of the goods, properties or services.
5. It is an ad valorem tax as its amount or rate is based on gross selling price or gross value
in money or gross receipts derived from the transaction.
3. Impact of Taxation vs. Incidence of Taxation
Impact of taxation and incidence of taxation are two different concepts.
Impact of taxation (liability) is the point on which a tax is originally imposed while incidence of
taxation (burden) is that point on which the tax burden finally rests or settles down.
Ways of shifting the tax burden:
1. Forward shifting - When the burden of the tax is transferred from a factor of production
through the factors of distribution until it finally settles on the ultimate purchaser or
consumer.
2. Backward shifting – When the burden of the tax is transferred from the consumer or
purchaser through the factors of distribution to the factors of production.
3. Onward shifting – When the tax is shifted two or more times either forward or backward.
4. Cross Border Doctrine and Destination Principle
CROSS BORDER DOCTRINE - Mandates that no VAT shall be imposed to form part of the cost
of the goods destined for consumption outside the territorial border of the taxing authority. Goods
and services are taxed only in the country where these are consumed.
DESTINATION PRINCIPLE
 - The destination of the goods determines taxation or exemption from tax. Export sales of
goods are subject to 0% rate (or zero-rated), while importations of goods are subject to
the 12% VAT.
- Exports are zero-rated because the consumption of such goods will be made outside the
Philippines, while imports of goods are subject to 12% VAT because they are for
consumption within the Philippines.

5. Rule of Regularity
The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a nonstock, nonprofit organization
(irrespective of the disposition of its net income and whether or not it sells exclusively to members
of their guests), or government entity.
Note: Services rendered by non-resident foreign persons shall be considered as being
rendered in the course of trade or business, even if the performance of services is not
regular (Section 4.105-3, RR No. 16-2005)
(2) Any business where the gross sales or receipts do not exceed P100,000 during any
12-month period shall be considered principally for subsistence or livelihood and not in the
course of trade or business.
(3) Again, an importation is VAT-taxable regardless of whether made in the course of trade
or business or not.

6. Transactions Covered by VAT

VAT-taxable transactions are those transactions which are subject to VAT either at the rate of
12% or 0% and the seller shall be entitled to tax credit for the VAT paid on purchases and leases
of goods, properties, and services. (CIR V. CEBU TOYO [FEBRUARY 16, 2005])
Elements of a VAT-taxable transaction:
1. There must be a sale, barter, exchange or lease in the Philippines
2. The sale, barter, exchange or lease must be of taxable goods, properties or services
3. The sale must be made by a taxable person in the course of trade or furtherance of his/its
profession

What is meant by “in the course of trade or business”?

In the course of trade or business means the regular conduct or pursuit of a commercial or an
economic activity including transactions incidental thereto, by any person regardless of whether
or not the person engaged therein is a non-stock, non-profit private organization or a government
entity.
7. Persons Liable to VAT
Any person who:
1. Sells, barters, exchanges, or leases goods or properties in the course of trade or business;
2. Renders services in the course of trade or business (including professional services);
3. Imports goods whether or not in the course of trade or business;
4. Buys or is the transferee of goods imported into the Philippines by a VAT-exempt person
wherein the buyer shall be deemed the importer;
5. Whose gross sales or gross receipts are over the threshold fixed by law or regulations.
8. VAT on Sale of Goods or Properties
Requisites for taxability of sale of goods or properties:
1. The sale must be an actual or deemed sale of goods or properties for a valuable consideration;
2. The sale must be undertaken in the course of trade or business;
3. The sale must be for the use or consumption in the Philippines;
4. The sale must not be exempt from VAT under the Tax Code, special laws, or international
agreement.
Note: The phrase “in the course of trade or business” means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person,
regardless of whether or not the person engaged therein is a non-stock, non-profit private
organization (irrespective of the disposition of its net income and whether or not it sells exclusively
to members or their guests), or a government entity.
It is immaterial whether the primary purpose of a corporation indicates that it receives payments
for services rendered to its affiliates on a reimbursement-of-cost basis only, without realizing
profit, for purposes of determining liability for VAT on services rendered. As long as the entity
provides service for a fee, remuneration or consideration, then the service rendered is subject to
VAT. (Commissioner of Internal Revenue vs. Court of Appeals and Commonwealth Management
and Services Corporation, G.R. No. 125355, March 30, 2000)
Considered as “goods or properties” for VAT purposes:

All tangible and intangible objects which are capable of pecuniary estimation, including:

1. Real properties held primarily for sale to customers or held for lease in the ordinary course of
business
2. The right or privilege to use patent, copyright, design or model, plan, secret formula or process,
good will, trademark, trade brand, or other like property or right
3. The right or privilege to use in the Philippines of any industrial, commercial or scientific
equipment
4. The right or the privilege to use motion picture files, films tapes and discs
5. Radio, television, satellite transmission and cable television line (see SECTION 106(A)(1), TAX
CODE)

Tax base of VAT on sale of goods or properties:

The 12% VAT is based on the gross selling price (GSP) or gross value in money of the taxable
goods or properties sold, bartered or exchanged.

For goods and properties other than real properties

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
VAT. Any excise tax, if any, on such goods or properties shall form part of the GSP
Note: If the consideration of a sale is not wholly in money as in a part-exchange or barter
transaction, the base is the price that would have been charged in an open market sale for purely
monetary consideration.

In case of real property

The gross selling price shall mean the consideration stated in the sales document or the fair
market value, whichever is higher.

Note: If the VAT is not billed separately, the selling price stated in the sales document shall be
deemed to be inclusive of VAT (RR 16-2005)

Requisites of a VAT-taxable sale For goods or properties other than real property:
1. There is an actual or deemed sale, barter, exchange of goods or properties for a valuable
consideration
2. The sale is undertaken in the course of trade or business or exercise of profession in the
Philippines
3. The goods or properties are located within the Philippines and are for use or consumption
therein
4. The sale is not exempt from VAT under Section 109 of the Tax Code, special law or
international agreement binding upon the government of the Philippines.
Note: (1) The absence of any of the above requisites exempts the transaction from VAT. However,
percentage taxes may apply. Actually, the annual gross sales or receipts must exceed
P1,199,500. Otherwise, it is subject to the 3% percentage tax on small business enterprises.
(2) We can combine (3) and (4) by stating that the transaction should not be a VAT zero-rated or
a VAT-exempt transaction.
Requisites of a VAT-taxable sale of real property:
1. The seller executes a deed of sale, including dacion en pago, barter or exchange, assignment,
transfer or conveyance, or merely contract to sell involving real property
2. The real property is located in the Philippines
3. The seller or transferor is engaged in real estate business either as a real estate dealer,
developer or lessor
4. The real property is held primarily for sale or for lease in the ordinary course of his trade or
business
5. The sale is not exempt from VAT under Section 109, special law or international agreement
binding upon the government of the Philippines.
6. The threshold amount set by the law should be met
Note: (1) The absence of any of the above requisites exempts the transaction from VAT. However,
percentage taxes may apply.
(2) As to (4) Remember that real properties held primarily for sale to customers are ordinary
assets. Hence, the income from the sale thereof shall form part of ordinary income subject to
graduated income tax rates. If it’s a capital asset, the income would be subject to capital gains
tax
(3) As to (6), the threshold amounts are: (1) The sale of a residential lot with a GSP must exceed
P1,919,500 and (2) the sale of a residential house and lot or other residential dwelling with GSP
must exceed P3,199,200. Otherwise, they are not exempt from VAT
Installment sale of a residential house and lot or other residential dwellings exceeding P1 million3
shall be subject to VAT.
(See SECTION 4.106-4, RR 16-2005 [SEPTEMBER 1, 2005], AS AMENDED BY RR 04-07
[FEBRUARY 7, 2007], RR 16-2011 [OCTOBER 27, 2011], RR 3-2013 [FEBRUARY 20, 2012]
AND RR 13-2012 [OCTOBER 12, 2012].)
How is VAT imposed on real property transactions?
1. If cash or deferred payment, then the VAT on the whole amount is already imposed
2. If installment, then the VAT is imposed on each payment
3. There is no VAT imposed on Section 40(C)(2) exchanges.

9. Transactions Deemed Sale

There is no actual sale. However, the law deems that there is a taxable sale.
Deemed sale transactions:
1. Transfer of goods or properties not in the course of business (originally intended for sale or for
use in the course of business)
2. Property dividends (transfer to shareholders as share in the profits of VAT-registered persons
or to creditors in payment of debt)
3. Consignment of goods without the sale being made within 60 days
4. Retirement from or cessation of business with respect to inventories of taxable goods existing
(see SECTION 106(B), TAX CODE)
Note: (1) Before considering whether the transaction is deemed sale, it must first be determined
whether the sale was in the ordinary course of trade or business. Even if the transaction was
“deemed sale,” if it was note done in the ordinary course of trade or business, still the transaction
is not subject to VAT (CIR v. MAGSAYSAY LINES [JULY 28, 2006]).
(2) As to (1), the transaction is deemed sale when the taxpayer-seller withdraws goods from his
inventory of goods held primarily for sale for his own personal or non-business use. The
withdrawal or transfer of goods results in the use or consumption of such goods by a person (the
seller himself) who is effectively the final consumer, such withdrawal or transfer is deemed a sale
subject to output tax.
(3) As to (2), the requisites to constitute the distribution or transfer to a shareholder or creditor a
transaction deemed sale are: (a) the VAT-registered person distributing or paying is a domestic
corporation; (b) what is being declared or paid is either real property owned by the company or
shares of stocks owned in another company; and (c) the domestic corporation is either a real
estate dealer (in case of real property) or dealer in securities (in case of shares of stock)
(4) As to (3), as a general rule, a consignment of goods by the consignment-owner to the
consignee is not a taxable transaction. However, it is subject to VAT when the consigned goods
are: (a) not sold by the consignee; and (b) not returned by him to the consignor-owner within 60
days from date of consignment.
(5) As to (4), the VAT-registered taxpayer who ceases or retires from business, including an
unregistered joint venture undertaking construction activity, must pay output tax on the gross
value of his inventory of materials, goods and supplies existing at the time of cessation or
retirement of business.
Transactions that are considered as retirement or cessation of business that give rise to
“deemed sale” subject to VAT:
1. Change of ownership of the business. There is change in the ownership of the business when
a single proprietorship incorporates; or the proprietor of a single proprietorship sells his entire
businesss.
2. Dissolution of a partnership and creation of a new partnership which takes over the business.
Consideration in determining whether a transaction is “deemed sale”:
Before considering whether the transaction is “deemed sale”, it must first be determined whether
the sale was in the ordinary course of trade or business. Even if the transaction was “deemed
sale” if it was not done in the ordinary course of trade or business or was not originally intended
for sale in the ordinary course of business, the transaction is not subject to VAT.
Tax Base of Transactions Deemed Sale:
The output tax shall be based on the market value of the goods deemed sold as of the time of the
occurrence of the transactions in nos. 1, 2, and 3.
However, in the case of retirement or cessation of business the tax base shall be the acquisition
cost or the current market price of the goods or properties, whichever is lower.
In the case of a sale where the gross selling price is unreasonably lower than the fair market
value, the actual market value shall be the tax base.